Fiscal policy implementation in Azerbaijan before, during and after the oil boom

Aliyev, Khatai; Gasimov, Ilkin Article Fiscal policy implementation in Azerbaijan before, during and after the oil boom Contemporary Economics Provided in Cooperation with: VIZJA University, Warsaw Suggested Citation: Aliyev, Khatai; Gasimov, Ilkin (2018) : Fiscal policy implementation in Azerbaijan before, during and after the oil boom, Contemporary Economics, ISSN 2300-8814, University of Finance and Management in Warsaw, Faculty of Management and Finance, Warsaw, Vol. 12, Iss. 1, pp. 81-94, https://doi.org/10.5709/ce.1897-9254.265 This Version is available at: https://hdl.handle.net/10419/195513 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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This study reviews Azerbaijan’s fiscal policy implementation and discusses its changes before, during and after the oil boom. Specifically, the period prior to 2005 is considered pre-boom, 2005-2014 is considered the oil boom and the years after 2014 are considered the post oil boom period. It is observed that the country’s fiscal policy was only slightly expansionary prior to the oil boom but highly expansionary during the oil boom. However, such expansion has not been sustainable due to being financed mostly by direct transfers from State Oil Fund of the Republic of Azerbaijan (SOFAZ) and taxes on the oil industry. As a result, the post oil boom period is characterized by contraction in the form of sharply decreasing public expenditures and initiatives to increase tax revenues, at least by preventing tax evasion. The expectations for the upcoming years include maintaining a contractionary policy by both decreasing budget expenditures and increasing tax rates or tightening measures against tax evasion. This study helps understand the current and near-term future fiscal policy challenges in Azerbaijan. 1. Introduction The government’s role in modern economies is essential from several perspectives. Modern books on macroeconomics broadly discuss basic concepts underlying the application of fiscal policy and its tools. Briefly, fiscal policy is how the government determines the level and allocation of budget expenditures and revenues, defines tax rates and applies several tools affecting the nation’s economy. In a resource-rich country, such as Azerbaijan, the aspects of fiscal policy implementation are identical to the above, while its effectiveness is investigated empirically. Thus, several studies have measured the relationship between public expenditures and economic growth in Azerbaijan (Aliyev, 2013; Aliyev & Nadirov, 2016; Bashirli & Sabiroglu, 2013; Dehning, Aliyev & Nadirov, 2016; Hasanov & Alirzayev, 2012; Hasanov & Mammadov 2013; Koeda & Kramarenko, 2008; Sabiroglu, Bashirli, & Qasimli, 2011). However, none of the referenced studies analyze the fiscal policy implementation before, during and subsequent to an oil boom. Therefore, this analysis of Azerbaijan’s fiscal policy implementation is novel and helps to understand the reasons and consequences of upcoming fiscal challenges. This article presents a descriptive evaluation of Azerbaijan’s fiscal policy implementation at different stages of economic development. Fiscal policy implementation in Azerbaijan before, during and after the oil boom ABSTRACT E62, H20, H50, H61 KEY WORDS: JEL Classification: Fiscal policy; budget expenditures; tax policy; oil boom; Azerbaijan 1 Azerbaijan State University of Economics (UNEC), Azerbaijan; 2 Baku Engineering University, Azerbaijan; 3 ASERC, Azerbaijan; 4 Institute for Scientific Research on Economic Reforms, Azerbaijan Correspondence concerning this article should be addressed to: Khatai Aliyev, Azerbaijan State University of Economics (UNEC), Baku, Azerbaijan. E-mail: k[email protected].az Khatai Aliyev1,2,3, Ilkin Gasimov3,4 Primary submission: 22.01.2016 | Final acceptance: 24.11.2016 82 Khatai Aliyev, Ilkin Gasimov 10.5709/ce.1897-9254.265DOI: CONTEMPORARY ECONOMICS