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How are tax deductions from the salary of an employee working in a municipal authority calculated?
How are tax deductions from the salary of an employee working in a municipal authority calculated?
According to the legislation, municipal authorities may participate in civil-law relations in the same manner as other legal entities. But what are the tax-related aspects in their employment relations with municipal employees, as well as in their day-to-day business operations? When municipalities withdraw funds in cash from their bank accounts, should a simplified tax at the rate of 1% be withheld from them? At what rate should tax deductions be calculated from the salaries of employees working in municipal authorities? Expert Ilgar Asadov provides clarification on the matter.
Article 220.12 of the Tax Code stipulates that a simplified tax at the rate of 1% is charged to legal entities and individual entrepreneurs for the withdrawal of cash funds from bank and other payment accounts. Although this provision on cash withdrawals from bank accounts formally applies to legal entities and individual entrepreneurs, it does not extend to municipalities. While there is no direct exception stated in the article itself, the exception is embedded in the legislation: entities whose income is exempt from taxation by law and which themselves are considered tax-collecting authorities — namely, municipalities — are exempt from tax withholding at the source of payment.
As for the second point, tax deductions from the salaries of municipal employees are regulated by Article 101 of the Tax Code and by Decision No. 56 of the Cabinet of Ministers dated February 18, 2019, “On the Approval of the Criteria for Activities in the Oil and Gas Sector and in the Non-State Sector” adopted for the purposes of applying this article. The Decision states that organizations financed from the state budget are not considered part of the non-state sector, and therefore, preferential tax rates do not apply to them.
Looking at the normative legal acts relating to municipalities and the actual situation, it is clear that municipal authorities also periodically receive funds from the state budget. Nevertheless, a municipal authority is not a state body in which the state holds a share; rather, it is a form of local self-government established by the Constitution of the Republic of Azerbaijan. The allocation of financial resources to municipalities is merely a form of state support.
For these reasons, municipalities are not considered part of the state sector, and preferential rates also apply to them. Therefore, tax deductions from the salary of a municipal employee should be calculated in accordance with Article 101.1-1 of the Tax Code.
Example: Gurban Aliyev (a fictitious name), a municipal employee of the Nizami District Municipality of Baku, receives a salary of 750 AZN. According to Article 101.1-1 of the Tax Code, since his monthly income does not exceed 8,000 AZN, he is subject to a 0% tax rate. This means that no income tax will be deducted from these earnings. However, deductions for social insurance, unemployment insurance, and mandatory health insurance will still apply:
Salary: 750 AZN
Income tax: 0 AZN
State Social Insurance (MDSS): 6 + (750 - 200) × 10% = 61 AZN
Unemployment insurance: 750 × 0.5% = 3.75 AZN
Mandatory health insurance: 750 × 2% = 15 AZN
Final amount payable:
750 – (61 + 3.75 + 15) = 670.25 AZN
Thus, Gurban Aliyev’s net salary will amount to 670.25 AZN.
According to the legislation, municipal authorities may participate in civil-law relations in the same manner as other legal entities. But what are the tax-related aspects in their employment relations with municipal employees, as well as in their day-to-day business operations? When municipalities withdraw funds in cash from their bank accounts, should a simplified tax at the rate of 1% be withheld from them? At what rate should tax deductions be calculated from the salaries of employees working in municipal authorities? Expert Ilgar Asadov provides clarification on the matter.
Article 220.12 of the Tax Code stipulates that a simplified tax at the rate of 1% is charged to legal entities and individual entrepreneurs for the withdrawal of cash funds from bank and other payment accounts. Although this provision on cash withdrawals from bank accounts formally applies to legal entities and individual entrepreneurs, it does not extend to municipalities. While there is no direct exception stated in the article itself, the exception is embedded in the legislation: entities whose income is exempt from taxation by law and which themselves are considered tax-collecting authorities — namely, municipalities — are exempt from tax withholding at the source of payment.
As for the second point, tax deductions from the salaries of municipal employees are regulated by Article 101 of the Tax Code and by Decision No. 56 of the Cabinet of Ministers dated February 18, 2019, “On the Approval of the Criteria for Activities in the Oil and Gas Sector and in the Non-State Sector” adopted for the purposes of applying this article. The Decision states that organizations financed from the state budget are not considered part of the non-state sector, and therefore, preferential tax rates do not apply to them.
Looking at the normative legal acts relating to municipalities and the actual situation, it is clear that municipal authorities also periodically receive funds from the state budget. Nevertheless, a municipal authority is not a state body in which the state holds a share; rather, it is a form of local self-government established by the Constitution of the Republic of Azerbaijan. The allocation of financial resources to municipalities is merely a form of state support.
For these reasons, municipalities are not considered part of the state sector, and preferential rates also apply to them. Therefore, tax deductions from the salary of a municipal employee should be calculated in accordance with Article 101.1-1 of the Tax Code.
Example: Gurban Aliyev (a fictitious name), a municipal employee of the Nizami District Municipality of Baku, receives a salary of 750 AZN. According to Article 101.1-1 of the Tax Code, since his monthly income does not exceed 8,000 AZN, he is subject to a 0% tax rate. This means that no income tax will be deducted from these earnings. However, deductions for social insurance, unemployment insurance, and mandatory health insurance will still apply:
Salary: 750 AZN
Income tax: 0 AZN
State Social Insurance (MDSS): 6 + (750 - 200) × 10% = 61 AZN
Unemployment insurance: 750 × 0.5% = 3.75 AZN
Mandatory health insurance: 750 × 2% = 15 AZN
Final amount payable:
750 – (61 + 3.75 + 15) = 670.25 AZN
Thus, Gurban Aliyev’s net salary will amount to 670.25 AZN.