35783 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 1 BUSINESS ENVIRONMENT IN UZBEKISTAN AS SEEN BY SMALL AND MEDIUM ENTERPRISES Survey results based on 2004 Tashkent, 2005 2 ontents 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises CONTENTS Glossary ...................................................................................................................................3 Preface....................................................................................................................................4 Overview of the Business Environment in Uzbekistan..........................................................6 PART I. Inspections .......................................................................................................................22 Reporting..........................................................................................................................34 Permits ..............................................................................................................................40 Registration ......................................................................................................................50 Taxes and Tax Administration.........................................................................................60 PART II. Statistical Results of the Survey.......................................................................................72 Annexes Methodology and Key Facts about the Survey .........................................................138 Annexes to Chapters ....................................................................................................146 STNETNOC Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Glossary 3 GLOSSARY CBU - Central Bank of the Republic of Uzbekistan CM - Cabinet of Ministers CSREO - Consolidated State Register of Enterprises and Organizations CTI - Chamber of Trade and Industry FDI - Foreign Direct Investment GDP - Gross Domestic Product Goskompriroda - State Committee for Nature Protection Goskomstat - State Statistics Committee Goskomzem - State Committee for Land Resources, Geodesy, Cartography, and Surveying ICC - Inspections Coordination Council IFC - International Finance Corporation LLC - Limited Liability Company MFER - Ministry for Foreign Economic Relations, Investment and Trade MIA - Ministry of Internal Affairs MJ - Ministry of Justice NAS - National Accounting Standards PIN - Taxpayer's Personal Identification Number RU - Republic of Uzbekistan SES - Center for State Sanitary-Epidemiological Surveillance under the Ministry of Health SME - Small and Medium Enterprises STC - State Tax Committee STI - State Tax Inspectorate VAT - Value-Added Tax Soum to US dollar exchange rates applied herein (CBU rates): Average 2003 exchange rate: $1=971.33 soums Average 2004 exchange rate: $1=1,020 soums January 1, 2005 exchange rate: $1=1,058 soums The 2004 per capita Gross National Income (World Bank assessment): US $460. 4 Preface 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises PREFACE This Report, presented by the International Finance Corporation (IFC), is the result of IFC's fourth annual survey of the SME sector in Uzbekistan. The aim of the survey was to discover entrepreneurs' attitudes to prevailing business conditions and to government reforms in this area. Implementation of the project was made possible through the financial support of the State Secretariat for Economic Affairs of Switzerland (seco). For the 2004 survey, the number of participating SME representatives was increased to 3,000. The number was augmented over previous years by including individual entrepreneurs in the sample and by an additional survey of enterprises engaging in foreign trade. Legal regulation of the activities of individual entrepreneurs and agricultural enterprises sometimes differs from that of the other SMEs. Where this is the case, the differences are explained in the relevant chapters of the Report. The quantitative and qualitative characteristics of the sample and the survey methodology made possible a comparison of the results to the results of similar surveys conducted by IFC in the Republic of Uzbekistan in the past, thus tracking the dynamics of key processes in the business environment in the country. This Report is not intended to be an exhaustive account or analysis of all the problems facing SMEs in Uzbekistan, nor does it reflect the opinions of IFC or seco about them. The survey provided a look at the situation through the eyes of entrepreneurs and revealed their opinions on the most important processes influencing the development of this economic sector. Based on analysis of the data, IFC has made recommendations for improving the business environment in Uzbekistan. Responding to suggestions by the Government of Uzbekistan, the format of the Report was somewhat changed for this year. Taking into consideration requests from our target readership, the present Report focuses on recommendations to address specific issues constraining SME growth in the country and on assessment of the impact expected from implementing the proposed measures. This survey reflects the business environment in Uzbekistan up to the end of 2004. Since then, the Government of Uzbekistan has taken a number of decisions aimed at improving the business climate in the country, including addressing problems highlighted by the survey. These solutions are reviewed in this Report; however, the effects can only be assessed comprehensively based on the results of the next survey. This Report consists of an overview, two main parts, and annexes. "Overview of the Business Environment" summarizes the main issues facing SMEs. Part I deals in detail with the areas in which IFC assists state agencies in improving procedures and removing obstacles to private enterprise ("Inspections," "Reporting," and "Permits") and also with the areas where IFC assistance is expected ("Registration" and "Taxes and Tax Administration.") Survey data on other aspects of entrepreneurial activity (foreign trade, financial institutions, licensing, standards, and certification) and additional data on the issues described in Part I are presented in the form of charts and diagrams in Part II of the Report. Should any questions arise, IFC is prepared to elaborate on the statistical data presented herein. The annexes contain the survey methodology and additional analysis of the legal and regulatory framework and international experience in addressing the issues reviewed in the main chapters of the Report. ECAFERP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Preface 5 The results of the survey were discussed at round table meetings and in focus groups. Participants included representatives of the Ministry of Economics, the Ministry for Foreign Economic Relations, Investment, and Trade, the Ministry of Justice, the Ministry of Finance, the State Tax Committee, and the State Customs Committee, as well as entrepreneurs and representatives of the Chamber of Trade and Industry. In this way, IFC obtained expert assessment of the results and main conclusions of the survey. The IFC SME Policy Project is grateful for the valuable contribution of the following agencies and organizations in the preparation of this Report: the SME Coordination Council, the Inspections Coordination Council, the Ministry of Economics, the Ministry of Justice, the Ministry for Foreign Economic Relations, Investment, and Trade, the State Committee for Demonopolization and Support of Competition and Entrepreneurship, the State Statistics Committee, the State Customs Committee, the State Tax Committee, the State Committee for State Property Management, the Joint Information and Analysis Department for Economics and Foreign Economic Relations under the Cabinet of Ministers, the Chamber of Trade and Industry of Uzbekistan, and the Association of Dehkan and Private Farms. The Project team also thanks our colleagues at the World Bank Resident Mission in Uzbekistan, the IFC Southern Europe and Central Asia Department, and the IFC Private Enterprise Partnership. This Report has been published in the Uzbek, Russian, and English languages. Electronic versions of this Report, as well as the 2001-2003 reports, are available at the IFC site http://www2.ifc.org/centralasia/sme/uzsurvey.htm. Additional hard copies can be obtained at: International Finance Corporation, International Finance Corporation World Bank Resident Mission in the Republic Private Enterprise Partnership of Uzbekistan 107B Amir Temur St. 2121 Pennsylvania Avenue, NW International Business Center, 14th floor Washington, DC 20433 Tashkent, 700084, Republic of Uzbekistan USA el. (+998 71) 138 59 28 / 138 59 50 Tel.: (+1 202) 458 0917 Fax: (+998 71) 138 59 27 Fax: (+1 202) 974 4312 6 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Overview of the Business Environment in Uzbekistan The importance of small and medium enterprises (SMEs) to the economic development of any country can hardly be overestimated. International experience has shown that this sector provides the flexibility an economy requires in order to respond to changes in business conditions. Since SMEs are less capital-intensive than large companies are, they are easier to establish and to reorient to other activities. Under normal business conditions, they can invest funds in the development of new areas of activity and build production capacity, thereby creating opportunities for economic growth, employment, and higher living standards. SMEs respond quickly to changes in the business climate of a country and can thus serve as an indicator of economic development and the effectiveness of government reforms. The SME sector plays an increasingly important role in Uzbekistan. According to the State Statistics Committee, it currently accounts for approximately 36% of GDP and 61% of total employment. In 2005, the Government of Uzbekistan set the ambitious goal of raising the share of the GDP contributed by SMEs to 45% by 2007. Analysis of recent economic trends in the country shows, however, that the current rate of SME development does not point to achieving that objective. NATSIKEBZU The increase in share of SMEs as a percentage of GDP can be promoted in two complimentary ways ­ by making it easier to start new businesses, thus sharply increasing NITNEMNORIVNE the number of SMEs, and through measures designed to support existing SMEs in improving their performance. The surveys IFC has conducted since 2001 have provided the means to track trends in the SSENISUB development of the business environment in Uzbekistan. The results have shown that a EHT substantial percentage of entrepreneurs consider business conditions (related to both start- FO up and development) "problematic" or "very problematic." WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 7 ENTREPRENEURS SPEND SUBSTANTIAL TIME AND FINANCIAL RESOURCES ON STARTING A BUSINESS The state regulates the establishment of businesses through registering these entities and issuing the required permits and approvals and through licensing, certification, and standards. The purposes of state regulation are: protecting consumer rights and interests; averting potential hazards to the public and the state; distributing limited resources; obtaining data on business activity for effective management and economic development. Regulatory procedures are also intended to be transparent, sufficiently simple to apply, and have no negative impact on the entrepreneur's motivation to do business. 8 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises In 2001, the government began implementing some targeted measures to facilitate the start-up of businesses. It introduced the "one window" registration procedure,1 applied "one window" principle to issuing several types of permits,2 reduced the number of activities requiring licensing,3 and introduced a system of product certification based on declaration.4 Nevertheless, the survey results have shown that starting a business still involves certain problems. Establishing an entrepreneurial entity takes more than a month. Registration, for instance, takes on average 19 business days. According to the survey results, a business must obtain on average three permits and approvals, which takes another 17 days. Where applicable to the business activity, it takes on average 17 business days to obtain a licence, 10 business days to obtain a standard, and 6 business days for certification. Entrepreneurs also spend substantial financial resources on these procedures. (See the chapters on Registration and Permits, as well as the Annexes.) Sixty-one percent of respondents who underwent the licensing procedure in 2004 described it as "problematic" or "very problematic" (almost one and a half times more than in the previous year). The survey showed that the average validity period for licences issued in 2004 was three years, while the law stipulated a minimum period of five years. The percentage of respondents who had to make unofficial payments to obtain licences increased from 24% in 2003 to 31% in 2004. By contrast, only 17% of respondents mentioned the need to make such payments during the certification procedure ­ NATSIKEBZU considerably fewer than in 2003, when 46% of entrepreneurs mentioned such need. NITNEMNORIVNE SSENISUB 1Resolution 347 of the Cabinet of Ministers of the Republic of Uzbekistan "On Improving the System of State Registration of Entrepreneurial Agents," August 22, 2001. EHT 2Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan "On Radical Improvement of Registration Procedures for FO Establishing Businesses," August 20, 2003. 3Resolution 222-II of the Oliy Majlis of the Republic of Uzbekistan "On the List of Types of Activity Requiring Licensing," May 12, 2001. 4i.e. produce, which is not subject to mandatory certification, may be certified by submitting declaration stating that the produce conforms with safety requirements. Resolution 318 of the Cabinet of Ministers of the Republic of Uzbekistan "On Additional Measures of Simplifying the Certification Procedure," July 6, 2004. 5The 2004 average soum to US dollar exchange rate set by the CBU was 1,020. WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 9 Box 1.1 Resolution PP-186 of the President of the Republic of Uzbekistan6 was introduced on September 21, 2005. Accordingly, as of October 1, 2005: Licences for all types of activity requiring licensing are issued for a period of at least five years; For 13 types of activity, licences are issued without time limit; The function of licensing six types of activity was transferred from commissions of the Cabinet of Ministers to state authorities. This Resolution also introduced a number of changes to the procedures for issuing permits, as described in the relevant chapter. Establishing agricultural enterprises involves additional difficulties related to land plot allocation and acquiring machinery and supplies of fuel, lubricants, fertilizers, and water. These problems apply to both newly-established businesses and those established in place of the former shirkat farms (agricultural cooperatives). In the latter case, the problems for entrepreneurs are aggravated by debts inherited from the dissolved shirkat farms. To solve these problems, a substantial number of respondents engaged in agriculture had to make unofficial payments (see Statistical Results of the Survey). Since entrepreneurs generally cannot start operations until they have obtained all registration papers and permits, administrative delays resulted in lost profits. According to estimates, the economy lost profits of 1.4 billion soums (approximately US$1.4 million) for each day that over 51.7 thousand new SMEs established in 2004 were idle.7 6 Resolution PP-186 of the President of the Republic of Uzbekistan "On Reducing the Types of and Simplifying Procedures for Issuing Permits to Engage in Entrepreneurial Activity," September 21, 2005. 7 Based on 51,728 SMEs undergoing registration in 2004, average annual sales per SME of 36 million soums, and percentage profit for new businesses of 20.6%. 10 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Growth in the number of SMEs is also affected by the complexity of the procedures for liquidating a business. Studies in a number of countries have shown a direct correlation between the number of liquidated businesses and the number of new ones.8 Practical liquidation procedures allow entrepreneurs to more readily enter the business arena, apply their abilities appropriately, react more flexibly to changes in the market, and use limited material and labor resources more effectively. Moreover, efficient liquidation procedures serve the interests of investors and lenders by making more funds available to finance new investment opportunities. The survey showed that more than two-thirds of respondents who had to liquidate a business at one time or other found the procedure "very problematic" or "rather complicated" (see Statistical Results of the Survey for more detail). This assessment can be attributed to the extremely complex regulatory framework (see Annex 1 for more detail). THE BUSINESS ENVIRONMENT IS NOT CONDUCIVE TO ENCOURAGING ENTREPRENEURSHIP A business environment favorable to entrepreneurs promotes economic development. Reducing unwarranted costs and risks spurs entrepreneurs to expand their businesses and make additional investment and creates employment opportunities. The survey results showed that in 2004, the alarming trend toward a diminishing number of enterprises investing in fixed assets had been halted in Uzbekistan. (In 2001­2003, the percentage had decreased almost threefold.) However, there was no significant increase in this indicator: Only one-fifth of respondents made investments in 2004. NATSIKEBZU NITNEMNORIVNE SSENISUB EHT FO 8Doing Business in 2005: Removing Obstacles to Growth. 2005. A copublication of the World Bank, the International Finance Corporation and Oxford University Press. WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 11 The volume of capital investment is important to economic growth, but so is the accompanying (and largely consequent) increase in productivity. The government of Uzbekistan can do nothing (or very little) to mitigate such factors as the high costs associated with the country's remoteness from the markets of industrialized countries, lack of direct access to sea ports, and regional instability. These are consequences of the country's geographical location ­ including its proximity to countries where military action took place not so long ago. Nevertheless, the government does have a direct impact on a number of other factors, such as an enabling environment, a well-developed infrastructure, access to financing, the business tax burden and tax administration, openness to foreign partners, stability and transparency of laws, protection of property rights, and the level of corruption. Uncertainty about the further course of economic reforms, an excessive tax and customs burden, the instability of regulatory measures and the potential for arbitrary interpretation of them, excessively complicated rules for doing business, and rigid control of state agencies reduces investment potential and motivation. Entrepreneurs bear additional expenses in overcoming complicated administrative barriers. Added to standard expenses (wages, transportation, raw materials, etc.) these costs can render many investment propositions unprofitable and reduce productivity. The survey revealed certain problems in the systems of taxation, inspections, reporting, financial intermediation, and foreign trade activity. A detailed analysis of the survey with respect to some of these factors in the entrepreneurship climate is presented in the following chapters. Additional information on other issues can be found in the statistics section. The 2004 survey results showed a heavy tax burden on SMEs, with a tax rate averaging 20% of revenue. Entrepreneurs felt that this was double the rate that would allow some potential for enterprise development. In 2004, the simplified tax system had not been fully implemented and enterprises in most sectors had to pay more than five types of taxes and fees. Further, tax law was unstable, controversial, difficult to understand and adhere to, and allowed for individual tax privileges and preferential treatment. Box 1.2 The World Bank Project "Business in 2005"9 conducted a study on the impact of high tax rates on business activity in various countries and based on the results, concluded that "international experience shows that a 1% reduction in taxes leads to a 3.7% increase in the number of firms, a 0.9% increase in sales, and a 1.1% increase in employment." The survey results showed a positive trend toward a decrease in the average number of inspections in the country and an increase in the number of enterprises undergoing no inspections in the course of a year. 9 Doing Business in 2005: Removing Obstacles to Growth. 2005. A copublication of the World Bank, the International Finance Corporation and Oxford University Press. 12 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Despite government measures to cut the number of inspections, the emphasis is still on exposing violations and imposing penalties rather than on assisting entrepreneurs in avoiding violations and addressing shortcomings. The system of choosing companies for inspection and carrying out inspections is still not transparent. As a result, businesses with higher sales are inspected more frequently and the number of entrepreneurs who have to make unofficial payments is growing. Respondents pointed out that some banks continue to perform functions inappropriate for financial institutions. These functions include supervising the activities of businesses and submitting information on their clients to third parties such as taxation agencies, the prosecutor's office, and local authorities. NATSIKEBZU One-third of respondents pointed out that, despite the official cancellation of the "cash "The "cash plan" is no longer plan," banks continue to require their clients to adhere to such plan. The survey showed set by the bank. Now, our NITNEMNORIVNE that, starting in 2004, local authorities were getting actively involved in cash collection (see tax inspector officially brings Annex 2). it to us on the Khokimiyat's instruction. If you fail to submit SSENISUB Like the previous year (see IFC's 2003 report, Business Environment in Uzbekistan as Seen the amount of cash planned, E by Small and Medium Enterprises), in 2004 the problem of access to cash was especially you are first summoned to the HT acute for enterprises in the real sector of economy (agriculture, industry, and construction). Khokimiyat, and then all kinds ofFO unpleasant things begin ­ such as revocation of permits and visits from tax inspectors for ad hoc inspections". Focus group participant WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 13 By law in Uzbekistan, on a client's instructions banks must transfer funds from the client's account no later than the day following the day of receipt of a payment order.10 However, because commercial banks expended their efforts and funds performing functions not appropriate for them, and because of problems with liquidity in some regions, it took more than two business days to transfer funds from one account to another. "I wanted to transfer some funds In some regions, settlement took five to seven days. Since there is no other way to effect from my business account in settlements, such delay often ties up funds of enterprises and affects their performance. Jizzak Region to Tashkent, but the bank transferred only a quarter Further information on typical problems in the relationship between SMEs and financial of the amount. For the second institutions is presented in Statistical Results of the Survey, and in IFC's 2001-2003 reports week running, I have been trying to get them to transfer the rest of "Business Environment in Uzbekistan as Seen by Small and Medium Enterprises."11 the money". The government of Uzbekistan provides support for exports. For example, exported goods Focus group participant have been exempted from customs duties and a number of other privileges have been granted to manufacturers of export-oriented goods. Despite these measures, exporters face numerous constraints. The survey showed that only one-third of respondents who tried to export their goods succeeded in doing so. The others failed to overcome a variety of administrative barriers. 10 Regulations for non-cash settlements were approved by Resolution 60 (¼) of the Central Bank on January 12, 2002 and registered (1122) at the Ministry of Justice on April 15, 2002. 11 The electronic versions are available at http://www2.ifc.org/centralasia/sme/uzsurvey.htm. 14 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Agriculture accounts for 61% of businesses in Uzbekistan, and the state is obliged to provide support to them. However, the analysis showed that a wide array of constraints prevented 90% of potential exporters representing this sector from exporting goods. More detailed information on SME export and import transactions is presented in Statistical Results of the Survey, as well as in the 2003 IFC Report Business Environment in Uzbekistan as Seen by Small and Medium Enterprises. IFC compared the survey results with data from the State Committee on Statistics.12 The percentage of respondents who indicated in the IFC survey that they carried out export and import transactions in 2004 was more than double the figures in the official data. NATSIKEBZU It seems that a substantial number of businesses, having failed to overcome administrative "For instance, all of our farm obstacles, engaged in unofficial trade in various ways. This was so for both export and produce is smuggled into import transactions. Kazakhstan, and from there it is transported to Russia as To address these issues, the Government of Uzbekistan passed a package of legal and if it had been produced in NITNEMNORIVNE regulatory measures in 2005 in which it outlined a two-year action program aimed at Kazakhstan. The government SS improving the business environment: has made the export procedureENI so complicated and expensive SUB that practically two-thirds of participants in foreign trade nowEHT operate in the shadow market. And those who operate officiallyFO are unable to compete with them." Focus group participant 12Letter 18-15-05 of the State Statistics Committee of the Republic of Uzbekistan dated March 09, 2005. WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 15 January 2005 ­ decision to draft a new Tax Code;13 March 2005 ­ approval of a program for implementing the objectives and tasks of reforming and modernizing the country;14 April 2005 ­ further reform and liberalization of the banking system;15 June 2005 ­ improvement to legal protection for businesses;16 June 2005 ­ introduction of a unified tax payment for SMEs, instead of the unified tax and multiple payments;17 June 2005 ­ reduction of the amounts of financial penalties and exemption for minor, unintentional, first-time violations;18 June 2005 ­ improvements to the system for submitting reports and calculating tax for SMEs;19 August 2005 ­ guarantees of unimpeded access to cash held in bank settlement accounts;20 September 2005 ­ cancellation of some types of procedures for obtaining permits and introduction of unlimited-duration licences for some types of activity;21 October 2005 ­ further reduction in the number of inspections.22 To the business community, the announcement of these intentions and some practical moves in this direction signalled further economic reforms. Improving the business environment through collaboration of the country's government with the business community, with support from donor organizations and international financial institutions, will help ensure stable development of Uzbekistan's economy. This Report presents an overview of the main problems entrepreneurs faced in undergoing inspections, obtaining all kinds of permits and approvals, reporting, registering businesses, and taxation in 2004. The summary tables that follow give a brief analysis of the main sources of these problems and detailed short-term and long-term recommendations on how to overcome them. The recommendations on the removal of barriers facing entrepreneurs, as revealed in the course of the survey, are intended to assist the government in its decision-making process in the course of reforming the business environment. Part II of this Report (Statistical Results of the Survey) contains detailed data obtained from respondents with respect to questions concerning the entire range of their operations, from registration and obtaining the necessary permits and licences, through the processes for certificates and standards, settlement transactions, calculation and payment of taxes and other compulsory fees, to foreign business transactions, and business liquidation. It also contains detailed demographic information on the respondents and their assessment of the business environment overall. The data on agricultural businesses and self-employed entrepreneurs not operating through a legal entity are presented separately. 13 Order R-2108 of the President of the Republic of Uzbekistan, "On Drafting a New Edition of the Tax Code of the Republic of Uzbekistan," January 07, 2005. 14 Resolution PP-24 of the President of the Republic of Uzbekistan, "On the Program for Implementing the Objectives and Tasks of Democratizing and Renewing Society, and Reforming and Modernizing the Country," March 10, 2005. 15 Resolution PP-56 of the President of the Republic of Uzbekistan, "On Further Reforming and Liberalizing the Banking System," April 15, 2005. 16 Decree UP-3619 of the President of the Republic of Uzbekistan, "On Further Improving the System of Legal Protection of Businesses," June 14, 2005. 17 Decree UP-3620 of the President of the Republic of Uzbekistan, "On Additional Incentives for the Development of Micro-Firms and Small Businesses," June 20, 2005. 18 Decree UP-3622 of the President of the Republic of Uzbekistan, "On Liberalizing Financial Liability of Businesses for Economic Violations," June 24, 2005. 19 Resolution PP-100 of the President of the Republic of Uzbekistan, "On Improving the System of Business Reporting and Raising the Penalty for Illegal Demands," June 15, 2005. 20 Resolution PP-147 of the President of the Republic of Uzbekistan, "On Guarantees of Unimpeded Provision of Cash Payments from Bank Deposits," August 05, 2005. 21 Resolution PP-186 of the President of the Republic of Uzbekistan, "On Reducing the Types and Simplifying Permit Procedures for Entrepreneurial Activity," September 21, 2005. 