Vol. 12 Issue 1 81-942018 To comprehend the context of “before-during-andafter the oil boom”, note that the post oil boom notion has not been covered by the existing literature. The earlier studies of Aliyev (2014), and Aliyev and Suleymanov (2015) segment the historical development of Azerbaijan’s economy as follows: the recession period (1991-1994), the restructuring period (1995-2005) and the oil boom (after 2005). Accordingly, we can define the period before the oil boom as 1991-2005. In 2005, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline commenced operations, at the same time as oil production rose sharply. Oil production peaked at over 1 million barrels per day in 2010, decreasing ever since. Despite the falling production, oil prices remained very high until the end of 2014, with the country continuing to enjoy the oil boom. However, beginning with the last quarter of 2014, oil prices fell almost three-fold, forcing the government of Azerbaijan to struggle with severe economic policy challenges and leading to two devaluations of the national currency (AZN) in 2015, by 33% on February 21 and by 47.6% on December 21. The end of the oil boom of 2005-2014 signified anew milestone for Azerbaijan’s economy. In this context, we argue that Azerbaijan has entered a new era or, more specifically, the post oil boom period beginning in early 2015. Analyzing the fiscal policy changes during the two periods is both interesting on its own and crucial to predicting the policy’s economic consequences during the post oil-boom period and the coming years. 2. Government budget After 1991, the government budget of the Republic of Azerbaijan was considerably enlarged, with its structure additionally being significantly changed. Note that 1991-1994 was a recession period with Azerbaijan at war with Armenia due to the Nagorno-Karabakh conflict. Therefore, we choose 1995, when macroeconomic stability was first attained, as the starting point for our analysis of Azerbaijan’s fiscal policy. It is useful to examine the general trends presented in the figure 1. The difference in the budget policy between the periods before the boom and during the oil boom is easily noticeable. Until 2005, neither Azerbaijan’s budget expenditures nor revenues exceeded two billion AZN. In the government budget for 2004, both expenditures and revenues are approximately 1.5 billion AZN. The size of the budget expanded every year except 1998, though the increases were slight. Another important characteristic of this period concerns the budget deficit. Except in 2004, when the budget was nearly balanced, budget deficits were incurred in all years, including 2005. Figure 1 shows the inflationadjusted trend of budget expenditures and revenues. The remarkable fiscal policy change after 2005 evidenced the start of a new period. In contrast to the government’s cautious approach towards expansionary fiscal policy, e.g., increasing budget expenditures, before the oil boom, budget expenditures in 2006 already reached 2.5 times the level of 2004. As the revenues rose as well, the budget had a surplus of 78 million AZN. The same pattern was observed during the following two years, as the size of the government budget increased significantly. As a result, the budget exceeded 10.7 billion AZN in 2008, increasing five-fold compared to 2005. Due to decreasing oil prices, the budget size stabilized at approximately 11 billion AZN in 2010 after a slight contraction in 2009. However, it did not remain long. Hence, 2011 government budget expenditures were nearly 15.4 billion AZN with the surplus of approximately 400 million AZN. An upward trend of government budget expenditures remained, although their changes were not matched by those of revenues. Except in 2013, the government budget balance remained negative after 2011. Nevertheless, it is crucial to note the increasing budget deficit. While the deficit stood at only 135 million AZN in 2012, it rose to 308 million AZN in 2014 and was expected