REPUBLİC OF AZERBAİJAN

On the rights of the manuscript

DIRECTIONS OF IMPROVING FINANCIAL ENSURING OF LOCAL SELF-GOVERNMENT IN AZERBAIJAN

Specialty: 5308.01 - “General economy”

Science: “Economics”

Applicant : Vugar Ahmad oglu Mammadli

ABSTRACT of the presented dissertation for the degree of Doctor of Philosophy

BAKU 2021

The dissertation work was carried out at the Department of “Financial and economic theory” of the Azerbaijan State Agrarian University. Supervisor of studies: Doctor of economic sciences, professor Fizuli Aziz oglu Mammadov

Official opponents: Doctor of economic sciences, professor Mahabbat Ashir oglu Mammadov

Ph.D in economics, associate professor Kamran Nureddin oglu Abdullayev

Ph.D in economics, associate professor Samira Raqif kizi Ahmedova

ED.1.10 Dissertation council operates under the “Institute of Economics” of ANAS under the “The Supreme Attestation Commission Attached to the President of the Republic of Azerbaijan”

GENERAL CHARACTERISTICS OF THE WORK

Actuality of topic and working degree: Reforms in the field of local self-government in Azerbaijan cover all aspects of socio-economic development of municipalities, including local finance. Almost today, the main tasks of local self- government bodies are to find resources and develop the municipal economy in order to ensure the effective functioning of the socio- economic system in the area along with the implementation of local budgets. At present, the budgets of municipalities are insufficient in comparison with the powers (status) granted to local self-government bodies in the country. The income of municipalities is not enough to finance the authorities related to the living of the population (for example, housing and communal services, education, health). Increasing the role of local self-government bodies in the promotion of the human factor in regional socio-economic development and the availability of independent decision-making in this area remains an actual issue. Thus, the current development and opportunities of the municipal system, which is chosen from the point of direct contact with the population, are not always at the desired level. Despite the fact that the financial support of local self- government in Azerbaijan is strengthened by the formation of the local tax system, municipalities do not yet have stable financial resources. The main reason for this is the low level of collection of local taxes and the lack of development of municipal entrepreneurship. Comprehensive analysis should be carried out in this area, theoretically substantiate the problems of tax and non-tax revenue formation of local budgets. All this gives special urgency to the issues of improving the financial security of municipalities. Also, the need for complex research provided the urgency of the subject of the presented dissertation. Recent changes to legislative acts on financial security of municipalities, i.e. recent changes in tax legislation, give special urgency to the subject. In particular, the implementation of the local tax and payment procedure only in cashless manner, the procedure 3 for calculating property tax from individuals, land and mining tax rates were aimed at improving the financial security of municipalities as a requirement of the day. Improving the financial security of local self-government bodies and increasing the role of local self-government bodies in the management of the socio-economic development processes of the territory has always been actual in the states that have taken the path of democratic development. Although it has been operating in our country for more than nineteen years, increasing the role of municipalities at the stage of regional management is one of the priority directions of the state policy. The solution of local problems through the use of the opportunities of municipalities as the closest management body to the population necessitates the development of local self-management. Features of local financial policy, preparation of local budgets, improvement of local taxation, economists of our country by A.Musayev [69, 70], B.X.Atashov [32], M.C.Huseynov [41], Sh.H.Hacıyev [38], F.Sh.Hacıyev [37], X.A.Huseynov [40] and others extensive research were realized. In connection with this problem, the research of foreign economists such as Q.B.Polyak [107, 108], B.M.Sabanti [113], L.L.İqonina [89], E.S.Sinisina [116], N.Q.Filatova [120], E.V.Xmelevskaya [123], U.O.Nikitkova [102], Q.M.Kolpakova [92], N.V.Postovoy [110], M.İ.Yandiyev [129], V.N.Voblenko [77], A.Q.Voronin [78], A.M.Yemelyanov [86], I.V.Yefimcuk [87], H.H.Lityaqin [94], I.D.Cernik [125] and others are also of particular importance. Strengthening the role of municipalities in solving local issues and problems, directions of increasing local financial resources and optimal organization of counter-centralization of finance have not been adequately studied. Therefore, there is a need to study the development of municipalities in terms of financial security. The purpose and tasks af the research: The purpose of the dissertation work is to develop scientifically substantiated proposals to improve the financial provision of local self-government in Azerbaijan through the management of local 4 taxation and efficient use of municipal property and to ensure the financial freedom of municipalities. Concretely tasks were defined to achieve the objectives in the study. - To study the theoretical and legal conditions of financial provision of municipalities by making proposals to improve the legislation; - Investigation of the role of municipal property in the financial provision of local self-government; - To assess the position and role of local taxation management in the financial security of municipalities. - Assessment of the current state of local finance. - Determining the structure of financial resources of local self- government. - To reveal the directions of formation of financial resources of municipalities in Azerbaijan. -Investigation of state support to municipalities. - Formulate the scientific and methodological basis of the organization of the local taxation management system, which is a key element of improving the financial security of municipalities. Research methods : The theoretical and methodological bases of the study are decrees and orders of the president of the Republic of Azerbaijan on the financial support of municipalities, laws adopted by the Milli Majlis of the Republic of Azerbaijan, as well as normative-legal documents adopted by the Cabinet of Ministers, scientific works of local and foreign economists conducting research in this field. In the research systematic approach, comparative analysis, economic-statistical analysis, deductive, economic-mathematical programming methods were used. Basis provisions of defence: - The development and activity of municipalities directly depends on their financial security. - Despite the policy of unification of municipalities in Azerbaijan, there are still municipalities with a very weak financial situation. - The main element of local financial policy should be the management of municipal property. 5 -As in some countries, instead of allocating part of state taxes to local budgets, it is necessary to increase the collection of local taxes and fees established by the country's legislation. - Reforms carried out in recent years to improve the land tax, along with improving the financial provision of municipalities, is a step aimed at the development of the agricultural sector in the country. - Although the determination of the tax base in Azerbaijan by the size of the property area has led to an increase in local budget revenues on property taxes in some municipalities, there are certain problems in the collection of this tax. - Municipalities have problems with the collection of mining tax. - The level of state aid on the local budget should be increased. -Municipalities should create an internal control system, an internal audit service that evaluates that system and use the services of independent auditors in this area. Scientific novelty of the research : The scientific novelty of the research consists of: - Within the framework of the financial policy of the state, the financial problems of the local self-government were investigated and the directions of improvement of financial security of municipalities were shown. For the first time in Azerbaijan, the financial resources of municipalities were grouped on the basis of various criteria (“Problems of increasing the financial resources of local self-government.” ANAS, Scientific Works, 2017-№6). - Economic composition was opened by indicating the role of municipal property in the implementation of local self-government development strategy. For the first time, indicators for the management of municipal property and the use efficiency of property have been identified in Azerbaijan ("Economic development of local self-government bodies through effective management of municipal property", Economics and Entrepreneurship, Moscow -2017, №3). - The current state of local finance has been analyzed and economic indicators reflecting the financial situation of municipalities have been identified. The financial situation of several municipalities was assessed on the basis of these indicators (“Assessment of the current 6 state of local finance.” Cooperation. 2018, №2). - The effect of changes in the national legislation on land tax and improvement of tax base on property tax from individuals on land tax on the collection were substantiated, the characteristics of mining tax on local building materials and mountain rent, which is the first manifestation of mining tax, were explained (“Land Tax: theory and practice”. Azerbaijan Tax Journal, July- August 2018; “Improving the financial provision of local self- government through the improvement of property taxes from individuals”, Tax Journal, 2016-3 (129); "Features of the taxes on construction materials of local importance." Economics and Entrepreneurship, Moscow: 2018, No. 1). - On the basis of analysis of formation of local budget revenues, ways of strengthening financial freedom of municipalities have been identified and the role of audit service in increasing local budget revenues have been assessed. (“The role of audit in increasing local budget revenues”, ASEU Scientific News, April-June 2017). Theoretical and practical importance of the research work: The proposals prepared on the basis of the results of the study are of theoretical and practical importance in improving financial security of local self-government in Azerbaijan, increasing savings, efficient use of real estate. Aprobation and application of the study: Speeches were made at conferences held in Azerbaijan and Russia on the results obtained. Among them are "Main criteria for the creation of municipalities in Azerbaijan" (Azerbaijan-2016), " Role of local taxation in the financial provision of the municipality of Mingachevir "(Azerbaijan-2018), İncrease of local budget revenues through the economic activity of Municipalities "(Azerbaijan-2018), "İncrease of local budget revenues through local payments “(Azerbaijan-2019),” The role of fixed assets in the creation of municipal enterprises “ (Russia-2019),” Assessment of financial freedom of the municipality of Mingachevir" (Azerbaijan-2019). In general, 18 scientific articles and theses were published on the research work, 5 of which were published abroad, including 2 of which were included in the international journal of summarization 7 and indexing. (Application references of Agdash municipality of Agdash District of the Republic of Azerbaijan no. 22 of 09.04.2018 and of Mingachevir municipality of the Republic of Azerbaijan no. 492 of 01.05.2018) Materials of the dissertation work can be used in the teaching of ”Municipal finance“,” Municipal economy " and etc. scientific subjects in higher schools, colleges. Name of the organization where the dissertation work is performed: The research work was carried out at the Azerbaijan State Agrarian University in Ganca. The total volume of the dissertation, indicating the volume of the structural units of the dissertation separately: The total volume of the dissertation are - 322050 characters. Including title page and table of contents 1950 characters, introduction - 17450 characters, chapter I -107450 characters, chapter II - 85500 characters, chapter III - 82500 characters, result 12150 characters, list of used literature 15050 characters, without taking into account tables, pictures, diagrams and used literature the volume of the dissertation are 245500 - characters.

