The Business Year

Balancing Act


Balancing Act

Minister of Taxes, Azerbaijan


Fazil Mammadov graduated from the Finance and Credit Department of the Azerbaijan Institute of Economy. He then worked at the Ganja Bank of Industry and Construction and later in the Operations Department of the Baku Bank of Industry and Construction. He served as a Professor and Chair Head at the Technical School of Finance and Credit. In 1993, he was elected Chairman of the Board at the Unsal Commercial Bank. In 1994, he was appointed Head of the Shamkir branch of the Agrarian Industrial Bank. Later, Mammadov was appointed the Deputy Chief and then Chief of the Main Department for Finance, Tariff, and Currency Control of the State Customs Committee. In 1999, he became the Chief of Main State Tax Inspection. He has been the Minister of Taxes of the Republic of Azerbaijan since 2000.

"Attracting foreign investment to the national economy is an integral part of the economic development strategy of Azerbaijan."

Azerbaijan is one of the fastest-developing economies in the region. What makes the country so interesting for foreign investors?

Attracting foreign investment to the national economy is an integral part of the economic development strategy of Azerbaijan. What makes our country particularly interesting for FDI is the open-door policy undertaken by the government toward foreign investors. The country enjoys political stability and legal guarantees are in place to protect investments. Azerbaijan possesses rich natural resources, minerals, and fertile lands. Our advantageous strategic location provides direct access to Central Asia and the Caspian basin region, thus enabling our participation in international trade initiatives such as the Silk Route and the North-South Transport Corridor. EU enlargement is also in our national interests, and, therefore, Azerbaijan actively participates in the EU’s regional programs, including the Eastern Partnership. Additionally, we have competitive local manpower in the country. We have passed important laws and regulations with regard to the protection of the rights and interests of investors. Property rights, equal opportunities for both local and foreign entrepreneurs, and the free repatriation of profits, as well as laws on investment activities and the protection of foreign investment are crucial. The government has signed agreements on the avoidance of double taxation, and on the encouragement and reciprocal protection of investments with many countries. Our economic potential and advantageous geographical location foster the interest of foreign investors who seek to make long-term investments in Azerbaijan’s economy. The share of foreign investments constitutes more than half of the nearly $120 billion invested in our economy over the last 17 years. This makes Azerbaijan the country with the highest FDI index per capita in the region. Nowadays, Azerbaijan accounts for 70% of the economy of the South Caucasus. Our economy is rapidly integrating into the global economy, and the country is wholly open to the import of high technology.

Your Ministry has made several achievements in introducing modern management techniques. What can you tell us about your relationship with the other tax administrations in Europe?

We are striving to establish a highly competitive, investment-attractive, simple, but still transparent and stable taxation system in Azerbaijan. Over the last 10 years, we have achieved significant progress in reducing the tax rate, modernizing the tax management system, and enhancing and applying new information technologies. This has helped us build effective control mechanisms as well as a flexible taxation system capable of coping with the changing and rapidly growing volume of the economy. We also make use of the experience of developed European countries in our tax system reforms. Our Ministry is an active member of the Intra-European Organization of Tax Administrations (IOTA), and we have established good relations with the OECD Center for Tax Administration. The cooperation we have undertaken with the World Bank and the EU in various projects also contributes to the modernization of our tax system. In 2012, we started establishing cooperation with the International Anti-Corruption Academy, and we’re looking forward to deepening our relations. Moreover, we closely cooperate with the tax administrations of leading countries, particularly those in Europe. We have signed agreements on the avoidance of double taxation with 43 countries, as well as agreements on mutual assistance with several countries. The Ministry of Taxes has been successfully implementing the European Neighborhood Policy Action Plan for a while now. We are constantly reforming our tax laws and regulations in order to harmonize them with European standards. Our country’s tax policy provides a good basis for undertaking an efficient and competitive economic policy in the region. Azerbaijan’s taxation service can be compared to our European counterparts, both in terms of management systems and level of digitalization. The process of harmonizing our national legislation with European legislation is well underway. Azerbaijan was the first country in the CIS to achieve remarkable success in areas such as the digitalization of the tax administration and the introduction of taxpayer services. There are certainly several areas such as e-auditing, the taxation of e-commerce, and transfer pricing that are new for our country. Therefore, these areas are high on our reform agenda. In the medium term, we are working on the advancement of an IT-based tax administration, the improvement of the Ministry of Taxes’ management system, and the establishment of a long-term strategy based on international experience and global standards. This strategy will cover the provision of a vast range of electronic services, the improvement of IT, and knowledge-based tax administration management, ensuring transparency and high efficiency.

