"Micro-entrepreneurs do not face such a heavy tax burden in any normal country in the world”

The draft law "On amendments to the Tax Code" is expected to be adopted in Azerbaijan. Discussions on it have already begun in the Milli Majlis.

According to the draft law, starting next year, micro-entrepreneurs with an average monthly number of employees in Azerbaijan less than 3 and arrears on mandatory state social insurance contributions will pay taxes not up to 5%, but up to 20% of their income, in other words, 75% tax benefits and tax exemption will not apply to them.

An expert on economic issues Rovshan Agayev  commented on the draft law "On amendments to the Tax Code" in an interview with ASTNA.

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Question: According to the amendments proposed to the Tax Code, the government is preparing to transfer microenterprise entities that pay 5% preferential income tax to 20% income tax. What is its purpose?

Answer: It is true that 2 years ago the government deprived microenterprises with small turnover of a simplified tax of 2% (4% in Baku) and transferred them to a 5% preferential income tax.  The essence of the matter is as follows - 2 or 3 years ago, the following amendment was made to the Code (Article 218.5.10): if an entrepreneur does not serve the population, but legal entities (that is, business entities), then in this case he cannot be a simplified taxpayer, even if he is a microenterprise with a turnover of less than 200 thousand manats per year. In this case, this entity is automatically considered a payer of 20% income tax. But at the same time, a provision was added to the Code (Article 102.1.30) according to which individual entrepreneurs who are microenterprise entities that keep records of income and expenses in accordance with the legislation receive a tax benefit for 75% of the income received. That is, the 20% tax scale for micro-entrepreneurs has been reduced to 5%. 

Now the government is going to deprive them of this benefit and transfer income tax to 20%. That is, if today a micro-entrepreneur pays 50 manats for 1000 manats of income, then from January he will have to pay 200 manats.

This Article  proposed to make a change according to which, if a micro-entrepreneur does not have 3 employees, then his income will be automatically taxed at 20%.

Question: Is the envisaged change normal?

Answer: There are many absurd points in this approach. The first is that, in accordance with the criteria approved by Cabinet of Ministers Resolution No. 556 of December 21, 2018, provided that a business entity consisting of 1 person is also a microenterprise (provided that the annual income is below 200 thousand manats), the tax authority provides benefits to an entrepreneur with 3 employees, but it deprives those who have 1 or 2 employees of such a right. Logically and, as the name implies, a micro-entrepreneur is someone who is a fairly small (both in turnover and in relation to the workforce) entity.

The second absurdity is that in no normal country in the world are micro-entrepreneurs with low incomes, who promptly create jobs, ensure self-employment and employment of their families, are not suppressed by such a heavy tax burden. And if this change happens, then taking into account social benefits, we will be talking about almost 30% of the tax burden.

The third absurdity is that those who have been talking for so many years about stimulating small and medium–sized businesses, about the care of the state, increasing the tax burden, are engaged in the maximum elimination of this stratum. The tax system should be based not on accounting calculations, but on calculations of macroeconomic policy, formed on the basis of serious consultations with interest groups.

Question: Why is the government canceling these benefits?

Answer: Most likely one of the arguments is that entrepreneurs with large turnover can earn tens of thousands thanks to a 15% discount by registering their activities through VÖEN (INN– Taxpayer Identification Number) in the name of 3-5 employees.  Is it real?   This is real, but the headache is not treated by decapitation, but treated wisely.  But will the new mechanism prevent such frauds?  It is unlikely, because for those who have done it before to benefit, it will still not be a special problem to create 2-3 microenterprise entities from 3 employees.  That is, they will still benefit from the 5% tax benefit.

And those micro-entrepreneurs whose nature of activity requires individual work (1 person) will suffer.  For example, IT specialists, translators, designers, various industry experts providing research services. Subjects with a large turnover, as before, will be able to find a way to distribute their turnover among 3 employees and get a 5% discount from 3-5 VÖEN, and the above-mentioned persons will be crushed under the weight of 20% of the tax burden.

Question: But even when hiring 3 people, there are enough expenses for medical, social insurance, as well as unemployment insurance. Income tax per employee (it may be 5% or 20%, but this is not yet accurate), transfers to the Social Protection Fund (if I am not mistaken 86.4 manats), transfer to compulsory health insurance (if I am not mistaken 13.2 manats). And all this is calculated for three.

Answer: The fact is that, according to the authors of these changes, if the talk is about the possibility of small businesses with a relatively large turnover (more than 200 thousand manats per year) and profit, a larger number of employees (for example, 10-15 people), to take advantage of this benefit, then they do not have additional costs. They are already making the social payments you are talking about for 10-15 employees.  In this case, for example, 6 of these 15 employees will register in the name of the newly created microenterprise entity by opening an additional VÖEN, and will also transfer part of their activities to them. That is, a subject in which 15 people and which is de facto owned by one person, from the new year will work with 2 or 3 different VÖEN.  In this case, there are no additional costs for employees, but the payer, who must work with 20% income tax, benefits from a 5% discount. That is, this example shows that an increase in the tax burden will not allow us to achieve this goal. However, due to this incorrect decision, a large number of micro-entrepreneurs will suffer great economic losses.

Question: What is the way out?

Answer: For the specific services mentioned above, you can determine the monthly and annual turnover, and get a 5% discount regardless of the number of employees.  For example, one of the possible ways out may be to set a monthly limit of 3,000 manats, a quarterly limit of 10,000 manats or an annual limit of 40,000 manats. The figures are conditional, it can be, for example, 5,000 manats per month and 70,000 manats per year.

The potential argument of the government is that entrepreneurs with a large turnover create micro-entrepreneurs at the expense of their employees in order to share the turnover. This step is being taken in order to prevent this. And I say that a large entrepreneur will now do this not with 1 of his employees, but with 3. That is, no additional costs arise. And so this employee, when he was in the company, was paid - salary + social insurance.