A failure to carry out a broader outreach campaigning on tax changes messed up businessmen

-Gubad bey, a plenary session of Milli Majlis discussed and approved a draft "On changes in the Tax Code". However, press comments are contradictory which, in turn, gives rise to perplexity. What is the contradiction?

- In my opinion, reasons of confusion are explainable. First, the philosophy of these changes and related factors are not explained in easy-to-understand manner. In fact, the core of the changes lies in the fact that tax payments are to be charged on the basis of profit, not turnover. It is very important from market economy standpoint, for enterprises must maintain accounting records and seek maximum profits. At the same time, the Ministry of Taxes is willing to propagandize activities of private sector, especially, non-oil one. By the way, new changes over distribution of taxes and social insurance payments in wages of hired workers are not applied to state and oil sectors.

As for factors predetermining tax changes, the Ministry of Taxes is willing to avail of tax and insurance funds as an instrument for legalization of shadow employment. Reasons are as follows: scanty receipts to the budget from the simplified tax, concealment of actual turnover in trade and public catering, inadequacy of actual and insurance payments of those rendering services under civil-legal agreements and widespread shady employment. Second, the society and private businessmen are not properly educated in economy. The Ministry of Taxes was to submit the project, at least, 6 months ago. Before the parliamentary debates the Ministry of Taxes was to perform an explanatory work due to the said changes, adequately instruct appropriate institutions, NGOs, specializing journalists, conduct trainings. In turn, NGOs must collaborate with taxpayers and press. Problems are caused by the lack of appropriate qualification and knowledge of many NGOs and journalists, unawareness of economic principles of society development. It is, in the first turn, school"s duty to provide adequate knowledge to the rising generation. Upperclassmen must unfailingly learn "Basic of economics," including the taxation. In my view, the Ministry of Taxes should closely collaborate with the Ministry of Education to solve the issue. By the way, the Ministry of Education should avail of training aids and the experience of Acad. Akif Mustafayev as an expert of the Ministry of Taxes.

- News is dispersed that under the changes in the Law On Social Security, from the next year the payments of persons employed on the basis of a service agreement will be dependent on profit margin. Many people believe that every businessman will pay 25% from his profit to the State Fund of Social Security. The meanwhile, the Ministry of Taxes insists that physical entities engaged in construction and trade business will pay 50% of minimum wages - 65 manats, other persons will pay 25% - 32,50 manats. How can you explain this confusion? What are taxes and social payments to be paid by physical and legal entities?

-In the first turn, changes in the sphere do not distinguish between physical and legal entities. Also, new changes are not pertaining to the state and oil sectors. In other words, benefits concern those engaged in non-oil sector. From January 1, 2019 they will be applied within 7 years. To comprehend these changes, we must know that persons engaged in economy carry out their activity by two statuses. The first group includes persons gainfully employed; relations between them and employers are regulated to comply with a labor contract. The second group is comprised of persons employed to comply with a service contract; they may be classified into 2 groups: those engaged as Taxpayer Identification Number (TIN) or in compliance with civil-legal service agreement, i. e. without TIN. And finally, changes vary in terms of tax and social insurance payments. Let"s look at them separately. First of all, it is necessary to take into account that changes concern employers of non-oil private sector only, as well as those employed by a labor contract.

From next year, taxes from persons employed under a labor contract will be charged in line with a new scale. Thus, under changes, profit taxes will not be paid by physical entities not engaged in oil and gas branch but by those engaged in non-state sector having monthly wages amounting to 8, 000 manats. Tax obligations of persons earning above 8, 000 manats make up 14%. As for insurance payments, there are serious changes for persons employed under a labor contract (non-oil private sector).

