The Wild East

By Global Tax Weekly

Recent tax developments in Azerbaijan are suggestive of a country with a modern outlook, keen to encourage local entrepreneurs to grow their businesses and welcome foreign investors with open arms. Taxes are low – corporate tax stands at 20 percent and the top individual tax rate has fallen to 25 percent – and lately tax reforms have focused on making life easier for companies with the introduction of more electronic services, the creation of a tax ombudsman and other measures designed to streamline tax administration. Tax holidays have also been granted to companies engaged in various non-oil related activities like information technology. According to a senior tax official, Azerbaijan is now working to harmonize its VAT regime with that of the EU. Some might see this is a retrograde step given the complexities of EU VAT law. But it is presumed that this decision has been motivated by the desire to attract more investment from Europe as the Government attempts to diversify an economy which has hitherto been extremely reliant on an abundance of mineral wealth, especially oil and gas. It all sounds very positive, yet I find myself praising a country like Azerbaijan through gritted teeth. Economically, it has come on in leaps and bounds since becoming independent from the USSR in 1991. Per capita income has increased seven-fold in the last decade alone, and its capital, Baku, now resembles a mini-Dubai shimmering on the Caspian Sea. Of course these feats have mostly been achieved on the back of oil and gas exports, leaving the country highly exposed to the roller-coaster nature of world oil prices. And Azerbaijan also has an ugly side. Although it claims to be a democracy, elections have repeatedly been declared illegal by international observers. Increasingly, opposition to the Aliev regime is brutally suppressed, while encountering corrupt public officials is almost a daily hazard for businesses. Azerbaijan also treads a precarious diplomatic tightrope between courting Europe – an important oil client – and pleasing Russia, knowing that its powerful northern neighbor is apt to redraw national boundaries on its sensitive southern flank at a stroke when feeling under threat, and this is a region where ethnic tensions continue to simmer. Let’s hope that Russia hasn’t caught wind of the EU VAT initiative. Vladimir won’t be pleased.

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