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CONTENT Introduction Chapter I: Theoretical bases of financial provision of local self-government 1.1. Methodological basis of financial support of local self- government 1.2. World experience and establishment of municipalities in Azerbaijan, legislative base regulating their financial activities 1.3. Principles and characteristics of local financial policy

Chapter II: Evaluation of the financial position of local self- government 2.1. The economic content of municipal property and the management of municipal property 2.2. Assessment of local finance and its current state 2.3. Structure of financial resources of local self-government

Chapter III: Ways of improving financial security of local self- government 3.1. Improvement of financial security of local self-government through improvement of land tax 3.2. Expansion of the tax base on property tax from individuals and the degree of mining tax on building materials of local importance 3.3. Economic activity of municipalities and ways of increasing their incomes Conclusion List of used literature

9 MAIN SCIENTIFIC PROVISIONS PRESENTED FOR DEFENSE The development and activity of municipalities directly depends on their financial guarantee. Municipality is a form of local self-government within the territorial boundaries in accordance with the legislation of the country. Municipalities have a rich history. Their formation was connected with the formation and management of cities. Currently there are 1606 municipalities in our republic. On the necessity and importance of the establishment of municipalities, national leader Heydar Aliyev stated that “the selection, organization and activities of municipalities are very important for our society, for our state and for every citizen. This means both the development of democracy and the creation of opportunities for our citizens to manage the country. Municipalities should play a very big role in the development of our country.” As a result of legislative and institutional reforms conducted in the field of local self-government under the leadership of the president of the country Mr. Ilham Aliyev, the activities of municipalities have been improved. In economic literature according to V.E.Chirkin and I.D.Maskulyaka the economic base of local self-government is: local finance, municipal property and other property (for example, local self-government grant to meet local needs). V.E. Cirkin considers “municipal property as the basis of local self-government financial and economic “[1]. Other authors support local finance without reducing the importance of municipal property. According to opinion Q.V.Polyakin, “when the local self- government functions in the process of redistribution and use of money, a system of economic relations is formed in the process of collecting part of the value of the public product, which is local finance” [2]. According to I.D.Maskulyaka, “the difference in local

