This chapter focuses on Tajikistan’s achievements and remaining challenges in the three areas of reforms identified in 2020, namely the investment framework, the enforcement of contracts and arbitral decisions in domestic courts, and tax administration. Taking into account the impact of the international context on the country’s economy, the chapter offers a series of policy recommendations.
Improving the Legal Environment for Business and Investment in Central Asia
Progress Report
4. Tajikistan
Abstract
Table 4.1. Summary of priority reform implementation and updated recommendations
Source: (OECD, 2021[1]), OECD analysis (2023).
Introduction
Tajikistan has weathered the economic storms of COVID-19 pandemic and Russia’s war in Ukraine fairly well
Since the beginning of the 21st century, real GDP has grown at an average annual rate of 7.6%, mainly driven by the extraction of minerals and metals, and supported by remittances inflows from labour migrants. Tajikistan has recorded the highest growth in Central Asia since 2016 and is the only country apart from Uzbekistan where growth remained positive during the pandemic in 2020. Growth slowed from 7.4% in 2019 to 4.4% the following year, due to worldwide and regional mobility restrictions drastically reducing economic activity. It appears that the war in Ukraine has had minimal impact on the economy so far: real GDP grew by 8% in 2022 (Figure 4.1). On the contrary, Tajikistan received large financial inflows through remittances and maintained low inflation. As of May 2023, annual inflation stood at 2.4%, which represents the lowest rate among all Central Asia countries (EBRD, 2023[2]).
Figure 4.1. Real GDP growth (2000-2022)
Source: (IMF, 2023[3])
Surprisingly, trade is one of the factors responsible for the country’s post-COVID recovery. In 2020, total exports jumped 20%: exports to Europe almost tripled due to increased metals demand, offsetting the fall in exports to every other part of the world, including CIS countries (-36%) and the rest of Asia (-18%). Then, in 2021, exports increased by 53% with the reopening of Asian borders. At the same time, it appears that imports were not heavily disturbed by the pandemic, as total imports only decreased by 6% between 2019 and 2020, almost entirely due to lower imports from China according to OECD computation based on data from (National Bank of Tajikistan, 2023[4]). In 2022, export volumes normalised following COVID-19 with substantial inventory sales of precious metals from the preceding two years (World Bank, 2023[5]).
Like the pandemic, the war in Ukraine has disturbed geographical trade patterns. In aggregate, it seems that the conflict did not have any effect on trade: in 2021, total exports amounted to USD 2.15 billion, while, in 2022, they amounted to USD 2.14 billion. However, geographical patterns changed. Exports were reoriented towards Asia, as exports to Europe dropped by 48% in 2022, offset by a 32% increase in exports to CIS countries and a 131% rise in exports to China. Moreover, imports increased by 23%, driven by Russia and China. This positive evolution of imports actually increased the trade deficit, as imports are now 2.5 higher than exports (OECD computation based on data from (National Bank of Tajikistan, 2023[4])).
Annual inflation has been decreasing since the pandemic and recently reached record low levels, unlike elsewhere in Central Asia. In early 2020, inflation peaked at 10.6% due to the restrictions related to the COVID-19 (Figure 4.2), hampering the supply of goods and foodstuffs. Indeed, the increase in food prices was responsible for more than 80% of total inflation. The National Bank of Tajikistan implemented restrictive monetary policies and eventually managed to contain this sudden increase in prices.
If the war in Ukraine provoked a regional inflation shock, the situation in Tajikistan remained almost unchanged. Following a brief uptick in inflation, in the longer run, the decreasing inflationary trend was maintained: a restrictive monetary policy has enabled the country to contain inflationary pressures, while the rise in the costs of food and fuel imports appears to have been offset in the first half of 2022 by a stronger somoni and the release of strategic food reserves (IMF, 2023[6]). In addition, the banking sector benefited from a significant increase in liquidity and fee-based earnings (IMF, 2023[6]). In May 2023, annual inflation reached 2.4%, far below other countries in the region.
Figure 4.2. Monthly and annual inflation in Tajikistan (2017-2023)
Remittances from labour migrants amounted to 28.7% of GDP between 2016 and 2021. Remittance inflows support private consumption, being a major driver of growth in the country, and are responsible for the reduction of poverty, as a large majority is used for food and basic needs. Around 85% of remittances originate from Russia; indeed, Russia reported 850,000 Tajik migrants with valid work permits at the end of June 2022. The increase in external labour demand in Russia as a consequence of the war in Ukraine has resulted in remittances rising to a record high value of 51% of GDP for 2022 (USD 5.2 billion). Tajikistan is the only Central Asia country for which net migration to Russia was positive that year. The appreciation of the ruble against the somoni also contributed to this rise. Finally, new employment opportunities for migrants arose on the Russian labour market due to war mobilisation and the departure of some Western companies and their staff. However, this increase in remittances is likely to be temporary; normalisation is expected in 2023, also because the value of the ruble against the somoni is regaining its pre-war level (The World Bank, 2023[8]) (ROSSTAT, 2023[9]).