22 Decree UP-3665 of the President of the Republic of Uzbekistan, "On Further Reducing and Improving the System of Inspections of Businesses," October 05, 2005. 16 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises - REC non- non- risk- for and the funds the funds on and penalties penalties ict inspectorates inspectorates LONG-TERM OMMENDATIONS Liquidate budgetary of accumulated from Liquidate budgetary of accumulated from Arrange workshops interpersonal psychology, confl management, strategic planning management entrepreneurs inspectors to the ciently by in for of of state their in for effi comply level of for access enterprises to enterprises voluntarily raise power the more them of inspectors potential entrepreneurs appeal and inspectors potential management by the by raise directing to decisions requirements inspectors THEM for of measures by the enterprises violate abuse rules and preventing inspectors legal resources law-abiding to inspections encourages requirements for reduce access entrepreneurs' on of reduce that business with of with inspectors, that in clear, entrepreneurs appealing legal ADDRESS interference and of procedure and law interference and improve enforcement TO burden incentive number with those potential rules from actions ciency the accountability inspectorate requirements the the the perceptions effi compliance inspectors and the of IMPACT the the systema unlawful activities power entrepreneurs' of of the of compliance the legal unlawful activitiespower provide legal comply penalizes awareness of making entrepreneurs Distribute Reduce and with Reduce Establish that and Eliminate officials Increase Prevent business abuse Increase by legal Standardize inspections Improve actions Change entrepreneurs agencies, appeal Increase by awareness Increase imposing Prevent business abuse EXPECTED 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 1. 2. 3. 4. for RECOMMENDATIONS ADDRESS among of among AND TO system system procedure introducing: to innocence" the inspections services of awareness inspectors awareness awareness inspectors inspections inspections through applied SOURCES, improve technical legal the legal legal the conducting by of and of of and for standards "presumption and MAIN RECOMMENDATIONS risk-baseda risk-baseda inspections conduct). checklists checklists of the level the level level the the the THEIR Standardize directing Checklists; Regulations (codes Simplify entrepreneurs Introduce Raise entrepreneurs Establish principle Raise entrepreneurs Introduce Raise entrepreneurs NATSIKEBZU SHORT-TERM PROBLEMS Introduce Introduce 1. · · 2. 1. 2. 1. 2. 1. 2. SYSTEM, and of in along number along the number of by PROBLEMS inspections inspections inspectors appealing NITNEMNORIVNE selecting their their inspections of INSPECTION OF for place objective place legal for legal of in administrative in selecting for among among the of in administrative in of transparency actions of THE put the as put the of level functioning level IN SOURCES systemA enterprises is with decrease not Fines inspections systemA decisions not SSENISUB enterprises is with decrease Lack conducting the Low awareness entrepreneurs Poor mechanism unlawful inspectors Low awareness entrepreneurs EHT cial cial not FO PROBLEMS subject in offi unoffi inspections appeal KEY PROBLEMS The enterprises operating most effectively are to more frequently Most inspections end penalties, both and Entrepreneurs preferred to inspectors' decisions WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 17 - REC formats simplify closer reporting international LONG-TERM OMMENDATIONS Further reporting Bring formats to standards not work work and abuse and abuse in and abuse reports SMEs for SMEs for for among among on on analytical analytical do involved do potential to potential to potential THEM demanding burden entrepreneurs burden entrepreneurs entrepreneurs the awareness of awareness time the cials problems time the cials legal offi of legal between reduce more between reduce entrepreneurs more between reduce of offi ADDRESS practice legislation of and and TO administrative thus administrative cials thus number for cials level the by level offi reports thus offi IMPACT the contacts and the the the tax contacts and the costs tax contacts and power power power Eliminate stipulated Raise entrepreneurs Reduce Reduce officials of Reduce Leave Reduce officials of Reduce submitting Reduce Leave Reduce officials of Increase entrepreneurs EXPECTED 1. 2. 1. 2. 1. 2. 3. 1. 2. 3. 4. 5. of a a RECOMMENDATIONS the with ADDRESS among arranging of arranging TO the submit AND compliance publishing and from agencies calculation to publishing and by among over tax by awareness govern reports right compliance levels cials framework law offi materials to state information the submitting contributions the cials format the materials control all SOURCES, legal of over offi at of for and receiving levels of all and MAIN RECOMMENDATIONS power regulations for control stronger level outside information additional electronic at information legislation the of the inspection frequency mandatory entrepreneurs in awareness of THEIR the and Exercise with Raise entrepreneurs series workshops demand Formulate procedure Grant reports Strengthen legislation Raise entrepreneurs series workshops SHORT-TERM PROBLEMS 1. 2. Eliminate to entrepreneurs current Limit taxes 1. 2. 1. 2. SYSTEM, law by of and for mail fees to the by taxes at PROBLEMS additional REPORTING OF required additional of entrepreneurs for for not submission legislation proceduresreports of reports level THE compulsory of right respected IN submit SOURCES Requests reports Requests information Monthly calculations other Lack establish receiving The to is regional not and highly PROBLEMS tax no receiving KEY PROBLEMS Preparing submitting reports remains problematic for entrepreneurs State agencies have conditions for reports 18 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises - the will them; REC the limiting the for 1 2 with time, of clause" in permits permit "silence reply period effective in consent" not LONG-TERM OMMENDATIONS Introduce principle the which be ­ "sunset Introduce declaratory principle for issuance Introduce the is principle complying 1. 2. for do theyIf to to to cials thus responsibility review. offi them would access access cials them them law access cials the procedures and for procedures for meet offi them assumes for by the meet for country, meet offi and time acts acts will will meet the will by power procedures: procedures: procedures: will procedures: because legislation, additional of THEM entrepreneurs opportunities opportunities permits legislation permits permits legislation in regulatory regulatory for for opportunities for some abuse servants issuance with permits throughout issuance issuance decisions, documents for servants issuance with defined for between for ask or ADDRESS through competitive through public competitive permit permit of obtain of competitive permit of public permit clearly as of TO requirements requirements of procedures of requirements activity contacts potential activity compliance to reviewing compliance the the requirements the application, introducing of the equitable market introducing equitable market of over for of equitable market of of over standards of the of the and in in transparency required aware period transparency the in transparency transparency number reduce accountability control aware aware aware control entrepreneurial entrepreneurial the time the the accountability permit-issuance the entrepreneur's IMPACT practice the practice the public the the corruption the requirements the thereby entrepreneurs operation the entrepreneurs to operation maximuma entrepreneurs public operation all reply RECOMMENDATIONS End restricting Reduce and Allow and End restricting Increase Allow and Guarantee entrepreneurs Ensure Reduce set Guarantee entrepreneurs Allow and Guarantee entrepreneurs Increase Standardize reducing Guarantee entrepreneurs Ensure meets and EXPECTED 1. 2. 3. 1. 2. 3. 1. 2. 1. 2. 3. 1. 2. 3. 1. 2 he agencies. AND state review whether permits period, of permit state cials of and permit state of with and cials relevant of and SOURCES, legal offi legal offi the limited independently number defining area of and seriesa eldfi defining area of materials the and seriesa notifying regulating MAIN RECOMMENDATIONS PROBLEMS among regulating non-performance among materials strictlya requested. the lawa and this workshops this in workshops in level level upon the lawa and in compliance accountability for functions determines within NATSIKEBZU the activity THEIR publishing their publishing must, the ADDRESS in Reduce Draft issuance policies Raise awareness entrepreneurs by information arranging Draft issuance policies Monitor legislation establish officials of Raise awareness entrepreneurs by information arranging immediately SHORT-TERM TO 1. 2. 3. 1. 2. 3. entrepreneur servants the engage SYSTEM, activity or at the that the public in of level legal of at that actions NITNEMNORIVNE PERMIT OF of among level framework legal of among means the means THE legislation regional level legislation regional level principle perform IN actions/engage principle to SSENISUB SOURCES PROBLEMS Unrestricted introduction permits Non-compliance with the Low awareness entrepreneurs Shortcomings regulatory Non-compliance with the Low awareness entrepreneurs the right EHT of is declaratory take the can has FO after is than of the consent"is he PROBLEMS number must more permits, "silence KEY PROBLEMS The entrepreneurs who obtain permits registration growing Obtaining permits problematic for one-third enterprises For therefore, The entrepreneur 1 2 WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 19 - REC on-line for the minimum the Introduce registration SMEs Study effectiveness of capital requirements LONG-TERM OMMENDATIONS 1. 2. of cials potential offi of the actions entrepreneurs the THEM procedures reduce over between regions thus accountability ADDRESS registration the and power control the of TO IMPACT the contacts of cials public offi abuse entrepreneurs offi abuse Increase Standardize throughout Reduce and for Ensure official EXPECTED 1. 2. 3. 4. noitartsigerfonoisnetxedefiitsujnuetanimilE.1 l fopu-tratsehtpugnideeps:stimilemit esaercnidluocyadenotsujybsessenisub ib4.1ybrotcessihtniselasfoemulovehtnoil thus raeyrepsmuos slaicfifofoytilibatnuoccaehtesaercnI.2 serudecorpnoitartsigerezidradnatS.3 snoigerehttuohguorht sruenerpertneneewtebstcatnocecudeR.4 aitnetopehtecudersuhtdnaslaicfifodna rewopfoesubarof fosnoitcaehtrevolortnoccilbuperusnE.5 of registration cials potential in offi actions of the entrepreneurs the procedures involved reduce over between regions expenses accountability registration and power control the the contacts laicfifo cials public Reduce for Increase Standardize throughout Reduce and for Ensure officials 1. 2. 3. 4. 5. regional regional and it it etc. regional etc. between the the make between make RECOMMENDATIONS ADDRESS at at information CTI, the at campaign information CTI, and TO and non-performance campaign non-performance AND for principle collaboration : for legislation legislation principle collaboration for cials conferences legislation inspectorates, cials information information: conferences inspectorates, with with offi information newspapers, for and in with offi to newspapers, SOURCES, on information easy-to-understand on and in easy-to-understand declaratory to and declaratory access and RECOMMENDATIONS the MAIN mechanisma registration registration compliance compliance sanctions duties wide-scalea the wide-scalea workshops in information mechanisma compliance sanctions duties workshops in agencies access information current agencies facilitate current their their THEIR Introduce Develop state Monitor level Monitor level Impose of arrange issue materials publish available Introduce Develop state Monitor level Impose of Undertake and arrange issue materials publish available SHORT-TERM PROBLEMS 1. 2. 3. 1. 2. Undertake facilitate · · · 1. 2. 3. 4. 5. · · · SYSTEM, at at for for of law state state cials with the cial mechanism legislation offi entrepreneurs mechanism denial legislation of between with awareness on between mechanism with awareness unoffi contact agencies PROBLEMS to/by REGISTRATION OF effective level legal of effective unjustified level legal make have awareness of to to various of THE an entrepreneurs an effective sanctions of of of and entrepreneurs in entrepreneurs IN collaboration regional level information collaboration regional level need need level SOURCES Lack for agencies Non-compliance the Inaccessibility/incomprehensibility of Low among Lack for agencies Lack imposing delays registration Non-compliance the Low among The payments The officials Low among to are ton PROBLEMS out limits veahstsodown met KEY PROBLEMS Contrary legislation, most entrepreneurs carry registration procedures themselves Registration time not Registration c gone 20 Overview of the Business Environment in Uzbekistan 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises - the burden LONG-TERM RECOMMEN DATIONS Further reducing tax pubic cials new public more offi of sector the corruption businesses to among sector by income for for number established shadow shadow power of sales the IMPACT the revenue corruption personal the administration potential THEM tax abuse Increase Increase companies Reduce Increase budget Reduce servants Increase Reduce Make effective Reduce and EXPECTED 1. 2. 3. 4. 5. 1. 2. 1. 2. ADDRESS TO basis the the from to legitimate optimize investors administration end to individuals tax PROBLEMS credit applied and sales ways for be on excluding foreign tax," to by on ndingfi and RECOMMENDATIONS ADDRESS strengthen long-term rates purchases based taxt to local TO on "tax fees profi AND income collection viewa contributions both capital and for tax interest for eliminate with security simultaneously the t tax depreciation taxes taxable concessions of calculating SOURCES, and profi credits for from social tax incomes conditions increasing RECOMMENDATIONS of equipment taxation, and MAIN rates input calculating basis tax aim deduction accelerated VAT double of the expenses personal individual burden equitable THEIR the calculating Allow for Allow purchased Allow tax NATSIKEBZU SHORT-TERM Reduce with 1. 2. 3. Reduce practice Change business Analyze the Eliminate Create - SYSTEM, tax" for that on income basis contribu tax than "tax sales tax foreign expenses the local NITNEMNORIVNE TAXATION PROBLEMS investment of in of profit OF security progressive individual worseis with THE rates on taxation, schedule IN tax tax taxation business included social and rate treatment SSENISUB enterprises SOURCES High High expenses Double and Some are calculating High tions tax Numerous concessions Tax companies of investment EHT FO is PROBLEMS tax KEY PROBLEMS The burden excessive WEIVREVO Business Environment in Uzbekistan as Seen by Small Overview of the Business Environment and Medium Enterprises 2004 in Uzbekistan 21 - reduce and cials salaries offi on to number introduce taxes tax collection advisory LONG-TERM RECOMMEN DATIONS Further the of contributions Raise of and financial incentives based increased tax and services taxpayers costs cials more businesses offi corruption by and business for administration state cial power administration of IMPACT tax the unoffi potential tax both abuse Reduce for Make effective Reduce transactions Reduce and EXPECTED 1. 2. 3. 4. - into sepa Tax system newa least Tax and favor the of at tax to (of comesit enterprises the taxt issues to the profi taxpayer's issues PROBLEMS administered to beginning period before the tax taxation but the established in with with cials ADDRESS basis amendment at passedis amendments (especially newly offi taxes cials TO amendments only for provisions tax dealing offi same through of mandatorya taxes Code dealing through of Code some in tax the effect for in Tax some Tax of system skills skills of on only dates only of skills into amendment skills tax regulatory provide an levied system system tax effective come and after stablea months) calculation 12 RECOMMENDATIONS taxes the the they year direct-actiona tax calculation professional the the the ambiguous entrepreneurs' the direct-actiona entrepreneurs' professional that least quarter) at Change Code Regulate such taxation one effect Guarantee (for Introduce Change Code Simplify VAT) Interpret Improve Improve Introduce Simplifying Improving Improving SHORT-TERM Consolidate rately 1. 2. 3. 1. 2. 1. 2. 3. 4. 1. 2. 3. 4. in and and and taxes system documents awareness PROBLEMS of of laws ambiguity tax OF of taxation and legal of number number entrepreneurs cials level offi SOURCES Large fees Instability Large regulating Contradictory regulations interpretation Low among tax - - legisla comis PROBLEMS Tax tion plicated 22 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises INSPECTIONS Internationally, business inspections are instruments for ensuring that MAIN businesses comply with legal requirements such as full and timely payment of taxes, environmental protection, health and labor safety, FINDINGS protection of consumer rights, and compliance with registration, licensing, certification, and other applicable standards. However, this instrument of state control should not be an obstacle to conducting and developing business. Over the past few years, the Lack of transparent criteria in government has implemented measures to reduce the number of selecting businesses for inspection business inspections carried out by inspectorates. (For more detail, has led to a situation where please refer to the 2002-2003 IFC reports "Business Environment in the enterprises operating most Uzbekistan as Seen by Small and Medium Enterprises.") effectively are subject to inspection most frequently. The results of the 2004 survey show that the trend toward reducing the number of SME inspections has continued. Since 2001, the Inspections continue to have a number of inspections at any one enterprise has decreased five punitive nature; most of them fold on average. In 2004, SMEs were inspected an average of 1.2 result in penalties, both official and times. Inspections lasted an average of 1.4 days and diverted two unofficial. employees from their principal occupation. By comparison, in 2003 the average results were 1.9 inspections lasting 4.4 days and diverting Entrepreneurs prefer not to appeal 1.9 employees. inspectors' decisions. Only 3% of respondents had appealed the Box 2.1 actions of inspectorates in court, and Inspections of individual entrepreneurs: only 39% of appeals were successful. The survey showed that the average number of inspections of individual entrepreneurs was also falling. In 2001, the average was 8 inspections, falling to 4.1 in 2004. However, it should be noted that individual entrepreneurs are inspected four times more frequently than legal entities. This may be because the law does not, in practice, regulate the procedure for directing and carrying out inspections of individual entrepreneurs operating as full-fledged businesses.1 However, the ultimate objective of inspections in Uzbekistan continued to be to expose violations and apply penalties, rather than preventing violations and/or helping entrepreneurs to remedy them. For this reason, the government's measures aimed at reducing the pressure of inspections on businesses produced ambiguous results. On the one hand, the number of enterprises undergoing no inspections increased six fold (from 11% to 67%). On the other hand, for the enterprises inspected, the inspections became even more problematic. 1 See Annex 3. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 23 23 Box 2.2 Before the large-scale administrative reforms in the Republic of Latvia, the main objective of inspections had been to expose violations and impose penalties. In the period 1999-2003, the government of Latvia undertook reforms, and one of the main areas for improvement was situation with respect to penalties. To address this issue, the principle "orientation toward compliance with regulatory requirements" was introduced into the work of inspectorates. Thus, imposing penalties ceased to be the ultimate objective, instead becoming just one way of ensuring compliance with safety requirements, and was to be applied only after considering alternatives. A 2003 survey of the business environment in Latvia showed that, as a result of the reforms, the incidence of penalties decreased: ­ fire-prevention and rescue service ­ by 87% ­ labor inspectorates ­ by 84% ­ sanitary inspection ­ by 82% ­ municipal police ­ by 73%. Moreover, in the period 1999­2003, in the fire-prevention and rescue service alone, the incidence of the following decreased: ­ administrative sanctions ­ by 12% ­ warnings to suspend activity/use of equipment ­ by 52% ­ amount of administrative financial penalties ­ by 3%. The survey also showed that, in the case of minor errors, inspectorates began to give written or verbal warnings about the need to prevent recurrence instead of imposing penalties. Through discussions about the results of the reform, the heads of inspectorates universally reached the understanding that changes in the frequency and duration of field inspections and the introduction of the "orientation toward compliance with regulatory requirements" principle did not lead to deterioration in public health or labor safety.2 THE ENTERPRISES OPERATING MOST EFFECTIVELY ARE SUBJECT TO INSPECTIONS MOST FREQUENTLY The survey shows that, in practice, there is a direct correlation between the frequency of inspections and the scope of activity of the enterprise. Most inspections are carried out at enterprises with high annual sales. This applies equally to audits and to technical inspections, even though the latter should not be related to sales volume. 2 Case Study: Inspectorate Reform in Latvia 1999-2003 FIAS. Jacqueline Coolidge, Lars Grava, Sanda Putnina. 24 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises "The higher the sales I disclose, the more I attract the attention of inspectors. Inconsistency in selecting enterprises for inspections has led to a situation where tax inspectors come to me three times a year, while a neighbor opposite me has not been inspected for four years so far ­ only because his official sales are lower." Focus group participant This state of affairs resulted from the following factors: A system of selecting enterprises for inspections was not put in place along with the administrative decrease in their number "How do we select them? We receive a list of enterprises from As already pointed out, the government's measures to reduce the number of inspections have the Inspections Coordination been successful to a certain extent (see Statistical Results of the Survey). However, the system Council, compiled based on the lacks principles to be applied to directing inspections and criteria for selecting enterprises list made by Tax Inspectorate. for inspections at the level of local inspectorate offices. This permits some officials to select In the past, we tried to select based on their own interests. those that were, in our view, most dangerous, but now we simply Fines as the objective of inspections? write applications for the whole list." In the opinion of focus group participants, inspectors were not guided by the need to Focus group participant, monitor, objectively, the entrepreneur's compliance with legislation when conducting an inspector inspection; rather, they were deliberately looking for violations that could provide the basis for a fine. "We are still entirely subject to the authorities. Despite all these A legal analysis has shown that the major inspectorates (Tax and SES inspectorates and the resolutions, officials will always State Inspectorate for Oversight of the Electric Power Industry) have extra-budgetary funds be able to turn everything in accumulated through retaining a portion of the penalties imposed on businesses found in such a way that, if you "quarrel" violation of the rules. with them, inspections at your enterprise will follow, one after the other." Box 2.3 Focus group participant, The State Tax Committee of the Republic of Uzbekistan3: entrepreneur Resolve that the Social Development and Material Support Fund of the state taxation agencies shall be formed of the following deductions: 10% of the amounts additionally collected by the state taxation agencies as a result of inspections (including fines) and the amounts of financial sanctions for abusing tax legislation (minus the amounts to be contributed to the extra-budgetary fund of the Tax and Currency Crimes Department under the Public Prosecutor's Office of the Republic of Uzbekistan); 10% of the amount of penalties for administrative violations; 10% of the amounts obtained from the sale of the property seized by the state taxation agencies and devolved to the state revenue. The State Inspectorate for Oversight of the Electric Power Industry4: Amounts collected for violations in the use of fuel and energy resources, oil products, gas, electricity and thermal energy shall, within a month, be transferred by enterprises, amalgamations, institutions and organizations to the settlement account of the State Inspectorate of the Republic of Uzbekistan for Control of the Use of Petroleum Products and Gas (Uzgosneftegazinspektsia) and 3 Paragraph 5, Resolution 14 of the Cabinet of Ministers, "On Issues of Organizing the Activity of the State Taxation Committee of the Republic of Uzbekistan," January 12, 1998. 4 Resolution 124 of the Cabinet of Ministers, "On Applying Economic Sanctions for Violations in the Use of Fuel and Energy Resources," March 9, 1994. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 25 the State Inspectorate of the Republic of Uzbekistan for Oversight of the Electric Power Industry (Uzgosenergonadzor). Of these amounts, 90% is to be transferred to a special national intersectoral power supply account, while 10% is to remain at the disposal of Uzneftegazinspectsia and Uzgosenergonadzor without any subsequent taxation. The State Sanitary-Epidemiological Surveillance of the Republic of Uzbekistan5: Sanitary-epidemiological stations of all levels shall open a special account in a bank to hold all funds obtained from penalties paid for abusing sanitary legislation, sanitary norms and rules, and hygienic standards, as well as mandatory rules established with the aim of preventing the emergence and spread of quarantined and other infections dangerous to the public. Of the total amount of the funds collected: 85% is to be allocated for epidemiological control and sanitary programs; 15% is to be allocated for providing material incentives to the staff of sanitary-epidemiological stations. The amounts of bonuses are to be determined depending on the personal contribution of the staff member to the common work results. The total amount of bonuses shall not exceed three salaries per year. "A tax inspector comes and This approach has led to an entrenched system of planned penalty collection. It explains, says, "Your sales this year have in part, the inspectors' desire to inspect primarily those enterprises with high annual sales, reached 100 million!" I say, `That's while the total number of inspections is decreasing. good ­ I paid more taxes!" To this, the tax inspector says, `No ­ now I must find 10 million worth MOST INSPECTIONS END IN PENALTIES, BOTH OFFICIAL AND UNOFFICIAL of violations at your enterprise; otherwise I will be punished." More than half of inspections resulted in penalties, either official (in the form of fines, follow-up inspections, suspension of banking transactions, administrative or criminal "We don't let the SES into our liability, etc.) or unofficial (in the form of unofficial payments.) In 2004, inspections of restaurant. Right at the entrance, we agree to the maximum fine 37% of respondents ended in official sanctions. Half of them paid fines of an average of and pay it. It is simpler for us to 230,000 soums (approximately US $225). Thirty-six per cent of respondents, including half pay at once than it is to distract of those who were fined officially and one-third of those who were not, made unofficial our staff from work and cause payments. inconvenience to guests." Focus group participants This problem is attributable to the following factors: A system of selecting enterprises for inspections was not put in place along with the administrative decrease in their number As in the case of the first problem, the large number of sanctions applied to the enterprises inspected reflected the fact that the number of inspections was falling, while inspectorates continued to be motivated to reach the "planned target" for penalties collected. 5 Regulation, "On the Procedure for Using Funds Obtained From Penalties Paid for Violating Sanitary Legislation," approved by Resolution 147 of the Cabinet of Ministers, April 8, 1998. 26 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises In addition, inspectors were often guided by personal interests. The survey results led to this conclusion: Concurrent with the general trend toward a decrease in the number of inspections, the percentage of respondents who made unofficial payments in the course of inspections increased four fold since 2001. Lack of transparency in conducting inspections and the decisions of inspectors During inspections, entrepreneurs deal directly with the inspectors with respect to the "I have no notion of what an firm's compliance with legal requirements. However, since the inspection procedure is inspector must check. I know poorly regulated, entrepreneurs do not always have a clear idea of which specific items the he will come and find some inspectors are required to check or entitled to check. violations, no matter what. So, I have to give him whatever Lack of transparency in the criteria for conducting inspections make it possible for officials money I have left from my to impose penalties for any violation, even the slightest. Making things worse, half of the income to get rid of him." survey respondents are of the opinion that it is "rather difficult" to meet the requirements Focus group participant for which compliance is checked by inspectorates. As a result, inspectors can easily find faults and collect fines and unofficial payments. Inspectors are not at all interested in informing entrepreneurs about how to avoid future violations. