Study of Small and Medium Enterprises in Azerbaijan - IFC

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Box 7.1 What is the Shadow Economy? By definition, the shadow (or informal) economy constitutes activities that are not recorded by the government. One of the main reasons for the very existence of the informal sector is entrepreneurs’ attempt to find a shelter from government-induced distortions such as excessive taxes, regulation, and bribery. Companies that conceal some of their transactions pay lower taxes, thereby shifting the tax burden onto the taxpayers who operate legally. Such companies operating within the law, however, do not have to waste resources to conceal their activities, and therefore can develop and achieve optimum growth. This premise is supported by the Doing Business (2005) project, which found that, “on average, in the 10 developing countries sampled, the output of shadow enterprises was 40 percent less than that of legal businesses operating in the same economic sectors.” Therefore, operating in the shadow economy is also harmful for the businesses themselves since they have limited ability to attract external funding. Companies that understate their profit to avoid taxes are also deprived of other opportunities – low financial indicators do not permit them to secure bank credit or use the services of leasing companies. Although in comparison with the previous year, Azerbaijan has made significant progress in reducing the number of tax payments (from 30 to 23), the 2009 Doing Business report indicates that the number of tax payments is still higher than in certain neighboring economies such as Kazakhstan, where businesses make just 9 tax payments per year and spend 271 hours on tax compliance (Table 7.6). Moreover, IFC survey results indicate that on average Azerbaijani businesses have to visit tax authorities for various reasons seven times a year, and their employees spend approximately 3 percent of their working hours on the preparation of tax reports. Table 7.6 The administrative burden for compliance with tax requirements in Azerbaijan is high compared to that of Kazakhstan Azerbaijan Kazakhstan VAT, number of payments per year 1-12 41 1 • compliance time, hours 162 92 SST, number of payments per year 12 1 • compliance time, hours 134 74 CPT, number of payments per year 1 1 • compliance time, hours 79 105 All taxes, number of payments 23 9 • compliance time, hours 376 271 Source: IFC/World Bank 2008 However, despite these complexities in tax reporting, only 16 percent of individual entrepreneurs and 11 percent of SMEs indicated in the IFC survey that tax payments and reporting procedures are problematic issues (Charts 7.3 and 7.4). Based on interviews with focus-group respondents, there are indications that a number of entrepreneurs are prepared and willing to engage in illicit payments in order to simplify reporting and controls. 41 See previous comment/footnote. 118 St u d y o f Sma l l a n d Me d i u m Ent e r p r i s es in Az e r b a i j a n
Chart 7.3 IFC Survey: Complexity of tax payment and reporting procedures as seen by IEs 100% 80% 60% 40% 20% 22% 78% 13% 87% 16% 84% Problematic Nonproblematic 0% Capital Regions Total Chart 7.4 IFC Survey: Complexity of tax payment and reporting procedures as seen by SMEs 100% 80% 60% 40% 88% 91% 89% Problematic Nonproblematic 20% 12% 9% 11% 0% Capital Regions Total In 2006, the Ministry of Taxes successfully launched the Automated Unified Information System (AVIS), which allows taxpayers to submit their tax reports electronically. The hotline for the Ministry of Taxes has been functioning since 2003 and is also available to taxpayers that need consultation on tax issues. These two services were very much welcomed by the focus group respondents. However, despite the option to submit tax reports via registered or electronic mail, many entrepreneurs prefer to submit them in person in order to resolve outstanding issues when meeting tax officials. This may also be partly due to a low level of Internet usage among entrepreneurs 42 . Another reason is that, in general, entrepreneurs have little knowledge of legal issues. Meanwhile, according to the official statistic of the Ministry of Taxes the number of entrepreneurs submitting tax reports electronically has been significantly increasing over the past years and peaked at 72 percent in April 2009, (source: Ministry of Taxes, 2009). 42 According to the IFC Survey, 28 percent of SMEs and 9 percent of individual entrepreneurs use internet during their daily work. Aze r b a i j a n Bu s i n e s s En a b l i n g En v i r o n m e n t Pr o j e c t 119
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Study of Small and Medium Enterpris
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Study of Small and Medium Enterpris
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5. Business Permits................
