Banks of Azerbaijan appeal for tax holiday
By Fatma Babayeva
The Banks of Azerbaijan have appealed for exemption from some part of income taxes for three years which will be directed to the capitalization, the source in the bank sector told to the Trend news agency on May 6.
The banks suggest applying tax break from 2016 till the end of 2018. The proposal was submitted to the Financial Market Supervisory Body by the Banks Association of Azerbaijan.
Similar measures have been already taken in Azerbaijan during the acute phase of the global financial and economic crisis of 2008. The main objective was to accelerate the development of the financial sector, to improve the quality of services in the banking and insurance sectors and to stimulate the increase in capitalization of the companies. Thus, operating banks and insurance companies were freed from part of income taxes that was directed to the capital increase.
The tax holidays lasted until the end of 2011. The government thought that there is no need to prolong them as the assets of Azerbaijan’s banks grew quite rapidly and they often faced the placement problem.
Nevertheless, the banks retained certain benefits given to them by the government. In December 2011, the Constitutional court of Azerbaijan made a decision to levy 10 percent tax on the dividends of the shareholders of the banks and insurance companies. According to the court, the net profit of legal entities which was directed to recapitalization does not fit to the notion of dividend.
The volume of the total bank capitals began to decline since February 2015 when Azerbaijan’s national currency manat devaluated by approximately 34 percent against the dollar.
Although the bank capitals slightly increased during some months, the total volume of capitals decreased 3.6 billion manats ($2.39 billion) by the end of February 2016 which is 15 percent less than the beginning of the year and 17 percent less than early February 2015- pre-devaluation period.
The reason for such a decrease in the bank capitals can be increased credit burden on the population after devaluations occurred in February and December 2015, which in its turns, led to a surge by 16.8 percent in the number of bad loans in February 2016 compared to one year before.
In accordance with the legislation, banks should create reserves in case of default on loans which they allocate from their own capital. Therefore, after the increase observed in the amount of bad loans, the total bank capitals began to drop. As a result, some banks had to breach the minimum requirement of the Central Bank of the country on the total bank capital which is 50 million manat ($33 million).
The tax exemption for some part of the income which will be directed to the capitalization may reduce the financial burden on the banks to some extent.
At the moment, 37 banks hold license to carry out banking activity in Azerbaijan. The government has been implementing the consolidation plan for country’s banks. Since the beginning of 2016, the CBA has withdrawn licenses of six banks which are AtraBank, Caucasian Development Bank, Texnika Bank, Gandja Bank, Bank of Azerbaijan and the United Credit Bank.
Two banks of Azerbaijan, Bank Standard and the International Bank of Azerbaijan are in talks to merge their assets within the framework of the given plan currently.
The consolidation process will allow stabilizing banks which have deliberately decided to merge, to increase their share in the market and to get more revenues.
International finance institutions, such as the International Finance Corporation, the European Bank for Reconstruction and Development, the World Bank and many others support the consolidation of banks in Azerbaijan by assessing it as a way leading to the financial recovery of the country’s banks.
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Fatma Babayeva is AzerNews’ staff journalist, follow her on Twitter: @Fatma_Babayeva
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