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 27 The focus group survey results, as well as an analysis of regulatory documents, showed that many complications could be attributed to the fact that the requirements of many technical services are based on regulatory documents dating back to the Soviet era. These requirements do not always reflect today's market-oriented conditions and/or current technology. Box 2.4 The provisions of the sanitary standards for enterprises trading in foodstuffs, dated September 10, 1996, serve as an example of requirements which have become outdated or unnecessary under market-oriented conditions: Para 45. ...chambers for storing foodstuffs should be fitted with lamps permitted for use in premises with low temperatures. The lamps should have protective bowls with a metallic wire mesh to prevent breakage and protect foodstuffs from glass fragments. Para 61. ...enterprises trading in foodstuffs shall have separate, isolated premises for accepting and storing glassware from the public, with an area of at least 18 m2, and at least 36 m2 in supermarkets. Para 123. ...before offering canned foods for sale, the stock-keeper or goods manager shall inspect them on a mandatory basis. For each lot of canned foods found unfit for consumption, a checklist shall be compiled in conformity with the applicable instruction, "On the Procedure of Quality-Based Acceptance of Industrial and Technical Products and Consumer Goods," dated June 15, 1965, with subsequent submission to a commission approved by a higher trade organization. ENTREPRENEURS PREFER NOT TO APPEAL INSPECTORS' DECISIONS The survey has found that the mechanism for appealing inspectors' unlawful actions or decisions, intended to ensure effective protection of entrepreneurs' rights and legal interests and to reduce the abuse of power by officials, is not functioning properly in Uzbekistan. For instance, only 3% of respondents had ever appealed an inspectorate action when they disagreed with its lawfulness. Only 39% of those who sought recourse at the relevant institutions were successful. 28 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises That only an insignificant fraction of entrepreneurs appealed the actions of inspectorate "Our case was tried twice. It took officials is explained by the following: half a year. We won in the end, but the money collected from Poor functioning of the mechanism for appealing unlawful actions us was never returned; it was One reason for the small percentage of respondents who appealed inspectors' questionable set off against future payments. This is wrong, because we could decisions is the poor functioning of the appeal mechanism itself. Focus group participants have put it into circulation right said that entrepreneurs preferred to forgo a judicial inquiry into their case because away. We effectively extended examination of claims took a long time, the costs were high, and it was difficult to induce credit to the state. But when we inspectorates to enforce court decisions. get a bank loan, we pay a high interest. On top of that, we had Moreover, focus group participants feel that appeals are complicated by bias against to cover the costs ­ even though entrepreneurs, as undoubtedly guilty of violations, on the part of both inspectorates and the court assigned the costs to the courts. the defendant, a state agency." Focus group participant LOW LEVEL OF LEGAL AWARENESS OF ENTREPRENEURS The survey showed that, in 2004, about 60% of respondents were only vaguely familiar "Undoubtedly, courts are with the legislation regulating the inspection process. deliberately on the side of state authorities, not entrepreneurs. This is obvious during court proceedings." Focus group participant It is largely due to this lack of awareness on the part of entrepreneurs that most inspections end in penalties. With inadequate knowledge of their rights and duties, entrepreneurs cannot prevent unauthorized inspections6 or defend their own interests. For instance, some focus group participants did not know they could demand that the inspection be carried out in the presence of a representative of the Chamber of Trade and Industry, whose function is to protect entrepreneurs' rights. Because of their low level of legal awareness, entrepreneurs rarely appeal against inspectors' decisions even if they regard them as unlawful. In addition, fearing possible repercussions, they are reluctant to act as the inspectorates' formal opponents. The prevailing attitudes among entrepreneurs in Uzbekistan include unwillingness to confront representatives of the authorities. 6Inspections carried out without the direction of the Inspections Coordination Council or its territorial commissions, or, in the event of a criminal case, without a ruling by the relevant law enforcement agency or prosecutor's office. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 29 SHORT-TERM RECOMMENDATIONS TO ADDRESS ISSUES IN Box 2.5 THE INSPECTION SYSTEM In October 2005, the President passed Decree UP- The problems described herein reduced the significance of 3665,8 which provided for the following: the results achieved by reducing the number of inspections. 1. It changed the frequency of standard inspections To improve the situation, radical changes to the entire system of entrepreneurs' financial and business activity: is required, throughout all its phases: selecting enterprises for Standard inspections of the financial and inspections and conducting inspections, criteria for imposing businessactivityofmicro-firms,smallenterprises, penalties on entrepreneurs, and the appeal process. and private farms will be conducted no more than once every four years, and of other Detailed recommendations for streamlining the process of businesses, no more than once every three selecting enterprises for inspections and conducting inspections years; and for establishing a partnership between entrepreneurs and The financial and business activity of newly- inspectorates are presented below. established micro-firms, small enterprises, and private farms may not be subject to standard Establish a risk-based inspection system for enterprises inspections for the first two years after their state registration. selection (Before the Decree came into effect, all standard In order to address the issues related to selection of enterprises inspections could be conducted no more than for inspections, it is necessary to eliminate the subjective selection once a year, and inspections of private enterprises by inspectorate employees of the enterprises to be inspected. To and firms that paid taxes and other mandatory fees on time and in full, complied with other standards that end, each inspectorate should formulate clear-cut selection and rules, and had relevant annual audit reports criteria. International experience has shown that the most could be carried out no more than once every two effective method of selecting enterprises for inspection is based years.) on an analysis by inspectorates of the potential risks involved 2. It abolished financial penalties for businesses that in the business activity.7 In other words, under this method, complied with the injunctions of inspectorates selection for inspection and frequency of inspection depends on resulting from inspections and covered damages voluntarily, within the prescribed deadlines and the extent of potential danger the operation of a business may in full measure, including the payment of the pose to public health, the environment, or the country's economy. penalty interest. 3. It eliminated the possibility of duplicate EXPECTED IMPACT inspections by tax agencies. Territorial tax agencies will inspect the financial and business A risk-based inspection system will: activity of SMEs registered in other districts/ improve the efficiency of resource distribution at towns, regardless of the actual location of their production premises, trade outlets, or inspectorates, because they would only inspect enterprises premises from which they provide services/work, with activities that pose the greatest danger; simultaneously with the relevant tax agencies in reduce pressure on successful, law-abiding enterprises and the locations of businesses registration. create additional incentive for entrepreneurs to comply In addition, a new roster of members of the with legislated requirements, because the frequency Inspections Coordination Council was approved. The Council was instructed to formulate, jointly of inspections will depend on their compliance with with the Ministry of Justice, the State Taxation established rules and standards; Committee, and other ministries and departments, reduce the number of inspections through more objectivity well-founded criteria for annual and quarterly in selecting enterprises for inspection and through businesses inspection schedules. And, by December 1, 2005, the Council was to set and approve an increased compliance with legislation by entrepreneurs; inspection schedule for 2006, including the list of reduce the scope of unfair competition, because this businesses to be subject to inspection based on system will encourage law-abiding enterprises and penalize those criteria, and including the frequency for the violators; conducting complex inspections. 8Decree UP-3665 of the President of the Republic of Uzbekistan, "On Further Reducing and Improving the System of Inspections of 7 For more detail see Annex 4. Businesses," October 5, 2005. 30 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Box 2.6 reduce the potential for officials at various levels to To establish transparent and simplified inspection abuse their positions through using inspections to punish procedures, many countries have introduced entrepreneurs; checklists to be used in the course of inspections, promote more effective business management, because as well as codes of conduct for inspectorates, which fully describe the procedure for directing entrepreneurs will have some idea, when they start a and conducting inspections and for appealing the business, of which bodies will inspect the enterprise and actions of inspectorates. when. For instance, in the course of implementing full- scale regulatory reforms, in the area of surveillance Put in order and improve the inspection process Mexico introduced inspection checklists containing Transparency in conducting inspections can be improved in the an exhaustive list of items to be checked. These were following two ways: widely disseminated among entrepreneurs through the mass media. First, inspectorates carrying out inspections not related to financial To simplify procedures, some inspectorates in and business activity of enterprises should introduce checklists Latvia introduced inspection checklists with all issues to be checked and the inspectorates' for each type of entrepreneurial activity. They should contain lists instructions combined in one document. Moreover, of specific questions, as well as the inspectorate's instructions for all inspectorates in Latvia have their own codes remedying any shortcomings discovered. Checklists should also of conduct fully describing their inspecting include a complete list of everything the inspector will check. The functions, the rights and duties of inspectors and those inspected, and the procedures for directing checklist should be made available to all entrepreneurs prior to and conducting inspections and for appealing inspection and be widely distributed among entrepreneurs.9 inspectorates' actions. Inspectors must familiarize entrepreneurs undergoing inspections with the EXPECTED IMPACT regulations. In the course of administrative reform, Canada With the introduction of checklists into the inspection formulated the Compliance Inspection Policy, which process, both entrepreneurs and inspectors will become regulates inspectors' activity. familiar with the range of issues to be covered in the course of an inspection. This will have the following benefits: Box 2.7 prevent inspectors from interfering in areas outside their competence, thus reducing opportunities for abuse of In June 2005, the President passed Decree UP-3619, which provided that the following legal sanctions power; were only to be applied to businesses by court order: raise awareness of the law and compliance with legal termination of activity; requirements by entrepreneurs, first because they will know the exact range of issues to be checked, and second suspension of activity, excepting cases of suspension for a period of no more than because records will be kept of violations found, on which ten business days to prevent emergencies, the frequency of inspections will depend; epidemics, and any other real threat to public standardize the process and raise the quality of inspections life and health; country wide, regardless of the level of the inspectors' suspension of transactions on bank accounts, proficiency; with the exception of exposed cases of money laundering and funding of terrorism; give entrepreneurs more scope to appeal questionable actions by inspectorate representatives and improve the financial penalties, with the exception of fines for delinquency in paying taxes and fees or in effectiveness of their appeals. cases where an entrepreneur pleads guilty to a Second, codes of conduct for inspectors should be prepared and violation and pays financial penalties voluntarily; put into practice. The codes of conduct should include detailed transferring items involved in a violation to the and clear-cut information on the powers granted to inspectors state; in carrying out inspections, the standard operating procedures of suspension for a period of more than ten days or inspectorates, the rights and duties of inspectorate representatives invalidation or annulment of licences (permits) and the businesses being inspected, the criteria for imposing for certain types of entrepreneurial activity (with the exception of licenses issued by the penalties (based on the extent of the threat to the public posed commissions of the Cabinet of Ministers and the by the violation,) the procedure for imposing and collecting Central Bank.) penalties, and the procedure for appealing the inspectorates' decisions made based on inspection results. 10 Decree UP-3619 of the President of the Republic of Uzbekistan "On measures of improving further the system of SME legal protection" dated June 14, 2005. 9For more detail, refer to Annex 5. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 31 Box 2.7 (continue) In addition, the President's Decree UP-362211 of June 24, 2005 formalized the intention of introducing into the Tax Code an amendment stipulating that all unavoidable uncertainty, controversy, and vagueness in the laws and regulations on taxes, fees, and payments would be interpreted in favor of the taxpayer. These measures were intended to create a more effective mechanism for protecting businesses and to reduce interference in their activities by inspectorates, with the aim of safeguarding entrepreneurs' legal interests and preventing unjustified restrictions on entrepreneurial activity. EXPECTED IMPACT With the rights and duties of each participant in the inspection process clearly defined, and regulations on the procedures to be followed put in place, the introduction of codes of conduct will: reduce opportunities for abuse of power by inspectors; create an additional mechanism for protecting the rights and interests of businesses; standardize the inspection process country wide; raise legal awareness among entrepreneurs. Embed the "presumption of innocence" principle Another measure to overcome the inefficiency of the mechanism for appealing inspectorates' decisions arising from entrepreneurs' attitudes is to introduce a law enforcement procedure requiring inspectorates to justify penalties based on inspection results in court before they can be imposed on businesses. EXPECTED IMPACT This measure would shift the burden of proof of the appropriateness of penalties from entrepreneurs to inspectorates in court. In addition, this approach would give inspectors increased responsibility for meting out penalties commensurate with the violations of entrepreneur. Being required to justify in court their decisions in imposing penalties based on inspection results would substantially reduce opportunities for abuse of power by inspectors. Technical services: simplify the regulations for entrepreneurs The regulations of technical services should be reviewed and simplified for entrepreneurs, to the maximum degree possible, in order to bring them closer to the current conditions brought on by a market-oriented economy and technological advancements, and to eliminate obsolete provisions. EXPECTED IMPACT Reviewing and simplifying the regulations for businesses would enhance the transparency of inspections substantially. Entrepreneurs would be better able to comply with fairer regulations, which would reduce the number of penalties imposed on them. 11 Decree UP-3622 of the President of the Republic of Uzbekistan, "On Liberalizing Financial Liability of Businesses for Economic Violations," June 24, 2005. 32 Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Raising the level of legal awareness among entrepreneurs and inspectors As both entrepreneurs and inspectors pointed out in focus groups, a partnership between inspectorates and SMEs is necessary in order to reduce the number of problems arising in the course of inspections. That aim would be advanced by raising awareness of the law among both entrepreneurs and inspectors. This could be achieved through joint round- table meetings, workshops, and publication and dissemination of information on the procedures for directing and conducting inspections, and so on. Box 2.8 The IFC SME Policy Project and the Ministry of Justice have jointly taken steps to raise the level of legal awareness among SMEs. In December 2002, they published a brochure, What You Must Know About Inspections, describing the entire inspection process and containing contact information for inspectorates and the "hot line" for the Ministry of Justice. It was distributed among SMEs country wide through regional departments of the Ministry of Justice, Khokimiyats region, the Chamber of Trade and Industry, the Association of Businesswomen, and the Association of Dehkan and Private Farms. The full version of the brochure was also published in the weeklies Taxation and Customs Newsletter and Soliklar va Bojhona Habarlari. Approximately 34,000 copies were distributed in all. The survey showed that 41% of respondents were familiar with the brochure, and 84% of them stated that they were satisfied with the information it contained. Almost half of entrepreneurs who used the brochure in the course of their entrepreneurial activity pointed out its usefulness. EXPECTED IMPACT This approach would raise the level of legal awareness among inspectors, top executives of inspectorates, and entrepreneurs. This increased awareness would lead to less abuse of the law by all parties involved in inspections and fewer problems arising from inspections for businesses. It would also improve compliance with regulations among businesses that are not inspected. Box 2.9 Since 2003, the IFC SME Policy Project has been actively collaborating with a number of ministries and departments in Uzbekistan to improve the system for directing and conducting inspections: an international expert was invited to participate in a number of round-table meetings and focus groups comprised of entrepreneurs and employees of the inspectorates most frequently engaged in inspecting businesses (tax agencies, fire-prevention units and SES units); to draw on the latest international experience, a study tour was arranged for representatives of the above-mentioned agencies to Latvia, which has been most successful in reforming the Soviet era regulatory system to European standards; based on the results of the round-table meetings and the study tour, a joint plan for improving the process of SME inspections by inspectorates was formulated, agreed upon with the heads of the Inspections Coordination Council, and approved by the national SME Coordination Council; in accordance with the plan, checklists for the fire-prevention and SES bodies were compiled, and pilot inspections were carried out as a basis for discussing with entrepreneurs the effectiveness of these documents and the necessity of introducing them; jointly with the SES bodies, work has begun on formulating criteria for risk-based inspection system. At the invitation of the Ministry of Justice, the Ministry of Economics, and the State Committee for Demonopolization and Support of Competition and Entrepreneurship, Project experts participated in drafting a number of government measures aimed at improving the system for directing and conducting inspections. SNOITCEPSNI Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Inspections 33 LONG-TERM RECOMMENDATIONS Subsequent steps in reforming the inspection system should be aimed at further simplifying the process for entrepreneurs. That requires a radical change in the way inspectors view inspections ­ as a source of income. The practice of planning for the revenue from penalties imposed on entrepreneurs should be abolished. Among other things, measures should include liquidation of the inspectorates' extra-budgetary funds accumulated from penalties imposed on businesses. It would be advisable to introduce a system of material incentives for inspectorate employees funded solely from the state budget, and to study the possibility of raising inspectors' salaries. Simultaneously with these measures, regular staff appraisals and upgrading of inspectors' professional skills should be undertaken. Box 2.10 In 2004, the World Bank studied the financial reporting system in Uzbekistan. The study showed that there were four large extra-budgetary funds in the country, and over twenty small ones. The latter were accumulated at budget-funded organizations that collected revenue in the course of their activities. The funds were spent on improving the operations of these organizations, as well as on bonuses and other remuneration for their employees. In the opinion of the World Bank, the existence of such funds carries a number of risks for the country's budgetary system. They fragment and even usurp the budgetary process, thereby complicating planning and control over the effective and targeted use of funds. In light of the problems involved in the existence of extra-budgetary funds, the World Bank recommends that the government of Uzbekistan abolish them in the medium term. In addition, to aid in establishing the partnership between entrepreneurs and inspectorates required in order to minimize problems and improve the effectiveness of inspections, it is advisable to introduce training programs such as interpersonal psychology and conflict management, and strategic planning and risk management for top executives. 12 The World Bank, Republic of Uzbekistan. 2004. Country Financial Accountability Assessment. Report N 31345-UZ, October, 2004. 34 Reporting 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises REPORTING The state requires businesses to submit reports in order to monitor MAIN their activities and for statistical purposes stemming from the need for effective economic management and development. However, FINDINGS submitting reports costs entrepreneurs time and money and distracts them from their primary activity. Not surprisingly, reporting is sometimes called "the information tax on businesses." A clearly defined and limited list of required reports, simplified to the Preparing and submitting reports extent possible to eliminate duplication, would serve the interests of remained highly problematic for both state agencies and entrepreneurs. The power of state agencies entrepreneurs, as pointed out by 41% to demand reports should be strictly prescribed by law. of respondents. In Uzbekistan, SMEs are only required to submit reports to state State tax agencies have no statistical and tax agencies and in the form established by them.1 conditions for receiving reports, as In practice, however, this limitation is not always observed, and pointed out by 40% of respondents. businesses must submit a variety of additional information to these and other agencies. For instance, one-third of respondents pointed out that the commercial banks demand various financial and statistical reports. PREPARING AND SUBMITTING REPORTS REMAINS HIGHLY PROBLEMATIC FOR ENTREPRENEURS The survey showed that, despite certain measures taken in Uzbekistan back in 2000 to simplify and put in order the SME reporting system, preparing and submitting reports continues to create many problems for entrepreneurs. Two out of five respondents pointed to the complexity of this process. Box 3.1 According to Resolution 65 of the Cabinet of Ministers of February 23, 2000, SMEs were required to submit reports only to local state statistical and tax agencies in the forms established by them. These reports were to be submitted once per quarter, and was not permitted to demand monthly reports from them. National accounting standard 202 established the list of financial reports to be submitted SMEs. They need only submit annual reports consisting of a balance-sheet, a financial statement, and information about accounts receivable and payable. 1 Resolution 65 of the Cabinet of Ministers of the Republic of Uzbekistan, "On Measures to Reduce and Put in Order Reporting by Small Enterprises," February 23, 2000. 2 NAS Para 5.9, "On the Procedure for Simplified Accounting and Reporting by SMEs (registered by the Ministry of Justice" on January 24, 2000, # 879). GNITROPER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Reporting 35 35 There are several factors in the degree of complexity in preparing and submitting reports. Requests for additional reports not required by law Despite the restriction on tax and statistical agencies that they may require financial reports from SMEs no more than once a year,3 respondents said that they were required to submit them much more frequently. Moreover, respondents pointed out that they had to submit additional forms of financial reports (on fixed assets, cash flow, and equity capital) which SMEs are not obliged to submit. "A tax inspector may call These circumstances arise from the improper enforcement of reporting regulations at the any time and demand any regional level. The level of legal awareness among both entrepreneurs and officials is also information. It may take the an important factor. If officials knew the fundamental laws and regulations in this area, accountant one week to do it, and making the same they would not accept reports more often than required by law or in forms not stipulated calculations as are required to in the regulations, even if entrepreneurs submitted them. Similarly, if entrepreneurs knew prepare a balance sheet. What the laws and regulations, they would not feel obliged to meet unlawful requests from is the use of the requirement to officials. submit a balance sheet once a year if similar information can be Requests for additional information demanded from us on a weekly basis?" Two out of five respondents pointed out that tax agencies demanded additional Focus group participant information. Looking at this issue by economic sector shows that additional documents are most often requested from retail trade and public catering enterprises, and most rarely from agriculture businesses. 3 Resolution 227 of the Cabinet of Ministers of the Republic of Uzbekistan, "On Measures to Further Improve Statistical and Financial Reporting," June 25, 2002. 36 Reporting 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises It should be pointed out that there are no restrictions on an agency's legal right to demand additional information.4 This increases the administrative burden on the entrepreneurs who have to prepare and submit additional information to tax agencies. Box 3.2 The right of tax agencies to demand additional information from entrepreneurs is stipulated by legislation in other countries as well. However, it is strictly regulated. In Latvia, for instance, if a tax inspector considers it necessary to obtain information other than the mandatory reporting forms, he must formalize each such demand as an inspection of the taxpayer's activity. Monthly submission of calculations of taxes and other compulsory fees Until recently, legal restrictions on the frequency of submitting reports did not apply to calculations of taxes, the unified social security fee, mandatory insurance payments, and deductions for extra-budgetary funds. Entrepreneurs had to submit these to tax agencies on a monthly basis, which reduced the significance and effectiveness of the government measures limiting financial reporting and distracted entrepreneurs from their primary activity. Thus, the establishment of a system under which SMEs would submit reports to tax agencies no more frequently than quarterly has not been completed. STATE TAX AGENCIES HAVE NO CONDITIONS FOR RECEIVING REPORTS The survey showed that 40% of respondents assessed the procedures for submitting "In Samarkand City, division into financial reports and calculations (waiting on the premises, the schedule for accepting districts has been abolished. reports, etc.) as "problematic" and "rather complicated." Although the state allows for Entrepreneurs used to submit submission by mail, only 2% of respondents took advantage of that option.5 More than reports to tax inspectorates in half of respondents did not even know that it was possible, and 26% indicated that tax three districts, but now we all have to take them to the City Tax inspectors demanded their personal attendance at the tax inspectorates to submit reports Inspectorate. On the days when and calculations. reports are to be submitted, long queues are formed there There are several reasons for the organizational problems with receiving reports. because everyone comes to one place. We have to stand in the queue several times ­ first for the inspector, then for the computer operator, and so on. When will normal conditions for submitting reports be put in place?" 4 According to Article 5 of Law 474-I of the Republic of Uzbekistan, "On the State Taxation Service," August 29, 1997, tax agencies, Focus group participant within their competence, have the right to obtain from legal entities and individuals information, references, documents, and copies of documents relating to the taxpayer's activity. 