1 . Chirkin V. E. Public administration/ / - textbook. V. E. Chirkin. M.: Yurist. 2004. – 475 p. 2 . Polyaka G. B. State and municipal finance: a textbook Ed. - 2nd ed.– M. UTIQI 10 finances is that its basis is the development of the territory and the satisfaction of the population's needs. Thus, municipal finance is the creation, distribution and use of financial resources to solve local important issues, including the sum of socio-economic relations “ [3]. Summarizing the content of the research of Azerbaijani and foreign scientists, it can be concluded that the development and operation of local self-government bodies directly depends on their financial security. In other words, it is impossible for them to function, develop, strengthen and take a useful place in building a democratic society without ensuring the authority of municipalities and financial support for the exercise of these powers.

Despite the policy of unification of municipalities in Azerbaijan, there are still municipalities with very weak financial situation. In practice, two models of local self-government are distinguished. especially in Western countries, two different models are used. One of the models is called anglosakson. This model, which is applied in Canada, USA, UK and other countries, is an english-saxon model. Another model is the french (continental) type. This model works in most countries of France, Arabia, Turkey, Latin America and Africa. On the basis of both models, the third type of mixture was formed in some countries. For example, in Japan, Italy, Germany, mixed varieties are applied [4]. On both models, municipalities have been granted broad rights and powers. Implementation of the rights and duties of municipalities in our republic is determined by the law of the Republic of Azerbaijan “on the status of Municipalities” dated July 2, 1999. Implementation of the local important social development issues mentioned in paragraph 2 of clause 4 “Local social protection and social development programs” of this law is related

DANA. 2007 – - 319 p. 3 . State and municipal finance: Textbook, I. D. Matskulyak-M: Rags. 2007. 640 p. 4. Hacıyev Sh. State and municipal administration // Textbook. Baku: -2011. - p.440. 11 to the status of municipalities. When creating municipalities in Azerbaijan, the number of population, financial sources, the overall level of development of the settlement should be taken into account. For example, despite the fact that rural municipalities with a low population have been united several times and their territories have increased, the financial situation of these municipalities is very difficult. The table in below shows the indicators of some rural municipalities in the Agdash administrative region, which is part of the Aran economic region (Table 1). Table 1. The main indicators of different municipalities 2015 2017 2019

Names of Collected Salary Collected Salary Collected Salary municipalities land and fund (in land and fund land and fund property manats) property (in property (in taxes (in taxes (in manats) taxes (in manats) manats) manats) manats)

Municipality 16452 6835 22586 8081 8636 8851 of Kukel Municipality 7700 2379 3869 4773 1393 3240 of Ashagı Nemetabad Municipality 7845 4728 5204 3960 1646 3600 of Pirkeke Municipality 9615 5740 31295 8252 4022 10884 of Qolqeti Municipality 4858 3975 6812 4725 1126 5820 of Shemsabad Municipality 2630 3960 500 3480 750 3064 of Pireze Municipality 1895 3790 1356 3465 690 3150 of Yenice The table was prepared by the author on the basis of the data of the mentioned municipalities.

12 It can be concluded from the table that due to the lack of funding in some municipalities in the country, the low level of overall development of the settlement, the local social issues assigned to them by law remain unfulfilled in those areas. In particular, if the taxes collected in rural municipalities are less than or equal to the annual salary fund, there can be no question of the implementation of local social issues in the territory of those municipalities. It should be noted that only land and property taxes are applied in the territory of the municipalities where the information is reflected, and the taxes they collect are less than the salary fund. Lack of funding for municipalities exists in most municipalities. Therefore, the availability of a source of funding for the performance of the functions of local self-government bodies should be one of the main criteria in the establishment of municipalities. It is expedient to reorganize rural municipalities through mergers, taking into account their financial capabilities. Thus, based on the opinion of the local population, municipalities can be merged. Otherwise, the members of the municipality elected by the residents of such settlements are elected to receive salaries. In general, a number of studies have been conducted on the mechanisms of municipal development in Azerbaijan and it has been proposed to change the principle of voluntariness with administrative levers. We believe that small municipalities are not able to build human resources, increase administrative costs, and allocate financial resources in the area. Therefore, the process of merging municipalities should be continued, taking into account financial resources. The main element of local financial policy the management of municipal property should be organized . Adequate financial potential is formed on the basis of correct financial policy. Local financial policy should be based on the principles of objectivity, systematism, authenticity, efficiency. The formation and management of municipal property is a completely new problem for our democratic republic, which has entered the path of independent development. Therefore, benefiting from the rich experience of different countries in this area is very important 13 and important for every municipality operating in Azerbaijan. In developed countries, municipal property is considered the main condition for the implementation of entrepreneurial activity. The socio-economic importance and economic efficiency of the property object in terms of solving locally important issues is considered the main criterion in the management of municipal property. One of the important areas of activity of municipalities is the development of municipal entrepreneurship, which is important for the management of municipal property. Each municipality can become the subject of small entrepreneurship. As a result, the state can be free from a number of problems. According to world experience, the number of commercial municipal enterprises should be increased. Determination of indicators of the effectiveness of property use assessment may be necessary in the formation and management of property to local self-governing bodies. Part of the municipal property brings income to local budgets, which is an active part of the property index. The other part not only brings profit, but also requires constant costs for the maintenance of these facilities without local self-management. This is the passive part. As a whole, municipal property is used in the social direction, on the other hand, it performs an economic function in terms of the economic foundations of municipalities. The main part of municipal property in our republic is land. Russian researcher N. Filatova analyzed the economic efficiency of municipal property on the basis of deductions from income from property, land tax and profits of municipal enterprises [5]. However, the land tax in our republic is paid to local budgets annually in the form of fixed payments for land plots regardless of the results of farm activity of land owners or users who are natural persons. Municipal lands are used to other individuals and legal entities are charged rent. Land tax is included in the rental fee. Also,

