What has changed in Azerbaijan’s taxation system this year?

In 2020, the whole world was engulfed by the COVID-19 pandemic, which changed not only economic relations, but also the measures taken to mitigate social consequences.

Support measures to restore global economic growth, which were previously estimated at $14 trillion, will continue in 2021 as well. For example, Canada will provide $70-100 million in fiscal stimulus over the next three years, Greece will support economic growth through solidarity taxes and social security contributions, and Australia has prepared a JobMaker plan. In line with global megatrends, fiscal expansion continues in Azerbaijan for both economic growth and social security. However, unlike global trends, fiscal expansion in Azerbaijan is largely due to the financial resources of the state, and not through, for example, the introduction of a solidarity tax.

On the other hand, Azerbaijan should further strengthen both the state budget and the country’s national security and defense capabilities.

According to the IMF, Azerbaijan is the country with the largest fiscal easing in 2020 among developing and middle-income countries. Thus, last year, cumulative fiscal easing was the highest in Azerbaijan, reaching 20 percent ​​of GDP. Azerbaijan, which is losing only to Kuwait this year, in 2022-2025 will again retain its leading positions among developing and middle-income countries.

Fiscal relaxation means an increase in government spending with revenue concessions. Of course, Azerbaijan’s emergence as a leader in this indicator was possible thanks to the ‘fiscal space’ created in the country. Of the 40 developing and middle-income countries, Azerbaijan has made the most of the opportunities from the state budget.

With unprecedented low oil prices and drop in production in Azerbaijan in 2020, the fight against drought and pandemic, as well as a glorious victory in the Great Patriotic War, were ensured by the financial power of the state. IMF’s fiscal report only confirms this fact. Azerbaijan has achieved leadership among the countries included in the group (China, India, Brazil), which are many times bigger than Azerbaijan.

Will temporary tax regime be preserved?

In order to reduce consequences of the spread of the coronavirus pandemic on the activities of economic entities, a temporary tax regime was introduced last year. Many entrepreneurs wondered whether the tax breaks introduced in 2020 for private businesses will continue in 2021. On March 9, President of Azerbaijan Ilham Aliyev approved amendments to the Tax Code, which we will discuss in more detail.

So, if persons who are VAT payers and who carry out activities in the field of public catering, after this period, continue activities on registering for VAT, they have to provide the tax authority with information in the prescribed form about the goods remaining at their disposal.

The State Tax Service has approved an information form ‘on goods purchased by persons operating in the catering sector who are simplified taxpayers, while continuing to register VAT after January 1, 2021,’ which these taxpayers must provide. This form is posted on the official website of the tax service.

The purpose of providing the information is to ensure that, when submitting goods for which VAT is not refundable, they are not re-taxed with VAT, that is, in order to avoid paying this tax twice for the same item. Subsequent submission of the goods specified in the information, the write-off of which, including as part of catering services, won’t be considered a turnover subject to VAT.

Meanwhile, for the construction and trade sectors, from January 1, 2021 to January 1, 2026, the rate of contributions for compulsory social insurance will be 50 percent of the minimum wage, 25 percent in other areas (taking into account differentiated coefficients by regions in the amount from 50 percent to 100 percent).

For persons engaged in entrepreneurship on an individual basis without the involvement of employees, until January 1, 2026, the following deductions for compulsory social insurance are provided:

- for presenters, musicians and dancers at weddings and other entertainment events and for persons providing individual photo, audio and video services – 5 percent of the minimum wage;

- for shoemakers, watchmakers, tailors, persons involved in the repair of televisions, refrigerators and other household appliances, providing household services – 3 percent of the minimum wage (taking into account differentiated coefficients by regions).

In addition, if an individual has an allotment with an area of ​​up to 5 hectares, the payment for social insurance will be carried out in the amount of 2 percent of the minimum wage for each family member (5 manat), if an allotment is from 5 to 10 hectares, the social insurance payment will reach 6 percent (15 manat per person), and for more than 10 hectares, an individual will have to pay 10 percent (25 manat per person).