5 Article 122 of the Tax Code of the Republic of Uzbekistan grants taxpayers the right to submit financial reports and tax calculations through communication agencies, i.e., by mail. GNITROPER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Reporting 37 "My firm provides accounting Lack of legislation to establish procedures for receiving reports services to several enterprises. In my official capacity, I have The high degree of complexity in the process of receiving reports is primarily due to the to visit tax inspectorates in lack of laws and regulations for state tax agencies with respect to standardized report three districts. I have a feeling receipt schedules, registration procedures, and report processing (including reports received that each inspectorate makes by mail or e-mail). its own rules. One of them accepts reports from morning Legal requirements are not observed at the regional level until lunchtime, another after lunchtime for only one hour, and The problems described above are largely caused by the lack of adherence to legal the third only every other day." requirements at the regional level. One example has already been mentioned ­ that tax Focus group participant agencies refuse to accept reports from businesses by mail, even though this form of submission is legal. However, it should be noted that the legal and regulatory framework contains certain contradictions that prevent entrepreneurs from exercising the rights granted to them. For example, according to National Accounting Standard 1, the submission date of a financial report submitted by a company in the vicinity of the agency is the day the relevant agency acknowledges receipt. For that reason, entrepreneurs cannot send their reports by mail because receipt of their report must be confirmed by a stamp and a signature.6 Also, demands for additional information forced entrepreneurs to visit state agencies more often than required by law. SHORT-TERM RECOMMENDATIONS ON ADDRESSING REPORTING ISSUES The reporting system requires further improvement. The problems with it increase the administrative burden and costs and distract entrepreneurs from entrepreneurial activity. This is especially critical for SMEs that often do not have sufficient financial and human resources. Abolish the practice of requesting additional information Tax agencies should no longer be empowered to demand additional information from businesses outside the framework of the inspections conducted by those agencies. EXPECTED IMPACT The administrative burden on businesses would be reduced by relieving them of the need to spend time and human resources on preparing additional information and documents. This measure would also reduce the possibility of abuse of power by officials who would rather demand additional information than analyze the reports available, thereby shifting part of their work onto entrepreneurs. Extend restrictions on the frequency of submitting reports to the calculation of taxes and other compulsory fees The existing legal restrictions on the frequency of submitting certain reports should be applied to the submission of tax calculations. It would be advisable to reduce the frequency with which SMEs are required to submit document to tax and statistical agencies to no more than quarterly. 6 According to Para 65 of NAS 1, Accounting Policy and Financial Reporting (registered by the Ministry of Justice on August 14, 1998, # 474), the submission date of a financial report submitted by a company in the vicinity of the agency is the date the relevant agency acknowledges receipt, and by entities situated outside the vicinity it is the date of its postmarked dispatch. 38 Reporting 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Box 3.3 The IFC SME Policy Project expressed the need to implement the above-mentioned measures back in 2004. It should be noted that in June 2005, the President's Resolution PP-100 was passed, which provided that: as of July 2005, the submission of calculations of taxes, fees, and other compulsory payments by SMEs to tax agencies was to be made quarterly rather than monthly; state tax and statistical agencies would no longer be permitted to demand from SMEs any information, references, or documents, other than the established financial and statistical reports, except in the course of inspections and in the manner specified by law; other agencies and organizations would no longer be permitted to demand from SMEs any information, including reports, data, references, and documents not stipulated by duly approved legislation. These measures were intended to address the many problems existing in the reporting area. In order to make viable a system under which SMEs report on their activities no more than quarterly requires ensuring strict compliance with the requirements of this Resolution by state agencies at all levels. EXPECTED IMPACT The actual effect of applying these measures can only be analyzed based on the results of the next survey. It is expected that restrictions on the frequency of submitting calculations will substantially reduce the administrative burden on SMEs and allow them to manage their resources more effectively. For their part, tax agency employees will be able to concentrate on analytical work since they will spend less time on receiving and processing calculations. Personal contact between entrepreneurs and representatives of tax agencies will also be reduced, thus reducing the potential for abuse of power. Regulate the procedure for receiving reports Many of the problems with submitting reports stem from the lack of a standard working schedule for tax agencies and the lack of a standard process for receiving reports, including by mail and e-mail. Addressing those problems through legislation to regulate the process is necessary to creating an enabling business environment. Intensified control over compliance with legislation in the field is also necessary, along with permanent programs to raise legal awareness among entrepreneurs and officials. EXPECTED IMPACT These measures would reduce the problems with submitting reports, end the state agencies' practice of establishing arbitrary schedules for receiving reports, and raise legal awareness among entrepreneurs and officials. Introduce electronic reporting To further alleviate the problems with reporting, it is recommended that entrepreneurs be permitted to submit reports in electronic format via the Internet. A factor in favour of this measure in that tax agencies in Uzbekistan are well equipped with computers. The problem is that relatively few SMEs are equipped with computers and still fewer have access to the Internet (see Statistical Results of the Survey). Nonetheless, a pilot project can be implemented in Tashkent City, where 38% of respondents have Internet access. Positive results may encourage other entrepreneurs to use computer technology, and eventually this system could be implemented country wide. 7 Resolution PP-100 of the President of the Republic of Uzbekistan, "On Improving the Business Reporting System and Enhancing Responsibility for Unlawful Demand," June 15, 2005. GNITROPER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Reporting 39 EXPECTED IMPACT Box 3.4 Exercising the option of submitting reports in electronic format will Pursuant to the President's Resolution PP- relieve entrepreneurs of the need to attend in person, thus allowing 100, "On Acceptance and Registration by State Tax Agencies of Businesses' Financial them to use their working hours more effectively. Tax agencies will Reports and Calculations of Taxes, be able to process the information received more efficiently and Compulsory Fees and Income Statements, thereby reduce administrative costs. The time saved will enable the and Written Applications and Notices,"8 regulations were formulated, providing for: staff of state agencies to perform analytical work. Personal contacts between entrepreneurs and representatives of tax agencies will be the option of submitting financial reports, at the taxpayer's discretion, either reduced, thereby reducing the potential for abuse of power. directly to a state tax agency or by mail or e-mail; Exercise stringent control over compliance with legislation at the regional level and raise legal awareness among a procedure for receiving and processing reports and calculations, including those entrepreneurs and officials received by mail and e-mail; Stringent control over compliance with legislation in the field is required the possibility that taxpayers could in order to end the practice of demanding extra reports and demanding submit reports to state tax agencies reports more frequently than once a year. In addition, it is necessary throughout the full business day; to implement continual efforts to raise legal awareness among both the conditions required to organize the entrepreneurs and officials through publishing a series of explanatory receiving of reports by tax agencies, including standard requirements for materials and by arranging workshops and round table meetings. the operation of offices where reports are received (such as availability of EXPECTED IMPACT information boards and computers with regulatory and legal software, etc.) Control over compliance with legislation, along with efforts to promote better understanding of laws and regulations among entrepreneurs and officials, will allow entrepreneurs to use the opportunities granted to them more effectively and reduce the Box 3.5 potential for abuse of power. Reporting in electronic format via the Internet and other electronic means is used LONG-TERM RECOMMENDATIONS in many countries (including Germany, France, the Netherlands, and Australia) In reforming the reporting system in Uzbekistan, simplifying financial to simplify document circulation between and other reporting procedures for SMEs should go hand in hand with entrepreneurs and state agencies. This makes submitting reports easier for exercising effective control over compliance with legislation at the local entrepreneurs and data processing easier level. The forms of reporting should be brought into compliance with for agencies. international standards provided that this will contribute to stability In Sweden, for example, all reporting is in the reporting system, which is necessary for doing business and carried out electronically. Entrepreneurs developing businesses successfully and will put no additional burden on send all tax statements to tax agencies via the Internet, attaching electronic seals. SMEs. Personal contact between entrepreneurs and tax inspectors is practically eliminated. This practice primarily applies to small enterprises in Sweden, which submit reports only once a year9. 8Registered by the Ministry of Justice of the Republic of Uzbekistan on July 29, 2005 (1500). 9Excise Taxes, the Swedish Way. Taxation and Customs Newsletter, August 1, 2005. 40 Permits 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises PERMITS The issuing of permits is a mechanism in the state regulation MAIN of business activity intended to prevent harm to public interest, distribute limited resources, and monitor entrepreneurial activity. FINDINGS But the effectiveness of a country's business environment is partly determined by the quality, simplicity, accessibility, and transparency of its administrative procedures, including the issuing of permits. In Uzbekistan, most entrepreneurs must obtain a variety of permits The number of entrepreneurs who in the course of their activity. Along with the registration of a must obtain permits within the first legal entity (or individual entrepreneurs), permits are mandatory year of activity is growing. In 2002, for certain types of activity. (For instance, wholesale trade, apart it was 81%; in 2004 it was up to 97%. from company registration, requires a special permit to engage in this activity.) Permits are also required for certain actions (such as Obtaining permits is problematic for changing the category of a property from living quarters to non- more than one-third of enterprises. residential property.) Going through this procedure, they faced a shortage of information, THE NUMBER OF ENTREPRENEURS WHO MUST OBTAIN PERMITS a large number of required AFTER REGISTRATION IS GROWING documents, ambiguity in the requirements, long waits for permits One of the problems in the existing permit system is the growing to be issued, and the need to make percentage of enterprises that have to apply to state agencies to unofficial payments. obtain permits during the first year of their activity. In 2004, newly registered enterprises required an average of three permits. One-third of these new businesses had to obtain four permits or more. Permit requirements exist in practically all areas of entrepreneurial activity in Uzbekistan. STIMREP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Permits 41 Box 4.1 Examples of existing permits: in construction ­ a permit for construction of facilities; in trade ­ a permit to engage in wholesale and retail trade; in production ­ a permit to use certain materials and substances; in export ­ a permit to export fresh fruits and vegetables; in import ­ a permit to import high-frequency equipment and radio-electronic devices; in nature management ­ a permit to discharge wastewater; in investment ­ a permit to open accounts abroad; in advertising ­ a permit to put advertisements on mail; in customs clearance ­ a permit to place commodities under temporary import (export) administration. A preliminary analysis by the Ministry of Justice and IFC revealed the existence of approximately 130 types of permits in the country. This may be attributed to the following factors. Unrestricted introduction of permits The large number of permits is due to the unrestricted introduction of new permits by various state agencies, which in turn is due to the shortcomings in the legal framework regulating this area. Box 4.2 Resolution 236 of the Cabinet of Ministers, June 28, 2002,1 provided that activities not included in the List of Activities Requiring Licensing (approved by Resolution 222-II of the Oliy Majlis, May 12, 2001) are not subject to licensing. However, permits are not licenses and can be introduced without limitation. 1 Resolution 236 of the Cabinet of Ministers of the Republic of Uzbekistan, "On Measures for Implementing the Law of the Republic of Uzbekistan `On Licensing Certain Types of Activity," June 28.2002. 42 Permits 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises The main cause of this problem is most probably the lack of a standard regulatory definition of terms such as "permit," "permission certificate," and "approval" in the laws applicable to all types of permits. Box 4.3 In legal practice, a permit/approval is a document in the established format, or decision expressed in any other documentary form, granting the holder the right to perform a certain action or engage in a certain activity. Another cause of the uncontrolled introduction of permits by various agencies is the lack of an exhaustive list of them in the applicable legislation. As a result, a number of obsolete permits are still applicable in the country, necessitated by the conditions prevailing at the time. A permit to export fresh fruits and vegetables, introduced because of the need to meet national requirements for produce at a time when prices in the domestic and external markets differed significantly, is an example. There are also permits that substitute administrative regulation mechanisms for market- oriented ones. For instance, a permit for the use of natural gas by SMEs issued by Khokimiyats of Tashkent City, the regions, and the Council of Ministers of the Republic of Karakalpakstan is a method of regulating access to resources administratively, while a market-oriented mechanism would mean that the SME would buy the required amount of gas from a supplier at market prices. Some permits duplicate or substitute for the functions of other state regulation instruments, such as certification and licensing. For example, permits granting the right to engage in wholesale and retail trade substitute for a license for these activities, although legislation does not refer to trade as a type of activity requiring licensing. An example of duplication is the permit for advertising certain types of products. The only criterion for issuing the relevant permit is submission of the conformity certificate for the product. Non-compliance with legislated requirements at the regional level An important factor in the large number of permits is non-compliance with applicable legislation at the regional level. The fact that permits are issued under regulations that have become invalid provides an example. For instance, the Ministry of Health continues to issue sanitary permits to businesses, even though the regulations requiring that they be issued2 have been invalidated, superseded by the adoption of another document3 that does not contain that requirement. MORE THAN ONE-THIRD OF RESPONDENTS EXPERIENCED DIFFICULTIES IN OBTAINING PERMITS Thirty-seven percent of respondents who had to obtain permits in 2004 assessed the procedure as problematic (for more detail, see Statistical Results of the Survey and Annex 6). They identified the following difficulties most frequently: the large number of documents required, inaccessibility of information on the conditions for issuing the permit (the documents required, the processing time, costs, and so on), ambiguity in the requirements, and the long waiting time. 2 Regulations "On the Procedure for State Registration of Entrepreneurial Entities" (Annex 1 to Resolution 347 of the Cabinet of Ministers of the Republic of Uzbekistan, August 22, 2001). 3 Regulations "On the Procedure for State Registration of Entrepreneurial Entities and Permit Issuance" (Annex 1 to Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan, August 20, 2003). STIMREP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Permits 43 The requirement to submit a great number of documents and lack of information on the terms and conditions for granting permits forces entrepreneurs to resort to unofficial payments to obtain the documents they need. Of respondents who obtained permits in 2004, 25% admitted to making unofficial payments during the process. Considering the difficulties in this process, such as the long periods for reviewing applications and the large number of documents required, the need to make unofficial payments to obtain or speed up the issuance of a permit becomes obvious. The problem exists in all parts of the country. 44 Permits 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Shortcomings of the regulatory framework As already mentioned, the applicable legislation not only allows state agencies to introduce all kinds of permits without any control but also fails to regulate the procedure for issuing permits. Box 4.4 Legislation lacks the requirement to include regulations with respect to specific procedures for issuing permits. Therefore, entrepreneurs are unable to get a clear-cut and comprehensive idea of the phases in obtaining a particular permit, the agencies that issue it, the costs, the list of or requirements for documents to be submitted, etc. This leads to abuse of power by officials. An analysis of applicable legislation shows that the problems in this area stem from the following: the conditions for issuing permits are unclear due to the lack of specific mechanisms for the interaction between state agencies and entrepreneurs; the issuing of permits is regulated by a large number of documents; entrepreneurs have difficulty accessing intradepartmental regulations governing the issuance of any specific permit and officials are unwilling to familiarize entrepreneurs with these documents; regulations are contradictory. Box 4.5 An example of contradictory regulations is the regulations governing changing the category of a property from living quarters to non-residential property: Regulations "On the Procedure for Reclassifying Living Quarters as Non-Residential Property" (Annex 4 to Resolution 18 of the Cabinet of Ministers, January 20, 2000) and Regulations "On The Procedure for State Registration of Entrepreneurial Entities and Permit Issuance" (Annex 1 to Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan, August 20, 2003). According to the former, a decision must be made within 30 days, while the latter stipulates two days. Both documents are currently in force, and officials are free to apply the provisions of either. Some regulations governing permits do not contain any specific processing periods at all4. Clearly, the present administrative procedure for obtaining permits does not have a "To obtain this permit, I have to standardized and integrated regulatory framework, nor does it have standardized principles, submit 20 documents I've never rules, and mechanisms. This leads to the conclusion that a system for issuing permits is heard of, and wait for three effectively absent in Uzbekistan. months. It is easier for me to work without a permit, bypassing the Non-compliance with legislated requirements at the regional level law." The many problems involved in obtaining permits are also caused by the lack of strict Focus group participant compliance with laws and regulations at the regional level. For instance, the law specifies uniform processing periods country wide. However, the survey showed that the time required to obtain the same permits varied by region. This reveals a failure to comply with applicable legislation at the regional level. 4 For example, Regulations "On the Procedure for Registration and Engagement in Wholesale and Retail Trade" (Annex to Resolution 407 of the Cabinet of Ministers of the Republic of Uzbekistan, November 26, 2002). STIMREP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Permits 45 "When I was trying to obtain a registration certificate, I was insistently advised to obtain this permit. I was told I could not operate without it. I spent a whole week, as well as my nerves and money, on collecting the documents. I later learned that LOW LEVEL OF LEGAL AWARENESS OF ENTREPRENEURS this permit had been abolished The above-mentioned problems in the permit system are largely attributable to the low long ago. But I had no strength to appeal it, so I gave up." level of legal awareness among entrepreneurs. Often, they do not know their rights, are not familiar with the main documents regulating their activity, and therefore can not "I wanted to export tomatoes. appeal the actions of state agencies in an effective way. You know yourselves that it is rather delicate produce. Every minute matters. I was told at the SHORT-TERM RECOMMENDATIONS ON REFORMING THE PERMIT SYSTEM customs that I had to obtain a permit from the Khokimiyat. Since permits are obtained in the initial phase of entrepreneurial activity, the problems There, they demanded a large with the process have a negative impact primarily on the entrepreneur's desire to do number of documents from me business, and therefore, on business development in general. and told me to come a week later. I asked when I would get the permit, but was told they Box 4.6 could deny me one if I got on Resolution PP-24 of the President, March 10, 20055 (Annex 6, Section III, Para 1.2), provides for the their nerves. I waited for their following: decision for ten days and got a refusal. Later, knowledgeable taking stock of all existing permits; people told me that they were abolishing a number of permits; obliged to review my application simplifying permit procedures. within 24 hours. If I had known that earlier, my tomatoes prob- ably wouldn't have spoiled." Focus-group participants 5 Resolution PP-24 of the President of the Republic of Uzbekistan, "On the Program for Implementing the Objectives and Tasks of Democratizing and Renewing Society, and Reforming and Modernizing the Country," March 10, 2005. 46 Permits 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Work on improving the system for issuing permits should proceed in the following three directions: reducing the number of permits; establishing a legal system aimed at reforming the issuing of permit in accordance with the principles of a market-oriented economy; raising the level of legal awareness among entrepreneurs and public servants by publishing a series of explanatory materials and arranging workshops. Reduce the number of permits To reduce the number of enterprises that have to obtain permits, it is necessary to abolish the following existing permits: permits introduced to deal with a situation that no longer exists; permits that are a substitute for market-oriented mechanisms and principles; permits that duplicate the functions of other state regulation instruments (certification and licensing). Permit procedures restricting economic activity in some way should be introduced solely by acts of the country's parliament ­ the Oliy Majlis. This would reliably protect businesses from legislation prompted by the considerations of the moment and would ensure transparency in this area. This principle should also be applied to other administrative procedures. A number of permits have requirements that actually serve as property or other qualifications that restrict competition. Therefore, one of the principles in regulating the procedures for issuing permits should be that introducing permits that restrict competition or substitute for market-oriented mechanisms is not allowed. EXPECTED IMPACT Reduction in the number of permits will accomplish the following: create favorable conditions for equitable access to markets; abolish the practice of introducing restrictions on entrepreneurial activity through regulations; raise the level of legal awareness among entrepreneurs and public servants; reduce the number of administrative barriers to entrepreneurial activity; reduce the potential for corruption. Draft a law to regulate permit procedures and define public policy in this area Since the problems with issuing permits are system wide, they should be addressed in a comprehensive way. Drafting a law defining standard public policy in this area will be necessary to accomplish this. The law should include the following: a definition of "permit" and other related terms; principles of the system for issuing permits, including that new permits may be introduced solely by law, that priority is to be given to moving to "one window" applications, that the declaratory principle is to be introduced for obtaining permits, etc.; an exhaustive list of the actions and types of activity for which entrepreneurs need permits; the procedures for obtaining specific permits. STIMREP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Permits 47 This law would legalize the fundamental principles and provisions of the permit system and the procedure for issuing permits (time allowed for reviewing applications and issuing permits, a substantiated and exhaustive list of the documents to be submitted, the reasons why a permit may be denied, the procedure and conditions for appealing decisions, reinstatement, suspension, resumption, and invalidation of permits, the procedure for and amounts of fees, and the rights and obligations of the parties.) The aim of the proposed model for reforming the issuing of permits is to establish a system governed by law rather than regulations. EXPECTED IMPACT The establishment of a standardized and transparent regulatory framework addressing the procedures for issuing permits would accomplish the following: standardize permit issuing procedures, thus ending the practice of arbitrary rules, and thereby removing ambiguity from requirements and eliminating regional differences; reduce the number of documents required and shorten decision-making time, since a state agency would have to substantiate any new document requirement and justify the number of the days required for issuing a permit to the legislative body; resolve the problem of inaccessibility of information about the procedures for issuing any particular permit, since laws are public documents; reduce the potential for corruption; raise the level of legal awareness among entrepreneurs and public servants. One of the main objectives of the proposed system is to ensure transparency in the process of issuing permits. This will allow entrepreneurs to plan for the expense and will reduce the potential for unofficial payments. Moreover, including all of the requirements in one document will make it possible to govern the procedures for issuing permits through direct legislation. Setting out clear-cut mechanisms for issuing permits in one law will substantially increase the legal protections for businesses and significantly reduce instances of abuse of power. Monitor compliance with legislation at the regional level and make officials more accountable for fulfilling their duties To prevent abuse of the permit issuing procedure, compliance with legislation by officials at the regional level should be strictly monitored. In order to increase their accountability, clear-cut mechanisms for imposing penalties on officials for delays, unsubstantiated denial of permits, demands for additional documents, etc., should be developed and introduced. EXPECTED IMPACT The introduction of these measures would encourage the officials at permit granting agencies to develop a more responsible attitude to issuing permits and ease the process for SMEs. The possibility that officials will be held accountable would be an effective instrument, helping entrepreneurs to influence the process of obtaining permits and to exercise their rights. Raise the level of legal awareness of entrepreneurs and pubic servants Raising the level of legal awareness of entrepreneurs and public servants through arranging a series of workshops as well as through publication and distribution of explanatory materials and the like will make permit procedures less problematic. 