The structure of trade shows Tajikistan’s limited economic diversification and complexity. On the one hand, the country exports a limited number of raw resources: mineral products represented 28% of total exports between 2016 and 2021, while gold accounted for 25% and non-precious metals for 22%. Over the same period, the range of imports was slightly broader and mostly composed of machines (23%), metals and minerals (22%), food (17%), textiles (10%) and chemicals (8%). Nonetheless, Tajikistan’s trade turnover almost doubled during the last decade: total exports and imports respectively increased by 80% and 94% between 2010 and 2022. Export growth was mostly driven by gold, metals and mineral product sales, as well as textiles to a lesser extent. CIS countries (especially Kazakhstan and Russia) remain the main partners (58% of exports and 35% of imports in 2022), but Europe (24% of exports) and China (17% of exports and imports) still play major roles in Tajikistan’s trade (OECD computation based on data from (National Bank of Tajikistan, 2023[4]).
This reliance on migrant remittances, an undiversified production and export base, and the country’s high risk of debt distress make Tajikistan highly vulnerable to external shocks. Considering the important share of remittances from Russia, inflows are dependent on the state of the Russian labour market, and also influenced by the value of the local currency against the ruble. If 1 RUB was equal to 0.146 TJS in February 2022, the ruble’s value increased by 38% by May 2022, when it peaked at 0.202 TJS. However, since then, the value of the ruble has dropped, to reach 0.121 TJS in July 2023. Therefore, everything else being equal, the amount of remittances going to Tajikistan would have fluctuated by +/- 40% only because of the foreign exchange market. Massive arrivals of Tajik citizens in Russia counterbalanced the depreciation of the ruble, as the number of migrant workers entering Russia from Tajikistan rose by 40% in the first quarter of 2023 compared to same period of the previous year. Going forward, it is uncertain to what degree Tajikistan will remain unscathed by Russia’s reduced economic activity, the falling ruble and the migration trends. Furthermore, even if the volume of external debt decreased from 63.5% of GDP in 2021 to 49.0% in 2022, the country is still considered to be at high risk of debt distress due to the repayment of Eurobond in 2025-2027 (The World Bank, 2023[8]).
Figure 4.3. FDI inflows in Tajikistan and Central Asia (2000-2021, % of GDP)
Note: Due to the irregularity of FDI inflows in the region, values were smoothed using a 3-year moving average
Source: (World Bank, 2023[10])
After a significant FDI decline in 2020, FDI started recovering in 2021 and the country managed to strengthen its position in 2022 with the mining sector leading investment inflows (Figure 4.3). Between 2010 and 2020, 48.3% of total FDI inflows were directed to the mining and quarrying sector, while 18.7% were directed to manufacturing and 12.2% to transport and warehousing. The remaining 20% of FDI inflows on this period mostly concerned construction, finance and agriculture (National Bank of Tajikistan, 2023[11]). When looking at the evolution of the distribution of inflows, we observe a large increase in the mining and quarrying sector (from 29% of total inflows in 2015 to 68% in 2020), compensated by a major decline in manufacturing (from 45% to 4% between 2015-2020). Tajikistan benefits from a major investor, China, contributing to 55% of total inflows this last decade, up to 75% for some years. CIS countries represented only 13.2% of FDI inflows on the same period, with Russia accounting for 11.4%.
Box 4.1. Measures implemented by the government to support businesses during COVID-19
To keep firms afloat, policymakers extended business liquidity and credit lines via designated funds and commercial banks. Countries also advocated bank loan repayment deferral. Taxation has been another significant policy lever, within the frameworks of which deferring tax declarations, deferring payments, halting audits, and/or exempting corporations from social obligations have been implemented. Lastly, business inspection moratoria have been also implemented in the country.
Additionally, under the COVID-19 Active Response Plan and Expenditure Support Program (CARES), the government of Tajikistan received a USD 50 million grant from the Asian Development Bank (ADB) for the implementation of the countercyclical package of actions.
Health sector measures for COVID-19 country preparedness and response implemented
Increased social assistance and food security measures implemented
Enhanced support for business entities and measures to safeguard employment implemented
To assist business entities and employees, the following steps were planned: (i) tax breaks for 40,000 micro, small and medium enterprises (MSMEs), (ii) moratorium on business inspections, including tax audits, until the program was completed, and (iii) concessional loans to MSMEs, 24% of which were owned by women. As a result, tax breaks were awarded in part; a suspension on business inspections was enforced for a shorter period than expected; and the issuance of concessional loans to MSMEs reached only around 17% of the amount planned by the end of the program.
