Our Analytics 19 december — 15:38

What do Ilham Aliyev's revolutionary amendments to Tax Code carry? (Our comment)



At the end of the year, Azerbaijani Milli Majlis (National Assembly) approved the bill 'On Amendments to the Tax Code,' about the revolutionary nature of which many members of the government and deputies had spoken about. Their main meaning comes down to the elimination of informal labour relations, the importance of solving problems existing in the design of labour relations, the protection of labour and social rights. The goal that prompted the government to take this step is related to the fact that informal employment creates serious obstacles to the regulation of the employment market, the implementation of tax, social insurance and other compulsory payments, as well as the availability of future social security rights for employees.

Revolutionary amendments of Ilham Aliyev

Serious steps to eliminate informal labour relations in Azerbaijan have been taken earlier, but the current fundamental reforms in the tax sphere will give a serious impetus to the elimination of informal employment from the beginning of the new year. This is quite a bold step on the part of the state, which actually gives up part of the state budget revenues for a certain period of time. But the country needs transparency in the economy, reduction of the shadow economy: with this goal incentives are created for entrepreneurs. The reforms concern the distribution of social insurance contributions between employees and employers, and in favour of the latter. And now employers must also support this step of the government. At first, all this may lead to a decrease in budget revenues; but even after this there will be no significant growth in transfers from the State Oil Fund (SOFAZ), as Finance Minister Samir Sharifov noted earlier. The government carried out all the necessary calculations and is able to cope with it.

However, Minister of Taxes Mikayil Jabbarov already during the discussion of amendments in the Milli Majlis, stressed that changes to the Tax Code included in the budget package of 2019 will cover five important directions.


Mikayil Jabbarov announces

What are these directions?

- support for entrepreneurship (important for maintaining economic development) and extending the rights of taxpayers;

- reducing the scale of the 'shadow economy' and ensuring the transparency of the economy, which is not limited to the replenishment of the state budget revenues;

- expansion of the taxable base;

- the use of tax incentives to improve economic efficiency;

- modernisation of tax administration.

But these are just general expressions, each of which requires a special comment. Today in the country there are two types of payments from salaries (wages). These are income tax and deductions by individuals for compulsory social insurance. These taxes are collected by the Ministry of Taxes and the State Social Protection Fund (pension fund), respectively. From the new year, only the Ministry of Taxes will be in charge of administering both payments, which greatly simplifies this process for employers. At the same time, the state takes a big risk, as it loses a certain part of its income. But after the reform, it expects a reduction in the volume of the 'shadow economy,' the elimination of informal employment, the revitalisation and acceleration of economic activity, especially in the private segment of the non-oil sector, as well as more complete provision of citizens' rights. This is a very significant, fundamental change and will actually cover every single employee of the non-oil, non-state sector.

Benefits will be noticeable for everyone. Today, the income tax rate is 14% of income in the amount of up to 2.5 thousand manats per month, and above this amount - 25%. And from January 1 for a period of 7 years it is planned to provide a 100% benefit to the income tax from the salaries of employees working in the non-oil and non-gas sector and the private sector. Moreover, the benefit will be extended to a salary of up to 8,000 manat. With a salary above 8,000 manat, the benefit will be 44%. In this case, the employee will pay income tax in the amount of 14% of the amount exceeding 8,000 manats. One must admit that the difference is really impressive. Perhaps there hasn’t ever been such large-scale benefits in Azerbaijan.

But this is not all, the non-taxable amount for persons employed in all sectors, from 2019, has increased from the current 173 manats to 200 manats. And deductions for compulsory social insurance provide for the use of differential rates. Thus, with a salary of up to 200 manats, the employee himself/herself pays for social insurance 3% of the salary, and the employer - 22%. If the salary exceeds 200 manats, the social insurance worker will pay 6 manats + 10% of the amount exceeding 200 manats, and the employer - 44 manats + 15% of the amount exceeding 200 manats.

Many benefits are provided for subjects of micro, small and medium-sized enterprises (SMEs). In particular, they will be provided with long-term tax benefits. Thus, small and medium business cluster companies for 7 years from the date of registration in the SME registry are exempt from income tax, land tax and VAT. For the same period, such a company is exempted from VAT and imports tax on technological equipment and devices for production or processing.

And part of the income from the services provided by entrepreneurs participating in the cluster of SMEs, aimed at capital expenditures, is exempted from income tax for 7 years. Micro-entrepreneurs are exempt from income tax and profit tax on 75% of income and profits from entrepreneurial activities, and legal entities and private entrepreneurs who are subjects of micro-enterprises are exempt from property tax.

Along with this, the amendments provide for tougher financial sanctions against financial institutions for violating tax laws. Thus, the financial sanction for non-compliance with the requirements of regulatory acts, including those providing for the exchange of tax and financial data on international agreements adopted by Azerbaijan, when financial institutions open accounts for legal entities and individuals or provide financial services to them, increases 5 times to 500 manats. The amendments also toughen penalties for taxpayers for violating accounting policies, raising excise rates on car imports, applying excise taxes on buses, changes in the simplified tax collection system, etc. From next year, the period of tax benefits provided in agriculture is extended for another five years.

Frankly speaking, tax benefits are applied in many areas of the country's economy. And it is clear, if the state applies tax breaks, giving up some part of its income, it expects an increase in returns, that is, economic efficiency. And in this case, the state offers very large benefits. In fact, such an important step is envisaged in addition to the benefits that have already been provided in the past years for the development and support of the non-oil sector.

And what should be especially emphasised, the tax base is planned to be expanded not by increasing the tax burden, but by bringing to tax those who work in the 'shadow.' This circumstance occupies the main place among the proposed changes to reduce the fiscal burden on salaries. 'This is the order of President Ilham Aliyev,' Minister Jabbarov notes.

Here lies the secret of the tax revolution of the head of state. He decided to replenish the state budget not by simply increasing the tax burden, which always causes discontent among the population, but by expanding the coverage of taxpayers. Don't we know how many jobs are today hidden 'in the shadows,' hidden from official bodies? As a result of unofficial salaries (wages) and jobs, employees who work in the 'shadow economy' actually remain apart from the social insurance and pension systems.

If an employee works without a contract or the official contract does not indicate salaries (wages), social insurance contributions do not accumulate and payments are not reflected in the personal retirement account, which not only deprives the budget of huge incomes, but also deprives workers of the right to receive a decent pension in the future. In particular, according to the minister, this reform provides for the restoration of pension rights and social insurance rights for 100 thousand people.

The priority issue will be the implementation of reforms related to the incomes of employees. The basis of these reforms will be benefits for employees in the private sector, not operating in the areas of oil and gas, that is, an absolute majority of them, as well as regulating the ratio of payments for state social insurance between the employee and the employer. The Ministry of Taxes is confident that the reforms will help reduce the tax burden on deductions for compulsory social insurance and reduce informal employment.

In addition, the unshadowing of salaries (wages) will have a positive impact on the restoration of the role of bank credit in the country's economy. Let's be frank, today the real salary of many workers does not correspond to the officially registered. And this is already a limiting factor for them, because in this case they cannot take short-term and long-term loans, including mortgage loans, which generally affects not only the welfare of citizens, but also economic growth...

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