5. Filatova N.G Effective management of municipal property as a condition of socio-economic development of municipal education /. Dissertation for the degree of Candidate of Economic Sciences 2009. 14 the profit tax at a rate of 20% from the profit of municipal-owned enterprises is paid to local budgets. The impact of the economic efficiency (EE) of the use of municipal property on the results of local budgets can be determined by: the ratio of the collected rent, income from the sale of the property and the income tax to the costs incurred in property management: EE=(RF+SP+PT)/C (1) RF-rental fee. SP-incomes from the sale of municipal property. PT- profit tax of municipal enterprises. C-costs incurred in property management. The table in below calculates the economic efficiency coefficient based on the indicators of Mingachevir municipality by years and analyzes them by years. Table 2. Indicator of economic efficiency of property of Mingachevir municipality. İndicators 2014 2015 2016 2017 2018 2019 Municipal 73208 94862 122099 119700 131580 130376 property rent. incomes from 52405 161090 3360 - 41896 33962 sales of municipal property Municipal ------institutions income tax Municipal 139838 125658 125435 121358 128666 160446 property management costs.

Economic 0.898 2.0369 1.00 0.986 1.348 1.024 efficiency of municipal property

The table was prepared by the author on the basis of the information of Mingachevir municipality. 15 Management is economically inefficient if the efficiency indicator is EE < 1, and efficient if it is EE ≥ 1. According to the table, the reason for the high economic efficiency rate in 2015 was the increase in the sale of municipal property. Especially since the land is depleted natural wealth, the sale of land is negative. Instead of allocating part of state taxes to local budgets, as in some countries, it is necessary to increase the collection of local taxes and fees established by the country's legislation. One of the conditions of the European Charter” on local self- government " on financial guarantee of local self-government is the organization of at least part of their financial resources from local taxes and fees, as well as the authority to determine the rates of local taxes by local self-government bodies within the limits specified by law. That is, by allocating local taxes to municipalities, they should be given authority in the field of taxation. The goal in the distribution of taxes in different ways is to create an initiative in local authorities. It is also to formalize the special incomes of municipalities, taking into account at what level the established tax is more efficient. The tax base for local taxes should be considered as evenly distributed across the country. In the study of the formation of tax revenues of local budgets in the economic literature, two questions forming: what taxes should be given entirely at the local level (granting authority to determine the basic elements of taxation), that is, what taxes should be considered as local taxes and how to allocate other taxes to the benefit of municipalities. According to V.V.Kurovkin, several methods of providing low budgets with tax revenues are known: - fixed; by this method, separate taxes are fixed on budgets according to the principle of “one tax-one budget” ; - concentrated; tax rates by this method are different on budgets (on the same type of tax). By allocating tax rates by law, municipalities are allowed to apply a special plus rate or reduction. In some literature, this method is called the method of joint use of the tax base. - normative; the amount of tax collected by this method is kept in 16 low budgets on the basis of the norm [6]. The competence of local authorities in the field of taxation is explained by their statutory rights and duties. Especially in the definition of taxes. Municipalities may be granted general or limited rights in determining taxes (which are the main elements of the taxation base and tax rates). Also, local taxes and fees may be imposed on the collection of taxes on the basis of their competence to formalize the local budget. In the scientific literature on taxation, a number of principles of the division of powers between local self-government and higher authorities have been defined. The limitation of powers depends on the mobility of the taxation base. That is, if the base is more mobile, then the upper level should be taxed. This is conditioned by the fact that mobile bases can move from one area to another. According to this principle, property (real estate) is transferred to local authorities for taxation purposes. Another principle is that the division of powers depends on the equal location of the taxation base. If the taxation base is located unequal, it is attached to the upper structues. When tax revenues are more dependent on economic activity, they are credited to the upper budgets, or rather to the local budgets when the base is stable. Thus, if the tax base depends on the economic policy of the country, it is necessary to contribute this tax to a more suitable budget level. The main condition in the division of tax powers in the economic efficiency of expenses related to the accounting of the taxation base. Which tax base should be charged to the upper authorities if it is large. In some cases, municipalities consider the application of local taxes, the application of progressive tax rates and the collection of these taxes from the population not as an obligation imposed on them in the legislation, but as a right granted to them. In addition, a some of municipalities do not deliver written payment notices to taxpayers. The study (according to an oral survey) shows

6 . Korovkin V. V. Fundamentals of the theory of taxation/, textbook, Moscow: Ekonomist, -2006. - 576 p. 17 that the level of accumulation is reduced as payment notifications are not delivered on time and are mainly calculated by municipalities as interest amounts. Another difficult point faced by municipalities in our country on tax collection is information scarcity. In particular, the accounting of real estate owned by a natural person is carried out on the basis of data (farm books) presented by the tax authorities in 1999. As a result, municipal authorities face difficulties in estimation the area of real estate. Taking these principles into account, it is appropriate to provide municipalities with information on real estate on a regular basis. In other words, we believe that the registration authorities must inform the municipalities in writing or electronically. In Azerbaijan, the concept of local budget was understood as a means of allocating from the state budget for the regions until municipalities were formed. After the municipalities were organized, the concept of local budget was adopted as a municipal budget with concrete meaning. Table 3. Dynamics of local income and expenditure changes (thousand manats). Growth Incomes decline and 2014 2015 2016 2017 2018 2019 in the expenses last 6 years(%) State budget (approved) - local incomes 782424.0 834536.0 766345.5 642381.0 653350.0 738766.0 -5.6% - local costs 1629449.0 1653950.0 1541251.0 718270.0 723925.0 842812.0 -48.3%

