Study of Small and Medium Enterprises in Azerbaijan - IFC

for short-term goals since it is not often desirable for new businesses with unstable
cash flows to pay interests.
To address this issue some countries, including Latvia, Estonia, Ukraine, Slovakia,
and Kazakhstan to some extent, have already abolished double taxation of corporate
earnings, eliminating either CPT or dividend tax or by allowing for the deduction of
dividends under CPT.
Another problem associated with CPT and PIT is the limited loss carry forward period
of three years with respect to PIT, and five years (in case of losses arising in connection
with dealing with property, three years) with respect to CPT. Such short loss carry
forward periods discourage investments in activities involving more unstable income
generation or later capital returns. The provisions in most other countries allow for considerably
longer loss carry forward periods. For instance, it is 10 years in Russia.
7.3.4 High PIT rates discourage the growth of individual
entrepreneurs and push them into informality and tax
evasion; the high social security rate is the main cause of
widespread unofficial employment
PIT rates in Azerbaijan are among the highest in the CIS countries 43 . For example,
in Russia PIT is set at 13 percent, while in Ukraine it is at 15 percent. Currently, the
PIT rate is 14 percent in the first tax bracket, which applies to personal income up to
2,000 Azerbaijani manats, and 35 percent in the second tax bracket, which applies to
income exceeding 2,000 Azerbaijani manats (with income up to 2,000 Azerbaijani
manats always taxed at 14 percent rate). As the figures show, first of all, the difference
between the tax bracket rates is substantial, and secondly, the threshold is very low.
Moreover, the personal income of an individual is also subject to 3 percent SST 44 ,
which may be regarded as double taxation of an individual’s personal income connected
with his/her employment. The Tax Code exempts a certain part of personal
income from PIT. Such exemptions, however, do not make much difference for the
PIT tax burden 45 . Such a situation creates strong incentive for individual entrepreneurs
to conceal their taxable income and for employees not to oppose unofficial employment,
which employers favor as a result of very high (22 percent) SST. These same
reasons create dual bookkeeping and a widespread in-cash salary system, where an
employee is paid official salary of a nominal amount and an unregistered in-cash salary
of a substantially higher amount. For this is reason, it comes as no surprise that the
employees working without employment agreements constitute certain percentage
of the total labor force.
43
According to the study by Rup Khadka. 2007, Reforming Azerbaijan’s Tax System to Increase Competitiveness
of the Non-oil/Gas Private Sector, the average CIS rate was 19 percent, World Bank 2008 Contestability of
Domestic Markets.
44
Overall SST rate is 25 percent of all qualifying amounts received by an employee. 22 percent of SST is paid by
an employer and remaining 3 percent is withheld from the employee’s income by the employer.
45
For instance, under the Tax Code, if an individual’s monthly income is less than 200 Azerbaijani manats, and if
their yearly income is less than 2,400 Azerbaijani manats , the part of the monthly income equaling to the monthly
average salary or the part of yearly income equaling to 12 times the monthly average salary is exempt from PIT.
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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