48 Permits 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises EXPECTED IMPACT An information program would give entrepreneurs a clear idea of the procedures for issuing permits and make them aware of the legal requirements for obtaining them. They would be able to recognize inappropriate demands by local authorities, and this would serve as public control over the actions of officials and reduce the potential for abuse of power. Box 4.7 Resolution PP-186 of the President, passed in September 2005,6 discussed in the section "Overview of the Business Environment in Uzbekistan," introduced amendments to the licensing system and also provided for measures to further reform the procedures for issuing permits, as follows: it cancelled 12 duplicate and excessive permits, including the wholesale trade permit, the permit for decentralized export of fresh fruits and vegetables, and a permit for the use of natural gas by SMEs; it instructed the government to draft and submit to parliament a Law on Permit Procedures containing a list of the actions and types of activity for which permits are required as well as simplified and clear mechanisms for issuing them. LONG-TERM RECOMMENDATIONS The system of issuing permits in Uzbekistan should be reformed simultaneously with reforming registration, licensing, and certification procedures. It should stipulate regular revision of the list of permits lists and simplification of procedures for issuing permits to entrepreneurs. The next phase of the reform should be the introduction of the declaratory principle to applications for permits. Given that the country's Government is interested in improving the system of business registration by the introduction of the declaratory registration principle, it is recommended that the same principle be applied to permit procedures. This would be a logical progression toward establishing a favorable business environment. The declaratory principle in permit applications implies the following: entrepreneurs independently determine whether they meet the requirements and standards specified in legislation and assume responsibility for complying with them; entrepreneurs may perform a certain action/engage in a certain activity immediately after notifying the relevant state agencies; relevant state agencies monitor the entrepreneur's compliance with the requirements and standards defined in legislation. The "self-certification" principle for entrepreneurs is widely practiced, having been adopted in many countries. Applicants certify that all of the documents they submit and actions they will perform will comply with the law. Under this system, the state expresses a certain degree of trust in the entrepreneur and simply checks the reliability of the information given. Introducing this principle would require a sufficiently high level of legal awareness among entrepreneurs and an effective state control system. Another way of improving the permit-issuance system in Uzbekistan would be to adopt the principle that "silence is consent." It works in the following way: A public servant must review an entrepreneur's application and reply to it by a strictly defined deadline, or ask for some additional time to consider it. If the deadline passes without a reply, the entrepreneur has the right to perform the action or engage in the activity that was the subject of the application. 6Resolution PP-186 of the President of the Republic of Uzbekistan, "On Reducing the Types of and Simplifying the Procedure for Issuing Permits for Entrepreneurial Activity," September 21, 2005. STIMREP Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Permits 49 Legalization of the "silence is consent" principle is necessary to reduce the administrative obstacles arising from procrastination in replying to applications, prompted by self-interest or inadequate professional skills. In many cases, the "silence is consent" principle provides a guarantee of timely review of applications. Moreover, it would improve discipline among officials and increase their feeling of responsibility by shifting the burden of justifying actions from entrepreneurs to public servants. Experience in countries that have introduced this principle has shown its effectiveness in administrative regulation of entrepreneurial activity. Box 4.8 The "silence is consent" principle was legalized in Spain by the Law on Administrative Proce- dures (Article 42/1992) as one of the institutional principles in the administrative procedures of the country. Under this law, a state agency must reply to any application received within six months. If specific laws provide for shorter terms, they prevail. Periods exceeding six months are only allowed in exceptional cases and provided that they are stipulated by law or other EU acts. If a state agency fails to reply within the prescribed deadline, the applicant, under the "silence is consent" principle, is vested with all the rights required to perform the requested actions or to engage in the requested activity. In 1990, Italy passed the Law on Administrative Procedures (Law 241/90), aimed at simplifying ad- ministrative procedures, reducing the duration and number of direct contacts between the pri- vate sector and state agencies. One of the simplification measures was the introduction of the "silence is consent" principle (silenzio assenso). Under the law, a state agency has a deadline by which it must reply to an application. If no negative reply is given within 30 days, the applicant may perform the requested action or engage in the requested activity. To date, the Italian gov- ernment has applied the principle to 194 administrative procedures. To facilitate periodic revision of the documents regulating the issuing of permits, it is recommended that a "sunsetting" (derived from the term "sunset clause") rule be applied to them. Under this rule, a regulatory document ceases to be in force upon the expiration of a specified period (generally from five to ten years) unless the interested state agency proves the need to extend the date. This mechanism provides an opportunity for a regular review of departmental regulations for provisions that have become obsolete or unnecessary, conflict with other legislation, or have simply become unlawful. However, this would involve certain administrative costs, which should be taken into consideration when introducing sunsetting. In implementing sunsetting, a separate department is generally established which, within the framework of its competence, has the authority to issue binding instructions to other state agencies. Box 4.9 The National Competition and Intellectual Property Protection Institute in Peru (INDECOPI) has been granted the power to revise regulatory documents governing entrepreneurial activity on a regular basis and provide the country's government with recommendations on removing contradictory and outdated provisions, as well as provision that worsen conditions for doing business. Upon expiration of a 30-day period, the INDECOPI recommendations become binding, unless the government has substantiated the need to preserve those provisions. 50 Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises REGISTRATION The "one window" registration system was introduced in Uzbekistan MAIN beginning in the second half of 2001.1 In 2003, it was somewhat expanded to include the ability to simultaneously obtain some FINDINGS permits.2 (For more detail, please refer to the IFC 2002-2003 reports "Business Environment in Uzbekistan as Seen by Small and Medium Enterprises" and Annex 7.) Contrary to the applicable Box 5.1 legislation, most respondents have Peculiarities of registration for individual entrepreneurs to carry out some registration procedures themselves: 74% In Uzbekistan, registration for individual entrepreneurs is somewhat different from that for legal entities (see Annexes 8 and 9.) In 2004, obtained their taxpayer PINs registration for individual entrepreneurs took an average of 13 business themselves, 57% registered with the days. A 2001 survey indicated that, prior to 2001, this procedure took an Pension Fund, and 44% registered average of one month. with the Road Fund. In 2004, registering as an individual entrepreneur cost about 63,000 soums (approximately US $62; the same as registering as a legal entity) including unofficial payments. According to the survey, nearly one-third The registration processing time of respondents (30%) had to make such payments. Prior to 2002, 17% limits set by law are not met. In made such payments during registration. 2004, the process took 19 days. The regulatory standard was seven days. The survey showed a lack of significant improvement in this process during the period under review. Indicators such as the average time required for registration, the costs of the necessary procedures, the Entrepreneurs' registration expenses need for unofficial payments, and the complexity of the process, as are not getting lower. In 2004, the reported by respondents in 2004, were generally comparable to the average costs, including unofficial previous year. payments, continued at the 2003 level ­ 63,000 soums (approximately US $62). Although the "one window" registration system was introduced in 2001, more than 16% of newly registered legal entities registered by other means. 1 Resolution 347 of the Cabinet of Ministers of the Republic of Uzbekistan, "On Improving the System for Registering Entrepreneurial Entities," August 22, 2001. 2 Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan, "On Radically Improving the System of Registration Procedures in Establishing a Business," August 20, 2003. NOITARTSIGER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Registration 51 Box 5.2 Why is it necessary to make the registration process easier?3 There are opposing views on the need for strict state regulation of the entry of enterprises into the market and the impact of such regulation on the business environment. However, World Bank professionals, in collaboration with Harvard University, conducted a comparative econometric study of the impact of the rules regulating the establishment of companies in 85 countries. The data did not show that stricter regulation barring "one day" firms from entry into the market raised the quality of the goods produced and services provided, improved the environmental or epidemiological situation, or intensified competition. At the same time (controlling for other factors), more stringent regulation of the process of establishing companies was associated with a higher level of corruption in the country as well as with an increase in the unofficial sector as a percentage of the economy. CONTRARY TO THE APPLICABLE LEGISLATION, MOST RESPONDENTS HAVE TO CARRY OUT REGISTRATION PROCEDURES THEMSELVES The survey showed that many entrepreneurs had to carry out some registrations procedures themselves, even though these procedures were the mandated responsibility of the registration authority. Most frequently, respondents had to obtain their taxpayer PINs from tax agencies and register with the pension and road funds themselves. According to the applicable provision,4 this responsibility lies with tax agencies after they receive the data on the enterprise to be registered from the registration authority. 3 Djankov, Simeon, Rafael la Porta, Florencio Lopez de Silanes, and Andrei Shleifer. 2001. Regulation of entry. (http://rru.worldbank.org/ Documents/PapersLinks/551.pdf). 4 Regulations on the Procedure for State registration and Permit issuance for businesses (Annex 1 to Resolution 357 of the Cabinet of Ministers, August 20, 2003). 52 Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises The situation can be attributed to several factors: Lack of an effective mechanism for collaboration between state agencies The registration procedure has not changed since 2003. Therefore, it was expected that, in the period under review, the registration system would settle, and the procedures for SMEs seeking registration and applying to authorized agencies for permits would be finalized in practice. However, the survey results and the focus group study showed that substantial problems remained in the relationships among registration authorities (regional and municipal registration offices and Ministry of Justice departments) and other state agencies (statistical agencies, the Ministry of Internal Affairs, tax inspectorates, territorial departments of the extra-budgetary Pension and Road funds, municipal departments of labor, employment and social security, etc.) involved in registration and the issuing of permits. These problems stem from the lack of a mechanism for coordinating the work of state agencies in registration and issuing permits by specifying the duties and responsibilities of their officials. Focus group participants reported that officials in registration agencies often suggested "Each Khokimiyat has its own that they deliver their documents to the other agencies themselves, saying that registration rules, applicable in its district. would otherwise take much longer. Entrepreneurs preferred to carry out some procedures There are districts where themselves in order to speed up registration and save time. there are no problems with registration." Non-compliance with legislation at the regional level Focus group participant In some regions (Syrdarya Region, for example) nearly all of the newly established enterprises had to deal with the tax agencies themselves. This indicates systematic violations of the established "one window" procedure for state registration of businesses. "It cannot be called the "one window" procedure. After registering at the Khokimiyat, I have to go to the tax inspectorate at the place of registration and declare, in writing, "Yes, I've been registered, I exist, and I'm starting my activity." Focus group participant 5The number of enterprises registered in other regions is not statistically significant for comparison purposes. NOITARTSIGER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Registration 53 Among the difficulties encountered in the course of registrations, the problems most often mentioned by respondents were lack of scruples on the part of officials and ambiguity in what is required of entrepreneurs. These problems were cited by 38% and 39% of respondents respectively. Inaccessibility/incomprehensibility of information to/by entrepreneurs Two out of five respondents who registered in 2004 pointed to the difficulties involved in this procedure. Two-thirds of the newly registered enterprises had problems obtaining full and reliable information from registration authorities on the terms and conditions of registration, such as the documents required, processing time, costs, etc. REGISTRATION PROCESSING TIME LIMITS ARE NOT MET Legislation stipulates specific processing time limits for state registration of businesses and for issuing permits; from seven business days to one month, depending on the complexity and the degree of administrative work involved in issuing engineering specifications and other permits. Processing state registration, without permits, may not exceed seven days. In practice, the registration procedure for SMEs in 2004 took an average of 19 business days; the same as in the previous year.6 Respondents considered the actual registration processing times excessive, citing is among the three main problems involved in registration. As in the past, regional differences exist in the average registration processing time, ranging from 11 business days in Bukhara Region to 29 business days in Tashkent Region. 6 The 2003 data applied to the whole period. From October 1 through December 31, 2003 (i.e. after modernization of the registration system,) the average registration period was 16 business days. 7 For comparison purposes, the number of enterprises registered in the other regions is not statistically significant. 54 Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises This failure to meet registration processing time limits is attributable to several factors: Lack of an effective mechanism for collaboration between state agencies "The main agency (in our case, Problems with collaboration between state agencies involved in the registration process the Ministry of Justice) completes force entrepreneurs to formalize some documents themselves because inspectorates (or the the registration within seven Ministry of Justice) substantially prolong the registration processing time. This is the result days. But this period is insufficient for it to have us registered with of the lack of a mechanism for collaboration between officials working in the various the other agencies, such as the agencies responsible for registration. tax inspectorate and statistical and other agencies. So, after Lack of an effective mechanism for imposing sanctions on officials for delays seven days it [the Ministry] passes and unjustified denial of registration the documents on to the other No matter how good the system of collaboration between state agencies involved in agencies, which take another week and a half to register us." registration, it will be ineffective without specific penalties applicable to officials for failure to meet the established time limits or for unjustifiably denying registration. The currently Focus group participant applicable provisions regulating the registration process8 do not stipulate a mechanism for imposing penalties on the employees of inspectorates or any other agency for failure to perform their duties as required with respect to businesses registration, thus permitting officials to violate the established procedure with impunity. Non-compliance with legislation at the regional level One of the reasons for the long registration processing period is non-compliance with legislation at the regional level. Lack of appropriate monitoring of compliance by officials with the established rules leaves them free to procrastinate in processing registrations. Most respondents had to carry out a number of associated procedures themselves, and the survey also showed that 16% (more than half of whom were in the agriculture sector) of respondents registered after October 2003 did not use the "one window" system. Cases where SMEs registered under invalid provisions were reported in nearly all parts of the country. REGISTRATION COSTS ARE NOT GETTING LOWER Based on the survey results, in 2004 the average costs related to registration, including unofficial payments, remained at the level of the previous year, amounting to 63,000 soums or approximately US $62. (In 2003, it was 62,000 soums, or approximately US $64.) The percentage of respondents who considered registration costs burdensome and excessively high decreased insignificantly. In 2004, one-third of respondents held that opinion. This change can be explained by inflation and another rise in the minimum wage as of August 2004. 8Regulations "On State Registration Procedure and Permit Issuance for Entrepreneurial Entities" (Annex 1 to Resolution 357 of the Cabinet of Ministers, August 20, 2003). NOITARTSIGER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Registration 55 The cost of registration in some regions differed substantially from the country's average. They varied from 37,000 soums (approximately US $36) in Andijan Region to 136,000 soums (US $133) in Tashkent City. "People in our district are not Registration costs were significantly different from region to region as well, even though very well-to-do, so if you give a official registration fees were the same throughout the country. The differences can be Khokimiyat official some 20,000- explained in part by the fact that some respondents used the services of various consulting 30,000 soums,11 he will draft a charter for you himself, and will companies, often for "turnkey" registration, for a specific fee. However, there are a number do it in such a way that no one of other subjective factors preventing a reduction in registration costs. will be able to find fault with it. But in Tashkent City, I've been The need to make unofficial payments told that one needs to pay at The survey results showed that the need to make unofficial payments persists: 20% of least 100,000 soums." respondents registering in 2004 pointed out the need to do so (25% in 2003.) In some Focus group participant regions, more than half of respondents had to resort to unofficial payments. 9 For comparison purposes, the number of enterprises registered in the other regions is not statistically significant. 10 The 2004 average soum to US dollar exchange rate set by the CBU was 1,020. 11 The 2004 average soum to US dollar exchange rate set by the CBU was 1,020. 12 For comparison purposes, the number of enterprises registered in the other regions is not statistically significant. 56 Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises The need to contacting officials in various agencies As mentioned above, the poor functioning of the "one window" registration system forced entrepreneurs to carry out some procedures associated with registration themselves, thus coming into contact with the officials in various agencies. This results in additional transportation costs for entrepreneurs and in higher incidence of unofficial payments. Focus group participants believed that unofficial payments had to be made to speed up the review of their documents. Entrepreneurs often preferred to pay above the official fees to avoid delay in obtaining various permits. LOW LEVEL OF LEGAL AWARENESS OF ENTREPRENEURS In addition to the difficulties mentioned above, some problems in the registration system stem largely from the low level of legal awareness with respect to regulation of their activity among entrepreneurs. While large companies can hire a lawyer to prepare the documents required and assist with registration, SMEs with limited resources usually do it themselves. Without knowledge of the regulations governing the registration process, they cannot insist that officials discharge their mandated duties and have to complete registration procedures themselves that should be performed by registration inspectorates and the Ministry of Justice. In the opinion of focus group participants, registration time limits are exceeded for the same reason. First, entrepreneurs often fail to prepare the required package of documents correctly, and officials of registration authorities return them for completion. Second, even if they prepare all the documents correctly, entrepreneurs cannot insist that officials comply with regulations if they are not aware of their rights.13 Moreover, entrepreneurs often have to pay either officials or consultants to prepare the package of documents required and to assist them in going through all of the procedures. This substantially increases registration costs for entrepreneurs. Box 5.3 Difficulties facing agricultural enterprises Within the framework of the program of accelerated development of the agriculture sector in Uzbekistan, the decision was made to transform the unprofitable and obsolete agricultural cooperatives (shirkats) into private farms. Owing to the nature of the business, agricultural enterprises face a number of problems unique to that sector. The main difficulties for farmers are acquiring the necessary machinery, obtaining a plot of land, and getting access to fuel and lubricants, fertilizers, and a water supply (see Statistical Results of the Survey). These difficulties are encountered by both the newly established private farms and those based on former agricultural cooperatives (shirkats). In addition, the latter also face the problem of debts inherited from the shirkats. SHORT-TERM RECOMMENDATIONS TO ADDRESS THE PROBLEMS RELATED TO REGISTRATION Establishing a business, even under the most favorable conditions, requires a good deal of determination from entrepreneurs. The state must support their efforts in every possible way. Many problems can be resolved by simply ensuring compliance with the applicable regulations, developing a more effective mechanism for collaboration among various state agencies within the framework of implementing the established procedures, and introducing a system of accountability for officials who fail to comply with registration 13 Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan dated August 20, 2003 has established only the general period from the date of application to the date of state registration including issuance of permits ranging from 7 business days to one month. Only based on an analysis of the procedure of document formalization partially described in the Annex it can be concluded that in the event of the state registration of a business without any permit issuance the procedure may not exceed seven (7) days. NOITARTSIGER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Registration 57 regulations. Some measures will involve additional expense; for Box 5.4 instance, the preparation and distribution of information materials on the registration procedure and the arrangement of large-scale In 2004, 51,728 new SMEs were registered. Based on the survey results, their average sales were 3 workshops and training events addressing this problem. However, million soums (approximately US $3,000) per month, if the government wants to improve the situation in this area and the average profit for the newly established dramatically, it should establish an entirely new mechanism of enterprises was 20.6%. Calculations based on these figures show that accelerating the business start-up registration using the declaratory principle, with the possibility of process by just one day could increase the volume moving to on-line registration in the future. of sales in this sector by 1.4 billion soums per year (approximately US $1.4 million.) These recommendations are dealt with in more detail below. Developing a mechanism for collaboration between state Box 5.5 agencies The "silence is consent" principle has been To address the problem of the lack of collaboration between applicable to business registration in Georgia15 various state agencies in the course of the registration process, it since 1995. Under the Law on Entrepreneurs, all legal entities must be registered by a court of is necessary to formulate and introduce clear and understandable law. To complete this process, entrepreneurs must requirements for the performance of the registration functions by notarize foundation documents, apply to the court, these agencies. These requirements would regulate the procedures provide documentary evidence of contribution to the authorized fund (a bank document if the and the time limits for document circulation, the rights and contribution was made in the form of money, or an responsibilities of the parties, and accountability for non- auditor's appraisal if the contribution was property,) compliance with the legislation regulating the registration process. pay the registration fee, and submit documents to the court. The court issues a state registration EXPECTED IMPACT certificate to the entrepreneur. If the court does not notify the entrepreneur of the registration or These measures would increase the accountability of all denial of it within the time limit specified by law, the legal entity is considered registered. In that case, agencies involved in registration with respect to compliance the court is obliged to issue a registration certificate with established procedures because their respective upon request. The review period before the responsibilities would be clearly defined. This would registration authority must make a decision on the registration was reduced from 15 days in 1997 to eventually end the practice of unjustified extension of five days in 2003. As a result, the World Bank Project registration processing time limits, standardize procedures "Doing Business in 2005"16 included Georgia on across all the regions, and substantially reduce costs and time the list of countries with the least time consuming process for starting a business. spent for entrepreneurs in the initial phases of their starting a business. After state registration, an enterprise must register with a tax agency, where it is assigned an Introduce the declarative principle for registration identification number. The 2004 IFC survey17 showed that 75% of entrepreneurs did this within one The problems caused by not meeting registration processing time business day. Ninety percent of SME representatives limits and red tape could be resolved by the introduction of the in Georgia said that there was no need to make unofficial payments in the course of registration. "silence is consent" principle. This means that an enterprise is Moreover, most focus group participants agreed automatically considered registered if the registration agency that, if they had prepared all the documents does not respond with a justified denial of registration within the required by the tax agencies correctly, there would have been no need for unofficial payments in that prescribed time limit. phase of registration at all. EXPECTED IMPACT The introduction of the declarative principle would reduce the potential for abuse of power by officials because their contacts with entrepreneurs would be reduced to a minimum. Businesses would be able to register in a timely fashion, which would lead to an increase in the number of new businesses. In addition, expenses for entrepreneurs would be reduced, competition would intensify with the entry of more new businesses into the 15IFC. Business environment in Georgia, as seen by small and market, and the number of jobs would increase. medium enterprises 2004. 16Doing Business in 2005: Removing Obstacles to Growth. 2005. A copublication of the World Bank, the International Finance Corporation and Oxford University Press. 14For more details about the declarative principle and the `silence is consent' principle, please 17IFC. Business environment in Georgia, as seen by small and refer to the "Permits" chapter. medium enterprises 2004. 58 Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Box 5.6 Monitor compliance with legislation at the regional level Addressing a joint session of both chambers of the and apply penalties for officials not performing their Oliy Majlis in January 2005,18 President I.A. Karimov duties of Uzbekistan announced a phased introduction of the declaratory principle of SME registration as one To prevent non-compliance with established registration of the priority measures aimed at promoting SME procedures, stringent control at the regional level is required. development. Simultaneously, clear mechanisms should be developed and Resolution PP-24 of the President "On the Program introduced for imposing penalties on officials for exceeding for Implementing the Objectives and Tasks registration processing time limits, non-compliance with the of Democratizing and Renewing Society and Reforming and Modernizing the Country," March "one-window" registration procedure, unjustified denial of 10, 2005, and Decree UP-3618 of the President "On registration, and similar actions/omissions. Measures for Accelerating the Implementation of Priority Directions in Intensifying Economic Reforms EXPECTED IMPACT and Further Liberalizing the Economy," June 14, 2005, provide for drafting a regulatory document, These measures will increase the accountability of within the first quarter of 2006, regulating, among other things, the declaratory principle of SME the officials of the agencies responsible for business registration. registration and significantly ease the process for entrepreneurs. The prospect that officials will be held accountable for dereliction of duty would be an effective Box 5.7 instrument to helping entrepreneurs to influence the The World Bank Project "Doing Business in 2005"19 registration procedure and to exercise their rights. identified Canada as the country with the simplest and fastest procedures for establishing companies. Registration may be carried out in Undertake a wide-scale information campaign and person, by mail, by fax, and via the Internet. At facilitate access to information present, approximately 80% of all new companies It is recommended that ongoing efforts be made to familiarize in Canada are registered through the on-line document processing center20. both entrepreneurs and officials with legislation applicable to them. Open access to this information should be ensured The registration procedure in Canada includes the following phases, each of which can be completed making information materials available at registration on the Internet21: inspectorates and departments of the Chamber of Trade confirming the company name using the and Industry, and publishing them in the mass media. These electronic database on existing companies, materials should be as accessible and easy to understand which takes up to one business day; as possible in order to eliminate the need for the services of submitting documents to the registration agency. consulting firms and lawyers during registration. Two forms are submitted with the application (one for the company charter and the other EXPECTED IMPACT for information on the company's office and directors) along with confirmation of the A program of disseminating information aimed at raising company name. Notarization of the foundation documents is not required. (But an entrepreneur the level of legal awareness of entrepreneurs and officials is liable under the law for submitting unreliable would allow entrepreneurs to monitor compliance by information.) This phase takes one business day state agencies with established procedures and establish a to complete and can be done at the same time as the first phase. The registration certificate is measure of public control over the appropriateness of the issued by e-mail. At this point, a 9-digit number is actions of officials. In turn, this would reduce the potential assigned to the company; for abuse of power. registration with tax agencies (2 days); registration with labor and social insurance LONG-TERM RECOMMENDATIONS agencies (carried out immediately.) Subsequent steps in reforming the business registration process should be aimed at a further reduction in the time and costs involved in registration and maximize the simplification of all 18 Karimov, I.A. Our Main Objective Is to Democratize and Renew phases of registration process. Society, and Reform and Modernize the Country. Report at the joint session of the Legislative Chamber and the Senate of the Oliy Majlis, January 28, 2005. One way to streamline the process should be the development 19 Doing Business in 2005: Removing Obstacles to Growth. 