The main problem is a discriminatory approach to taxpayers and a lack of transparency

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Question: It is time for the annual tax return. As a rule, entrepreneurs during this period face innovations or problems. Annual changes in tax legislation create certain difficulties. The structure creates bureaucratic obstacles for entrepreneurs in the form of innovations in the electronic version. Why do they do it? For what purpose?

Answer: In general, every year (except for 2008, 2010, 2011, 2013 and 2020) many changes are made to the Tax Code. In itself this is not normal. Taxes are one of the basic rules of the game in the state. And in a democratic society, this is the main institution of the social contract between civil society and the state. In a country where the rules of the game change frequently, normal economic development is impossible. Because entrepreneurs and investors plan serious projects for a period of at least 5 years. Naturally, in such a situation, there are much fewer people willing to invest in the country. Unfortunately, few people in the government understand this. They still think like in the USSR. Those who want to develop the economy through software and roadmaps fail to understand the importance of the rules of the game and institutions.

The vast majority of changes made every year are related to tax administration. In general, all over the world, taxpayers are prone to tax evasion (including through loopholes in the law). Therefore, the state tightens administration in order to reduce cases of evasion. But this cannot be done annually. This suggests that there are few educated, scientifically-minded personnel in the government and tax authorities. If they were, they would approach the problem systematically and would not prepare draft amendments to the Tax Code as another step against tax evasion schemes invented annually by taxpayers. On the contrary, thinking strategically and taking into account foreign experience, they would take preventive measures, i.e. develop a more perfect Tax Code. Our Tax Code is extremely unsuccessful, both in terms of language and in terms of legislative techniques. To develop a good code, it is necessary to have a scientific base and know foreign experience. Our officials, going on numerous foreign business trips, instead of learning something, walk around like tourists, and that's the result.

Question: Are they doing this deliberately to illegally induce entrepreneurs to evade reporting and try to solve it with unofficial payments? Or is it done in order to impose more penalties to get more money from people?

Answer: As already mentioned, the problem is not in strict tax administration, but in the fact that new rules are introduced every year. As long as taxpayers understand and assimilate these rules, they will be presented with new innovations. In developed countries, to educate taxpayers, I publish interpretations of the Tax Code. It is impossible for us. How to prepare an interpretation if at least a quarter of the Code is updated annually? As a result, in a number of cases, taxpayers commit violations because they do not understand the innovations, and the tax authorities fine them. Naturally, there is a doubt that the goal of the tax authorities is to fine taxpayers in order to replenish the budget. As a result, every year the business climate in the country is weakening, entrepreneurs are curtailing their activities, etc.

Question: What changes were made to tax legislation and tax reporting rules this year? And which ones are the most challenging for entrepreneurs?

Answer: Many of the changes are objective and normal in themselves. For example, the requirements for payment transactions have been tightened (additional information that must be indicated in payment orders, etc.) so that the tax authority can obtain more complete information on settlements. All this, of course, complicates the work of entrepreneurs. From this point of view, accountants and other employees must study and correctly apply innovations. I repeat: if these innovations had not changed for at least 5 years, there would have been no problems. But, studying all this every year anew requires a considerable investment of time and money.

Question: To what extent is quarterly or annual reporting necessary? The tax office sees the bills, VÖİN, incoming income, at the same time, it can track the amount of tax paid and other expenses for the SSPF and CHI and other expenses. Why, in this case, the entrepreneur should report quarterly?

Answer: I don't see any problems here. Let it be at least a monthly report. If there is a well-established experience, all this will be done automatically. Even a student can do it. Foreign experience in this matter is different. In general, the tax authority is better able to identify cases of tax evasion when it receives information in more than one form. That is, in itself it is not a problem.

Question: They are talking about e-government, smart government, asan-government projects. However, instead of simplifying the system, they complicate it even more. Is it really so difficult to simplify it?

Answer: As already mentioned, the problem lies solely in updating the rules every year. Yes, from year to year the time spent by the taxpayer on the submission of reports increases. But it's not just us. Even in developed countries, tax administration is a complex and time-consuming task. They just don't change the rules that often.

Question: What do you offer? What needs to be done to eliminate bureaucratic obstacles in the taxation system, make the work of entrepreneurs easier and stimulate taxpayers?

Answer: The main problem of Azerbaijan's tax system is not that the tax administration is rigid and bureaucratic. It is like that everywhere. Even a radical change in legislation is not the main problem. The main problem is the discriminatory approach to taxpayers and the lack of transparency.

A tax is a gratuitous payment to the state. The vast majority of people do not want to pay taxes. This desire is neutralized in a positive sense only in two cases: when the taxpayer sees the same approach to everyone and transparent use of the budget. We do not have either one or the other at the proper level.