Summary execution of local budgets - local 49065.7 30803.9 31617.2 36079.4 35973.7 36381.8 -25.9% incomes - local costs 49743.6 30882.5 31328.6 35711.5 35995.9 36378.8 -26.9% Source: www.azstat.org

Based on the table information, we can note that the revenues

18 of the consolidated local budgets decreased by 25.9% in altı years and the expenditure by 26.9%. The main reason for this is the increase in local revenues and the balance of expenditure on income due to the sale of land in previous years. The reason for the 48.3% reduction in the local expenditure of the state budget is due to the centralized expenditure on culture and education in recent years. In 2020, local revenues are planned at 764535.0 thousand manats, local expenditures at 814870.0 thousand manats. The increase of local revenues by 13% in 2019 compared to 2018 and 17% in 2020 is the legalization of revenues (turnover) on the basis of the development of entrepreneurship and increase of cashless turnover in the country. With respect to revenues, expenses also increased by 16% in 2019 and by 12.6% in 2020. One of the main issues of modern management of the country is ensuring financial freedom of local self-government. The financial freedom of municipalities is to provide themselves with financial resources with their own power, without outside influence. İn world practice, including in the scientific work of russian researchers such as E.Khmelevskaya and U.Nikitkova are used different coefficients to assess the financial situation of the municipality: CİR =Rİ / Sİ (2) coefficient of incomes relation. Rİ-regulated income; Sİ-special incomes. CFF =Sİ / Tİ (3) coefficient of financial freedom. Tİ-total incomes. BGC =X/S (4) budget guarantee coefficient. E-expenses; N- the number of the municipal population. CBE =TI /N (5) coefficient of budget efficiency. CP =SI /E (6) coefficient of providing special incomes of minimal expenditure [7];[8].

7. Khmelevskaya Elena Vyacheslavovna Formation and use of financial resources of municipal education /. Dissertation for the degree of candidate of economic sciences. -2007. - p.130. 8 . Nikitkova Ulyana Olegnovna - Tax factor in the development of financial independence of municipal education /. Dissertation for the degree of candidate of economic sciences. -2012. -p.24. 19 The table below shows the last five-year statistical indicators of the Republican subordinated cities of Mingachevir and Yevlakh municipalities of the Aran economic region:

Table 4. Statistical indicators of Mingachevir and Yevlakh municipalities (manats). İndicators Mingachevir Yevlakh 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Special 316236 193467 245853 259502 244273 109543 34206 66673 125038 115484 İncomes İncluding: - tax incomes 60284 68008 71800 61620 62292 10955 11078 12124 26994 54368 -non-tax incomes 255952 125459 174053 197882 181981 98588 23128 54549 98044 61116 Regulated Incomes: 140000 155000 170000 170000 170000 22000 22000 22000 22000 22000 Total incomes 456236 348467 415853 429502 414273 131543 56206 88673 147038 137484 Total costs: 353887 406933 387720 416475 416200 131557 56230 88308 146502 137411 Municipality population _ _ _ - 100670 _ _ _ - 62036 number (person) Source: table was developed by the author based on the data of the municipalities in the table.

There are differences in tax revenues of both municipalities. Thus, the mining tax on building materials of local importance, which is attributed to local taxes and fees, is applied in some municipalities. In 2016, 29315 manat mining tax was collected for the extraction of locally important construction sands in the territory of Mingachevir municipality, which is 43% of the tax revenues collected for the same year. Table 5 shows the financial situation of Mingachevir and Yevlakh municipality for 2015-2019:

20 Table 5. Statistical indicators of Mingachevir and Yevlakh municipality (manats). İndicators Mingachevir Yevlakh 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Coefficient of 0.44 0.80 0.69 0.66 0.7 0.20 0.64 0.33 0.18 0.19 incomes relation (CİR) coefficient of 0.69 0.56 0.59 0.60 0.59 0.83 0.61 0.75 0.85 0.84 financial freedom (CFF) budget 4.04 3.85 4.14 3.94 4.13 2.12 0.91 1.42 2.36 2.22 guarantee coefficient. (BGC) coefficient of 4.53 3.46 4.13 4.27 4.11 2.12 0.91 1.43 2.37 2.22 budget efficiency (CBE) coefficient of 0.78 0.50 0.59 0.62 0.58 0.83 0.61 0.79 0.85 0.84 providing special incomes of minimal expenditure. (CP) Source: Table was prepared by the author based on the data of the municipalities.

According to the table, the ratio of income and financial freedom in both municipalities has not fundamentally changed over the years, which indicates that the subsidies allocated from the state budget are aligned with the forecast indicators of the revenues of local budgets. There is an increase and decrease in the ratio of budgetary guarantees and outcomes, which is the result of the proper adjustment of the expenditure of local budgets to revenues. That is, both municipalities have implemented budgets based on the principle of balancing over the years.

