Study of Small and Medium Enterprises in Azerbaijan - IFC

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Contents Abbreviations....................................................................................... 4 Foreword and Acknowledgements................................................... 5 Executive Summary............................................................................. 6 Policy Recommendations..................................................................11 Introduction........................................................................................22 1. Methodology.................................................................................27 1.1 Background........................................................................................................ 27 1.2 Purpose of survey.............................................................................................. 27 1.3 Sampling strategy.............................................................................................. 27 1.4 Firm classification in the Azerbaijani economy.................................................. 28 1.5 Data collection................................................................................................... 29 1.6 Qualitative method of data collection............................................................... 29 1.7 Distribution of official data and survey sample, by sector of activity................ 29 2. SMEs in Azerbaijan.......................................................................33 2.1 Individual entrepreneurs.................................................................................... 35 2.2 Small enterprises................................................................................................ 38 2.3 Main source of investments: own funds........................................................... 39 2.4 State subsidies for SME development............................................................... 40 2.5 Legal environment and SME confidence........................................................... 41 3. Business Registration....................................................................45 3.1 Registration: the legal framework..................................................................... 45 3.2 Registration of legal entities.............................................................................. 46 3.3 Registration of individual entrepreneurs............................................................ 48 3.4 Economic impact estimate................................................................................. 49 3.5 Introducing registration one-stop-shop............................................................. 49 3.6 The new legal framework................................................................................. 50 3.7 Registration procedure for legal entities............................................................ 50 3.8 Registration procedure for individual entrepreneurs......................................... 52 3.9 Unofficial payments........................................................................................... 54 3.10 Recommendations........................................................................................... 54 4. Business Licensing.........................................................................64 4.1 Licensing: the legal framework.......................................................................... 65 4.2 Licensing coverage............................................................................................. 66 4.3 Licensing procedure........................................................................................... 67 4.4 Economic impact of licensing............................................................................ 70 4.5 Recommendations............................................................................................. 71 2 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
5. Business Permits............................................................................74 5.1 Permits: the legal framework............................................................................ 75 5.2 Permits coverage................................................................................................ 77 5.3 Permits issuance and revocation procedures are unclear and vague................ 80 5.4 Permit expenses................................................................................................. 81 5.5 Economic impact of permits.............................................................................. 81 5.6 Main problems faced by entrepreneurs while obtaining permits..................... 82 5.7 Recommendations............................................................................................. 83 6. Business Inspections.....................................................................90 6.1 The majority of all active enterprises are subjected to inspections................... 91 6.2 Inspection outcomes.......................................................................................... 96 6.3 The Inspections’ Registration Book.................................................................. 102 6.4 MED’s representative presence at the inspections........................................... 104 6.5 Inspections and regular visits – different concepts for the entrepreneur........ 105 6.6 Recommendations........................................................................................... 106 7. Business Taxation........................................................................110 7.1 Taxation: the legal framework......................................................................... 112 7.2 Simplified tax regime....................................................................................... 113 7.3 Standard tax regime........................................................................................ 116 7.4 Recommendations........................................................................................... 124 8. Access to Finance........................................................................126 8.1 Overview of the Azerbaijani financial system.................................................. 126 8.2 Financing SME operations............................................................................... 128 8.3 Poor mutual understanding between banks and SMEs.................................. 135 8.4 Recommendations........................................................................................... 138 9. Foreign Trade...............................................................................141 9.1 Foreign trade: the legal framework................................................................. 142 9.2 The role of individual entrepreneurs and SMEs in foreign trade..................... 144 9.3 Main difficulties faced by IEs and SMEs in importing .................................... 150 9.4 Key difficulties faced by exporting smes......................................................... 156 9.5 Recommendations........................................................................................... 158 Conclusion........................................................................................164 References........................................................................................166 List of Laws......................................................................................167 Statistical Annexes..........................................................................169 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 3
Page 1 and 2: Study of Small and Medium Enterpris
Page 3: Study of Small and Medium Enterpris
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 19 and 20: Business Taxation Problems Sources
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
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,
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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
Page 91 and 92:
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
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
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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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