What has Azerbaijani government achieved by optimizing labor market? Review by Caliber.Az

One of the most important results of the fiscal reforms carried out for the third year was the reduction of income tax in the non-oil sector, which helped to expand the tax base, including by bringing an unreported income of employees out of the shadows. An effective tool of this policy was the optimization of the process of registration of employment contracts, including in the non-governmental sector. According to the State Tax Service (STS), from 2019 to this day, the number of employment contracts has increased by an additional 400 thousand, or almost a third. The process of digitalization of the country's labor market will be completed in near future: the relevant draft law will soon be submitted to the Milli Majlis, and with its adoption labor contracts will be concluded in electronic format.

The ultimate goals of the large-scale legislative and administrative reform in recent years are to improve the business and investment climate and modernize key sectors of the national economy. The most important component of these reforms is the optimization of the tax sphere, ensuring fuller involvement of business entities and labor market participants in the field of fiscal control. Until recently the situation in this sphere was rather complicated: double accounting was widespread when real wages of hired employees exceeded greatly what was specified in the documents for tax reporting. A large proportion of individuals hired by small and medium-sized businesses (SMBs) worked without employment contracts, which deprived them of decent social (pension) security in the future, not to mention the inaccessibility of the social package, paid vacations, pay for bulletins, fixed working hours, overtime pay and other benefits provided for by the Labor Code.

In order to overcome this negative, amendments and additions to the Tax Code (TC) were adopted in 2019, contributing to a direct reduction of the tax burden, as well as encouraging the reduction of unreported profits and bringing the turnover of the shadow market into the accountable and controlled by fiscal authorities. The priority of the tax reform was a radical change in the taxation of income of employees in the non-oil sector, as well as the regulation of the ratio of payments on state social insurance between the employee and the employer.

The amendments to the TC envisioned full exemption from income tax for individuals whose monthly salary is up to 8,000 manats and tax on income exceeding this amount was set at 14 per cent. For comparison, in the previous period, the income tax rate was 14 per cent from the income of up to 2,500 manats per month and 25 per cent from income exceeding this amount. Another amendment in this sphere was an increase of the minimum untaxed salary from 173 to 250 manat, and as opposed to previous changes, this point covered all sectors including the oil and gas industry.

Changes also affected the sphere of deductions of physical persons (not involved in the oil and gas sphere) for mandatory social insurance: to ensure economic attractiveness, these benefits were introduced for seven years, while measures to control payments of social insurance and unemployment insurance were imposed on the State Tax Service (STS) under the Ministry of Economy.

Reducing the fiscal burden had a huge multiplier effect on the labor market and increased transparency in labor relations. Thus, for employees and employers, it made no sense to hide the number of wages and the phenomenon of payment of most wages "off the books" began to rapidly disappear, while in the private sector the rate of full-fledged employment contracts has increased sharply. Moreover, today the statistics on labor contracts in the public sector and major private companies, including financial, industrial and oil sectors, are close to 100 per cent. The growth of transparency in this sphere is also promoted by the widespread payment of labor through bank cards instead of cash.

The latest statistics from the Fiscal Agency testify to the high efficiency of fiscal reforms and changes in labor market administration. According to the STS, from the beginning of the reforms to optimize income tax, the number of employment contracts concluded between employees and employers, as of December 1, 2022, increased by 339.553 thousand - up to 1,741,468 contracts. It is noteworthy that the highest dynamics of the conclusion of employment contracts are observed in the non-oil private sector: in this segment, the figures have increased by more than 287.5 thousand - up to about 827.5 thousand contracts. STS specialists believe that the growth in the number of employment contracts has been achieved through the creation of effective mechanisms for control over the registration of jobs, the transparency of the wage fund, and the labor market. As a result of measures taken in this area this year, an increase in the number of labor contracts has been observed in the industrial sector, especially in trade and services, where there were huge gaps in compliance with labor legislation in the recent past.

Despite the reasonable successes of labor market reform, transformations that ensure transparency and efficiency in the field of labor relations will continue. In particular, a legislative package has already been developed and will soon be considered in the Milli Mejlis, providing for a complete transition to electronic labor contracts. "Records management, HR administration, and other parameters will be managed through an electronic system, thereby eliminating the need for paperwork in this area," Sahil Babayev, Minister of Labor and Social Protection of Azerbaijan, said during a recent parliamentary session. According to the minister, next year the country will start applying mechanisms for mandatory electronic signing of all employment contracts. The process of preparing for the implementation of new digital mechanisms in the Internet resource of the Ministry of Labor and Social Protection of Population began in May of this year, in particular, in the near future all procedures relating to labor relations, including the conclusion, change, and termination of employment contracts will be carried out electronically through the updated platform "Labor & Employment".

What has the government achieved by optimizing the labor market, and what benefits will the country's citizens gain from the transition to digital platforms in this area?

First of all, efforts to reform the field of labor contracts helped increase budget revenues for social obligations. So, for 10 months of this year, thanks to the maintenance of real statistics on the number of employees and wage fund, the proceeds on mandatory state social insurance premiums rose by 18.4 per cent compared to the same period of the previous year, amounting to about 3.7 billion manats. At that, non-budgetary organizations and companies brought 2.4 billion manats of income for the reporting period, which is 19.7 per cent more compared to the previous year. The latter clearly demonstrates that today the private non-oil sector has tightened the discipline of compliance with the norms of the Tax and Labor Codes, even outstripping the overall collection of social insurance contributions in the country.

At the same time, the process of digitalization of employment contracts will also be beneficial for employees. In the long run, it will simplify the employment process, as there will be no need to collect paper documents due to the integration of the "Labor and Employment" platform with other electronic e-government systems. At retirement age, citizens will not have to collect various documents - the pension calculation process will be automated, taking into account digital information in the database of the employee's length of service, contributions to the pension, and other funds. Digitalization of labor contracts will create a regime of transparency and protect citizens from social risks by fixing the obligations of the employer to the employee in an accessible electronic format. And local freelancers will have more opportunities to find an employer from another region - by remote interview, it will be possible to conclude an electronic employment contract and work online.

Another incentive to comply with the norms on labor contracts was recently adopted by Milli Majlis amendments to the Law on Social Benefits, according to which in case of an employment contract for at least one year specialists working in Azerbaijani territories liberated from occupation, from January 1, 2023 will be provided a lump sum to support the material and living conditions.