21 Examining the financial resources of municipalities, it can be concluded that financial resources can be grouped on the basis of the following criteria: - compulsorily created on the basis of the nature of creation and arising on a voluntary basis. - by source: special funds, funds allocated by higher authorities and funds raised from the financial market. -allocated to the local budget, extra-budgetary funds and financial resources of municipal enterprises. We believe that today, as in some countries, it is necessary to increase the collection of local taxes and payments, as defined by the legislation of the country, rather than allocating part of state taxes to local budgets. We believe that the reforms carried out in recent years to improve land tax are a step in the development of the agricultural sector in the country along with improving the financial support of municipalities. One of the sources of fixed income of municipalities is land tax. The tax period of the land tax is a calendar year. One feature that distinguishes land tax from other taxes is that tax rates are different on agricultural, industrial and residential fund lands. With the change of 20 June 2014, the tax rate of more than 10000 square meters of land on a group of lands was doubled. Land plots with increased tax rates are of industrial type, residential and garden areas. If we consider that individuals pay land tax to the local budget, and this change is effective from 1 January 2015. The main advantage of land and property taxes is the stability of the tax base, little change during the tax period, didnt depend of land and property owners and users from the results of financial and economic activities. That is, land and property taxes can be considered as a stable income of the relevant budget. That is why, as in some countries around the world, it is possible to improve the financial security of municipalities by considering the land and property tax as a whole local tax. According to the study, despite the changes in the land tax legislation (in the direction of improvement), as well as the 22 optimization of tax rates, they are not able to properly use the financial resources provided to municipalities. In some municipalities, land tax collection is not at the desired level. Although the determination of the tax base in Azerbaijan by the size of the property area has led to an increase in local budget revenues from the property tax in some municipalities, there are certain problems in the collection of this tax. Until 01.01.2015, property tax from individuals was calculated at 0.1% of the inventoried value of the buildings owned by them. The lack of inventar value of most buildings or the fact that this value is many times less than the market value created a problem in the collection of property tax. According to the change made on June 20, 2014, the property tax of individuals in our republic is determined according to the size of the area of real estate. After this change, some of the problems arising from the legislation in the field of property tax collection have been eliminated. The change in the tax base, the introduction of a new mechanism, has created conditions for the taxation of non- residential areas. However, in some cases, people who do not have a Certificate of real estate refuse to pay property taxes. In the tax legislation, the calculation of property tax for buildings owned by individuals is contradictory. Most of the houses in the country, especially in rural areas, lack of a certificate of ownership creates difficulties in taxing this property. The result of the survey conducted among 10 municipalities of the Central Aran region shows that rural municipalities can not calculate property tax because they do not have property documents. Therefore, as in some countries, the collection of property tax from owners or users is considered appropriate for the purpose. In this case, by measuring buildings on the territory of municipalities, property tax calculations on behalf of the heads of farms are legalized. In comparison with residential buildings of individuals, it is possible to increase the collection of taxes, which are the main financial source of municipalities, by applying special ratios to the property tax of buildings used for entrepreneurial (as well as leased) 23 purposes. Also, by applying coefficients to apartments in tourism regions, it is possible to minimize the shortcomings of taxation of property object for the area of real estate. In order to improve the financial security of local self- government, according to world experience, it is expedient to increase the objects of property tax at the expense of vehicles and to include the property tax of legal entities in local taxes. This is because property taxes are paid at different rates for the same asset used for business purposes. In general, property taxes are not levied on movable assets used by individuals for business purposes. Although changing the tax base on property taxes from individuals has had a positive effect on collection in some municipalities, there are still many reasons for the problem. This is due to the fact that municipalities do not work properly, as well as the legislation. Thus, some municipalities have no experience in collecting property taxes at all. Municipalities have problems collecting mining taxes. The mining tax on construction materials of local importance is applied by municipalities located in the area of the steppe and foothills. The mining tax is a form of mountain rent. Land rent has been studied mainly in the economic literature. The unbreakable connection of the earth's surface with the earth's crust allows for joint consideration of land and mountain rents. The mining tax is applied under many different names in many countries. Such taxes paid by users of natural resources have different characteristics. Such taxes, along with the fiscal nature, are of a regulatory nature. Thus, natural resources are not renewable. Here, the tax regulates the use of natural resources, as well as prevents harmful effects, is applied to nature (environmental) protection measures. As construction sands of local importance were extracted in the territory of Mingachevir municipality, the analysis was conducted on the basis of the last six-year statistical indicators of that municipality. The following table shows the last five-year statistics of the municipality of Mingachevir, a city with a republican subordination:

24 Table 6. Mining tax collected in Mingechevir municipality (AZN). Indicators 2014 2015 2016 2017 2018 2019 Mining tax 34084 29315 24300 13150 19600 19350 Special incomes 173887 316236 193467 245853 259510 244273 - tax incomes 48274 60284 68008 71800 61620 62292 - non tax 125613 255952 125459 174053 197890 181981 incomes Table presented by the author on the basis of the information of the (www.mingechevir-belediyye.az) site.

2014 19350; 14% 34084; 24% 2015 19600; 14% 2016 2017 13150; 10% 29315; 21% 2018 24300; 17% 2019

Chart 1. Dynamics of collection of mining tax on Mingechevir municipality (in manat)

As can be seen from the table data, the volume of mining tax has decreased over the years. That is, the specific weight of the mining tax fell from 70.6% to 18.31%. However, since 01.01.2016 the rate of the mining tax has been doubled by subtracting from 0.5 to 1 manat for 1 cubic meter. Based on the research, we can note that the main problem of municipalities on the collection of mining tax is the inability to correctly determine the amount of extracted minerals. Thus, the tax authorities can determine their sales turnover by observing the chronometer procedure in the taxpayers of mining, like any taxpayer. It is more expedient to grant such powers to municipal tax authorities. Another issue is that the maps reflecting the territories

25 of municipalities are not fully prepared, so that municipalities face certain difficulties in confirming the right of ownership. We believe that the rates of the mining tax should be improved, as the price 1 cubic meter of sand in the market is 20-25 manats and 1 manats is paid for mining tax. The level of state aid to the local budget should be increased. In addition to the special incomes of municipalities in the world practice, state aid has a special weight. The role of state aid in balancing the income and expenditure of local budgets is not small. Financial assistance is also used to provide services to the population. The state budget allocated to local budgets can be allocated to 2 diections without purpose (grant) and purpose (subsidy, subvention). According to the law of the Republic of Azerbaijan (”On budget system") subsidies are given to local budgets without charge in order to regulate their income and expenses. In some countries, subsidies to local budgets account for 50 percent of local budget revenues. In the Scandinavian countries, also in Estonia (a post-Soviet country), this indicator is above 50 per cent. The table below summarizes the overview local budgets, grants to local budgets and the share of grants in local budget incomes : Table 7. Grants allocated to overwiew local budgets (thousand manats). Indicators: 2014 2015 2016 2017 2018 2019 Incomes of budgets of local self-government organization 49065.7 30803.9 31617.2 36079.4 35973.7 36381.8 (municipalities) (total by Republic). Grants allocated to 5200,0 5200,0 5200,0 5200,0 5200.0 4700.0 municipalities The share of grants in 10.6% 16.88% 16,45% 16,41% 14.45% 12.92% incomes of local budgets Source : The table was compiled by the author based on the information of the Statistical Committee of the Republic of Azerbaijan.