to approach approximately 842 million AZN in 2015. Despite sharp decreases in budget expenditures proposed for the following year, the proposed budget deficit was proposed to be approximately 1.7 billion AZN in 2016. The basic reasons underlying the fiscal policy changes are the amounts of transfers from SOFAZ to the government budget, as well a soil price volatility. Figure 2 shows this correlation graphically based on quarterly data. A positive correlation is clearly observed between oil prices and government budget revenues. Moreover, the changes in budget revenues are due to changes in direct transfers from SOFAZ to the government budget. Figure 2 also shows that the government’s expansionary fiscal policy during the oil boom was not financed by increasing tax revenues. Indeed, the total www.ce.vizja.pl 83 Fiscal policy implementation in Azerbaijan before, during and after the oil boom This work is licensed under a Creative Commons Attribution 4.0 International License. Figure 1. Government budget revenues and expenditures (millions AZN, base year 2010) Source: Adapted from “Statistical Database” by the State Statistical Committee of the Republic of Azerbaijan (2016, January). Retrieved from https://www.azstat.org/MESearch/search?departament=10&lang=en Figure 1: Government budget revenues and expenditures (millions AZN, base year 2010) Source: Adapted from “Statistical Database” by the State Statistical Committee of the Republic of Azerbaijan (2016, January). Retrieved from https://www.azstat.org/MESearch/search?departament=10&lang=en  Figure 2. The budget revenues vs. SOFAZ transfers (left axis, millions AZN, inflation adjusted - base quarter 2000Q4) and oil prices (right axis, USD) Source: Adapted from “Statistical Bulletin” by Central Bank of Azerbaijan (2016, January). Retrieved from https://en.cbar.az/ pages/publications-researches/statistic-bulletin/, “Reports archive: quarterly statements” by State Oil Fund of the Republic of Azerbaijan (2016, January). Retrieved from and http://www.oilfund.az/index.php?page=hesabat-arxivi&hl=en_US Figure 2: The budget revenues vs. SOFAZ transfers (left axis, millions AZN, inflation adjusted - base quarter 2000Q4) and oil prices (right axis, USD) Source: Adapted from “Statistical Bulletin” by Central Bank of Azerbaijan (2016, January). Retrieved from https://en.cbar.az/pages/publications-researches/statistic-bulletin/, “Reports archive: quarterly statements” by State Oil Fund of the Republic of Azerbaijan (2016, January). Retrieved from and http://www.oilfund.az/index.php?page=hesabatarxivi&hl=en_US  84 Khatai Aliyev, Ilkin Gasimov 10.5709/ce.1897-9254.265DOI: CONTEMPORARY ECONOMICS Vol. 12 Issue 1 81-942018 amount of transfers from SOFAZ to the government budget reached 59.3 billion AZN by July 2015 (SOFAZ, 2015). Accordingly, we will discuss tax-based fiscal policy changes later. In addition, SOFAZ financed many state projects beyond the scope of government expenditures. If we consider the government to be responsible for such projects under the fiscal policy framework, it is worth examining the latest statistics. Thus, the primary projects financed by SOFAZ involved spending 1,847.6 million AZN on improvements in social condition for refugees and IDPs, 779.6 million AZN invested in the construction of the Oguz-Qabala-Baku water supply system, 1196.1 million AZN expended on the reconstruction of the Samur-Absheron irrigation system, 90 million AZN invested in the statutory capital of the State Investment Company, 441.4 million AZN financing of the “Baku-Tbilisi-Kars railway”, 127.2 million AZN financing of the “State Program on education of Azerbaijani youth abroad in the years 2007-2015”, and 596.1 million AZN spent on the construction of “STAR” Oil Refinery Complex. An analysis of revenue sources of Azerbaijan’s government budget can yield a better understanding of fiscal policy changes during the mentioned periods. Diversification of budget revenue sources is crucial for long-term