Study of Small and Medium Enterprises in Azerbaijan - IFC

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Problems Sources of Problem Recommendations Expected Effect Most inspections end in sanction: official fines or informal ‘settlements’ 1. Non-transparency in decisionmaking on inspections; 2. Overregulation of technical inspections (outdated Soviet-time or overly complex new requirements); 3. Weak institutions handling appeals against illicit actions of inspectors; 4. Low legal awareness of entrepreneurs. • Introduce inspection certificates that specify penalties for failure to comply with the regulation; • Introduce sanction mechanism to be launched only by judiciary decision; • Simplify the technical requirements for business units; • Increase legal awareness of entrepreneurs. • Inspectors prevented from illegally interfering with business operation and thus minimized opportunity for abuse of office; • Businesses less inclined to offer unofficial payments and thus stimulate corruption; • Increased compliance with established standards and regulations; • Increased business community’s legal awareness; • Codified and uniformed inspection procedures; • Effective mechanisms for inspection appeals established, resulting in complaints being properly handled. Mechanisms for protection and appeals against unlawful actions of inspectors are practically inoperable 1. Non-transparency in decisionmaking on inspections; 2. Inspection system is inefficient. • Introduce inspection certificates specifying penalties for failure to comply with the regulation; • Introduce sanction mechanism to be launched only by judiciary decision; • Increase legal awareness of entrepreneurs. • Existence of genuine appeals against on-site inspection procedures; • Increased compliance with established procedures and rules; • Increased legal awareness of business community’s Increase inspectors’ liability in terms of determining legal pressure methods; • Inspectors prevented from illegally interfering with business operation and minimize opportunity for abuse of office. 16 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
Business Taxation Problems Sources of Problem Recommendations Expected Effect Graduation from the simplified to the standard tax regime leads to increase of tax burden 1. High tax rates of the standard tax regime. • Index threshold against inflation; • Consolidate both turnover tax and social security tax (SST) into a simplified tax; • Reduce the overall tax burden imposed under the standard tax regime. • Greater satisfaction of entrepreneurs with the tax policy, code and regulations; • Less inclination of the private sector to stimulate corruption; • Greater compliance rate and thus reduction of the “shadow economy”, tax evasion and corruption; • Increased tax revenues; • Increased number of tax-paying businesses. Tax Compliance and tax administration is burdensome, inconsistent, unclear and changes too frequently 1. Same tax accounting for SMEs and large tax payers; 2. Large number of tax reports and payments; 3. Tax accounting procedures are not sufficiently clear and in line with best international practice; 4. The procedures for conducting tax inspections are not sufficiently clear and the oversight of the inspectors and inspections is not satisfactory. • Introduce simplified accounting for individual entrepreneurs and SMEs; • Reduce the number of reports and payments all business entities are required to make, especially the number of SST reports (from 12 to 2, or ideally just 1 report per year), and providing for quarterly VAT reporting option for SMEs; • Consolidate tax reporting, i.e. introduce unified tax accounting and reporting that would allow submission of a single tax report for all or several taxes: – Streamline tax accounting procedures; – Reduce the number of contacts between tax officials and entrepreneurs by encouraging electronic tax reporting; – Introduce risk management principles in planning and conducting inspections, focusing the verifications on the businesses where higher returns are expected; – Introduce clearer and more elaborate regulation of tax inspections (especially powers and obligations of tax inspectors), limiting their scope to tax specific areas, yet also increasing the supervision over tax inspectors and sanctioning any violation by tax inspectors. • Tax Code and the related legislation and bylaws should be changed as infrequently as possible and effective dissemination of such amendments to the business community is commendable. • Reduced time and direct costs for tax administration for both businesses and the government; • Reduced number of reports for submission; • Reduced number of errors committed by entrepreneurs when reporting, hence the cost and time for rectifying them; • Increased legal certainty and predictability for entrepreneurs; • Internationally verified simplification of tax compliance and tax system (e.g. by Doing Business report); • Reduced number of direct contacts between entrepreneurs and tax officials and less unofficial payments; • Government resources redirected from overregulated tax procedures to an efficient use of compliance monitoring and reforming the system; • Budgetary savings as a result of the more efficient use of public resources. 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 17
Page 1 and 2: Study of Small and Medium Enterpris
Page 3 and 4: Study of Small and Medium Enterpris
Page 5 and 6: 5. Business Permits................