The OECD has been working with Tajikistan to improve the business and investment climate
To help the government improve the business and investment environment and create enabling conditions for private sector development, the OECD conducted research in 2019-2020 in the legal environment for business and pointed to the need for more structural reforms in three policy domains, namely the investment framework, contract enforcement and tax administration (OECD, 2021[1]).
Implementation of existing laws for investment and entrepreneurial activity
The initial OECD assessment noted that Tajikistan had built a relatively solid legislative framework for business and investment activity, with the introduction in 2016 of a new investment law (IL) that outlines key provisions for, and protection afforded to, foreign and domestic investors. In particular, the IL provides numerous guarantees, such as equality of foreign and domestic investors before the law, guarantees from direct expropriation, provisions for compensation for indirect expropriation, and access to freely convertible currency, among others (OECD, 2021[1]). Tajikistan’s FDI regime is open and non-discriminatory in principle, with the country’s score in the OECD FDI Regulatory Restrictiveness Index close to the average for non-OECD countries, and in line with regional peers.
However, several areas for concern remained for foreign investors. While Tajikistan’s FDI regime is relatively open, some restrictions persisted in relation to land use rights, which are limited to long-term leases, and sectors such as agriculture and forestry, media, and financial and legal services, which are among the industries where legal limitations remain significantly more restrictive than in OECD countries. Lastly, indirect expropriation was identified as a roadblock to investment, especially as the method of calculation of compensation was not clearly defined (OECD, 2021[1]).
Enforcement of contracts and arbitral decisions in domestic courts
Investors report that Tajikistan’s courts have at times failed to implement foreign arbitral awards and rulings, sending a negative signal to prospective foreign investors, despite the country having ratified other international and bilateral treaties and conventions such as the Recognition and Enforcement of Foreign Arbitral Awards Convention (the New York Convention). In addition, Tajikistan is not yet a member of the International Centre for the Settlement of Investment disputes (ICSID) Convention. Investors have also complained about the lack of transparency of dispute settlement decisions. It was recommended in the OECD 2021 report to create a business ombudsman to independently represent the views and rights of businesses and support out-of-court dispute settlement and develop alternative dispute resolution mechanisms which have not been common practice for business case resolution.
Tax administration
Tax rates in Tajikistan were the highest in Central Asia, resulting in a large fiscal burden on firms. In addition, the complexity of the tax administration has made compliance costs high (OECD, 2021[1]). Both domestic and international firms have reported difficulties in accessing information on taxation, further challenging reporting. Finally, out-of-cycle inspections from the side of the tax administration were identified by businesses as another major challenge. A new Tax Code was in the drafting process at the time of writing the OECD 2020 report to address those issues and is discussed in further detail below.
Assessing progress since 2020
The following sections provide an overview of implementation progress of the three priorities for improving the legal environment for businesses identified in the 2020 OECD report and suggest a way forward taking into account new priorities following the pandemic and the regional context (Table 4.1).
Priority 1: The investment framework has improved, but there is a need to further soften existing restrictions
The government has taken steps to improve the business and investment environment
An online platform developed in testing mode provides access to information on investment and entrepreneurial activity
The government undertook measures to improve access to information on investment-related legislation. A website now provides access to legislation, decrees, and regulations in the Tajik and Russian languages (Ministry of Justice of the Republic of Tajikistan, 2023[14]). The website also includes information on the regulatory impact assessment and legislative process developments of draft laws and other legal acts, as well as a register of such drafts (UNCTAD, 2023[15]). An online platform was also developed by the State Committee on Investment and State Poverty Management (SCIPSM) in test mode to give access to information to both international and local investors and entrepreneurs. The platform was developed (i) to automate the process of coordination of inspections between inspection bodies, (ii) to co-ordinate the planning of inspections among those bodies, (iii) to prevent the repetition of inspections, (iv) to ensure the non-admission of violation of terms of inspection of business entities and the use of data for risk assessment in each sector, (v) to control compliance with the law in inspections and analysis results and (vi) to use the data to feed into sectoral risk analysis. The roll-out of the platform across the government is however still pending.
Greater trade and investment links have improved the investment climate in recent years
Several developments demonstrate efforts to streamline investment policies and processes. There are in theory no restrictions on foreign ownership or control of firms and no sector-specific restrictions that prevent market access (Lloyd's Bank, 2023[16]), and opportunities in the energy, agribusiness, food processing, tourism, textiles, and mining sectors have been identified as promising. In 2021, authorities continued moving towards compliance on intellectual property rights protections (US Department of State, 2022[17]).
