"The only way out is for the president to veto the adopted law"

At the meeting of the Milli Majlis, on December 5, the amendments proposed to the Tax Code were adopted in the third reading. According to the draft law, starting from 2024, microentrepreneurs in Azerbaijan with an average monthly number of employees less than 3 and arrears in contributions to compulsory state social insurance will pay income tax of 20% instead of 5%. In other words, the 75% tax benefit will not apply to them.

It should be noted that according to the Tax Code in force earlier, 75% of the profits of individual entrepreneurs who are subjects of microenterprise accounting for income and expenses were exempt from income tax from entrepreneurial activities.

According to the proposed change, 75% of profits from entrepreneurial activities of individual entrepreneurs who are subjects of microenterprise, the average monthly number of employees of which is at least 3 people and who do not have arrears in contributions to compulsory state social insurance will be exempt from income tax.

How will these changes affect microentrepreneurs?

Lawyer Akram Hasanov, the expert on financial issues, speaks on the topic.

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Question: The amendments to the Tax Code provided for in relation to microenterprise entities provide for a 4-fold increase in taxes. Can this be regarded as the liquidation of microenterprise entities?

Answer: The answer is yes. On the one hand, the Competition Code has been approved. On the other hand, partially competitive microenterprises are being put out of action.

Question: According to the new change, microenterprise entities will be able to take advantage of the benefit provided they retain at least 3 additional employees. Is it possible for all microentrepreneurs to retain 3 additional employees?

Answer: Of course not. The net profit of a microenterprise, in accordance with the very essence of microenterprise, is small. As a rule, this is an individual entrepreneur. How can he support three employees? With this exception, the authors of the project seem to be playing with the people.

Question: For example, a microenterprise with a monthly profit of 500 manats will have to pay taxes in the amount of 200 manats, including social security and compulsory medical insurance. This already means a loss of 40% of the profit. Where is the way out of this situation?

Answer: In this case, the only way out is for the president to veto the adopted law. If this does not happen, microenterprise will disappear, and the process of concentration of the country's economy will accelerate. Large holdings have become so wild that they want to take over any sphere, even the smallest business.

Question: A number of microentrepreneurs work on the basis of a service agreement and do not have the right to hire additional workers. For example, journalists working on the basis of official contracts, service sector employees, what tax obligations will they have? How can the use of benefits be applied to them?

Answer: There are no exceptions. The media business will face the same fate.

Question: Does a 4-fold increase in the tax burden of microenterprise entities increase the risk of tax evasion?

Answer: Attempts to evade payment occur without it. There may be more of them, but not much.   Because tax administration is also being tightened in parallel.

Question: Can such an approach lead to an increase in illegal entrepreneurship?

Answer: Probably not. Because, as already mentioned, tax administration is also being tightened in parallel. Actually, the most negative innovation of the project is not the destruction of microenterprise at all. The most serious problem is the consolidation in Article 16.1.11-14 of the Tax Code of the following taxpayer's obligation: "When conducting business operations, in order to verify business reputation, financial condition, availability of relevant goods in their lawful possession, availability of legally owned goods, as well as relevant employees and other resources, knowledge and skills to perform work and receive appropriate supporting documents from taxpayers who provide him with goods (works, services)."  That is, one entrepreneur must control the other, with whom he cooperates. In fact, the tax authority shifts its work to the business. For example, suppose a media organization buys office supplies. Before that, it must find out the financial situation of the seller, where and how he purchased goods, whether he has enough employees for activities, etc. In short, it is necessary to conduct a "due diligence" (legal expertise). That is, everyone should be detectives. Because it is directly impossible to obtain comprehensive information on this data in a legitimate way. You can't trust the documentation of the company you work with either: what if it's cheating on you?! In short, if tomorrow it turns out that the company from which you buy pens and notebooks is on the blacklist of the tax authority, you will also be reprimanded. For example, they will say that you allegedly performed a non-commodity operation, so come and pay an additional tax.  Actually, even medium-sized businesses cannot carry out this work in full. To do this, you need to keep a lot of additional workers.  This means that gradually small and medium-sized businesses will also be blacklisted and disappear. The tax authority will find fault with them in place or out of place. Actually, he's already doing it. And after that there will be a formal basis.  As a result, only big business will remain in the country.  Therefore, this is the most terrible innovation. With this innovation, the remaining normal business in the country will be destroyed.

Question: Is it possible to apply more precise criteria in this area?

Answer:  With a sound approach, of course, this is possible.  However, there is a systemic problem.  The development of entrepreneurship should be supported by the Ministry of Economy. But the most powerful body in its composition is the tax service, whose main task is to replenish the budget. Therefore, the Ministry operates under conditions of conflict of interest and is virtually paralyzed. It is impossible to achieve anything with such a ministry.

Question: Is the tax burden of microenterprises in neighboring countries high? What stimulating steps are being taken to develop microenterprise in these countries?

Answer: As a rule, their tax burden, reporting, etc. are very simple and easy. Yes, some abuse it and evade taxes. But against the background of the development of the country's economy, it does not matter. And our main goal of the changes is not to prevent tax evasion, but to promote monopolization. Imagine that the responsible officials of the structures responsible for economic development are close relatives of the heads of large holdings. Therefore, by giving in to each other, they serve not the people and the state, but the further growth of large oligarchic business.