Page 7 and 8: Foreword and Acknowledgements IFC,
Page 9 and 10: critically examines all areas of op
Page 11 and 12: of each formality. Special attentio
Page 13 and 14: Policy Recommendations Business Reg
Page 15 and 16: Problems Sources of Problem Recomme
Page 17: Problems Sources of Problem Recomme
Page 25 and 26: Capital: Baku Country’s populatio
Page 27 and 28: The state, ultimately responsible f
Page 29 and 30: 1. Methodology 1.1 Background The s
Page 31 and 32: the share of economically active co
Page 33 and 34: Scope of activity Official statisti
Page 35 and 36: 2. SMEs in Azerbaijan The aim of th
Page 37 and 38: Meanwhile, the number of small and
Page 39 and 40: Table 2.2 Statistical information o
Page 41 and 42: The “typical” small enterprise
Page 43 and 44: According to the IFC survey, more t
Page 45 and 46: 2.5.3 Legal disputes Most entrepren
Page 47 and 48: 3. Business Registration In January
Page 49 and 50: According to the law previously in
Page 51 and 52: 3.4 Economic impact estimate Accord
Page 53 and 54: tion duplicate is addressed to the
Page 55 and 56: the local tax inspectorate for regi
Page 57 and 58: 3.10.3 Introduce the electronic reg
Page 59 and 60: 3.10.7 Simplify the liquidation pro
Page 61 and 62: Business registration before ‘one
Page 63 and 64: Process map of one-stop-shop busine
Page 65 and 66: Registration for individual entrepr
Page 67 and 68: 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
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Annex 4.1 Checklist of issues for d
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Based on the IFC survey estimates,
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5.2 Permits coverage The Azerbaijan
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Box 5.4 An example of overlapping p
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5.4 Permit expenses Azerbaijani leg
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Chart 5.9 40% Average percentage of
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2.4. Specifying in the law a unifor
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Annex 5.1 Procedure for obtaining c
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Annex 5.2 Checklist of issues for d
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The most significant legal act in i
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6.1.2 There is no effective mechani
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6.1.4 Entrepreneurs are not aware o
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IFC’s analysis showed that only h
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6.2.2.1 The inspections process and
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View from an entrepreneur: “The s
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Chart 6.11 Average registration in
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going in the opposite direction. In
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clearly defined circumstances, or a
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Annex 6.2 Presidential Decree No. 7
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The bulk of individual entrepreneur
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Items 1-9 are collected at the firs
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The IFC survey reveals that one in
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Table 7.5 Main tax obligations of a
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Chart 7.3 IFC Survey: Complexity of
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7.3.2 Tax inspections negatively af
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7.3.5 The cumbersome VAT administra
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• Introducing clearer and more el
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Chart 8.1 Development of Credit Ins
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More than 90 percent of entrepreneu
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Chart 8.9 The loan interest rates o
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Case study of a Baku-based glass an
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View from a bank employee: “One p
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Box 8.2 Examples of a successful cr
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Box 8.3 Examples of alternative mec
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9. Foreign Trade The volume of fore
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Box 9.1 Customs regimes under the C
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As Chart 9.1 illustrates, 98 percen
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Table 9.1 A comparison of the proce
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The comprehensive system of mandato
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Table 9.2 Average costs for imports
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Box 9.5 Customs payments The Custom
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Box 9.8 An excessive number of docu
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Moreover, due to the underdeveloped
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Expected impact More comprehensible
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9.5.6 Accelerate WTO accession of A
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Chart 9.5 Goods importable upon app
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Azerbaijan has been long pending a
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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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