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Foreword and Acknowledgements IFC,
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critically examines all areas of op
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of each formality. Special attentio
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Policy Recommendations Business Reg
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Problems Sources of Problem Recomme
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Business Taxation Problems Sources
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Capital: Baku Country’s populatio
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The state, ultimately responsible f
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1. Methodology 1.1 Background The s
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the share of economically active co
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Scope of activity Official statisti
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2. SMEs in Azerbaijan The aim of th
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Meanwhile, the number of small and
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Table 2.2 Statistical information o
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The “typical” small enterprise
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According to the IFC survey, more t
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2.5.3 Legal disputes Most entrepren
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3. Business Registration In January
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According to the law previously in
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3.4 Economic impact estimate Accord
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tion duplicate is addressed to the
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the local tax inspectorate for regi
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3.10.3 Introduce the electronic reg
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3.10.7 Simplify the liquidation pro
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Business registration before ‘one
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Process map of one-stop-shop busine
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Registration for individual entrepr
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4.1 Licensing: the legal framework
Page 69 and 70: Chart 4.1 Number of activities requ
Page 71 and 72: While the Rules specify limits for
Page 73 and 74: Chart 4.6 Economic impact of licens
Page 75 and 76: Annex 4.1 Checklist of issues for d
Page 77 and 78: Based on the IFC survey estimates,
Page 79 and 80: 5.2 Permits coverage The Azerbaijan
Page 81 and 82: Box 5.4 An example of overlapping p
Page 83 and 84: 5.4 Permit expenses Azerbaijani leg
Page 85 and 86: Chart 5.9 40% Average percentage of
Page 87 and 88: 2.4. Specifying in the law a unifor
Page 89 and 90: Annex 5.1 Procedure for obtaining c
Page 91 and 92: Annex 5.2 Checklist of issues for d
Page 93 and 94: The most significant legal act in i
Page 95 and 96: 6.1.2 There is no effective mechani
Page 97 and 98: 6.1.4 Entrepreneurs are not aware o
Page 99 and 100: IFC’s analysis showed that only h
Page 101 and 102: 6.2.2.1 The inspections process and
Page 103 and 104: View from an entrepreneur: “The s
Page 105 and 106: Chart 6.11 Average registration in
Page 107 and 108: going in the opposite direction. In
Page 109 and 110: clearly defined circumstances, or a
Page 111 and 112: Annex 6.2 Presidential Decree No. 7
Page 113 and 114: The bulk of individual entrepreneur
Page 115 and 116: Items 1-9 are collected at the firs
Page 117 and 118: The IFC survey reveals that one in
Page 119: Table 7.5 Main tax obligations of a
Page 123 and 124: 7.3.2 Tax inspections negatively af
Page 125 and 126: 7.3.5 The cumbersome VAT administra
Page 127 and 128: • Introducing clearer and more el
Page 129 and 130: Chart 8.1 Development of Credit Ins
Page 131 and 132: More than 90 percent of entrepreneu
Page 133 and 134: Chart 8.9 The loan interest rates o
Page 135 and 136: Case study of a Baku-based glass an
Page 137 and 138: View from a bank employee: “One p
Page 139 and 140: Box 8.2 Examples of a successful cr
Page 141 and 142: Box 8.3 Examples of alternative mec
Page 143 and 144: 9. Foreign Trade The volume of fore
Page 145 and 146: Box 9.1 Customs regimes under the C
Page 147 and 148: As Chart 9.1 illustrates, 98 percen
Page 149 and 150: Table 9.1 A comparison of the proce
Page 151 and 152: The comprehensive system of mandato
Page 153 and 154: Table 9.2 Average costs for imports
Page 155 and 156: Box 9.5 Customs payments The Custom
Page 157 and 158: Box 9.8 An excessive number of docu
Page 159 and 160: Moreover, due to the underdeveloped
Page 161 and 162: Expected impact More comprehensible
Page 163 and 164: 9.5.6 Accelerate WTO accession of A
Page 165 and 166: Chart 9.5 Goods importable upon app
Page 167 and 168: Azerbaijan has been long pending a
Page 169 and 170: List of Laws 1. The Tax Code of the
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Statistical Annexes Aze r b a i j a
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Chart A1.3 Individual Entrepreneurs
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Chart A1.7 Individual Entrepreneurs
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Chart A1.14 Three Major Types of Ob
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Registration Chart A2.1 Entrepreneu
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Chart A2.8 Three Major Problems Occ
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Chart A3.3 Existence of Licenses by
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Chart A3.9 Three Major Obstacles to
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Chart A4.4 Obtaining of Any Permits
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Chart A4.10 Time Required to Obtain
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Chart A5.4 Application for Credit o
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Chart A5.12 Average Interest Rate (
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Chart A6.3 Entrepreneurs That Under
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Chart A6.8 Authorities That Made In
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Chart A6.13 Breakdown of Number of
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Chart A6.19 Average Duration of One
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Chart A6.25 Small and Medium Enterp
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Chart A7.3 Small and Medium Enterpr
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Chart A7.8 Reported Share of Busine
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Chart A8.3 Usage of Optional (not c
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Azerbaijan Business Enabling Enviro
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Study of Small and Medium Enterprises in Azerbaijan - IFC

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