stability. However, Figure 2 shows the dependence of budget revenue on the SOFAZ transfers and world oil prices. Illustrating it more effectively, Figure 3 shows the share of direct transfers from SOFAZ in the total budget revenue. Apart from the dependency on direct transfers from SOFAZ, it is noteworthy to review sources of non-transfer revenues and changes across the periods of interest. According to the data obtained from the State Statistical Committee of the Republic of Azerbaijan, the dominant revenue sources of the government budget before the oil boom were the Value Added Tax (30%), the corporate income tax (14.8%), and the labor income tax (14.68%). In 2005, the crossover year towards the oil boom, these remained almost unchanged. The only relatively noticeable changes occurred in the share of the corporate income tax, increasing to 17.29%, and taxes on international trade and transacFigure 3. Direct SOFAZ transfers to the government budget (millions AZN, inflation adjusted – base year 2010) Source: Adapted from “Statistical Bulletin” by Central Bank of Azerbaijan (2016, January). Retrieved from https://en.cbar.az/ pages/publications-researches/statistic-bulletin/, “Reports archive: quarterly statements” by State Oil Fund of the Republic of Azerbaijan (2016, January). Retrieved from and http://www.oilfund.az/index.php?page=hesabat-arxivi&hl=en_US Figure 3. Direct SOFAZ transfers to the government budget (millions AZN, inflation adjusted – base year 2010) Source: Adapted from “Statistical Bulletin” by Central Bank of Azerbaijan (2016, January). Retrieved from https://en.cbar.az/pages/publications-researches/statistic-bulletin/, “Reports archive: quarterly statements” by State Oil Fund of the Republic of Azerbaijan (2016, January). Retrieved from and http://www.oilfund.az/index.php?page=hesabatarxivi&hl=en_US  www.ce.vizja.pl 85 Fiscal policy implementation in Azerbaijan before, during and after the oil boom This work is licensed under a Creative Commons Attribution 4.0 International License. 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Revenue-total (millions AZN) 714.6 1220.9 1509.5 2055.2 3868.8 6006.6 10762.7 10326 11403 15700.7 17281.5 19496.3 18400.6 (%) 100 100 100 100 100 100 100 100 100 100 100 100 100 including: Labor income tax 94 150.4 221.6 317.43 407.30 588.59 627.188 581.87 590.2 715.7 813 859.7 980.3 (%) 13.15 12.32 14.68 15.44 10.53 9.8 5.83 5.63 5.17 4.56 4.7 4.4 5.33 Corporate income tax 125.9 178.3 223.4 355.39 1360.5 2457.7 2862.32 1329.2 1429.9 2134 2252 2374.8 2302.7 (%) 17.62 14.6 14.8 17.29 35.16 40.92 25.6 12.87 12.5 13.59 13.03 12.18 12.51 Land taxes 6.7 11.3 14.1 15.267 18.547 27.089 30.6301 26.235 35.3 35.3 30.6 33.1 35.4 (%) 0.94 0.93 0.93 0.74 0.48 0.45 0.28 0.25 0.31 0.22 0.18 0.16 0.19 Property tax 11.8 26.6 32.2 40.436 55.792 72.3 112.892 66.168 101.8 103.9 105.1 125.1 141.3 (%) 1.65 2.18 2.13 1.97 1.44 1.20 1.05 0.64 0.89 0.66 0.61 0.64 0.77 VAT 190.8 409.7 452.7 599.87 737.85 1179.2 1910.87 2012.8 2082. 2222.7 2366.9 2710.0 3119.6 (%) 26.7 33.5 30.0 29.2 19.07 19.63 17.75 19.5 18.26 16.15 13.7 13.9 16.95 Excise tax 22.4 67 72.4 140.98 187.37 402.88 486.874 485.15 514.9 480.2 531.5 593.3 797.3 (%) 3.13 5.49 4.79 6.85 4.84 6.71 4.52 4.7 4.51 3.06 3.07 3.04 4.33 Tax on mining 50.4 56.7 97.8 53.540 100.16 123.16 147.610 121.90 130.1 129.8 125.8 121.5 116.2 (%) 7.05 4.64 6.48 2.60 2.59 2.05 1.37 1.18 1.14 0.82 0.73 0.62 0.63 Taxes on int. transactions 63.4 92.7 101.5 205.18 139.34 293.2 449.712 418.13 291.8 433.1 592.5 675.2 684.7 (%) 8.87 7.59 6.72 9.98 3.60 4.88 4.18 4.04 2.56 2.76 3.43 3.46 3.72 Other taxes 9.00 12.8 16.5 28.1 40.9 68.591 96.8 86.793 90.3 140.6 157.6 161.5 192.7 (%) 1.26 1.05 1.09 1.37 1.06 1.14 0.9 0.84 0.79 0.89 0.91 0.82 1.04 Other receipts 140.2 215.4 277.3 299 821.1 793.76 4037.73 5197.7 6136.2 9305.4 10306.5 11842.1 10030.4 (%) 19.62 17.64 18.4 14.55 21.22 13.21 37.5 50.33 53.81 59.27 59.64 60.74 54.51 Table 1. Government budget revenues by source Source: Adapted from “Statistical