26 The table shows that the amount of subsidies allocated to local budgets did not change during 2014-2018. Another reason for the increase in the share of subsidies for 2015-2017 is the decrease in consolidated local budget revenues. In 2020, a subsidy of 5,000,000 manat was allocated. Until recent years, all municipalities were allocated the same amount of grants, regardless of their size , which led to a decrease in the number of initiatives of municipalities to increase their financial resources. Thus, although the legislation provides for certain conditions (factors) for the allocation of funds, this was not observed in reality. Clause 34.4 of the law” On budget system " was amended on June 20, 2014 in the new edition. Accurate criteria for calculating the upper limit of this subsidy are defined. Among these criteria, it is important to take into account the income and expenses of municipalities. Another amendment is the addition of clause 32.2.2 of the law "on budget system". Prior to the addition, financial support was not clear. Thus, the lack of concreteness of subvention caused problems. The amendment legalized the term of subvention. Municipalities can apply until mart 15 each year through their own or represented assosations regarding the adoption and implementation of local programs. Their application must be reviewed and reported within 30 days. Subvention is also planned to be given to municipalities to delegate additional powers.. In 2019, 1000.0 thousand manat subsidies were allocated to municipalities, and in 2020 - 1200.0 thousand manat. In world practice, credit relations form the basis of municipal finance, such as tax-budget relations. In accordance with the terms of the European Charter of Local Self-Government, municipalities may raise funds from the debt market for financing within the framework of national economic policy. The aim is to ensure the flexibility of the financial system of municipalities. In western countries, local self-government agencies attract money from the debt market in two ways: by circulation of securities and by buying financial resources from credit organizations. 27 In most states, special programs are adopted for the development of the municipal lending system. Especially competent state organizations subsidize the percentage of bank loans of municipalities. In fact, the lending of municipalities by commercial banks in developed countries is developing with state support. The use of credit resources of local self-government agencies in our country is not at all. The loans received by municipalities are aimed at short-term payment of current expenses only. They can not become a participant of credit relations because they do not have real estate of local self-government bodies. One of the main reasons that hinder the access of local self-government agencies to the credit market is the lack of specialists with the necessary knowledge of municipalities. In particular, municipalities do not have the necessary strategies for working with credit instruments. Despite changes in the legislation to provide state support to municipalities, there has been no increase in the amount of subsidies over the years. Also, almost no municipal initiative kastararak has received subvention from the state budget. Despite the fact that the involved loans, especially bank loans, make municipalities dependent on financial and credit institutions, may lead to an increase in the municipalities ' private income through re-established business projects. A mechanism should be developed by the relevant authorities to provide soft loans to municipalities, and municipal enterprises should become market participants by obtaining loans. Municipalities should establish an internal control system, an internal audit service that evaluates that system, and use the services of independent auditors in this area. According to the law “On Local Taxes and Fees”, municipalities have been allocated local payments. Based on the research, we can note that the collection of these payments, their share in local budget revenues differs from municipality. Some of the local payments to municipalities are directly related to their economic activities. Thus, the municipality can lease and sell property, including land, and allocate special places for stationary or mobile trade, catering and other services. Revenues from this 28 activity are collected in the municipal budget as a local payment. It is applied for the placement of street advertising on municipal lands, buildings and other objects (in open space) according to street advertising, according to the tradition of placing and broadcasting advertising on municipal lands, buildings. Payment for parking of all kinds of vehicles in the places determined by the decision of the municipalities or car stops owned by legal and natural persons in the territory of the municipality can be applied for not more than 0.1 manats per vehicle. With the change of 15.12.2017, the law (”On the base of municipal finance") was added to the local budget for the allocation of funds from parking spaces organized on municipal roads, which is aimed at solving some problems. Thus, to date, the parking rights were collected by the service structures within the executive bodies. The payment of not more than 1.1 manats per person from hotels, sanatoriums and tourism services in the territory of the municipality can be determined. The procedure for calculating local taxes and the last two payments, payment and granting of concessions, as well as the upper limit of rates are established by law. The necessity of its application and concrete rates are determined by the decisions of municipalities. Also you are able to make decisions about voluntary lump-sum payments, provided that they are used only for the purpose. Payment for hotels, sanatoriums and tourist services is mainly paid by hotels in the areas where tourists are accepted. Also in some areas of the republic there are sanatorium centers, for example in Naftalan, Mardakan, Bilgah settlements, the payments of these enterprises have a special weight in the municipal budget. This payment is widely applied in the developed areas of health tourism, including the tourism sector. The following table summarizes the payment of the city of Naftalan, a city of Republican subordination, for sanatorium services for 2014-2019:

29 Table 8. Information about the incomes of the municipality of Naftalan Indicators 2014 2015 2016 2017 2018 2019 Municipality incomes 48727 48298 53521 62913 112638 81264 Accumulated sanatorium-payment 30746 32804 34582 38784 80942 54754 for resort services The share of payment for sanatorium-resort 63.1% 67,9% 64,6% 61,6% 71.9% 67.4% services in local budget incomes Source: The table was prepared by the author based on the data of the municipality of Naftalan.