2005. and introduction of registration via the Internet (the current A copublication of the World Bank, the International Finance Corporation and Oxford University Press. procedure stipulates the option of submitting documents in 20 de Sa, Liliana, Business Registration Start-up: a Concept Note person or by mail.) This would require the use of electronic (draft). IFC and the World Bank, September 28, 2005. 21 Ibid. NOITARTSIGER Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Registration 59 signatures. The relevant legal framework already exists in Box 5.7 (continue) Uzbekistan for regulating electronic document circulation and the use of digital signatures23 and should be used to promote the The option of Internet registration was introduced in Denmark22 in September 2001. Prior to that, an introduction of on-line registration. entrepreneur could submit the required documents to a registration agency personally or by mail, e- The ability to choose the method for submitting documents to mail, or fax. Now, an entrepreneur (or an agent the registration agency would allow entrepreneurs to use their acting on his behalf) can fill out a registration application and submit all the required documents working time more effectively. In addition, on-line registration via the Internet. Their authenticity is confirmed by would minimize the number of contacts between entrepreneurs an electronic signature. and state agencies, which would reduce substantially the potential This method allows a more flexible registration for abuse of power and corruption. schedule, which speeds it up considerably. In Denmark, it is now possible to register a company Experience in countries that have introduced on-line registration within a few hours ­ not days as in the past. shows that it is effective. A major expense in starting a business, and therefore a constraint Box 5.8 on the establishment of new businesses, is the minimum authorized capital requirement. Authorized capital amounts in Uzbekistan: Limited or additional liability company ­ the According to international practices, the requirement for minimum authorized capital is 50 times the minimum authorized capital is primarily explained by the need minimum wage as established by legislation on the date document are submitted for the company's to protect the interests of the company's creditors and investors. state registration (as of January 1, 2005, 326,000 However, the amount of the minimum capital often does not soums or US $310.) cover the company's liabilities. Moreover, the contribution can Closed joint-stock company ­ the minimum be made in a form other than money and can be withdrawn after authorized capital is 200 times the minimum wage registration. as established by legislation on the date of the company's state registration (as of January 1, 2005, The need in minimum authorized capital requirements for 1.3 million soums or US $1,200.) banks, exchanges, or insurance companies, is beyond doubt. Open joint-stock company ­ the minimum However, it is necessary to examine whether the existence of such authorized capital is US $50,000 at the Central Bank exchange rate. requirements for other businesses is expedient and corresponds to the declared objectives. Markets ­ the minimum authorized capital is 500 times the minimum wage established by legislation on the date of the market's state registration (as of January 1, 2005, 3.3 million soums or US $3,000.) Box 5.9 Minimum authorized capital requirements are generally introduced in order to ensure liquidity at the level required to minimize the risk of business failure. However, surveys have not revealed any correlation between the amount of capital requirement and the number of business failures.24 Therefore, the governments in many countries have concluded that these requirements are only a barrier to business development, and have taken steps to reduce or abolishing them. For instance, in Australia, Botswana, Vietnam, Canada, Nepal, the USA, Thailand, Uganda, France and other countries, there are no requirements for a minimum amount of limited liability capital.25 23 Law of the Republic of Uzbekistan, "On Electronic Digital Signature," December 11, 2003; Law of the Republic of Uzbekistan, "On Electronic Document Circulation," April 29, 2004. 22 24 European Commission Enterprise Directorate. 2002. (Final de Sa, Liliana, Business Registration Start-up: a Concept Note (draft). IFC and the World Bank, Report) Benchmarking the Administration of Business Start-ups. September 28, 2005. (http://europa.eu.int/comm/enterprise/entrepreneurship/ 25 Doing Business in 2005: Removing Obstacles to Growth. 2005. A copublication of the World support_measures/start-ups/bench_admin_business_start-up_ Bank, the International Finance Corporation and Oxford University Press. final_2002.pdf). 60 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises TAXES AND TAX ADMINISTRATION The state needs funds to implement its social and economic MAIN programs, including those aimed at improving the business environment in the country. They are mostly implemented from FINDINGS budgetary funds collected in the form of taxes and other mandatory payments. These taxes and payments, in turn, impose a burden on entrepreneurs and, along with administrative constraints, reduce their incentives and opportunities for further investing in their businesses In 2004, the average tax burden in and creating jobs. One of the main tasks of the Uzbek Government Uzbekistan was 20% of sales. is to ensure balance between the interests of the state and businesses by establishing an effective, equitable, and sustainable taxation Tax legislation is complicated. The system. problems most respondents faced The survey showed that taxation causes difficulties for most included the large number of taxes entrepreneurs and addressing issues related to it was one of the and fees, contradictory regulations, most difficult aspects of their activity. Three out of five respondents the instability of the taxation system, described the taxation process as "rather problematic" and "very the large number of regulatory problematic." IFC surveys have shown that the taxation process is documents, and the complexity of becoming more problematic year over year. regulations. THE TAX BURDEN IS HEAVY In 2004, the tax burden on SMEs was an average of 20% of revenue, which respondents considered excessive. Focus group participants felt that the existing tax burden had a negative impact on their ability to invest in their businesses. In the opinion of respondents, the optimum tax rate for Uzbekistan would be 10% of sales, or half the current rate (see Statistical Results of the Survey.) NOITARTSINIMDA A heavy tax burden not only hampers business development but also forces entrepreneurs into the "shadow" sector of the economy in XAT order to remain competitive. DNA SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 2004 Taxes and Tax Administration 61 61 "Today, taxes are so high that if The survey revealed the following factors in the heavy tax burden: you pay them honestly, you get pushed out of the market." High tax rates Focus group participant Despite the trend toward reducing taxes, tax rates are still high. In construction and some other sectors where SMEs paid the unified tax, the 2004 rate was 13% of sales.1 Box 6.1 In Russia, for example, for SMEs paying taxes under the simplified taxation system, the unified tax rate was 6% of revenue or 15% of revenue less expenses.2 The entrepreneur has a choice of tax system. Businesses using the simplified taxation system do not pay the value-added tax (VAT), with the exception of the VAT on goods imported into the customs territory of the Russian Federation.3 For businesses taxed under the general taxation system, the 2004 tax on profit was reduced from 20%4 to 18%.5 However, not all of their expenses were deductible. SMEs also paid additional tax at the rate of 8% of net profit for territory improvement and development of social infrastructure.6 All businesses, regardless of the taxation system chosen, were also required to contribute a percentage of revenue to targeted funds; namely, 0.7% to the pension fund and from 1% to 2.5% (depending on the type of business) to the road fund.7 Starting in January 2005, these contributions were increased by the requirement to pay 1% of sales to the education fund.8 Box 6.2 Impact of the tax burden on foreign direct investment (FDI) An analysis of the results of 25 surveys regarding the impact of the tax level on foreign direct investment (mostly data on FDI in the USA or made by American firms) showed that a tax rate increase of approximately one percentage point reduced FDI by approximately 3.3%.9 1 Resolution 567 of the Cabinet of Ministers of the Republic of Uzbekistan, December 25, 2003. 2 Article 346.20 of the Tax Code of the Russian Federation. 3 Article 346.11 of the Tax Code of the Russian Federation. 4 Resolution 455 of the Cabinet of Ministers of the Republic of Uzbekistan, December 30, 2002. 5 Resolution 567 of the Cabinet of Ministers of the Republic of Uzbekistan, December 25, 2003. 6 ibid. 7 ibid. 8 Decree UP-3431 of the President of the Republic of Uzbekistan, May 21, 2004. 9 World Bank. 2004. World Development Report 2005: a Better Investment Climate for Everyone. 62 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises High tax costs of investment Entrepreneurs consider several factors in deciding whether to invest in business development. The existing and projected taxation conditions are the decisive factor. The results of four annual surveys on the business environment in Uzbekistan showed that the percentage of respondents making capital investments was diminishing year over year. In 2001, one in two respondents made such investments; in 2004, only one in five did so. "In my opinion, an effective taxation system should be based on the following proportions: One third of the profit goes to the state in the form of taxes and fees, one third is retained in the business for further development and investment, and the remaining third is the owner's profit. In this country, the state takes practically everything, and after taxes and various mandatory fees are paid, there is nothing left for business development." Focus group participant In Uzbekistan, there are legal limits on the deduction of investment expenses from the basis for calculating tax on profit. Interest expenses on credit extended for a period of over 12 months and deductions made according to accelerated depreciation rates are subject to taxation.10 A company obtaining credit to invest in its business not only pays interest on the debt, but also pays profit tax on the expenses involved. Box 6.3 Legislation restrains the renewal of fixed assets in Uzbekistan The Tax Code sets the depreciation periods for equipment at 5 to 20 years, depending on the type. For instance, the schedule allows businesses to depreciate no more than 20% of the cost of computers and computer technology annually, which implies their replacement every five years.11 However, because of the rapid progress in technology and the universal use of information technologies, innovations are introduced every six months. In industrialized countries, companies replace such equipment almost annually so as not to lag behind their competitors. Accelerated depreciation is available in Uzbekistan, but if applied, all deductions above the percentages set by the Tax Code are subject to profit tax. If equipment is purchased through credit from a bank, the profit tax will also apply to the interest. So, it can be said that by discouraging businesses from opting for accelerated depreciation of their equipment, the current legislation restricts the introduction of new technologies. As well, companies in Uzbekistan do not receive input credits on the 20% VAT paid on fixed assets (premises, equipment, etc.) This increases the costs to the businesses, which they depreciate over a term that depends on the type of asset ­ from five years (for cars or computers) to 20 years (for buildings or infrastructure.) NOITARTSINIMDA XAT DNA 10 Regulations "On the Structure of Costs in the Production and Sale of Products (work, services) and the Procedure for Calculating Financial Results," approved by Resolution 54 of the Cabinet of Ministers of the Republic of Uzbekistan, February 5, 1999. 11 Article 23 of the Tax Code of the Republic of Uzbekistan. SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Taxes and Tax Administration 63 High social security contributions and a progressive Box 6.4 income tax schedule Flaws in legislation impede modernization of Mandatory social security fees, which have the same status as businesses in Uzbekistan taxes, put a substantial burden on SMEs.12 In addition to paying In Uzbekistan, imported manufacturing equipment personal income tax based on a progressive tax rate schedule, is exempt from the value-added tax. This privilege employees pay contributions to the pension fund and dues to the does not apply to equipment imported for Trade Union Federation Council. subsequent resale in the domestic market. Small companies without sufficient resources to buy equipment abroad buy through intermediaries The result of the progressive personal income tax rate schedule operating in the domestic market who specialize in and the high rates of contributions to funds aimed at improving importing equipment. social security is that neither employers nor employees are To start production, many SMEs purchase interested in formalizing the labor relationship. This restricts second-hand equipment in the domestic wage and salary increases as well as growth in the number of market. Unsophisticated equipment they usually order from local manufacturers. In establishing jobs, expands the shadow economy, deprives the public budget production, they spend large amounts of money of revenue, and leaves employees vulnerable. According to focus on the construction of production premises by local group participants, a substantial number of SMEs address this companies. issue by paying wages and salaries unofficially. In those cases, Entrepreneurs pay 20% VAT in acquiring fixed both the companies and the employees are breaking the law. High assets (equipment and production and auxiliary payroll deductions and personal income tax make it customary to premises.) If they buy imported equipment through an intermediary company, they first have do so. to pay the customs duty on which the VAT will be calculated. The business receives credit for the "Look at the salary of company employees... Even the salary of directors VAT paid on raw materials and consumables in the is only 30,000-40,000 soums!13 Everyone knows very well that this figure is course of one production cycle, on manufacturing for the tax inspectorate, and most of the salary is paid with envelopes equipment (through depreciation) in equal portions over 13 years, and on production premises over 20 of cash. Where do we take this cash from? We have to make some years. This is stipulated by the following clause in the payments bypassing the settlement account in order to find the money. Tax Code: "The tax on fixed assets acquired and And this is going on everywhere." intangible assets used in the business is not subject Focus group participant to input credit."15 By contrast, the tax codes of most countries (including the USA, Germany, Russia, Kazakhstan, etc.) allow input credits for capital Box 6.6 purchases. What harm does the shadow sector do? Subsequent sale of imported equipment is also problematic. If a company sells equipment in order Companies that conceal some of their transactions pay lower to buy new equipment, even after a significant taxes, thereby shifting the tax burden onto the taxpayers who period, it will have to pay VAT, customs duties operate legally. But operating in the shadow sector is also harmful based on the initial (contract) value, plus the for the businesses themselves. Companies operating within the law penalty accrued since the date it was imported do not have to expend resources to conceal their activities, and into the territory of Uzbekistan. (For more detail, therefore can develop and achieve optimum growth. This premise is please refer to the 2001­2003 IFC reports "Business supported by the World Bank project "Doing Business in 2005,"14 which Environment in Uzbekistan as Seen by Small and found that, "on average, in the ten developing countries sampled, Medium Enterprises.") the output of shadow enterprises was 40% less than that of legal businesses operating in the same economic sectors." In addition, enterprises operating in the shadow sector have limited Box 6.5 ability to attract external funding. Companies that understate their profit to avoid tax are also deprived of other opportunities ­ low In Russia, income tax is payable at a proportional financial indicators do not permit them to secure bank credit or use (flat) tax of 13%. In addition, the social tax is the services of leasing companies. levied according to a regressive schedule. Under this schedule, tax is payable at a reduced rate on salaries exceeding a specified amount. The maximum rate is 26% (20% for agricultural enterprises.)16 12 In 2004, businesses paid a consolidated social security contribution of 33% of payroll. Effective January 1, 2005, this was reduced to 31%. Revenue from the consolidated social security con- tribution is distributed among the extra-budgetary pension fund, the State Employment Fund, and the Trade Unions Federation Council. In addition, businesses contributed a percentage of sales to the pension fund. 13 In 2004, the average US dollar exchange rate set by the CBU was 1,020 soums. 15 14 Doing Business in 2005: Removing Obstacles to Growth. 2005. A copublication of the World Article 75 of the Tax Code of the Republic of Uzbekistan. Bank, the International Finance Corporation and Oxford University Press. 16Article 241 of the Tax Code of the Russian Federation. 64 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Box 6.7 Some business expenses are included in the basis for Tax treatment of expenses restricts the calculating profit tax development of private enterprise The current limitations19 on deducting some expenses from the The prevailing tax treatment of a number of basis for calculating tax on profit effectively results in taxation of expenses not only creates additional difficulties expenses. For example, companies cannot deduct interest paid in the basis for calculating profit tax, it also substantially reduces opportunities to enter the on credit extended for a period of more than 12 months or on market ­ especially taking into account that the short-term credit in excess of the discount rates set by the Central standards have not changed since the planned Bank, and they pay tax on accelerated depreciation rates. economy era, when state enterprises did not need to spend significant funds on promoting their A similar situation exists with respect to expenses involved in goods and the government wanted to limit these expenses. entering new markets and maintaining or expanding positions in those already developed. The tax legislation in Uzbekistan For instance, in Uzbekistan the annual deductible advertising expense is only 2% of annual gross specifies expense rates for market research and for travel and income for trade, procurement, and supply-and- hospitality expenses. All expenses exceeding these rates are subject sales enterprises and annual revenue from the sales to profit tax. (work, services) including VAT for other sectors,17 even though companies have to spend the greater part of their income on entering new markets Double taxation, "tax on tax," and taxation of sales (especially markets in industrialized countries.) A fundamental taxation principle is the one-time taxation of any taxable item. Uzbekistan is not currently adhering to that Box 6.8 principle. For example, sales revenue is the basis not only for the In Uzbekistan, companies that utilize more unified tax payable (in the case of the simplified taxation system) resources pay more for environmental pollution but also for mandatory payments to the pension fund, road fund, than those that actually pollute the environment. and education fund. The ecology tax applicable in the country is unique in its taxable basis. It is small (1%), but it is Another example is the territory improvement and infrastructure levied on production costs. That is, the tax is based development tax. It is levied on profit, net of all taxes (including not on excessive water or air pollution but on all the profit tax.) operating costs (raw materials, remuneration, etc.) and periodic expenses, with the exception of As well, the VAT on imports is calculated on a basis including the mandatory payments to the budget, taxes, fees, and contributions to social funds.18 Thus, the tax is customs value, the excise tax, and customs duties.20 This "tax on levied on the company's expenses rather than its tax" is a heavy burden on the importer (see Annex 10.) The same income. The more resource-intensive the business, applies to goods subject to excise tax produced in Uzbekistan. the higher the payments. In addition to income taxes, a number of compulsory fees are levied based on the volume of sales. Thus, if an enterprise has a low profit margin, it is overtaxed even though the percentage of the tax seems small. Thus, even though the rates of taxes and other mandatory payments are low and comparable with neighboring countries, because they are levied on the same taxable basis, and expenses, excise taxes and customs duties are included in the taxable basis, the tax burden is actually a heavy load hampering business development in Uzbekistan. NOITARTSINIMDA XAT 19 DNA 17 Regulations "On the Structure of Costs in the Production and Sale of Products (work, services) Resolution 444 of the Cabinet of Ministers of the Republic of and the Procedure for Calculating Financial Results," approved by Resolution 54 of the Uzbekistan, October 15, 2003. Cabinet of Ministers of the Republic of Uzbekistan, February 5, 1999. 18Article 111 of the Tax Code of the Republic of Uzbekistan. 20Article 70 of the Tax Code of the Republic of Uzbekistan. SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Taxes and Tax Administration 65 In wholesale trade, we consider ourselves lucky if the profit is 3­4%. We Box 6.9 cannot set a higher markup ­ people's incomes are too low, and they will simply stop buying our goods. Our only salvation is high sales and The practice of granting individual tax concessions high turnover. That much profit is enough to keep us going and for further in Uzbekistan development. But if you are forced to pay 2­3% of the sales to all kinds of The Order of the President of the Republic of funds, you are effectively working for nothing." Uzbekistan on drafting of a new Tax Code, passed Focus group participant in January 2005, highlights the need to pay special attention to the issue of equalizing tax conditions for all taxpayers, primarily by canceling unjustified Numerous individual tax concessions concessions and exceptions to the general taxation system.24 However, the practice of granting such The taxation system should be based on equitable principles. privileges continues. In addition to the concessions If a state wishes to promote business development in generally granted to many of companies earlier (and which unprofitable areas, it can either subsidize those sectors (and will continue to be in effect for some years,) a further number of companies received such many economists believe that this is the most effective and concessions in 2005. In the first quarter alone, the easily-controlled method21) or apply various kinds of preferential following exemptions were granted: tax treatment. In the latter case, however, the application of tax value-added tax concessions should be simple and transparent, and preferential Samarkand Tea-Packing Factory, on the sale of treatment should not depend on the subjective decisions its own packaged tea;25 of a limited number of people. All tax concessions and the Shurtan Gas Complex, on the entire volume of criteria for entitlement should be governed by the Tax Code, raw materials (granules) sold to plants producing including a detailed mechanism for their application. At present PVC film;26 in Uzbekistan, both temporary and one-time tax concessions Jizzak Plastmassa Joint-Stock Company, on the are used as a result of lobbying, which is then formalized by sale of finished PVC film to cotton farms;27 government resolutions. This is inequitable for taxpayers, Andijonpolietileni Joint Venture, on the sale of undermines fair competition, and creates opportunities for finished PVC film to cotton farms;28 corruption. customs fees (with the exception of the customs clearance duty) Tax treatment of local companies is worse than that of UzDAEWOOAuto, on components and units enterprises with foreign investment for the assembly of cars in the amount of 3,008 Uzbekistan has a system of incentives for companies with foreign pieces;29 investment. Most are granted various tax concessions. Samarkand Tea-Packing Factory, on raw tea, equipment, machinery, and inventory imported for its own production needs;30 Box 6.10 all local taxes Preferential treatment for companies with foreign investment VBD Toshkent Ltd.31 In addition to existing concessions,22 effective July 1, 2005, enterprises in a number of economic sectors that attracted foreign direct investment were exempt from income (profit) tax on their primary activity, property tax, social infrastructure development and territory improvement tax, environmental tax, the unified tax for micro-firms and small enterprises, as well as a number of mandatory deductions to the road fund.23 These concessions were granted for periods based on the amount of foreign direct investment: US $300,000 to $3 million ­ 3 years; US $3 million to $10 million ­ 5 years; 24Order P-2108 of the President of the Republic of Uzbekistan, Over US $10 million ­ 7 years. January 7, 2005. 25Resolution 15 of the Cabinet of Ministers of the Republic of Uzbekistan, January 12, 2005. 26Resolution 4 of the Cabinet of Ministers of the Republic of Uzbekistan, January 5, 2005. 27ibid. 28ibid. 29Resolution PP-39 of the President of the Republic of Uzbekistan, 21 Hussey, Ward M. and Donald S. Lubick. Basic World Tax Code. 1996. http://www.taxanalysts. March 29, 2005. com/www/website.nsf/Web/BasicWorldTaxCode?OpenDocument. 30Resolution 15 of the Cabinet of Ministers of the Republic of 22 For example, those introduced by Decrees of the President of the Republic of Uzbekistan UP- Uzbekistan, January 12, 2005. 1652 of November 30, 1996, UP-2143 of November 24, 1998, and UP-3267 of June 20, 2003. 31Resolution 8 of the Cabinet of Ministers of the Republic of 23 Decree UP-3594, April 11, 2005. Uzbekistan, January 7, 2005. 