Database” by the State Statistical Committee of the Republic of Azerbaijan (2016, January). Retrieved from https://www.azstat.org/MESearch/search?departament=10&lang=en 86 Khatai Aliyev, Ilkin Gasimov 10.5709/ce.1897-9254.265DOI: CONTEMPORARY ECONOMICS Vol. 12 Issue 1 81-942018 tions, growing from 6.72% to nearly 10%, while the portion of other receipts fell by approximately 4%. During the initial years following the start of the oil boom, sharp increases in the amount and share of the corporate income tax are observed. In comparison to 2005, the amount grew fourfold in 2006 and nearly sevenfold in 2007. This explains its share climbing to 40.92% in 2007. In the following years, the contribution of all other sources decreased, while the share of other receipts (primarily direct transfers from SOFAZ) reached the peak level of 60.74% in 2013. A detailed description of quantitative changes in the government budget throughout the years is available in Table 1. None of the tax-based revenue sources have expanded proportionally to changes in the government budget. 2.1. Budget expenditure analysis by source The allocation of budget expenditures is as important as the change in the government’s total spending. While investigating the role of public expenditures in economic growth, many scholars separate “productive” expenditures (Aschauer, 1989; Del Monte & Papagni, 2001; Glomm & Ravikumar, 1997). Scholars promote several factors behind unproductive budget expenditures. For example, Del Monte and Papagni (2001) stress the influence of bureaucratic corruption one efficiency of public expenditures. Examining resource-rich economies, Coutinho (2011) states that sharp revenue increases “tend to be channeled to lowreturn, overly ambitious projects, which crowd out private investment”. Additionally, the structure of budget expenditure in Azerbaijan changed significantly during the past. Supporting the argument of Coutinho (2011), the especially significant changes were observed during the oil boom. To obtain better results in this context, it is necessary to analyze the structure of budget expenditures during the time period. During 1991, the first year of independence, the amount of budget expenditures was 192.8 million AZN, of which 52.7 (27.33%) and 92.8 million AZN (48.13%) were spent on the national economy and social and cultural activities, respectively. Four years later in 1995, the total amount of budget expenditures reached 428.4 million AZN. Of this amount, 52.6 million AZN or 12.28% was directed to the national economy. The share of social and cultural activities in budget expenditures was 35.3%, or 152.2 million AZN. The increases in these figures during four years can be explained by political and economic stability and the signing of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline agreement, called the “Contract of the Century”. During the next five years covering the time period 1995-2000, the budget expenditures increased, reaching 764 million AZN. Of this amount, 89.4 million AZN (11.7%) was spent on the national economy and 382.6 million AZN (50.07%) on social and cultural activities. In 2005, the total expenditure amounted to 2140.681 million AZN. Of this amount, 20.77% was spent on the national economy, whereas 39.39% was directed to social and cultural activities. Supported by the start of the oil boom in 2005, the total budget expenditure during 2005-2013 increased sharply, reaching 19143.5 million AZN in 2013. The spending on the national economy and the social and cultural activities amounted to 8207.5 AZN and 4081.8 AZN, respectively. Trends in other parts of the budget expenditure during 1991-2014 are also interesting. Additionally, it is valuable to examine expenditures in the main sectors, such as education, health care, and science, to understand the fiscal policy implementation background. The statistics show that although the monetary amounts of the mentioned expenditure categories increased during 1991-2014, their