A physical one-stop-shop was established to serve those trying to create a business, obtain construction permits and access to electricity, register property, and other procedures for free. The number of registering structures was lowered from four to one, and the registration time was reduced from forty-nine days to five days (UNCTAD, 2023[15]). The announcement in December 2022 of fresh negotiations on an enhanced partnership and co-operation agreement with the European Union bodes well for investment prospects (Economist Intelligence Unit, 2023[18]), as it should improve access to the EU market for goods originating from Tajikistan.
Tajikistan has consistently improved its overall trade facilitation performance since 2017 (Figure 4.4), which has contributed to enhancing the country’s investment attractiveness. Notable improvements took place in the areas of information availability, involvement of the trade community, fees and charges, simplification of trade documents, automation, streamlining of border processes, and border agency co-operation. Compared to the average performance of the Central Asia region, Tajikistan has a strong performance in the involvement of the trade community, streamlining of fees and charges, simplification of trade documents, automation, streamlining of border processes, border agency co-operation, and governance and impartiality. A trade portal was launched in 2019 and continues to be developed with step-by-step procedures for export, import and transit, including information on trade partners, local producers with their contacts, regulations related to trade, processing procedures in the customs territory re-import, re-import, temporary importation, temporary export and special customs procedures. The Trade Portal also provides access to five tools to analyse the international market.
Figure 4.4. Tajikistan in the OECD Trade Facilitations Indicators (2017-2022)
Source: OECD TFIs database, 2022
The legislative framework for investment still creates hurdles for foreign investors
Foreign investors still face registration, property, land, and capital restrictions
While Tajikistan has an investment law, it does not specify the list of sectors and activities in which FDI is prohibited or permitted subject to conditions. The IL does not clearly define entry restrictions for foreign investment, nor does it clarify what constitutes national interest considerations, which can limit or prohibit foreign investments (UNCTAD, 2023[15]). A negative list can therefore sometimes help clarify restricted areas for FDI.
When registering their business, foreign investors must go through a lengthy process. Despite provisions of the IL which guarantee non-discrimination and equal rights between domestic and foreign investors, the latter must manoeuvre through a more arduous process to obtain licences. A single-window business registration system was created in 2019, which the Tax Committee is responsible for, but companies must also register with the Social Protection Agency, the Statistics Agency, the Ministry of Labour, Migration, and Employment, the Sanitary-Epidemiological Service at the Ministry of Health, and with local authorities and municipal services. In theory, registering a business should not take more than five business days, but in practice it can take several weeks or even months (US Department of State, 2022[17]). The procedure for closing a business remains complex and can take more than six months.
Foreign real estate ownership is allowed but restricted, as notaries require foreign investors to obtain approval from the Ministry of Justice to certify a real estate transaction (U.S. Department of State, 2023[19]). Security services may have a veto right for business activities in certain regions, and access to agricultural land is not allowed to foreign investors, despite the fact that agriculture is a prioritised sector for investments. Land ownership is not possible, as all land belongs to the State according to domestic law. Foreign investors and companies may be granted land-use rights for fifty years, while Tajik individuals and entities may have indefinite land-use rights. If leaseholders do not use land in accordance with the purpose of their lease, the authorities can revoke the lease rights (US Department of State, 2022[17]). Compensation is foreseen but usually only covers the market price of the factory but not that of the land.
Investors also face convertibility issues and restrictions on capital movement. All trade must be conducted in local currency, and hard currency cannot be withdrawn. According to the IL, foreign investors are guaranteed the right to transfer their income in foreign currency outside of Tajikistan, but OECD interviewees reported that, once profit is generated, a company needs to wait for several months to have it converted or transferred, and any transfer above 20k USD requires an approval from the National Bank of Tajikistan, if that transfer is considered as capital movement. The online form to request such a transfer has been reported not to work.
Finally, the absence of distinction between shareholder remuneration and re-investment means that the tax authorities tax the whole amount of dividends. Such a practice removes incentives for investors to reinvest proceeds. Providing incentives for reinvestment can induce reinvestments of amounts higher than in the absence of the tax incentive.
Access to information remains challenging
Presidential decrees, legislation, government orders, instructions, ministerial memos, and regulations are not always easily accessible to the public. To receive up-to-date legal and regulatory information, businesspeople and investors may need to purchase access to Adliya, a commercial legal database. Some unpublished regulations have been found to contradict other state structures’ regulations, while draft laws and regulations are rarely published for public consultation (US Department of State, 2022[17]). OECD interviewees were not aware of the existence of the online platform for investors, and updates to the website have been reported as irregular (OECD, 2022[20]).