“Attracting foreign investment to the national economy is an integral part of the economic development strategy of Azerbaijan.”

The Tax Administration is the most advanced state agency in Azerbaijan to apply IT. What has been the impact of the application of modern technology?

The development of ICT is one of the key factors that define the level of development of a country. The government of Azerbaijan has set a strategic goal to extensively use ICT tools in all spheres of society, including public management. The establishment of e-government constitutes a fundamental part of endeavors undertaken in this regard, which are reflected in a specific state program. Serious steps are being made in the country to achieve an efficient e-government system and to integrate ICT tools into the management of state agencies. The establishment of e-government has entered an active phase in Azerbaijan. The provided e-services help to increase transparency in the activities of state agencies, reduce their direct contact with citizens and potential corruption cases, and improve citizen trust in state agencies. For the first time in Azerbaijan, a VAT deposit account was introduced enabling the full digitalization of tax controls in the VAT administration process. The application of the single VAT deposit account has prevented VAT evasion as well as reduced the administrative load on taxpayers. The one-stop shop for the registration of commercial legal entities is an integral part of our electronic services, and receives much praise from taxpayers and international organizations alike. The electronic registration of physical persons engaged in entrepreneurial activities was first introduced on July 1, 2011, followed by the registration of legal entities with domestic investments in February 2012. Meanwhile, the registration process of cash registers was applied to the cash payment process in Azerbaijan. As a whole, this technology considerably reduced costs for the tax administration. According to information from IOTA, as of late 2011, the taxation service of Azerbaijan was the most efficient tax administration in Europe and the post-Soviet region in terms of the proportion of tax administration costs to income from taxes, at 0.35%. At present, all processes related to entrepreneurial activities between the tax administration and taxpayers are largely digitalized. Entrepreneurs can simply pay their taxes on the internet, meaning they do not encounter any bureaucratic problems and transparency is assured. This all leads to time savings and cost reductions. Suffice to say, the Ministry of Taxes is the leading government agency in providing the most e-services under the “electronic government” policy in our country.

In the World Bank’s Doing Business report, Azerbaijan’s tax system was described as an area with positive dynamics. Is this a green light for investors?

The role of Azerbaijan in providing global energy security is steadily growing. The increase in oil revenues leads to an increase in the capabilities of our country in the geopolitical arena. On the other hand, it has positive impacts on the development of the non-oil sector in Azerbaijan. I would like to stress the fact that the development of the non-oil sector is the main priority direction of our state policy. Azerbaijan is striving to achieve the overall development of the country, establish a diversified economy, reduce the dependence of state income on the oil sector in the future, and increase non-oil revenues by efficiently using energy resources to invest in the non-oil sector. In the coming years, the main targets of the government’s economic policy include deepening the diversification policy in the non-oil sector, raising the competitiveness of the economy, improving its structure and levels of foreign trade, reforming investment policy while developing infrastructure and innovation activities, and ensuring the development of human capital. As a key factor affecting the business environment, the number of taxes have decreased, and rates on major types of taxes are nowadays lower than the European average. Entrepreneurs involved in the agricultural production sector have been exempt from all taxes except the land tax. This foundation aims to enhance Azerbaijan’s non-oil export capacity as well as attract foreign investment.

© The Business Year – May 2013



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