Also, the amount of deductions for compulsory social insurance for members of the bar association, auditors and accountants has been reduced from 20 percent of the minimum wage to 10 percent of the minimum wage.

Along with this, it is planned to exempt a whole group of food and non-food products from taxation, and to increase the rates for excisable goods. Initially, the import and sale of wheat, the production and sale of wheat flour and bread were exempted from taxation in Azerbaijan until January 1, 2021. Now this moratorium has been extended for another year.

The tax exemption for the production and sale of bran has been extended until March 1, 2022. The term of this decision expired on March 1, 2021. This decision speaks of the importance of this industry for the development of livestock and poultry farming.

In addition, by the end of 2021, the provision of non-working (toxic) assets by banks that have lost their solvency, as well as the presentation of bank assets under bankruptcy procedures, is exempted from VAT as part of resolution measures in the manner prescribed by the relevant executive authority.

In addition, until January 1, 2022, the VAT exemption is extended for the performance of work and the provision of services on the basis of an agreement concluded with a body (structure) established by the relevant executive authority, legal entities of public law created on behalf of the state.

According to the amendments to the Tax Code, the import of vaccines against the COVID-19 coronavirus pandemic and syringes for them, as well as goods and materials for the reconstruction of oil refineries with an annual capacity of at least 3 million tons, is exempt from taxes. They are also exempted from paying customs duties from January 1, 2021 for two years.

In order to effectively use the gold reserves in Kalbajar district, the government also exempts the import of machinery, equipment and devices for the production and processing of gold and silver jewelry from VAT for up to three years - from January 1, 2021.

The changes also provide for a full VAT exemption for the sale of gold and silver in the form of bars, coins and pellets.

The Azerbaijani authorities are also exempting imports of platinum, gold and processed, sorted, framed and fixed diamonds from the payment of excise duties until the end of 2023.

The import of 20 grams of gold, jewelry and other household items to Azerbaijan, processed, sorted, inserted into a frame and fixed 0.5-carat diamonds for individual consumption were previously exempted from excise duty.

Meanwhile, on the contrary, it is proposed to include all types of smoking tobacco, with the exception of hookah tobacco and industrial tobacco, in the list of excisable goods.
Thus, the excise tax will now be imposed on homogeneous, chewing and snuff tobacco (produced in Azerbaijan), as well as tobacco and heated tobacco products.

According to the amendments to the Tax Code, the rate of excise duty on all types of smoking tobacco, with the exception of tobacco for hookahs and industrial tobacco, as well as for homogeneous, chewing and snuff tobacco, is set at 30 manat per kilogram.

The excise rate for tobacco and heated tobacco products is set at 12.9 manat for every 1,000 pieces.

The changes also provide for an increase in excise rates on cigarillos produced in Azerbaijan - from 31 manat to 43 manat for each 1,000 pieces (an increase of 38.7 percent), cigarettes made of tobacco and their substitutes - from 31 manat to 35 manat for each 1,000 pieces (an increase of 12.9 percent), liquid for electronic cigarettes - from 20 manat to 100 manat for each liter (an increase of 5 times).

New Code

So, the year 2021 brought a wide variety of goodies in the form of innovations for accountants. Some of them, however, were introduced during the pandemic, and the decision to extend tax breaks is due to the desire to give time to businesses to recover their activities. The lawmakers adopted other changes already in the new year.

The current Tax Code has been applied in Azerbaijan since January 1, 2001, and many amendments are made to it every year. However, in the medium term, it is planned to prepare a new version of the Tax Code, said Head of the main department of tax policy of the State Tax Service Nijat Imanov.

He said that the work is underway to improve tax policy. Among the priorities are ensuring that tax legislation is focused on investment, supporting the domestic market, continuing the fight against the shadow economy and creating a competitive environment. In addition, it is planned to bring tax legislation in line with international experience and improve accounting policy, Imanov noted.

He explained updating the Tax Code by a number of factors, in particular, the need to make the document ‘more competitive and understandable.’ In order to attract investments to Azerbaijan, it is necessary to increase the stability of the Tax Code and ensure integration into international tax relations, he added.