19 January, 2013

Internet helps Azerbaijanis circumvent corruption

A modern tax system is an important reason why Azerbaijan, despite is authoritarian regime and widespread corruption, is one of the world’s most successful reform nations.

Since independence in 1991, the former Soviet republic of Azerbaijan has been marked by a series of problems. The country still has authoritarian government, and wide-spread corruption. But in recent years, the country has also had one of the world’ fastest growing economies – where 2006 saw growth exceed 30%. This performance has naturally been based on their oil and gas assets, but an unnoticed contribution also comes from the many market reforms implemented in recent years. One of the more important of these involves a well-functioning taxation system.

Azerbaijan had long lived with an outdated, ineffective system left over from Soviet days. Regulatory burdens for businesses were heavy, and complete lack of confidence encouraged many to refuse paying taxes. That’s when the new national Tax Minister, Fazil Mammadov, was assigned the difficult task of modernising the entire system.

Mammadov knew that many in the country were critical to any changes, but also understood the need for new ideas. That’s why the tax minister chose to have a modern digital technology-based system developed to form the basis for a flexible, effective taxation system.

This project was directly lead by Natig Amirov, First Deputy Tax Minister and Head of Tax Policy and Strategic Research Department. When considering digitalisation of the Tax Ministry in summer 2004, Amirov proposed this should also include enabling taxpayers to file income returns and pay taxes online. These added reforms may seem remarkable in a country with relatively low development levels as Azerbaijan, but the need for transparency was also extremely significant. The capability to file tax returns and pay taxes electronically enabled taxpayers to ‘evade’ corrupt bureaucrats.

The new digital system has functioned quite well. By 2009, the total hours Azeri businesspeople needed to manage the tax bureaucracy declined by over one-third from the previous year. This successful reform effort has also been highlighted as a model example by the World Bank, and the International Finance Corporation ‘Doing Business’ report.

In this way, tax digitalisation and reform can inspire countries like Sweden, too. For even in more advanced economies, namely, potential remains to simplify governmental contacts for private individuals and businesses through greater use of online-based systems. Hopefully, Azerbaijan’s leaders learned a further important lesson: Transparency in government works much better than holding onto outdated authoritarian control and corruption that still remains from the Soviet era.

More reading:

Doing Business reform (2009). ‘How to create a world-class taxation system from scratch: the story of tax reform in Azerbaijan’, case study

Doing Business (2011). ‘Doing Business 2011: Making a Difference for Entrepreneurs – Azerbaijan’.

Index of Economic Freedom, information regarding Azerbaijan

Nima Sanandaji