66 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises This policy puts local businesses at a disadvantage, which in turn has a negative effect on the competitiveness of the goods they produce. According to focus group participants, local investors get around the problem by illegally taking their capital abroad, establishing companies in foreign countries, and making investments in Uzbekistan through them. This was confirmed by officials of some state regulatory agencies who participated in focus groups. International practices have shown32 that concessions granted to individual enterprises and to whole sectors are not generally an effective mechanism for promoting their development. Stability and transparency in the taxation system is more effective, and the system should be theoretically neutral; that is, it should have a minimum impact on an entrepreneur's decision as to the type of business activity to pursue. TAX LEGISLATION IS COMPLICATED According to the survey, current tax legislation is too complex. It was not only the respondents paying tax under the general system who found it so; those who opted for the simplified taxation system held the same opinion. Twelve per cent of respondents using the simplified system expressed a desire to go back to the general system.33 There are several reasons for the excessive complexity of the taxation system: The large number of taxes and fees Businesses paid a large number of taxes and equivalent fees. Even SMEs using the simplified taxation system paid an average of five taxes in 2004. NOITARTSINIMDA XAT 32Hussey, Ward M. and Donald S. Lubick. Basic World Tax Code. 1996. http://www.taxanalysts.com/www/website.nsf/Web/BasicWorldTaxCode?OpenDocument. DNA 33In Uzbekistan, not all businesses have the right to choose their taxation payment system. Trade and public catering businesses pay tax on gross revenue, agricultural enterprises pay the consolidated land tax applicable to the production and processing of their own farm produce, legal entities engaged in organizing lotteries, sweepstakes, and other risk-based games pay a consolidated tax on gross revenue, and certain types of entrepreneurial businesses pay a fixed tax. SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Taxes and Tax Administration 67 Article 123 of the Constitution of the Republic of Uzbekistan provides that the right to set taxes rests with the Oliy Majlis, the country's parliament. However, some taxes and mandatory fees (examples include the unified social security fee, which is regarded as a tax and controlled by tax agencies, and contributions to the extra-budgetary education fund introduced January 1, 2005) are not included in the Tax Code passed by the Oliy Majlis in 1997. They were introduced through later government decisions, contradicting the Constitution. Some taxes are levied on the same base amount (such as sales or payroll) but administered separately. An entrepreneur has to transfer the amounts accrued on the same base amount to different accounts with the relevant agencies and submit separate tax calculations for each of them. This increases the administrative load on enterprises substantially. Instability of the taxation system The current taxation system is characterized by a high degree of instability. In 2004, over 35 regulatory acts were passed introducing approximately 100 amendments to the tax legislation. In the survey, 51% of respondents pointed to the instability of tax legislation as a factor having a negative impact on the operation of a business. Given the unpredictability of tax liability, companies cannot adequately plan their cash flow or business development. Moreover, the frequent changes in taxation requirements, of which businesses are either not aware or are informed after the changes have come into effect, prevent SMEs from operating legally in compliance with tax legislation. The large number of documents regulating taxation The numerous amendments introduced into tax legislation over the course of many years since the adoption of the Tax Code have resulted in a swollen regulatory basis for governing taxation. At present, apart from the Tax Code, which often covers only general tax matters, the taxation process is governed by a large number of other regulatory acts, including resolutions of the Cabinet of Ministers and departmental documents.34 This is not transparent, and it makes the taxation system cumbersome and difficult to understand for both entrepreneurs and tax officials, which significantly increases the number of tax problems for businesses. 34 According to some experts, the legal framework for taxation includes more than one thousand documents approved in the past seven or eight years. 68 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Box 6.11 Contradictory laws and regulations and ambiguity in How should the tax on profit be calculated? interpretation The survey showed that 49% of SMEs pay taxes The disorganized introduction of amendments to tax legislation under the general tax method. According to and the large number of regulatory documents in force focus group participants, one of the reasons is that complicates control over their content and compliance with the tax rates under the simplified tax method are rather high. SMEs with small profit margins found the fundamental provisions of the Tax Code. (For more detail, it more advantageous to pay tax on profit rather please refer to the 2003 IFC Report "Business Environment in than on gross sales. However, even arriving at Uzbekistan as Seen by Small and Medium Enterprises.") As a the correct taxable figure requires skill on the part of the accountant because there are substantial result, tax legislation is losing cohesion. The provisions of various differences between calculating expenses for regulatory documents can be contradictory or ambiguous, leaving accounting purposes versus taxation purposes. tax inspectors free to interpret controversial issues, often not in Taxable income (profit) is determined by factoring some expenses back into the figure. the entrepreneur's favor. Special Regulations "On the Structure of Costs Low level of legal awareness among entrepreneurs and Involved in the Production and Sale of Products officials of the state tax inspectorates (work, services) and the Procedure for Calculating Financial Results"35 were passed for this purpose. Many problems related to taxation are explained by the low level They included schedules classifying business of legal awareness among both entrepreneurs and tax inspectors. expenses (with 17 subcategories) and established the procedure for calculating profit for tax Lack of competence on the part of tax officials impeded the purposes. Annex 1 to the Regulations lists expenses establishment of a good working relationship between them and (with approximately 70 subcategories) deductible the taxpayers. This led to opportunities for abuse of power by from income in calculating net profit for the period, officials in the form of penalties. As a result, respondents were but which are to be included in calculating profit for tax purposes. Annex 2 lists expenses that are disinclined to consult inspectors when they did not understand not deductible from the taxable basis during the the provisions of tax legislation. reporting period, but may be deducted in later periods (another 15 subcategories.) Based on the Regulations, ministries, departments, and economic SHORT-TERM RECOMMENDATIONS TO ADDRESS ISSUES IN amalgamations (corporations, associations, THE TAXATION SYSTEM companies, etc.) identify the particular deductible expense structure and accounting procedure Reducing the tax burden relevant to their respective sectors. Measures to reduce the heavy tax burden restraining the This complex calculation method leads to many development of enterprises should include the following: errors, disputes, and additional costs for both businesses (accounting and auditing services and reduce the existing tax rates and simultaneously cancel a penalties) and the state (labor costs associated large number of tax preferences (this would maintain public with subsequent inspections and communications and further training for tax officials.) budget revenue balance and ensure equitable conditions for competition,) and strengthen tax administration to increase the tax collected; establish equitable conditions for local and foreign investors and abolish the practice of granting individual preferential treatment ­ all concessions, and the conditions and procedures for granting them should be prescribed in the Tax Code; reduce the instances of double taxation and taxation based on sales; change the basis for calculating profit tax by allowing the deduction of an enterprise's objective expenses, including interest paid on long-term credit and accelerated depreciation of equipment; allow VAT input credit on capital purchases; analyze personal income levels with a view to revising the NOITARTSINIMDA income tax burden and the amounts of social security contributions. XAT DNA 35 Approved by Resolution 54 of the Cabinet of Ministers of the Republic of Uzbekistan. February 5, 1999. SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Taxes and Tax Administration 69 EXPECTED IMPACT Reducing the tax burden on businesses will help: establish equitable conditions for all businesses and thus foster the development of fair competition in the market; increase sales and investment activity for existing companies; encourage the establishment of new enterprises; increase public revenue; reduce corruption. Most respondents believed that entrepreneurs conceal some of their revenue to evade tax they consider excessive (see Statistical Results of the Survey.) Tax reform would help reduce the shadow sector, thus increasing the tax base. In turn, a reduction in social security contributions and income tax would assist in the following aims: increase the incomes of the working population through reduced mandatory deductions from income and higher wages and salaries; as officially reported salaries increase (including formalization of previously unofficial portions) employees would enjoy a higher standard of living through becoming eligible for benefits such as mortgages and consumer loans, medical insurance, and voluntary pension funds (which would partially reduce the burden on the state); increase the number of jobs and develop labor-intensive sectors; reduce the shadow economy by encouraging legal employment. Simplifying the tax system One measure for simplifying the tax system could be to reduce the number of the taxes. To that end, it is recommended that taxes levied on the same basis but administered separately be consolidated. Tax agencies could subsequently redistribute tax revenue for various purposes at the discretion of the state. Box 6.12 Measures taken by the Government of Uzbekistan to improve the simplified tax system The country's government acknowledged the need to simplify the tax system and reduce the number of taxes and mandatory contributions. Effective July 1, 2005, a consolidated tax payment for SMEs using the simplified tax system was implemented, replacing the unified tax plus mandatory deductions to the extra-budgetary pension fund, the road fund and the education fund.36 This measure reduced the tax burden for entrepreneurs (the tax rate decreased from 15.2% to 13% for the industry and construction sectors, for example) and also reduced their administrative burden since it was no longer necessary to administer deductions to target funds separately. However, this measure did not apply to some businesses that adopted the simplified tax system (procurement and supply-and-sales enterprises, brokerage firms and enterprises providing services under service agreements) or to businesses using the general tax system. This somewhat reduced the significance of the innovation because it further fragmented the existing tax regime and did not simplify tax accounting for most companies.37 36 Decree UP-3620 of the President of the Republic of Uzbekistan, June 20, 2005. 37 According to the survey, this measure may directly concern 15% of existing SMEs. 70 Taxes and Tax Admistration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises The new version of the Tax Code, now being drafted, is intended to address the excessive complexity of the tax legislation. To eliminate the unwieldiness, instability, and contradictions in the tax system and avoid these problems in the future, the Tax Code should become a direct-action law, that is, it should fully regulate all issues related to taxation without reference to other regulatory acts. Any ambiguity should be interpreted in the taxpayer's favor. In addition, it is recommended that any changes to tax legislation be allowed only through the introduction of amendments to the Tax Code by the Oliy Majlis, a quarter (at least) before the changes come into effect at the beginning of the next tax year. This will allow entrepreneurs to bring their business in compliance with the planned changes. It is also recommended that newly established business be guaranteed a stable tax regime for a certain period (at least 12 months) after start-up. Box 6.13 Drafting a revised Tax Code According to the Order of the President of the Republic of Uzbekistan,38 redrafting the Tax Code is to focus on the following: develop clear and robust principles, approaches and canons for the formulation of tax policy; reduce the tax burden on businesses, enhance the role of taxes in encouraging the development of production and service businesses, ensure rational and economical use of resources, and abolish ineffective taxes and contributions; ensure the direct action of the Tax Code and simplify the tax system through maximum consolidation of the rules for calculating and paying specific taxes; equalize tax treatment, primarily by eliminating unjustified concessions and exceptions from the general tax system; ensure the stability of the tax system, permitting entrepreneurs to plan business development; improve tax administration and increase tax collection by ensuring full payment of taxes and contributions to the public revenue and extra-budgetary funds and reducing opportunities for tax evasion. EXPECTED IMPACT Simplifying the tax system will aid in the following objectives: reduce administrative expenses for both the state and businesses; increase tax collection through fewer unintentional errors on the part of taxpayers; permit more adequate planning for business development; reduce unofficial business transactions; reduce the potential for corruption and abuse of power by officials. Fewer taxes and simplified tax legislation would reduce the administrative burden on businesses. However, efforts should not be confined to the revising the Tax Code. Along with implementing those changes, the fiscal system should be improved further. LONG-TERM RECOMMENDATIONS The ultimate objective in reforming the tax system should be to create a business environment in which local enterprises are able to compete with similar businesses abroad (primarily in the CIS countries and the Central Asian region.) This would engender accelerated development of domestic entrepreneurship and serve as additional incentive to NOITARTSINIMDA attract foreign investment in the country's economy. XAT DNA 38 Order P-2108 of the President of the Republic of Uzbekistan, January 7, 2005. SEXAT Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Taxes and Tax Administration 71 Tax reform in Uzbekistan should continue in two directions: further reduction in the tax burden and simplification of tax administration. To move further in the first direction, it is recommended that tax rates continue to be reduced and that some taxes and contributions be eliminated. In addition, the approach to identifying the basis for some kinds of taxes (the tax on the profit of legal entities, for example) should be revised. Box 6.14 Uzbekistan's competitiveness with other countries Given the globalization of the world economy and the free flow of capital, fiscal policy should take into consideration the situation in neighboring countries. Today's "country competition" means that countries must create a business climate that allows local businesses to be competitive in the international market and make their economies more attractive for investment A trend took shape in Europe after the EU expansion. A combination of low taxes, simple administration procedures, and a cheap and skilled labor force turned the Central and East European countries into a magnet for investment. Slovakia, for example, with a population of 5.5 million, attracted US $4 billion in FDI in 2002.39 Competition exists on both global and regional levels. Uzbekistan's main competitors are Kazakhstan and Russia, which are carrying out phased reduction in tax rates. For example, the value-added tax is 20% in Uzbekistan, but 10­18%40 in Russia and 15% in Kazakhstan.41 To simplify tax administration, experience in the Baltic countries should be drawn upon, where there are only about ten public taxes. Box 6.15 As international experience has shown, tax systems based on a small number of taxes and contributions are most effective. The Baltic countries provide an example. Their taxation systems are simple, transparent and highly effective. In Latvia,42 for example, there are nine taxes; namely, business income tax, value-added tax, personal income tax, mandatory social security contributions, property tax, customs duties and fees, tax on natural resources, excise tax, and gambling and lottery tax. The simple tax system and the low total tax burden have permitted Latvia to eliminate the practice of granting tax concessions. This has made the taxation system still more transparent. In Estonia,43 there are only seven taxes: personal income tax, business profit tax, social tax, sales tax, land tax, gambling tax, and excise tax. The issue of a system of government spending of public money received into national and local budgets and target funds is becoming more vital. The amount of revenue from taxes and from various mandatory contributions, and how the money is spent, should be published in the mass media on a regular basis, in as much detail as possible. Another important concern is to eliminate among tax officials the approach that inspections are a means of obtaining income. Among other things, the possibility of raising their salaries should be considered, along with introducing financial incentives dependent on successful tax collection and effective advisory work with taxpayers and not on the number of offences found and the amount of the penalties imposed. 39 "Can the optimum share of the budget in the GDP be determined?" Economic Review, # 7 (70), 2005, September 27­October 30, 2004. 40 The applicable tax rate depends on the type of the good (article 164 of the Tax Code of the Russian Federation). 41 Article 245 of the Tax Code of the Republic of Kazakhstan. 42 Source: the State Revenues Service of the Republic of Latvia. 43 Yusupov, Yu., "Do We Need a New Tax Code?" Economic Review, # 7 (70), 2005. 72 Statistical Results of the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises STATISTICAL RESULTS OF THE SURVEY This section contains the main statistical findings of the fourth business environment survey in Uzbekistan. It incorporates some additional information on the issues dealt with in detail in the previous chapters of the report and the results of the survey on aspects of entrepreneurial activity in which regulation has not been substantially amended since the previous report. Those interested in a more detailed analysis of the problems not dealt with in the previous chapters may refer to the 2001-2003 IFC reports "Business Environment in Uzbekistan as Seen by Small and Medium Enterprises." This section includes the following subsections: a summary of respondents' assessment of the difficulty with the main administrative procedures, with breakdowns by region; respondents' opinion of the conditions for doing business; additional information on the issues reviewed in the preceding chapters of the report (Inspections, Permits, Registration, and Taxes and Tax Administration); information on other aspects of entrepreneurial activity (Entrepreneurs and Banks, Export, Import, Certification and Obtaining Standards, and Licensing); results of a survey of agricultural enterprises and individual entrepreneurs; information on survey respondents. YEVRUS EHT FO STLUSERLACITSITATS 72 Statistical Results of the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises STATISTICAL RESULTS OF THE SURVEY This section contains the main statistical findings of the fourth business environment survey in Uzbekistan. It incorporates some additional information on the issues dealt with in detail in the previous chapters of the report and the results of the survey on aspects of entrepreneurial activity in which regulation has not been substantially amended since the previous report. Those interested in a more detailed analysis of the problems not dealt with in the previous chapters may refer to the 2001-2003 IFC reports "Business Environment in Uzbekistan as Seen by Small and Medium Enterprises." This section includes the following subsections: a summary of respondents' assessment of the difficulty with the main administrative procedures, with breakdowns by region; respondents' opinion of the conditions for doing business; additional information on the issues reviewed in the preceding chapters of the report (Inspections, Permits, Registration, and Taxes and Tax Administration); information on other aspects of entrepreneurial activity (Entrepreneurs and Banks, Export, Import, Certification and Obtaining Standards, and Licensing); results of a survey of agricultural enterprises and individual entrepreneurs; information on survey respondents. YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 73 PROCESSES OF DIFFICULTY 74 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises PROFILE OF RESPONDENTS YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 75 76 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 77 RESPONDENTS' ASSESSMENT OF BUSINESS ENVIRONMENT 78 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 79 80 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises REGISTRATION YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 81 PERMITS 82 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 83 TAXES AND TAX ADMINISTRATION 84 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 85 86 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 87 88 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises INSPECTIONS YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 89 90 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 91 92 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises SMEs AND BANKS YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 93 94 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 95 96 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 97 EXPORT OPERATIONS 98 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 99 100 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 101 102 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 103 IMPORT OPERATIONS 104 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 105 106 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 107 108 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 109 108 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 109 110 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises CERTIFICATION AND OBTAINING STANDARDS YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 111 112 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 113 LICENSING 114 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 115 116 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises AGRICULTURAL ENTERPRISES YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 117 118 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 119 120 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 121 122 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 123 124 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises STATISTICAL RESULTS OF THE SURVEY OF INDIVIDUAL ENTERPRISES Profile of individual entrepreneurs YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 125 126 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Registration YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 127 Permits and approvals 128 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Export and import operations Taxes and tax administration YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 129 130 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Individual entrepreneurs and banks YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 131 132 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 133 Inspections 134 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Licensing YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 135 Certification and Obtaining Standards 136 Statistical Results of the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Respondents' assessment of business environment YEVRUS EHT FO STLUSERLACITSITATS Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Statistical Results of the Survey 137 138 Methodology and Key Facts about the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises METHODOLOGY AND KEY FACTS ABOUT THE SURVEY This report is based on the results of a survey undertaken by an independent research firm in January-February 2005. The research firm's staff conducted on-site interviews using a specially developed questionnaire. This year, the number of respondents was increased to 3,000 with the inclusion of individual entrepreneurs into the sample and an increase in the number of enterprises engaged in foreign trade. This category of respondents was the subject of a separate survey undertaken by the IFC in April 2005. Respondents were classified according to the legislation that came into effect as of January 1, 2004.1 The law says that SMEs include only micro-firms and small businesses. The definition of "medium-size businesses" that existed prior to 2004 is absent from the new classification. Detailed definitions of SMEs are presented in Annex 11. The results of the survey were discussed in focus groups consisting of representatives of a number of state agencies, the Chamber of Commerce and Industry of Uzbekistan, and entrepreneurs. This methodology was used to evaluate the results and main findings for each part of the questionnaire. Experts provided assessments of data relating to a number of questions. SAMPLE SELECTION To conduct the survey a multi-tiered, a randomly selected sample of respondents was created, corrected for regional differences. The random respondent selection was based on established selection criteria for Uzbekistan's regions and economic sectors and the size of SMEs. At the regional level, the survey was conducted at region centers and neighboring settled areas. The sample consisted of SMEs from each of the country's 12 regions, the Republic of Karakalpakstan and city of Tashkent as they existed at the time of the survey. Respondents were the owners or high-level management decision-makers of enterprises. Data, current as of January 1, 2005, drawn from official State Committee for Statistics of the Republic of Uzbekistan data on the country's entire SME community, was used to ensure that all economic sectors and regions of the country were included in the sample. The criteria for the sample were as follows: Economic sectors in which SMEs were engaged; The country's regions in which SMEs operated; The number of small businesses and micro-firms by economic sector and region of Uzbekistan. YEVRUS The quantitative and qualitative features of the sample, as well as the survey method, made it possible to gather data compatible with the data in the surveys IFC conducted in Uzbekistan in 2002, 2003 and 2004. EHTTUOBA The breakdown of the entire SME community of Uzbekistan by economic sector and region is as follows: STCAF YEK DNA 1Resolution 439 of the Cabinet of Ministers of the Republic of Uzbekistan, October 11, 2003. YGOLODOHTEM Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Methodology and Key Facts about the Survey 139 140 Methodology and Key Facts about the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises SMEs total Small % of total num- number businesses Micro-firms ber of SMEs Industry 20069 1830 18239 8 Agriculture 146177 7575 138602 62 Construction 10940 897 10043 5 Wholesale trade 11425 904 10521 5 Retail trade & public catering 30481 2497 27984 13 Other services 12860 1279 11581 5 Other 5550 561 4989 2 Total in the Republic of 237502 15543 221959 100 Uzbekistan % of total SME total Small number of number businesses Micro-firms SMEs Republic of Karakalpakstan 12324 591 11733 5 Andijan region 18613 1130 17483 8 Bukhara region 18856 755 18101 8 Jizzak region 15406 399 15007 6 Kashkadarya region 41678 1079 40599 18 Navoi region 8640 413 8227 4 Namangan region 12036 938 11098 5 Samarkand region 20836 1408 19428 9 Surkhandarya region 12292 1113 11179 5 Syrdarya region 10520 468 10052 4 Tashkent region 17329 1420 15909 7 Fergana region 18190 1695 16495 8 Khorezm region 12913 623 12290 5 Tashkent city 17869 3511 14358 8 Total in the Republic of 237502 15543 221959 100 Uzbekistan YEVRUS Total Small businesses Micro-firms Industry 8% 12% 8% Agriculture 62% 49% 62% EHTTUOBA Construction 5% 6% 5% Wholesale trade 5% 6% 5% STCAF Retail trade & public catering 13% 16% 13% Other services 5% 8% 5% YEK Other 2% 4% 2% DNA Total in the Republic of 100% 7% 93% Uzbekistan YGOLODOHTEM Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Methodology and Key Facts about the Survey 141 Republic of Karakalpakstan Sectors Total Small businesses Micro-firms Industry 8 0 8 Agriculture 83 4 79 Construction 9 1 8 Wholesale trade 5 0 5 Retail trade & public catering 14 1 13 Other services 8 0 8 Other 3 0 3 Total 130 6 124 Andijan region Sectors Total Small businesses Micro-firms Industry 30 2 28 Agriculture 83 5 78 Construction 12 1 11 Wholesale trade 29 2 27 Retail trade & public catering 29 2 27 Other services 9 0 9 Other 4 0 4 Total 196 12 184 Bukhara region Sectors Total Small businesses Micro-firms Industry 14 1 13 Agriculture 134 5 129 Construction 8 0 8 Wholesale trade 11 0 11 Retail trade & public catering 20 1 19 Other services 8 1 7 Other 3 0 3 Total 198 8 190 Jizzak region Sectors Total Small businesses Micro-firms Industry 4 0 4 Agriculture 140 4 136 Construction 3 0 3 Wholesale trade 2 0 2 Retail trade & public catering 8 0 8 Other services 3 0 3 Other 2 0 2 Total 162 4 158 142 Methodology and Key Facts about the Survey 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Kashkadarya region Sectors Total Small businesses Micro-firms Industry 14 0 14 Agriculture 356 9 347 Construction 12 1 11 Wholesale trade 4 0 4 Retail trade & public catering 41 1 40 Other services 8 0 8 Other 4 0 4 Total 439 11 428 Navoi region Sectors Total Small businesses Micro-firms Industry 6 1 5 Agriculture 61 3 58 Construction 4 0 4 Wholesale trade 4 0 4 Retail trade & public catering 9 0 9 Other services 5 0 5 Other 2 0 2 Total 91 4 87 Namangan region Sectors Total Small businesses Micro-firms Industry 12 1 11 Agriculture 76 6 70 Construction 6 0 6 Wholesale trade 7 1 6 Retail trade & public catering 16 1 15 Other services 8 1 7 Other 3 1 2 YEVRUS Total 128 11 117 Samarkand region EHTTUOBA Sectors Total Small businesses Micro-firms Industry 23 2 21 STCAF Agriculture 121 8 113 YEK Construction 10 1 9 Wholesale trade 14 1 13 DNA Retail trade & public catering 35 3 32 Other services 11 1 10 Other 6 0 6 Total 220 16 204 YGOLODOHTEM Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Methodology and Key Facts about the Survey 143 Surkhandarya region Sectors Total Small businesses Micro-firms Industry 11 1 10 Agriculture 70 7 63 Construction 8 1 7 Wholesale trade 8 1 7 Retail trade & public catering 23 2 21 Other services 6 0 6 Other 3 0 3 Total 129 12 117 Syrdarya region Sectors Total Small businesses Micro-firms Industry 5 0 5 Agriculture 83 4 79 Construction 3 0 3 Wholesale trade 3 0 3 Retail trade & public catering 11 1 10 Other services 4 0 4 Other 2 0 2 Total 111 5 106 Tashkent region Sectors Total Small businesses Micro-firms Industry 17 1 16 Agriculture 107 9 98 Construction 9 1 8 Wholesale trade 5 0 5 Retail trade & public catering 32 3 29 Other services 8 1 7 Other 4 0 4 Total 182 15 167 Fergana region Sectors Total Small businesses Micro-firms Industry 16 1 15 Agriculture 121 11 110 Construction 8 1 7 Wholesale trade 11 1 10 Retail trade & public