percentage shares did not increase and even decreased in some years. For example, the education share of budget expenditures was 39.98% in 1991, becoming 34.65% in 2014. This tendency was also observed in the healthcare sector, at 16.7% in 1991 and 14.83% in 2014. The percentage share of science spending was the only increasing category, from 0.57% to 0.66% during this period, a fairly small change. More detailed statistics are presented in Table 2. The overview of expenditures shows overall that Azerbaijan’s fiscal policy has been largely expansionary during the oil boom but turned contractionary during the subsequent years. On the other hand, by January 1, 2015, the country’s external debt amounted to 5081.5 million AZN (6478.2 million USD), or 8.6% of GDP. Of the external debt amount, 7.3% was extended for up to ten years, 60.2% for up to twenty years, and 32.5% www.ce.vizja.pl 87 Fiscal policy implementation in Azerbaijan before, during and after the oil boom This work is licensed under a Creative Commons Attribution 4.0 International License. 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Expendituretotal (millions AZN) 764 1234.5 1502.1 2140.7 3790.1 6086.2 10774.2 10503.9 11765.9 15397.5 17416.5 19143,5 18709.0 (%) 100 100 100 100 100 100 100 100 100 100 100 100 100 including: National economy 89.4 242.9 290.9 444.7267 1246.89 2350.004 4958.599 4373.9 4889.9 6803.2 6960.7 8207.5 7598.7 (%) 11.70 1968 19.36 20.77 32.90 38.61 46.02 41.64 41.56 44.18 39.97 42.87 40.61 Social and cultural activities 382.6 535.2 642.2 843.3 1049.7 1670.3 2312.5 2763 2901.4 3447.2 4072.9 4081.8 4484.4 (%) 50.07 43.35 42.75 39.39 27.69 27.44 21.46 26.30 24.66 22.39 23.38 21.32 23.97 of which: Education 181.8 234.8 294.1 372.50 479.06 722.99 979.719 1147.90 1180.8 1268.5 1453.2 1437.7 1553.9 (%) 47.52 43.87 45.79 44.17 45.64 43.28 42.37 41.55 40.70 36.80 36.68 35.22 34.65 Health care 40.9 55.3 73.5 115.25 161.10 257.19 346.228 402.366 429.2 493.4 609.4 618.9 665.3 (%) 10.69 10.33 11.44 13.67 15.43 15.40 14.97 14.56 14.79 14.31 14.96 15.16 14.83 Social protection and security 139.3 214 236.5 304.92 341.48 594.77 846.384 1054.42 1123 1495.4 1769.5 1750.3 1971.2 (%) 36.4 39.98 36.83 36.16 32.53 35.61 36.60 38.16 38.70 43.38 43.44 42.88 43.95 Other 20.6 31 38.2 50.589 67.144 95.295 140.225 158.267 168.4 189.9 240.8 274.9 294.0 (%) 5.38 5.79 5.95 5.99 6.40 5.70 6.06 5.73 5.80 5.51 5.91 6.73 6.55 Science 9.3 16.6 20 28.8 32 43.9 62.1 83.3 92.8 106.1 116.7 117.0 124.2 (%) 1.22 1.34 1.33 1.34 0.84 0.72 0.58 0.79 0.79 0.69 0.67 0.61 0.66 Administrative expenditures 111.4 189.4 245.2 330.3 421.54 629.9 786.32 938.6 971.5 992.2 1271.5 1398.6 1553.3 (%) 14.58 15.34 16.32 15.43 11.12 10.35 7.30 8.94 8.26 6.44 7.30 7.31 8.30 Other expenditures 171.3 250.4 303.8 493.6 1040 1391.9 2654.7 2345.1 2910.3 4048.8 4994.7 5338.6 4948.4 (%) 22.42 20.28 20.22 23.06 27.43 22.87 24.64 22.33 24.73 26.3 28.68 27.88 26.44 Table 2. Government budget expenditures by source Source: Adapted from “Statistical Database” by the State Statistical Committee of the Republic of Azerbaijan (2016, January). Retrieved from https://www.azstat.org/MESearch/search?departament=10&lang=en 88 Khatai Aliyev, Ilkin Gasimov 10.5709/ce.1897-9254.265DOI: CONTEMPORARY ECONOMICS Vol. 12 Issue 1 81-942018 for over twenty years (The Ministry of Finance of the Republic of Azerbaijan [MOFAZ], 2015). 3. Tax policy After regaining independence in 1991, the tax policy and related reforms were among the most important issues for the newly independent country. The first step of the tax reform was made by establishing a tax service under the Ministry of Finance in 1990. However, after regaining independence, this service became more important for the state; hence, the tax service was separated from the Ministry of Finance into the Main State Tax Inspectorate under the Republic of Azerbaijan established in 1991. The main idea behind this action was to improve the tax legislation and increase efficiency of tax collection. This