Study of Small and Medium Enterprises in Azerbaijan - IFC

7.3.5 The cumbersome VAT administration and
malfunctioning VAT rebate system create incentives for tax
evasion and unofficial contacts
Under the Tax Code, all VAT payers, regardless of their size, must submit monthly
VAT reports, amounting to 12 reports per year. Given the tax handling systems that
large taxpayers usually have, monthly reporting is not likely to be burdensome for
them. However, for SMEs, monthly VAT reporting is too frequent and increases
the costs of tax compliance. In IFC’s opinion, to reconcile the interests of the tax
authorities and entrepreneurs, the number of VAT reports for smaller taxpayers should
be reduced to four per year; the change from quarterly to monthly VAT reporting
would be a one-off timing adjustment mandated by taxpayer’s turnover exceeding
the established threshold for this purpose. Such reforms may reduce the costs of
compliance for SMEs and the tax authorities.
Box 7.3 Simplification of VAT filing has proved to be cost efficient for SMEs 46
In many countries, reduction of filing frequency of VAT reports proved to be cost saving for SMEs. For example, small businesses in the
UK (as well as in most European countries) with an annual turnover below 1,350,000 British sterling ($2,100,000) can opt for an annual
accounting scheme. Under this scheme, the taxpayer is obliged to make monthly or quarterly installments based on an estimate of his total
VAT liability.
Similar systems are in operation in other countries. In New Zealand, for example, taxpayers generally are obliged to file every two months,
while SMEs can opt to file a return only twice a year and filing can be timed to coincide with the accounts reporting date. In Canada, returns
are normally filed within one month of the reporting date, while small firms have three months after their reporting date to file their returns.
Among CIS countries, in Ukraine, taxpayers with annual turnover less than 300,000 Ukrainian hryvnia ($40,000), may opt to file VAT returns
quarterly.
Yet another nuance in VAT system is connected with VAT rebates. When a non-
VAT seller purchases products from a VAT supplier who charges VAT on his sales,
a non-VAT seller is not entitled to reclaim the VAT he has paid on purchase price.
In this event, such a seller acts as an “end-user” and carries the burden of VAT. To
offset for the VAT, the seller has to sell the purchased products for higher (less
competitive) prices. Thus, according to tax code, the simplified tax payers are not
entitled to VAT rebates (since the majority of simplified tax payers are not VAT
payers). Such a situation de facto increases the seemingly low tax burden of the
simplified tax payers.
46
World Bank 2007.
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 123