Indirect expropriation risks persist
While the IL guarantees protection for direct expropriation, the government can indirectly expropriate property as per the terms of the IL (article 14), the law on privatisation, the civil code, and the criminal code. As a result, expropriation risk is still present in Tajikistan. OECD interviewees have reported that the de facto primacy of the security, customs and tax laws over the IL adds uncertainty with regards the protection of investment projects. This has prompted some investors to ask to conclude investment contracts under common law rather than in domestic legislation to secure their investments.
Further improving investment attractiveness requires to strengthen the investment framework, relax restrictions on land access and diversify sources of financing
Clarifications in the investment legislation and framework would give investors greater certainty
The hierarchy and content of the IL could be improved. Clarifying the hierarchy of the IL with other laws would reduce the level of uncertainty associated with indirect expropriation risks. In addition, the IL could contain a publicly available negative list with sufficient details on the sectors involved to clarify authorised and prohibited areas for FDI. The list could enumerate all the sectors, activities or areas where i) foreign investors cannot invest, ii) can only invest up to a certain percentage of equity, or iii) can only invest after going through a special screening or approval process. All other activities not explicitly mentioned in the list should be considered as automatically open to FDI.
A streamlining of establishment procedures could also be considered. Most procedures involving foreign businesses still need to be conducted in person and could be made available online. The one-stop-shop for investors should be effectively implemented, including its e-version, and information should be regularly updated. This streamlining could also involve devolving more powers to institutions dealing with investments: the SCISPM’s and Tajinvest’s respective roles in designing and implementing investment policy and promoting and facilitating investment should be strengthened (UNCTAD, 2023[15]).
Restrictions on land and property access could be relaxed
Current restrictions on land rights represent a significant barrier to investment. If the introduction of private property in land is not under consideration, the government could ensure that the alienability of land use rights is extended to foreign entities, as it is already the case for Tajik individuals and legal persons. In the same vein, the government could undertake measures to guarantee equal access to property ownership between local and foreign firms by ensuring that procedures to access property are the same for both. The provision on compensation in case of indirect expropriation should also be reviewed to include not only the market price of the factory or other assets but also that of the land.
Funding and capital constraints should be addressed
The government could consider easing restrictions on access to finance and withdrawal of capital. In particular, it could support the development of a wider array of financial instruments to foster private investment. A limited range of financial products is currently offered to SMEs, which mostly rely on debt instruments such as commercial bank loans or microfinance (ADB, 2019[21]). Developing new financial instruments allowing access to equity investment, such as convertible loans, venture funding, factoring, and leasing could be considered, which would allow to address high collateral requirements, prohibitive interest rates, and the short tenors currently offered by traditional commercial loans. The government is currently working on a new venture capital funding law which should unlock new funding opportunities for start-ups. In addition, facilitating money transfers outside of the country would reassure foreign investors that they can reallocate profits as they see fit, as hard currency deposited in a Tajik bank account is difficult to withdraw, despite the fact that there are no legal limits on money transfers (US Department of State, 2022[17]).
Priority 2: The judicial system has become more transparent, but the dispute resolution mechanisms need strengthening and simplification
The legal framework for businesses has registered some improvements
The government has taken steps to improve judicial transparency
In June 2021, the government adopted the law “On Access to Information on the Activities in the Courts” to increase the transparency and openness of judicial proceedings. The law aims to improve public access to information about the activities of the courts through the appointment of dedicated staff in charge of public relations and the creation of court websites. The latter provide the opportunity for citizens to access a schedule of appointments, hearing dates, and email addresses of the judges and representatives of the Supreme Economic Court and to read about court decisions. An e-case management system was created for parties to a case to access court notices online. Press conferences with the media are planned on a bi-annual basis to take stock of the activity of economic courts.
Pre-trial dispute resolution is being developed especially in tax-related disputes
OECD interviewees have mentioned the Tax Committee’s and Ministry of Finance’s endeavours to foster dialogue and resolve disputes with the business community. In particular, the Tax Committee created an independent Council of Pre-trial Dispute Settlement, which serves as an advisory body to consider tax disputes between the taxpayer and the tax authority and review complaints from taxpayers. This advisory council is formed of representatives from the justice, financial, business support and tax government agencies and ministries, as well as of independent consultants. Following a pre-trial review of the taxpayer’s complaint, the Council issues a recommendation submitted for the relevant state body to make a decision. Such a Council can serve as an alternative dispute resolution mechanism to solve taxpayers’ and tax authorities’ litigation cases.
Dispute resolution mechanisms need further strengthening
The creation of a Business Ombudsman has been delayed
The government had undertaken to create a business ombudsman, but this ambition has not yet been realised. First discussions about its establishment were included in the Midterm Development Programme of the country for 2021-2025, with implementation planned for 2022.The process is, however, still at the level of discussion, and it is considered to transfer the business ombudsman’s functions to the Commissioner for Human Rights. A Business Ombudsman with oversight for inspection agencies and regulations would provide a strong public-private dialogue mechanism and could play an important role in dispute settlement (OECD, 2021[1]). Ensuring the independence of such an institution could be met following the example of Kyrgyzstan, through the appointment of a foreign citizen.