process continued during the subsequent years, resulting in the Ministry of Taxes being founded on February 11, 2000 on the basis of the Main State Tax Inspectorate. The primary idea behind the changes was to ensure the state control over the collection of tax payments and to adapt the tax system more precisely to the economic system. The taxation system in the Republic of Azerbaijanis based on the Tax Code adopted in 2000. Other legal acts and international treaties adopted into local law also play an important role in ensuring a sufficient tax policy. Taxes in the country are divided into three levels: state taxes, autonomous republic taxes and local (municipal) taxes. According to the Tax Code on corporate income taxes, the Value Added Tax (VAT), excise taxes, property tax, land tax, road tax, mining tax and simplified tax are the proper taxes in the Republic of Azerbaijan. According to the Tax Code of the Republic of Azerbaijan, persons with a monthly income of less than 200 AZN do not pay taxes on the first 93.50 AZN. The personal income tax rate on the monthly income of up to 2000 AZN is 14%. In other words, 14% tax rate applies to persons with annual incomes of up to 24000 AZN. However, persons with monthly incomes greater than 2000 AZN are taxed 280 AZN plus 30% of income over 2000 AZN. In addition, taxes at the rates of 3% for employees and 22% for employers have to be paid as Social Protection Fund contributions. On the other hand, companies meeting certain criteria must pay corporate income taxes. This tax is 20% of the annual profit. VAT is levied via another tax form on companies with incomes of 150 000 AZN during 12 consecutive months, and individuals earning 90 000 AZN during 12 consecutive months. The rate of VAT in Azerbaijan is 18%. Excise taxes are considered indirect taxes on producers and importers of excise goods. The rates of excise taxes for various goods are as follows: 0.2 AZN per liter of sparkling wine, 0.08 AZN per liter of beer and beer-containing drinks, 12.5% for tobacco products, etc. Such taxes also apply to cars, other vehicles such as yachts, and sports boarding depending on the engine volume. The tax rates per ccmfor vehicles with engine volume of up to 2000ccm, 3000 ccm, 4000 ccm, and more than 4000ccmare, respectively, 0.15 AZN, 300AZN plus 1 AZN per ccm, 1300 AZN plus 2 AZN per ccm, and 3300AZN plus 4 AZN per ccm. The property tax is assessed on assets carried on balance sheets and asset registers. This tax is calculated as 1% of the average annual net book value of fixed assets. In addition, the land tax was levied on land owners or users on the territory of the Republic of Azerbaijan. The rate of this tax is 0.06 AZN for every statutory unit. The road tax is intended for transport equipment entering the territory of the Republic of Azerbaijan. The rate of this tax depends on various criteria, such as capacity, weight, andthe number of seats. Additionally, privately owned transport vehicles are also subject to road tax. Government-owned and agricultural vehicles are exempt from this tax. The tax rate on transport facilities is as follows: 0.01 AZN per ccm for passenger cars with engine capacity up to 2000 ccm. The tax rate on cars with the engine capacity over 2000 ccmis 20AZN plus 0.02 AZN per ccmof capacity exceeding 2000 ccm. The tax rate of 0.02 AZN per ccmis intended for buses and other auto transport. According to the Tax Code of the Republic of Azerbaijan, companies and natural persons extracting minerals within the territory of the Republic of Azerbaijan and its sector of the Caspian Sea are liable for a mining tax. It is calculated on the total volume at wholesale prices per 3 m . A simplified tax system is intended for establishments with a net book value of more than 1 million AZN, which are not registered as VAT payers. The simplified tax rate is 4% for activities performed in Baku and 2% in other regions. For persons in the construction industry, the respective tax rate is 10 AZN per 2 m .