90000 80000 80942 70000 60000 50000 54754 32804 40000 38784 30000 34582 20000 30746 10000 0 2013 2014 2015 2016 2017 2018 2019 2020

Chart 2. Change of payments for sanatorium and resort services by Naftalan municipality over the years

Figure 2 shows the diagram showing the changes in the payments by the Naftalan municipality for sanatorium and resort services over the years. Today, the main problem of municipalities in our country is the low level of collection of statutory revenues, especially taxes and fees. Financial control in this area is very weak. This case is supervised by the relevant commissions of municipalities in

30 accordance with the law. We believe that internal audit control in this area should be strengthened. Internal audit has a positive impact on the development and efficiency of municipalities. According to the order of the President of the Republic of Azerbaijan dated July 28, 2007, the accuracy of financial (accounting) reports of municipalities in accordance with the existing legislation must be confirmed by an auditor's report. However, the municipal institution has a low level of staffing capacity, and financially incompetent municipal employees run the budget at a low interest rate and are unable to seek the advice of independent auditors. During the preparation and use of the local budget, there is a balance of revenues and expenditures, which ultimately leads to lower costs.

Table 9. The following table shows the percentage of municipalities undergoing mandatory audits The number of Number of municipalities municipalities % undergo Years throughout the subject to audit Republic. mandatory audits. 2013 1607 1269 79,0% 2014 1607 913 56,8% 2015 1607 599 37,3% 2016 1606 661 41.1% 2017 1608 1265 78.7% 2018 1608 980 60.9% 2019 1606 1436 89.5% Source : The table is prepared by the author based on information www.audit.az

The following chart 3 shows the number of municipalities that have passed mandatory audit over the years:

31 1600 1436 1400 1269 1265 1200 980 1000 913 800 599 661 600 400 200 0 2013 2014 2015 2016 2017 2018 2019

Chart 3. Number of municipalities undergoing mandatory audit in Azerbaijan

The study shows that although there has been a decrease in the number of municipalities that have undergone mandatory audits due to financial difficulties, there has been an increase in 2017-2019. Unfortunately, the mandatory audit of municipalities is only related to the implementation of the local budget, ie it does not cover economic control and does not reflect economic activity. The audit has nothing to do with the use of the property. Municipalities should establish an internal control system and an internal audit service that evaluates that system and use the services of independent auditors in this area. Independent auditors should pay special attention to the organization of internal control during the audit, ways to increase revenues and the development of a program for the use of municipal property. In addition to the above, at the end of the dissertation work, the results of the research were summarized, practical proposals and recommendations were put forward to improve the financial support of local self-government in Azerbaijan.

32 The main content of the study is contained in the following works published by the author: 1. "Facilitating the collection of local taxes", ASAU scientific works, Ganca-2015, №3, pp. 125-127. 2. ” The main criteria for the establishment of municipalities in Azerbaijan", materials of the International symposium on modern problems of university-industrial relations in the Bologna educational process. Ganja-2016, p. 374-377. 3. "Improvement of tax legislation is an important condition of improvement of financial security of state and municipalities", Adao scientific works, Ganca-2016, №1, p. 134-137. 4. "Financial and economic bases of local self-government in Azerbaijan", ASAU scientific works, Ganca-2016, №2, p. 125- 128. 5. "Improvement of financial security of local self-government through improvement of property tax from individuals", Taxes journal, 2016-3 (129), p. 131-142. 6. " Features of the financial policy of municipalities”, Economy and Business. Theory and practice. №10, Novosibirsk- 2016, p. 73-77. 7. "Automation of calculation of taxes of land plots of municipalities", Economics and Business. Theory and Practice. №11, Novosibirsk-2016, p 55-58. 8. "Economic development of local self-government bodies through effective management of municipal property", Economics and Entrepreneurship, Moscow-2017, № 3, p. 425-428. 9. “The Role of Audit in Increasing Local Budget Revenues”, ASEU Scientific News, April-June 2017, p. 279-290. 10. "Problems of increasing financial resources of local self- government”. Anas, scientific works, pp. 157-164, 2017 - №6. 11. "Features of the commercial tax on local construction materials". Economics and Entrepreneurship, Moscow: 2018, №1, p. 1283-11286. 12. ”The role of local taxation in financial provision of Mingachevir municipality". Global trends and modern Azerbaijan Republic scientific conference. MDU. p.37-139. 33 13. ”Assessment of the current state of local finance". Cooperation. 2018, №2. p.203-209. 14. "Land tax: theory and practice". Azerbaijan Taxes Journal, July-August 2018, p.37-48. 15.”Development of agrarian sector through the improvement of land tax". ASAU scientific works, Ganca-2018, №3, p. 140-144. 16. ”Increase local budget revenues through the economic activity of municipalities". Materials of the XXII Republic scientific conference of doctoral students and young researchers on education of youth abroad during the Azerbaijan Democratic Republic, Baku, 2018. p34-337. 17. "The role of fixed assets in the creation of municipal enterprises". Modern science: Current issues, achievements and innovations " IX International Scientific and Practical Conference (Russia, Anapa , January 25, 2019) p. 37-43. 18."Increasing local budget revenues through local payments". International scientific conference” actual problems of modern natural and Economic Sciences " held at Ganca State University on May 03-04, 2019; pp. 248-251.

34 The defense of the dissertation will be held on 11 June 2021 at1400 at the meeting of the Dissertation Council – ED.1.10 operating under the Institute of Economics of Azerbaijan National Academy of Sciences.

Address: AZ 1143. Baku, H. Javid avenue 115 e-mail: [email protected]

Dissertation is accessible at the library of the Institute of Economics.

Electronic versions of dissertation and its abstract are available on the official website of the Institute of Economics of Azerbaijan National Academy of Sciences.

The abstract was sent to the necessary addresses on 10 May 2021.

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