Judges are perceived to lack independence
Parties seeking dispute resolution submit their claims to economic courts. However, firms have reported a lack of independence in decision-making, lengthy delays of court decisions and a cumbersome process, which act as deterrents to reliance on the judiciary. OECD interviewees and (U.S. Department of State, 2023[19]) state that outcomes tend to favour the government, and decisions are not always made publicly available. It remains to be seen if the new law on access to information will change this.
Commitments to international conventions are not always followed
Tajikistan is signatory to several bilateral and international conventions on dispute settlements, but domestic courts do not always enforce or recognise their rulings (US Department of State, 2022[17]). For instance, the country ratified the New York Convention on the recognition and enforcement of foreign arbitral awards and acceded to the Convention in 2012 but several arbitral awards have been overturned. OECD interviewees have also mentioned disputes related to double taxation issues. Whilst Tajikistan has signed several agreements to avoid the issue of double taxation, tax authorities still require firms to pay taxes in Tajikistan notwithstanding provisions agreed upon in those agreements.
Improving contract enforcement requires strengthening judicial independence and simplifying the arbitral process
More judicial independence will lead to greater confidence in the courts
Strengthening the independence of the courts would help improve the impartiality of court decisions and businesses’ trust in the judiciary. Judges should be free of influence and pressures that could affect the way they perform their duties. Efficient and impartial institutions for the administration justice, the predictability of legal outcomes, the protection of property rights and the maintenance of stability are indeed preconditions for a supportive investment environment, as a functioning justice system contributes to firms making longer-term investment decisions (OECD, 2021[22]). In practical terms, measures to ensure the independence and accountability of the judiciary could include publishing objective criteria for the appointment of judges based on merit and qualifications, the security and irremovable character of their tenure and the random allocation of cases to minimise corruption risks (ENCJ, 2014[23]), (OECD, 2018[24]).
Formal reporting mechanisms can support judicial independence and accountability
Reporting is a key aspect of the transparency and accountability of the judicial system. Formal reporting mechanisms on issues such as case disposals, timeliness, case duration, appeal waiting times and other aspects of the quality of the judicial process should be created through regular reporting structures and a database on the performance of the judicial system along these aspects. Data would allow observers to analyse the performance of justice procedures and understand where efforts should be focused. The reporting should be periodically published and could include a benchmark of the different courts to foster emulation (ENCJ, 2014[23]). An independent body such as a Business Ombudsman, involving business associations and representatives, could also report cases of non-implementation or mis-implementation of the law.
Simplifications in the arbitral process can reduce costs associated with dispute resolution
The government could consider introducing simplified procedures to offer legal and judicial services proportionate to SMEs’ cases. There are currently no specialist courts to hear disputes relating to land or intellectual property rights, nor are there small-claims courts. Small claim courts can provide tailored and fast-track procedures proportionate to the amount of money at issue. Such courts improve access to justice for SMEs as they free up court time and financial resources and contribute to judicial efficiency (OECD, 2017[25]). Robust small claims procedures usually limit the role of lawyers to reduce the cost of legal representation, require smaller court fees associated with filing the claim, and restrict the use of expert assessments and oral witness testimony as expenses for collecting evidence can be time-consuming and expensive for the litigants (World Bank, 2021[26]). Specialist courts focusing on land or property rights could also be created to reduce the number of cases pending before the main first-instance court and lead to shorter resolution times.
Alternative dispute resolution mechanisms such as mediation, negotiation and arbitration for international investors can also be further developed to settle disputes outside of the courtroom and reduce the strain on the judiciary. The creation of a Mediation Centre and of the Council of Pre-trial Dispute Settlement to resolve tax disputes are already positive steps in that direction. The project of a law on mediation could also be resumed.
Priority 3: Tax administration has benefitted from digitalisation and more public-private dialogue, but interpretation issues need addressing
Tajikistan adopted a new Tax Code in 2022
Tajikistan adopted a new Tax Code in January 2022 with the aim of promoting socio-economic development and strengthening public finances through the reduction of tax evasion and the easing of the tax burden on firms. The new version of the Tax Code states that it is based on the principles of legality, obligation, cooperation of tax authorities with the taxpayer, fairness, unity of the tax system, and transparency. Key changes to the code include the introduction of chapters on transfer pricing and tax monitoring, the creation of a tax avoidance commission and of a Council for Pre-Trial Dispute Resolution, the use of electronic fiscal receipts, virtual cash registers, and an e-marking system to track goods imported into Tajikistan, the provision of independent assistance to taxpayers by tax consultants, and tax monitoring based on voluntary requests from taxpayers whose turnover is higher than 15 million TJS (about 1.25 million EUR). The new code also foresees the development of risk assessment criteria to determine the different levels of non-compliance risks, with KPIs associated with the system. The tax system was simplified through a reduction of the number of taxes from ten to seven, and several amendments and additions were made to account for the issue of bad tax debts and their writing-off. Tax exemptions for the mining sector were gradually phased out, and a rise in the income tax rate for mining businesses supported an increase in tax revenue (Economist Intelligence Unit, 2023[18]) (IMF, 2023[6]). The Tax Committee reported that the amount of tax collected for 2022 exceeded the target by almost 600 million TJS (around 55 million USD).
