Caucasus and Central Asia in the Globalization Process
292
- Very high “royalty” element of the system
increases investors’ risk of absolute loss at
lower oil prices and reduces the range of
economic fields.
- Varying take that is not related to costs or
profits creates inherent uncertainty about the
long term impact of the system.
- System creates economic disincentive at each
of the exploration, development and production
margins, particularly for high cost, remote
fields.
- Producers with limited access to export
infrastructure or markets can suffer a
disproportionately high mineral extraction tax
rate because it is linked to export price and not
realised or netback price.
e. Other Tax System and Tax Administration
Parameters About Investment Climate
Tax authorities or particularly tax bureaucracy
are burden on companies in many countries. In
that cases tax administration amongs the biggest
obstacles to investment and doing business.
In Azerbaijan, total number of tax payments
per year is 36 payments and it takes 1.000 hours a
year, compared with 70 payments and 256 hours
in Russia. In terms of time it takes to prepare, file
and pay (or withhold) the corporate income tax,
the value added tax and social security
contributions (in hours per year), Azerbaijan is in
the worst ten countries in the 175 economies
covered in this survey.
Table 5: Paying Taxes Indicators in Azerbaijan and Russia
Region or Economy
Payment
(number)
Time
(hours)
Profit
Tax (%)
Labor tax and
Contributions (%)
Other Taxes (%)
Total Tax Rate
(% profit)
East Asia & Pacific
29.8
290.4
19.7
10.9
11.6
42.2
Europe & Central Asia
50.0
423.0
11.7
30.6
13.7
56.0
Latin America & Caribbean
41.3
430.5
22.8
14.5
11.8
49.1
Middle East & North Africa
28.9
236.6
16.7
18.7
5.5
40.8
OECD
15.3
202.9
20.7
23.7
3.5
47.8
South Asia
30.1
304.6
20.3
8.0
16.8
45.1
Sub-Saharan Africa
41.0
336.4
24.2
14.0
33.0
71.2
Azerbaijan
36
1,000
16.9
25.5
2.4
44.9
Russia
70
256
12.7
35.9
5.5
54.2
Source: Pricewaterhousecoopers &The World Bank, Paying Taxes: The Global Picture, 2006.
The World Bank Investment Climate Survey
and FIAS report indicated that, in Russia, working
with the tax bureaucracy is considered a bigger
problem than tax rates. The tax regime for business
is improving, but still represents a formidable
source of state control over private enterprise. Tax
rates and tax regulations were cited by survey
respondents as the most severe obstacles to
investment in Russia. In addition to the complaints
about high tax rates and complex tax structures,
most businesses are also burdened by procedural
problems in tax administration.
Most interviewees (including investors, private
accountants, and even tax inspectors) agreed that
tax inspections are heavily influenced by “revenue
targets,” which can (and usually do) include fines
and penalties. It was also widely agreed by tax
inspectors and taxpayers alike that tax arrears
(again, including penalties) can drive an otherwise
healthy company into bankruptcy. This risk
significantly deters new investment. Even without
such risks, investors in Russia need to devote
significantly more resources to accounting
activities than they do in countries with less
cumbersome tax structures.
23
4. Recommendations and Conclusions
When speaking about good tax system, we
think of a system that allows a country’s
authorities to implement tax policy in the most
efficient way. The main characteristics of such a
system generally include the provision of adequate
revenue-generating capacities, achievement of
economic efficiency, provision of equity, an
optimal tax mix, simplicity, effective tax
administration and transparency.
24
Tax policy should be designed to increase
transparency,
consistency,
fairness
and
effectiveness. Governments need revenue, but
they also want to stimulate healthy domestic
economic activity and attract investment from
abroad. Because of this the tax systems of the
countries must be business friendly. The aim
should be a low rate, broad based tax system with
transparent laws, consistently applied, fairly
23
FIAS, Russia: Administrative Barriers to Investment Within
Subject of the Russian Federation, September 2001, p. vi.
24
Stephanyan (2003), p.4.
II International Congress
293
administered and with disputes subject to appeal
to independent courts, so that investors can then
predict the tax consequences of their actions with
some confidence. The cost of uncertainty is borne
by the general body of taxpayers, as investors will
make their decisions (and the economy will suffer
the disincentive effects of) the worst assumption,
with much lower revenue actually collected.
