Study of Small and Medium Enterprises in Azerbaijan - IFC

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7.4 Recommendations 7.4.1 Make the graduation from the simplified to the standard tax regime less burdensome, by: • Indexing VAT threshold for inflation; • Consolidating into the simplified tax both turnover tax and SST; and • Reducing the overall tax burden imposed under the standard tax regime 47 . Expected impact These measures may create a more favorable business environment for individual entrepreneurs and SMEs, and contract the “shadow economy” by reducing tax evasion and corruption, which will, in return, lead to an increase in tax revenues and number of registered businesses. 7.4.2 Simplify the tax compliance, especially for individual entrepreneurs and SMEs, by: • Introducing simplified (different) accounting for individual entrepreneurs and SMEs; • Reducing the number of reports and payments individual entrepreneurs and SMEs are required to make, especially reducing the number of reports with respect to SST from 12 to two reports, or ideally to one report per year, and providing for a quarterly VAT reporting option for SMEs; and • Further streamlining tax accounting procedures. Expected impact As a result of these measures tax compliance will become less time consuming and less expensive both for businesses and the government. Having a lower volume of reports to check, tax authorities will redirect their resources to more value added work. Clearer tax accounting procedures will reduce the number of mistakes by entrepreneurs, hence the cost and time for rectifying them, at the same time increasing certainty for entrepreneurs will allow them to assess their incomes more accurately. Simplification of tax compliance and the tax system and further reduction of contacts with tax officials will discourage unofficial payments. 7.4.3 Improve tax administration by: • Simplifying tax payments by consolidating them with an option to pay more frequently and reducing the number of taxes wherever possible; • Introducing risk management principles in planning and conducting inspections, focusing verification on the businesses where higher returns are expected; 47 These recommendations are the result of consultations with, and research by the World Bank. Reference is made to World Bank 2008 Contestability of Domestic Markets. 124 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
• Introducing clearer and more elaborate regulation of tax inspections (especially, powers and obligations of tax inspectors), limiting their scope to certain areas; increasing the supervision over the tax inspectors and aggravating the penalties for violations of law by tax inspectors. Expected impact As a result of improvement of tax administration, businesses will spend less time and resources on tax payments and the government’s costs and time on processing tax payments will reduce in parallel. Businesses will have less incentives to conceal their revenue and will not need to make unofficial payments, which will reduce corruption. Application of risk management principles will help the government to redirect its resources from unnecessary tax procedures to more efficient use. More efficient regulation of inspections will decrease the scale of corrupt practices. 7.4.4 Reduce or eliminate the following taxes which represent an obstacle to business growth, by: • Eliminating double taxation of corporate earnings by allowing for a deduction of dividend under CPT or PIT; • Introducing a flat rate for PIT (remove tax brackets), consolidating 3 percent SST to PIT, lowering current high 35 percent PIT rate to 10 percent and indexing the PIT threshold income for inflation 48 . Expected impact These measures will create additional incentives for companies to invest in business development, and will reduce their incentives to hide revenues and increase expenses. Reduction/elimination of SST will reduce unofficial employment, increase employer’s incentive to hire more and increase employees’ income, and make more employees eligible for social benefits in the future. 7.4.5 Provide for wider free business consultations for individual entrepreneurs and SMEs and organize workshops, seminars, and similar events to increase entrepreneurs’ legal awareness Expected impact Access to tax and accounting consultations would facilitate tax filing and accounting for smaller businesses. Increased legal awareness of entrepreneurs will reduce unofficial payments and the time required to deal with tax payments and tax inspection procedures, positively affecting entrepreneurs’ profits and state tax revenues. 48 See footnote 47 above. 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 125
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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
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Chart 4.1 Number of activities requ
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While the Rules specify limits for
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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 and 120: Table 7.5 Main tax obligations of a
Page 121 and 122: Chart 7.3 IFC Survey: Complexity of
Page 123 and 124: 7.3.2 Tax inspections negatively af
Page 125: 7.3.5 The cumbersome VAT administra
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
Page 171 and 172: Statistical Annexes Aze r b a i j a
Page 173 and 174: Chart A1.3 Individual Entrepreneurs
Page 175 and 176: 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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