Box 4.2. Key rate changes of Tajikistan’s 2022 Tax Code
The rates of several taxes were reduced or reviewed:
the VAT rate was reduced from 18% to 15% and is expected to be reduced to 13% as of January of 2027;
a flat rate for the income tax of 12% was introduced and replaced the degressive income tax system (8% to 12%);
income tax was kept at 13% for companies producing goods;
income tax was reduced from 23% to 20% for financial institutions and telecom companies;
income tax for other companies was reduced from 23% to 18%; and
social taxes were reduced from 25% to 20%;
The road user’s tax and excise tax were withdrawn.
Source: Tax Committee of the Republic of Tajikistan (2023)
The Tax Committee has been actively engaging with the private sector on the Code’s changes
OECD interviewees praised the proactiveness of the Tax Committee in collecting feedback, sharing drafts of the new Tax Code, and integrating the private sector’s comments in the last version of the Code. Following its adoption, the Tax Committee was mindful of communicating the changes of the Code to the private sector, with a focus on SMEs. Tax authority specialists organised offline and online seminars with taxpayers, domestic and foreign investors, and diplomatic missions to explain the new provisions of the Tax Code (how to submit requests for tax returns, issues of land, real estate and vehicles valuation, etc.) and provide the opportunity to engage in Q&A sessions. A dedicated page on the Tax Code providing the latest updates was created on Telegram and Viber, TV programmes were brought to a wide audience through the Tojikiston and Safina channels, 150 thousand text messages were sent to citizens, and taxpayers can now submit questions and complaints on the Tax Committee’s website. A call centre can also be contacted on a daily basis. Tax administrators provide support to citizens and businesses looking to pay their taxes on the publicly accessible terminals in cities. Written appeals have become much less frequent, as taxpayers can now submit their cases by phone, email or on their personal account.
Compliance monitoring is increasingly grounded on risk-based approaches
The Tax Committee, together with the SCISPM, developed criteria to assess the level of risk of taxpayers’ activities and non-compliance, differentiated by company size. The level of risk may be defined as low, medium or high. A taxpayer falling under a high risk is contacted by an authorised state body online on the personal account to remedy the situation. The new Tax Code stipulates new provisions on tax monitoring, where a taxpayer earning more than 15 million TJS can, on a voluntary basis, agree with the tax authorities on exemptions on in-house controls and tax audits for a period of one year. Improvements in monitoring have resulted in a decrease in the share of tax audits in proportion to the number of tax entities: if in 2018 2.8% of businesses were audited, this figure decreased to 1% in 2021.
Positive changes in compliance and appeals trend can be noticed
According to the Tax Committee, the reduction of the type and the rate of taxes has resulted in a lower burden on the taxpayers, which has had a positive impact on compliance and the reduction of the shadow economy. Tax administration was also enhanced thanks to the reduction of the costs and time spent by taxpayers filing tax returns. The introduction of the concept of ultimate recipient of income (or beneficiary) and strides in the implementation of international treaties have improved tax relations with non-residents receiving income from Tajikistan. Combined, these developments resulted in a decrease in the number of taxpayers’ appeals in 2022.
A wide range of tax services is available digitally
The Tax Committee has intensified its efforts to digitalise tax administration, which has been positively received by firms. Satisfaction with the ongoing digitalisation of the tax services has been reported by firms interviewed by the OECD. Since 2020, the Tax Committee has developed and implemented more than 80 e-services. Companies can register online on the Tax Committee’s website. Among concrete examples of available e-services, one can mention the ‘’Andozi Man’’ (‘’My Tax”) application, which can be used both by citizens and entrepreneurs to fulfil tax obligations and interact with the tax authorities. More than ten e-services are currently available on the app, such as information about the activity of the Tax Committee, the submission of e-documents for verification, inspection authorities’ addresses, a tax calculator, the Tax Code, the taxpayer’s identification number, tax payments made, etc. The Tax Committee and the State Savings Bank Amonatbank developed a tax payment functionality on the Amonatmobile application. Taxpayers can also pay real estate, land and vehicle taxes on the Tax Committee’s website. The procedure to register as a VAT payer can be done through an online application form in a few minutes. All this has increased the number of taxpayers who file their tax returns electronically. During 2022, the number of taxpayers who filed their tax returns electronically increased by more than 6.5 thousand. According to the Tax Committee, the total volume of transactions carried out using cash registers increased by 28% in 2022 compared with 2021. In general, smoother and easier interactions between tax authorities and taxpayers have resulted in improvements in tax administration.