25
In this respect two key taxation principles
must bear in mind. First, “high rates don’t work”
and second, “tax law must be clear and simple”.
Investment will be stimulated if the overall burden
at investor level is reasonable: what is
“reasonable” is will depend on circumstances, but
generally Cooperate Income Tax rates in the range
20 to 30 % should produce healthy revenue
without inhibiting business-provided that the tax
base really reflects true economic profit. Tax base
and (how taxable income is calculated) and how tax
is administrated can be more important than rates.
The factor that most often cited as discouraging
international investment is uncertainty: if an
investor cannot get a clear explanation about how a
tax is interpreted he has to assume the worst.
26
Oil and gas sector tax regime must be
appropriately designed that will encourage new
investments. Administrative procedures should
be simplified to increase transparency that is
important for foreign investment. A broad range
of fiscal instruments is available to policymakers
to design a fiscal regime for the oil sector that will
attract investment as well as secure a reasonable
share of economic rent for the government. Some
may favor greater reliance on production-based
levies to ensure a steady stream of revenue for the
government. Others would put greater emphasis
on profit-based levies to minimize distortions.
Most countries have both profit-based and
production-based levies.
27
It is clearly too ambitious to move straight
from the current fiscal systems for petroleum
exploration and production activities to a profit-
based system for the whole petroleum sector.
28
Actual trends in taxation show that there is a
general an increasing shift from direct taxation to
indirect taxation. More specifically governments
are looking towards VAT/GST (Value Added
Tax/Goods and Services Tax) as the major source
of tax revenue for the future. Consumption taxes
25
John Chown, “Financial Markets in Emerging and Transi-
tional Countries”, ITIC Special Report, The Taxation Sys-
tems, Investment Regulation and Economic Development in
Select Countries of Eurasia, March 2005, p.8.
26
Chown, (2005), p.8-9.
27
Sunley & Baunsgaard & Simard (2002), p.18.
28
Daniel & Fernando (2004), p.16.
are growing as a major source of tax revenues for
governments across the globe. Tax authorities
worldwide are gradually migrating from direct
taxation to the less visible indirect taxation, and
this reduced visibility reinforces the need for
reporting on the total tax contribution.
29
Tax administration and administrative
mechanisms for implementing transfer pricing
rules and double taxation treaties needs to be
improved in both countries. The effectiveness of
tax systems depends not only on the design of tax
policies but also on effectiveness of tax
administration. Once governments have their tax
policies
appropriately
designed,
the
tax
administration plays the main role by securing the
effective implementation of these policies for
achieving the objectives.
30
Simplification of tax legislation and process,
the easing of the compliance burden, and the
consolidation of taxes might generate benefits for
both these countries governments and businesses.
And also improving quality of services to
taxpayers to be comparable with the best world
practice would better.
International experience shows that the rational
enforcement of a comprehensive transfer pricing
framework can be a significant stimulus to tax
collections.
31
Transfer pricing is the big tax
headache facing MNCs around the world. Time
and again tax authorities have found this one of the
most lucrative areas for raising the tax take. For the
same reason there can be no doubt that transfer
pricing will become more significant in the future
in every CIS jurisdiction. In some places adoption
of OECD -style rules is still in the future, in others
the rules are there already but the tax authorities are
in the process of honing their skills and increasing
their expertise and their enforcement powers. Based
on the above trends, businesses in the CIS
companies should already be looking for ways to
reduce the risk of transactions being challenged by
the tax authorities in the future, through the
implementation of policies and proce-dures to
identify and manage transfer pricing risks.
32
The existence of double tax treaties with the
home jurisdictions of investors and service
companies is an important factor in promoting
foreign investment, provided that the intent of the
treaties is properly understood and applied by
Azerbaijan tax authorities.
29
Ine Lejeune, “VAT/GST: The Win-Win Taxation Systems
of the Future?”, The World Bank & PriceWaterHouse
Coopers, Paying Taxes: The Global Picture, 2006, p.25.
30
Stephanyam, (2003), p.5.
31
Page (2006), p.6.
32
Page (2006), p.7.
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