Let's say I'm an entrepreneur. Naturally, I have competitors. If I know that they pay taxes the same as I do, then there is no problem. This means that our costs are the same and paying the tax does not lead to unfair competition. But, we are not like that. Not everyone is treated equally, those who pay less taxes (for example, by temporarily lowering the price of their product or service) may end up incapacitating an honest taxpayer. True, in recent years corruption in this area has decreased and the volume of the shadow economy is not the same as before. But, fundamentally, this problem has not been solved.

A simple example. The rent for real estate in the country in most cases does not correspond to the real one. That is, formally, the rent is paid less so as not to pay too much taxes. But is everyone being held accountable? Not! The tax authority is pursuing the tenant, they say your rent is below the market price, you evaded paying taxes, now pay taxes, fines and interest for the past period. And what is the proof? An expert's opinion. And the expert, of course, writes what the tax authority requires. What is he writing? He writes that the rent in such an area is actually more expensive. What is he referring to? To the ads of property owners! You say that an ad is an offer, not a market price, because by law the market price is the price that is formed as a result of the interaction of supply and demand. That is, other concluded agreements. For some reason, the tax authority does not consider other lease agreements for this area and does not say that other areas were leased at this price, and you paid at a lower price? Most likely because the tax authority “found a common language” with other landlords and does not want to touch it because they “respected” each other. Therefore, he refers as evidence to the absurd opinion of a certain expert. This is the discriminatory approach!

Are taxes collected right? Can we control it? Not! The law “On Public Procurement” is not even formally enforced in most cases. For example, according to this law, each public institution at the end of the year must publish its procurement plans for the next year on the procurement portal. Do they do this? No! I’m not even talking about that the purchases themselves in most cases are carried out according to the “kickback” scheme. Why is this happening? Because there is no transparency. The society does not have mechanisms to control these processes. There is no electronic control system for spending budget funds. They are controlled only by the Accounts Chamber. And she reports to Milli To the Mejlis, and everyone knows that our Milli Majlis is a parliament only in words, there is no real control.

Yes, and what kind of control can there be if our society does not have the most common tools for controlling transparency over activities, the government. For example, officials do not have a system for declaring income and expenses. The State Register of Real Estate, the State Register of Legal Entities, etc. are closed. Although, in developed countries, these data are publicly available. Enter and see who owns such and such a land plot or building, who owns which company, etc. Naturally, these conditions are also relevant with us from the point of view of the issue of inequality, which was mentioned earlier. If everything is hidden, how do we know if everyone is being taxed correctly or not?!

As a result, we perceive taxation not as a contribution to the preservation of our native state, but as a payment of tribute to a foreigner. That is, the taxpayer does not think - this is my state, I pay taxes so that officials receive salaries, security is ensured, roads are built, other socially useful works are performed, and so on, and I would demand that officials respect my rights.

Democracy and the rule of law in the West were created precisely as a result of people's correct understanding of the meaning of taxes. In fact, it is a person with such an approach who is a citizen, that is, the owner of his state. It is no coincidence that in these countries a citizen even has the right to determine the expenditure of certain taxes.

We do not have such an opportunity, but the share of indirect taxes in the total volume is less than direct taxes. What does direct tax mean? For example, income tax. I get paid and pay income tax on it. So I know how much I personally pay the state in taxes per month. What is an indirect tax? For example, value added tax (VAT). I buy groceries in the store. Food prices also include VAT. The payer of this tax is the store, not me. But in the end, I pay taxes. But I don't notice it. Therefore, I do not know how much taxes I pay to the state in total. Therefore, my motivation to demand my rights from the state decreases.

We have a total of nine types of taxes. Seven of them are direct (personal income tax, corporate income tax, simplified tax, property tax, land tax, road tax and mineral extraction tax), and two are indirect (VAT and excises). However, in weight terms, the share of VAT in total revenue is more than 56%, and excises - about 10%. That is, the total share of indirect taxes is 66%. Thus, 2/3 of the taxes in the country are indirect, when they are paid, the taxpayer does not feel like a taxpayer investing in the state. By the way, it is no coincidence that individuals in our country are exempted from income tax for 7 years on wages. And everyone is happy that they do not pay taxes. Yes, you don't pay directly because you are charged indirectly. As a result, you feel not entitled, but obliged. By the way, in the USSR there was also no personal income tax. That is, the approach is about the same. In general, the question of taxes ultimately reveals the essence of the state. - - Does the state exist for the people or does the people exist for the state?

I seem to be too verbose. In general, the philosophy of the issue should change. We need a new tax code that has a scientific basis and is based on foreign experience. Its development should be transparent. And most importantly, its principles should be the subject of public discussion from the very beginning. And once adopted, the code must be stable. Only on this basis is a normal business environment possible in the country. Naturally, if a real judicial reform begins in parallel.

Kamran Mahmudov