However, challenges related to interpretation, implementation and administration remain
Frequent legislation changes and varying interpretations create implementation challenges
Businesses have expressed concerns about the lack of harmonised interpretation of the Code across the government, which adds confusion to the implementation of the law. They reported an added layer of complexity related to unclear formulations and conflicting interpretations of specific clauses among different offices of the tax administration itself. Whilst large foreign firms may have the in-house capacity and leverage to resolve these issues with the tax authorities, SMEs may not be able to do so. Overall, the lack of clarity of certain clauses of the Code has significantly challenged the government’s objective to simplify tax policy with the introduction of the new text.
Unplanned inspections and early tax payment requests have been mentioned as roadblocks to tax compliance
Firms have also complained about the frequency of tax inspections. A moratorium on inspections was implemented in 2022 considering the instability of the international context and to let taxpayers adapt to the new code. However, the retroactivity of the inspection period was increased from five to six years to account for the absence of checks in 2022, meaning that checks for 2022 will still take place retroactively. In addition, while tax inspections can apply on business activity of the five previous years, in case of irregularities, tax authorities can further investigate tax compliance in the ten previous years and calculate the sum due on that past ten-year period, applying interest and penalties amounting to double the tax payment due. Such a measure does not encourage firms outside the tax base to start paying taxes and hampers the government’s efforts to reduce the size of the shadow economy. Cashless firms paying taxes online do not understand why they are still subject to cameral inspections.
Payments are sometimes requested or refunded outside of the scope of application of the text. Firms have reported that the tax administration attempts to make them fit under different articles of the code to request several tax payments which should not apply (e.g., mining companies) or to proceed with advance tax payments. On the other hand, VAT refunds have been subject to delays, which can take one year. Delays have resulted in firms declaring additional other income to benefit from an indirect tax deduction corresponding to the VAT return amount due, while some OECD interviewees increased their prices following the withdrawal of the VAT incentive which allowed offsetting. Some importers reported to illegally bring goods in Tajikistan do not pay VAT and transfer VAT payment obligations to their retailers.
Further improving the tax administration requires addressing implementation issues and working on adopting a more client-oriented approach towards the taxpayers
Harmonising the interpretation of the Tax Code should be a priority area of work
Streamlining interpretation across the different areas of the government is a low-hanging fruit to ease the tax burden on firms and improve the implementation of the Tax Code. Online reporting tools or regular surveys could be developed and channelled through the Chamber of Commerce or regional and sectoral business associations for firms to report cases of misinterpretation or lack of clarity on an anonymous basis. More generally speaking, avoiding frequent changes to the law is an objective that should be pursued by the authorities to increase tax compliance.
The Tax Committee should pursue its efforts to improve relations with the taxpayers
The Tax Committee has already worked to raise awareness on changes made and should pursue endeavours for businesses to understand new provisions. Measures to do so include conducting awareness-raising activities on an ongoing basis with businesses and other segments of society, to foster the acquisition of tax knowledge and financial literacy. Firms should also have the possibility to appeal conflicting interpretations of the law before an administrative judge. In parallel, tax authorities need to train all staff to be informed of regulatory changes and communicate accurate information to businesses.
The Tax Committee should define a clear scope for inspections to decrease the administrative burden on firms. Looking at the example of Kazakhstan (Government of Kazakhstan, 2021[27]), the Tax Committee and other relevant government agencies could define a short and clear list of cases where an inspection should be performed. It could also introduce a clause on the responsibility of the administration when conducting an inspection whereby any inspection conducted beyond the framework becomes illegal and can be a motive for litigation by the firm concerned.
Digitalisation is another part of the Tax Committee’s agenda to support smoother interactions with the taxpayers which can be further rolled out across the government. The Tax Committee mentioned the importance of providing IT equipment, necessary software and technologies to other ministries and agencies, as well as the processing of large volumes of data to achieve tax reform goals. This also requires the development of a stable, high-speed, and accessible Internet across the regions as well to ensure businesses in remote areas can access online tax services. Dushanbe-based agencies are expected to switch to the cashless payment system SmartPay to ensure that the payment of all taxes, duties, fines, license and insurance fees, fees for utilities and other types of public services is performed in a non-cash form (Asia Plus, 2023[28]).
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