From next year, insurance payments for those earning 200 manats remain invariable (employer - 22%, employee - 3%). However, those earning more than 200 manats, employer pays 44 manats + 15% of a part exceeding 200 manats (earlier 22%); employee - 6 manats +10% of a part exceeding 200 manats (earlier 3%). Thus, a social load of employee has risen. An unemployment insurance amount in respect both of employer and employee has not changed (0.5%). The same is true of those rendering services on the basis of without TIN civil-legal agreements. As before, a figure levied is 25%.

Amendments are stipulated to obligatory social security contributions for employees (according to TIN) who derive revenues from non-hired professional activity.

Thus, for persons engaged in construction and trade spheres an insurance payment is 50% of minimum wages; in other spheres - 25%. This is to say that persons with TIN and engaged in construction and trade spheres will have to pay 65 manats a month; those engaged in other spheres (for example, NGO, consulting service, etc.) will have to pay a social insurance at the rate of 32.50 manats a month. Of interest is the fact what kind of tax they will have to pay. I"d like to add that they will no longer pay a simplified tax. Note that upon entry into force a range of simplified taxpayers will be essentially restricted. From now on, payers of simplified tax may include a retail trade providing the population with (without TIN) products; performing cargo and passenger transportations across the territory of the Azerbaijani Republic, registered taxpayers (maidservants, gardeners, barbers, tailors, waiters, etc.), public catering (turnover exceeding 200,000 manats, 8%).

Persons employed under a service agreement will be numbered among self-employment subjects because of minor turnover. To be frank, it"d be difficult to insist upon the above because the Cabinet of Ministers has not yet approved criteria for micro-entrepreneur subjects. Should those engaged in a service agreement be regarded as self-employment subjects, they would enjoy benefits at the rate of 75% and pay 20% tax from 25% of income.

-The Ministry of Taxes believes that novelties in social insurance payments will lead to the rise in entrepreneurship activity and legalization of workplaces. However, many experts believe that it will result in the growth of shadow economy. Others disagree with this point of view. To their thinking, it will lead to the growth of transparency. What do you think of it?

-I believe that changes concerning hired workers may yield positive results. As for the service contract, the Tax Code makes no differences of this sort. There is a taxpayer with his scope of activity where a turnover comes in (for instance, trade, domestic services, etc.); in other respects there are expenditures and related profits, as well as taxes paid. It is natural that time will show results of tax reforms. When planning amendments into tax regulations, it is necessary to allow for their influence on prices and existing requirements. I mean to say that it is risky to amend taxes and I"m not aware of whether the government has carried out calculations on the subject.

-How can you explain that no taxes will be levied from a businessman earning 8, 000 manats?

-These amendments do not concern a businessman but wages being paid to employees by an employer of which I told you before. They concern monthly income of physical entities as hired workers employed not in oil and gas but non-state sector. They are expected to take effect since January 1, 2019 and be valid for 7 years. In other words, the above-stated does not concern persons engaged in state and oil companies to be effective till 2026.

-NGO leaders point out that these changes are specified for defying principles of NGO work performance. In other words, these changes are targeted against them only. As you know, many NGOs have to act in line with service agreement lately. In their view, the purpose of these changes is to draw them into incremental tax payments. What do you make of this?

- There are still deficiencies in NGO obligations. As you are well aware, NGOs are engaged in non-commercial activity and secure no profits. To my thinking, there is need in some clarifications in the Tax Code. In my opinion, when adjusted for NGO"s present conditions, it"d be appropriate to resume grant agreement-based operations instead of service agreements. At present, an emphasis has to be laid on liquidation of state registered grant agreements and resumption of collaboration with foreign donors.

- What is the philosophy of these changes? Is this easement of the policy of tax and socially beneficial insurance payments, as the government insists, or tightening of the process?

- The philosophy of these changes are based on the fact that all taxpayers paid duties not from turnover tax but from gains and profits; from increase in the number of employees and participants of labor contracts; social insurance promotion. The question is that an entrepreneur has a great deal of difficulty in getting right into the nuts and bolts of the system of taxation and insurance without relevant explanations.