catering 20 2 18 Other services 11 1 10 Other 3 0 3 Total 190 17 173 144 Methodology and Key Facts about the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Khorezm region Sectors Total Small businesses Micro-firms Industry 8 0 8 Agriculture 101 5 96 Construction 4 0 4 Wholesale trade 4 0 4 Retail trade & public catering 11 1 10 Other services 6 0 6 Other 2 0 2 Total 136 6 130 Tashkent city Sectors Total Small businesses Micro-firms Industry 45 9 36 Agriculture 2 0 2 Construction 19 4 15 Wholesale trade 14 3 11 Retail trade & public catering 52 10 42 Other services 39 8 31 Other 17 3 14 Total 188 37 151 Individual entrepreneurs in services of goods of trade catering sample Region Number entrepreneurs the Retail Transportation services Consumer Public Production consumer Butchers Other Republic of Karakalpakstan 10 4 3 1 0 1 0 1 Andijan region 50 10 15 6 1 9 2 7 YEVRUS Bukhara region 25 5 6 4 1 5 1 3 Jizzak region 16 4 3 2 1 3 1 2 Kashkadarya region 35 10 6 4 1 5 1 8 EHTTUOBA Navoi region 19 6 5 2 0 2 1 3 Namangan region 31 3 5 6 1 5 1 10 Samarkand region 48 13 14 5 1 8 2 5 STCAF Surkhandarya region 26 6 8 3 1 4 1 3 YEK Syrdarya region 10 3 2 1 0 2 1 1 Tashkent region 29 8 5 5 1 4 1 5 DNA Fergana region 33 7 5 5 1 9 2 4 Khorezm region 18 5 3 2 1 4 1 2 Tashkent city 50 20 2 10 1 9 2 6 Total 400 104 82 56 11 70 17 60 YGOLODOHTEM Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Methodology and Key Facts about the Survey 145 Participants in foreign trade Export Total Exporters Importers Import Tashkent city 80 32 32 16 Kashkadarya region 10 4 4 2 Samarkand region 10 4 4 2 Total 100 40 40 20 146 Annex 1 to Overview of the Business Environment in Uzbekistan 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Uzbekistanin Environment Business the of Overview LIQUIDATION to1 Annex VOLUNTARY Business Environment in Uzbekistan as Seen by Small Annex 2 to Overview of the business and Medium Enterprises 2004 environment in Uzbekistan 147 Annex 2 to Overview of the business environment in Uzbekistan THE ROLE OF LOCAL AUTHORITIES IN REGULATING CASH CIRCULATION In discussing the "cash plan" in focus groups, participants noted that, starting in 2004, local authorities ­ Khokimiyats ­ began to play a more active role than commercial banks were. Banks have actually transferred the function of setting the plan and monitoring cash collection to Khokimiyats, which, through local tax agencies, demand that entrepreneurs fulfill the cash collection plan. Entrepreneurs said that Khokimiyats apply all means of exerting pressure on them if they refuse to fulfill the cash plan. For instance, if an enterprise fails to fulfill the plan, its trade permit can be revoked or an ad hoc or short- term inspection can be conducted by tax agencies. The tax inspectorate of Mirabad District informs you that the estimated amount of cash to be contributed to the account of your enterprise (café) in July 2004 is 2,200,000 soums. Mirabad District Tax Inspectorate The tax inspectorate of Mirabad District notifies you that based on the estimates of the tax inspectorate your enterprise shall turn in cash to your bank account in the amount of 1,500,000 soums. Mirabad District Tax Inspectorate 148 Annex 3 to Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Annex 3 to Inspections ANALYSIS OF LEGISLATION REGULATING INSPECTION OF INDIVIDUAL ENTREPRENEURS In practice, the legislation governing the procedure for directing and conducting inspections of economic entities does not regulate state control over the activity of individual entrepreneurs. This conclusion is based on two factors. FIRSTLY, THERE IS THE PROBLEM OF TERMINOLOGY. Law 717-I "On State Control over the Activity of Economic Entities," December 24, 1998, intended to regulate state control over the activity of economic entities, does not include a definition of "economic entity". The term is present in Article 3 of the law "On Competition and Restriction of Monopolistic Activity in Commodity Markets," December 27, 1997, where it is defined as a legal entity of any organizational and legal form including a foreign entity engaged in the production, sale and acquisition of goods and provision of services, its amalgamations, as well as an individual engaged in entrepreneurial activity without the establishment of a legal entity. However, examining the context of the law "On State Control over the Activity of Economic Entities," the term economic entity implies only a legal entity, the activity of which it regulates, since it states that the activity of individual entrepreneurs is regulated by other regulatory acts. The Law "On State Control over the Activity of Economic Entities" Article 9. Grounds for conducting a standard inspection including an audit of the activity of economic entities that are legal entities by inspectorates, with the exception of cases stipulated in Part 2 of the present Article are as follows: · an excerpt from the coordinating plan of inspections of the activity of businesses issued by a special authorized agency or its relevant territorial unit; · an order of a inspectorates issued on the basis of the coordinating plan or a decision of a special au- thorized body on conducting an ad hoc inspection including an audit, with the indication of inspection objectives, the structure of the inspecting group and the terms of inspection... Article 13. Inspections of the activity of individual entrepreneurs are conducted by tax or other inspectorates within the limits of their powers and in accordance with the procedure established by law. SECONDLY, THERE ARE NO REGULATORY ACTS GOVERNING THE PROCEDURE FOR DIRECTING AND CONDUCTING INSPECTIONS OF INDIVIDUAL ENTREPRENEURS. There is currently no regulatory act governing the procedure for directing and conducting inspections of the entrepreneurial activity of individuals. In effect, none of the legal and regulatory acts that govern inspections governs their relationship to individual entrepreneurs; they refer to other regulatory acts without specifying which ones. The Law "On State Control over the Activity of Economic Entities": Article 13. Inspections of the activity of individual entrepreneurs are conducted by tax and other inspectorates within the limits of their powers and in accordance with the procedure established by law. SNOITCEPSNI OT 3 XENNA Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 3 to Inspections 149 Regulations on the procedure for conducting inspections of the activity of economic entities and keeping the Inspections Registration Book (new version) (approved by Order 917-1 of the Minister of Justice, registered by the Ministry of Justice on May 15, 2001), which is a regulatory act, refers to the regulatory documents of the Inspections Coordination Council: Subparagraph 4, Paragraph 13. Grounds for conducting inspections of the activity of individual entrepreneurs are regulated by the regulatory documents approved by the Council. Regulations "On the Procedure for Coordinating Inspections of the Activity of Economic Entities" Conducted by Inspectorates (amended), approved by Resolution 01 of the Inspections Coordination Council on April 23,2001, which is the main regulatory document of this body, also contains only a referral: Paragraph 30. Inspections of the activity of individual entrepreneurs are conducted by inspectorates within the limits of their powers and in accordance with the procedure established by law. 150 Annex 4 to Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises OF tois whose information between function inspectorates. COORDINATION INSPECTIONS Inspections Coordination Council, only establish contacts the a risk, OF (BASED own with LEVEL) every does each its low frequency RISK inspection risk compiles and than on THE limit setting businesses more years.) FREQUENCY INSPECTIONS ON Legislation not frequency. Based assessment, inspectorate annually plan inspections (for average no two the in to from from to from easily substances 10,000 substances 10,000 chemical products tons. pressure) easily chemical from products, pressure) normal from normal 50,000 chemical normal chemical normal ammable,fl flammable chemical to products, (under m3. and ammable,fl flammable chemical tons. products, (under m3. and COUNTRIES easily and and 5,000 easily and and of combustible tons. gases 100,000 gases 100,000 to 50,000 combustible tons. to INSPECTED chemical to chemical BE FOREIGN TO Especially flammable substances amount Liquid and 100,000 Explosive circumstances 10,000 Especially flammable substances 5,000 Liquid and 100,000 Explosive circumstances 10,000 as for SOME to the IN kept and the BUSINESSES explosive are referred which the of 1 in volume exceeds amounts. especially highly stations by as Affairs. chemical chemical carriedis the advice SELECTING substances stored the INSPECTIONS FOR where and substances) minimum (hereinafter days:2 railway freight of which Ministers infrastructure recognized of on Internal of FOR flammable near least ammablefl CRITERIA Businesses and substances products flammable at Facilities railway hazardous and of simultaneously established Facilities Cabinet significant Ministry ENTERPRISES risk/ (B) LEVEL risk/hazard risk/hazard RISK High (A) Average hazard Low (C) Table SELECTING LATVIA: the Inspections to1 SNOITCEPSNI to4 FOR OF re-fi and OT service 4 Attachment Annex CRITERIA REPUBLIC INSPECTORATE State fighting rescue See 1 XENNA Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 4 to Inspections 151 OF not a are area are by on in OF not singlea control related are the there of are by inspections on in example, authority. there (for environmental area example, conducting environmental to COORDINATION INSPECTIONS Inspections coordinated single However, interdepartmental agreements collaboration the (for in inspections to protection.) control conducting COORDINATION INSPECTIONS Inspections coordinated authority. However, interdepartmental agreements collaboration of in related protection.) - IDEN TA YROGE risk, POINTS) (BASED no is on (for low BUSINESSES ON but setting and years.) THE year,a months. Based inspectorate TO CKSIREHTYFI six inspections frequency two ASSESSMENT T OF (BASED >=186 171-185 156-170 141-155 126-140 <=125 INSPECTIONS in law. plana OF LEVEL) once other by each average every IN once of RISK than compiles with FACILITIES than inspections than OF THE less regulated assessment, own more INSPECTED FREQUENCY ON No more Frequency not risk annually its businesses no BE NUMBER TO 2004/2005 8 1 10 4 34 34 RISK the INSPECTED by and longa OF THE BE doubtsis for ON yeara TO years2 years3 years4 years5 years 10 inspectorates there inspection other (if statements inspected FREQUENCY INSPECTIONS (BASED LEVEL) Once Every Every Every Every Every as tax BUSINESSES priority of well been TO for as inspection not OF SELECTING unit, an reliability have INSPECTED for NUMBER BUSINESSES BE 8 14 55 124 203 968 FOR identified the reports.) that businesses. calculation grounds CRITERIA Large Businesses tax with concerning accounting Businesses time. (B) (A) (C) (B1) (B2) (B3) (B4) (A) (C) risk/hazard LEVEL risk/hazard risk/hazard COUNTY: risk/hazard risk/hazard risk/hazard risk/hazard RISK High Average Low LEVEL risk/hazard risk/hazard CARDIFF RISK High Average Average Average Average Low - tax health GERMANY: INSPECTORATE State authority ENGLAND, INSPECTO- RATE Environ mental protection and agency 152 Annex 4 to Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises area OF not singlea for are the OF joint are by inspections on in example, of are solely there (for environmental establishing contacts to of agencies activities organizing control conducting COORDINATION INSPECTIONS Inspections coordinated authority. However, interdepartmental agreements collaboration of in related protection.) COORDINATION INSPECTIONS The inspectorates coordinated purpose information between and inspections. notis risk on with more LEVEL) months4 months6 months 12 LEVEL) Based inspectorate plana no risk, INSPECTIONS RISK INSPECTIONS RISK inspections businesses years.) OF THE every every every OF inspections law. THE of each low ON than year.)a (for two than year.)a by than year.)a ON compiles own and its every less times less less FREQUENCY (BASED No (3 No (twice No (once FREQUENCY (BASED Frequency regulated assessment, annually setting frequency average than to in halls. to goods potential cause banquet partially paidis engaged the taxes. often with large manufacturing imported business that amounts. storing for attention and and dishes; products. which INSPECTED duties BE foodstuff of large INSPECTED in from stablea foodstuffs. BE (more TO (any foodstuffs premises of TO equipment, customs law. by assortment foodstuffs foodstuffs. non-hazardous stalls, products countries, example, business. perishable of high set (for BUSINESSES foodstuffs to pathogens.) processing diseases. fulla foodstuffs. general BUSINESSES certain time.) the with bakeries. by and hazardous sealed subject from standards distribution longa SELECTING hazardous hazardous non-hazardous bars, of of SELECTING telecommunications for violations FOR storage food-related of of and toxin-producing Restaurant Snack Multi-purpose foods. exported/imported FOR of products imported violated importer/exporter of hermetically type produce, of criteria. preparation of CRITERIA Preparation develop Multistage dangerous Example: Preparation Preparation Example: No Sale Preparation Example: prepared CRITERIA The farm equipment.) Imported Products previously History import/export Incidence Other risk risk/ (B) LEVEL risk/ line risk LEVEL risk/red (A) risk/green (C) RISK High hazard Average Low RISK High line Average yellow Low line : SNOITCEPSNI : Service OT inspection 4 CANADA INSPECTORATE Food agency JORDAN INSPECTORATE Jordanian Customs XENNA Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 4 to Inspections 153 are of are purpose the INSPECTIONS purposes contacts for agencies. INSPECTIONS OF for inspectorates of solely information OF inspectorates of solely information between agencies. activities establishing activities COORDINATION The coordinated of contacts COORDINATION The coordinated establishing between RISK law. annually frequency more RISK law. annually more THE by no THE by frequency no ON risk, ON risk, low regulated inspectorate low inspections regulated inspectorate inspections (BASED notis and (BASED each own notis and each own its its average average INSPECTIONS setting with years.) INSPECTIONS setting years.) OF inspections assessment, inspections assessment, with of risk plana two OF of risk plana two on businesses every on businesses every FREQUENCY LEVEL) Frequency Based compiles (for than FREQUENCY LEVEL) Frequency Based compiles (for than be for to be INSPECTED criteria to INSPECTED criteria SELECTING BE 156 BE 50 TO businesses SELECTING FOR over TO FOR over businesses are are selecting CRITERIA BUSINESSES There for inspected. CRITERIA BUSINESSES There selecting inspected. (B) (B) (A) risk (C) (A) risk (C) LEVEL risk risk LEVEL risk risk RISK High Average Low : RISK High Average Low of - MEXICO: INSPECTO- RATE Labor inspection Mexico NETHERLANDS INSPECTO- RATE Radio-com munication agency 154 Annex 4 to Inspections 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Annex 1 to Table FACILITIES RECOGNIZED BY THE CABINET OF MINISTERS OF LATVIA AS ESPECIALLY SIGNIFICANT (HIGHLY EXPLOSIVE, FLAMMABLE MATERIALS AND ESPECIALLY SIGNIFICANT FACILITIES): NAME OF FACILITY LOCATION I. Riga 1 Petroleum terminal 22 Ezer St. 2 Petroleum storage depots and storehouses 7a Tvaik St. 3 Riga Shkirotava railway station 81b Krustpils St. II. Riga Area 4 TPS-2 production (thermal power station) Atsone, area around Salaspis Square 5 Olain Petroleum storage depot 16th km of the Riga-Elgava highway, Olain District 6 Underground gas storage depot in Inchukalns Ragana, Krimulda District III. Daugavpils and Daugavpils Area 7 Daugavpils railway station 138 A. Pumpura St. 8 Ilukste inline production controller's office Ilukste IPCO, Shedere District (IPCO) (petroleum storage depot) IV. Elgava 9 Elgava railway station 1a Statisas St. V. Liepaja 10 Liepaja railway station 1 Emilias St., Liepaja VI. Rezekne 11 Rezekne-I railway station 11 Lokomotiviu St. VII. Saldus Area 12 Petroleum storage depot Druva, Torni VIII. Ventspils 13 Chemical substances, chemical products and 66 Dzintaru St. petroleum products terminal 14 Petroleum products terminal 90 Dzintaru St. 15 Petroleum products terminal 75 Talsu St. 16 Petroleum products terminal 1 Dzelztselnieku St. SNOITCEPSNI OT 4 XENNA Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 5 to Inspections 155 Annex 5 to Inspections SAMPLE CHECKLIST FOR A FIRE PREVENTION SURVEILLANCE AGENCY The checklist consists of a list of questions, including exhaustive detail on the items to be inspected (i.e. everything that an inspector will inspect) and a direction from the controlling authority specifying the measures to be taken by the entrepreneur to correct the shortcomings found and the entrepreneur's right to appeal the inspector's actions (or omissions) and decisions if they are unlawful in the entrepreneur's opinion. The introduction of such checklists should provide for their broad distribution among businesses. In April 2005, fire prevention surveillance agencies tested checklists at seven gas stations, and in July 2005, the sanitary-epidemiological surveillance agencies tested them at 10 retail trade enterprises. The checklists for fire-prevention surveillance agencies included the following questions: availability of the documents required, availability and good condition of fire extinguishers, availability and good condition of the equipment required, compliance of the gas station area with minimum requirements, and availability of the relevant fire safety signs. The inspectors and the entrepreneurs who participated in the experiment agreed that the checklists facilitated the inspection procedure and made it more transparent. Both parties to the inspection made practical suggestions on improving checklists and expressed an interest in their widespread implementation. Sample checklist 156 Annex 6 to Permits 2004Business Environment in Uzbekistan as Seen by Small and Medium Enterprises CERTIFIED PREVIOUSLY NOT 3 ADDITIVES FOOD IMPORT OR PRODUCTION IN USE TO 2 PERMIT CERTIFICATE) HYGIENEA OBTAINING FOR 1 OBTAIN Permits to6 MAP TO Annex PROCESS (REQUIRED Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 7 to Registration 157 Annex 7 to Registration REGISTRATION PROCEDURE FOR LEGAL ENTITIES1 REGISTRATION AGENCY 5 Regional and municipal statistical (REGISTRATION UNITS) ENTERPRISE FOUNDER 1 agencies (to obtain a company Regional and municipal registration 2 name) offices 2 Ministry of Justice of the Republic of Uzbekistan2 Consulting and other firms Ministry of Justice of the Republic of Karakalpakstan3 Chamber of Trade and Industry 3 4 STATISTICAL AGENCIES Extra-budgetary Pension (to include enterprises in the CSREO) Fund INTERNAL AFFAIRS DEPARTMENTS (to issue permit to make a seal Territorial Road Fund and a stamp) TAX AGENCIES Municipal labor, Registration of permit (to issue taxpayer PIN) 3 employment and social security department documents4 SEQUENCE: 1. Submit application to statistical agencies to obtain a company name certificate: Time limit to review and issue certificate ­ 3 days Cost of certificate ­ free of charge. 2. Prepare and submit documents to the Regional or Municipal Registration Office (at the founders' option, can be done by the Chamber of Trade and Industry or by consulting or other firms): Registration time limit ­ 7 business days Registration cost ­ 5 times the minimum wage4 (27,200 soums prior to August 1, 2004; 32,650 soums after August 1, 2004)5. 3. The Registration Office submits documents to statistical, tax and internal affairs authorities for registration: ­ inclusion in the CSREO ­ Internal Affairs department permit to make a seal and a stamp ­ registration as a payer of contributions to the extra-budgetary pension fund, employment fund and the road fund; taxpayer's PIN. Time limit for each procedure ­ 2 days. Cost of each procedure ­ free of charge. 4. If applicable, the Registration Office obtains and registers necessary permits: Time limit ­ from 7 business days to one month, depending on the permit. Cost of each permit ­ from 10% of the minimum wage to 20 times the minimum wage, depending on the permit (544 to 108,800 soums prior to August 1, 2004 and 563 to 130,600 soums after August 1, 2004)6. 5. Registration Office issues State Registration Certificate. 1 Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan, August 20, 2003. 2 The Ministry of Justice of the Republic of Uzbekistan registers audit and insurance firms, exchanges, and enterprises with foreign investment and markets estab- lished in Tashkent City. 3 The Ministry of Justice of the Republic of Karakalpakstan or oblast departments of justice register enterprises with foreign investment and markets established in the Republic of Karakalpakstan or oblasts. 4 Authorized bodies and public utility agencies issue permits for connection to supply lines, required for facility construction and reconstruction, and for reclassify- ing living quarters as non-residential property. 5 For registration of an economic entity by the Ministry of Justice of the Republic of Uzbekistan, the Ministry of Justice of the Republic of Karakalpakstan and oblast departments of justice, state duty is payable as follows: 5 times the minimum wage and $500 ­ enterprises with foreign investment; US $2,000 ­ enterprises with foreign investment whose authorized capital consists solely of foreign investment; 4 times the minimum wage ­ insurance and audit firms, exchanges, and markets. 6 The minimum wage in the first seven months of 2004 was 5,440 soums. In August 1, 2004, it was raised to 6,530 soums. 158 Annex 8 to Registration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Annex 8 to Registration REGISTRATION PROCEDURE FOR INDIVIDUAL ENTREPRENEURS1 INDIVIDUAL ENTREPRENEUR 1 4 REGISTRATION AGENCY (REGISTRATION UNITS) Regional and municipal 3 registration offices INTERNAL AFFAIRS DEPARTMENTS (to issue permit to make a seal 2 and a stamp) TAX AGENCIES Registration of permit (to issue taxpayer PIN) documents2 SEQUENCE: 1. Prepare and submit documents to the Regional or Municipal Registration Office: Registration time-limit ­ 7 business days. Registration cost ­ 5 times the minimum wage (27,200 soums prior to August 1, 2004; 32,650 soums after August 1, 2004)2. 2. The Registration Office submits information on the individual entrepreneur to tax and internal affairs authorities for registration: Time-limit for each procedure ­ 2 days; Cost of each procedure ­ free of charge. 3. If applicable, the Registration Office obtains necessary permits: Time-limit ­ from 7 business days to one month, depending on the permits; Cost of each permit ­ from 10% of the minimum wage to 20 times the minimum wage, depending on the permit (from 544 to 108,800 soums prior to August 1, 2004 and from 563 to 130,600 soums after August 1, 2004)3. 4. The Registration Office issues the State Registration Certificate and hands permit to make a seal and a stamp along with other permits (if applicable) to the entrepreneur. NOITARTSIGER OT 8 1Resolution 357 of the Cabinet of Ministers of the Republic of Uzbekistan, August 20, 2003. 2Authorized bodies and public utility agencies issue permits for connection to supply lines, required for facility construction and reconstruction, and for reclassifying living quarters as non-residential property. 3The minimum wage in the first seven months of 2004 was 5,440 soums. In August 1, 2004, it was raised to 6,530 soums. XENNA Business Environment in Uzbekistan as Seen by Small and Medium Enterprises 2004 Annex 9 to Registration 159 Annex 9 to Registration REGISTRATION PROCEDURE FOR INDIVIDUAL ENTREPRENEURS ­ IMPORTERS1 State Tax Inspectorate 1 Internal Affairs Departments 1 6 Ministry for Foreign Economic Relations, Investments, and Trade 2 INDIVIDUAL ENTREPRENEUR 5 City and Regional Khokimiyats Territorial customs authorities 3 4 Bank SEQUENCE: 1. Submit documents to the State Tax Inspectorate for state registration: Time-limit to review ­ 7 business days. Registration cost ­ 5 times the minimum wages (27,200 soums prior to August 1, 2004; 32,650 soums after August 1, 2004)2. The State Tax Inspectorate issues: (a) a Certificate of State Registration of the Individual Entrepreneur; (b) registration (permit issuance) card; (c) copy of the permit of Internal Affairs Department to make a seal and a stamp. 2. Submit documents to MFER to obtain a Certificate of a Foreign Economic Relations Participant: Time-limit ­ 3 business days. Cost of certificate ­ 1 minimum wage2. 3. Visit the territorial customs authorities to put a registration stamp in the registration (permit issuance) card: Time-limit ­ 2 business days. Cost ­ free of charge. 4. Open a bank account: Time-limit ­ 2 business days. Cost ­ no more than 1 minimum wage2. 5. Obtain a permit to engage in retail trade from the Khokimiyat: Time-limit ­ not specified. Cost ­ free of charge. 6. Visit the State Tax Inspectorate to obtain a Registration Card of an Importer: Time-limit ­ 3 business days. The Registration Card of an Importer is a permit to engage in export-import transactions. 1 Resolution 412 of the Cabinet of Ministers of the Republic of Uzbekistan, September 2, 2004. 2 The minimum wage in the first seven months of 2004 was 5,440 soums. In August 1, 2004, it was raised to 6,530 soums. 160 Annex 10 to Taxes and Tax Administration 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises Annex 10 to Taxes and Tax Administration AN EXAMPLE OF "TAX ON TAX" IN IMPORT TRANSACTIONS In the case of imports, VAT calculation results in "tax on tax." First, the customs duty and excise tax on the customs value of the imported goods are calculated (if the excise tax is applicable to the type of goods;) then the VAT is calculated based on the total of customs value + customs duty + excise tax. Example. The customs value of the goods is US $100. The customs duty on it is 30%, or US $30. The excise tax is also 30% (another US $30.) The VAT (20%) will be calculated based on 100+30+30=160, amounting to US $32. Thus, the total tax burden on goods worth US $100 will be US $92 (or 92%.) This mechanism for levying VAT (with the taxable base being the customs value + customs duties + other mandatory fees) is applied in a number of other countries (for example, NOITARTSINIMDA Russia, Kazakhstan, Kyrghyzstan, EU countries.) However, as the above example shows, XAT the practice leads to an increase in import costs. In other words, while rates for taxes and fees do not seem large when taken separately, the total tax burden on import transactions DNA increases significantly. The government should take this into account when deciding on the rates for compulsory fees to be paid on importing goods. SEXAT OT 01 XENNA Business Environment in Uzbekistan as Seen by Small Annex 11 to Methodology and Key Facts and Medium Enterprises 2004 about the Survey 161 Annex 11 to Methodology and Key Facts about the Survey DEFINITION OF SME Prior to January 2004, businesses in Uzbekistan, depending on the average annual number of their staff, were classified into micro-firms, small and medium enterprises and other enterprises not included into the SME category. Small enterprises enjoyed a number of privileges and concessions that did not apply to medium enterprises. Effective January 1, 2004, the criteria for defining small enterprises changed, while the privileges remained, and the category of medium enterprises was excluded from the classification of SMEs.1 The new classification extended the range of small enterprises by placing a higher limit on the number of employees. As a result, most medium enterprises fell into the small enterprise category as of January 1, 2004. The category also includes some businesses not previously considered SMEs: from 30 to 50 employees ­ in agriculture, the agro-processing sector and other industrial and manufacturing areas; from 20 to 25 employees ­ in science, research services, transportation, communications, services (with the exception of insurance companies,) retail trade and other non-manufacturing areas. Medium enterprises in the following sectors were not included in the small enterprise category: more than 50 employees ­ in mechanical engineering, metallurgy, fuel and energy sector and chemical industry; more than 25 employees ­ in wholesale trade and public catering. At the same time, while the SME category had been based on the number of staff directly employed at the headquarters of the enterprise, the 2004 definition also included the average annual number of staff at micro-firms and small enterprises employed in subsidiaries, branches and representative offices. 1 Decree of the President of the Republic of Uzbekistan "On Amending the Decree `On Measures to Promote the Further Development of Private Enterprise, Small and Medium Businesses," April 9, 1998,' August 30, 2003. 162 Annex 11 to Methodology and Key Facts about the Survey 2004 Business Environment in Uzbekistan as Seen by Small and Medium Enterprises SMALL AND MEDIUM ENTERPRISES (PRIOR TO SMALL ENTERPRISES (SINCE JANUARY 1, JANUARY 1, 2004) 2004) INDIVIDUAL ENTREPRENEURS INDIVIDUAL ENTREPRENEURS Micro-firms with an average annual number of Micro-firms with an average annual employees not exceeding: number of employees not exceeding: 10 ­ in manufacturing sectors 20 ­ in manufacturing sectors 5 ­ in services and other non-manufacturing sectors 10 ­ in services and other non- manufacturing sectors 5 ­ in trade 5 ­ in wholesale and retail trade and public catering Small enterprises with Medium enterprises Small enterprises with an average annual an average annual with an average number of employees not exceeding: number of employees annual number not exceeding: of employees not exceeding: 40 ­ in industry 100 ­ in industry 100 ­ in food, light industry, metal work and instrument-making, woodworking, furniture industry and construction materials 50 ­ in mechanical engineering, metallurgy, fuel and energy, and chemicals 20 ­ in agriculture and 30 ­ in agriculture and 50 ­ in farm produce and produce other manufacturing other manufacturing processing and other industrial and sectors sectors manufacturing sectors 20 ­ in construction 50 ­ in construction 50 ­ in construction 10 ­ in science, 20 ­ in retail trade, 25 ­ in science, research services, research services, retail services, and other transportation, communications, trade and other non- non-manufacturing services (with the exception of insurance manufacturing sectors sectors companies,) trade and public catering, and other non-manufacturing sectors 30 ­ in wholesale trade and public catering YEVRUS EHTTUOBA STCAF YEK DNA YGOLODOHTEM OT 11 XENNA