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SME Legal Environment Meeting Minutes, April 14, 2006 April 14, 2006 - 14.00-15:30 - . IFC Private Enterprise Partnership Tajikistan Office
Before the start of the discussion, Florentin Blanc observed that there were fewer participants as is usual, as some projects have recently closed or are nearing completion, and follow-up projects are still under consideration.
- World Bank PRSP ? Private Sector Development component
Robert Gourley, from the World Bank, was the first to speak and gave a brief overview of his mission in Tajikistan.
The goal of his assignment is to help prepare the new Poverty Reduction Strategy Paper?s private sector component, and in particular to ensure that the key elements from the new National Development Strategy, and the views of all donors, are incorporated.
This was his second mission, and he had focused mainly on reviewing / discussing the current version of the NDS (private sector component). The work will continue in future months, and there should be two additional consultants working on PRSP preparation under EU-funding.
The project presupposes strong interaction with various Ministries of Tajikistan. He also noted that the project had a small team and the period for its implementation was rather short. The draft matrix, which he will prepare based on existing documents and discussions, will be circulated to donors for feedback.
- Leasing development in Tajikistan
Zarina Odinaeva, from IFC Azerbaijan and Central Asia Leasing Facility, was invited to speak next and make a small presentation of IFC?s activities in leasing development in Tajikistan.
She briefly described the situation with the leasing market in the country. The Law on Leasing was adopted in 2003 but there are still many steps needed to (i) perfect the regulatory environment and (ii) strengthen banks? capacity in leasing management.
IFC is currently working with a set of local banks with a view to giving them access in the future to a credit line specifically dedicated to leasing.
Among the regulatory issues remaining, she emphasized that the Tax Code has the wrong definition and treatment of leasing, which makes leasing less attractive. A summary of the key issues discussed is attached, in Russian and English. Comments are most welcome.
It was observed that leasing was showing growing tendency in Europe, so it had all grounds for flourishing in Tajikistan.
She reported that in 2005 the amount of leasing transactions in Tajikistan equaled to TJS 1,935,000, but with only three (large) transactions. The banks are still in an experimenting with leasing. Out of all banks providing leasing services only Tojiksodirotbank has a separate daughter-company that deals with leasing. All the other banks make leasing transactions directly. If the banks see benefits in it, they may establish specific daughter-companies.
The question was put raised, in relation to tax liabilities, as to who is the balance-keeper for the leasing object. Zarina replied that as per international accounting standards (IAS standard 17), the leasing object is on the lessee?s balance sheet, and the bank has it as a loan transaction. There was a strong discussion on this, Michael Schneider arguing that this was incorrect practice, and the point was clarified later as follows (summary courtesy of Bill Kennedy):
IAS 17 makes a bright line distinction between what it calls ?finance leases,? which are defined as ?those that transfer substantially all the risks and rewards incident to ownership to the lessee.? Basically in other words, a finance lease is close to a loan transaction, and ownership in truth rests with the lessee ? it?s a secured transaction. Finance leases are shown on the lessee?s books as an asset and depreciated by the lessee, and also as a liability (i.e., a loan that must be repaid). All other leases, i.e., those which do not transfer ?substantially all the risks and rewards incident to ownership to the lessee,? are ?operating leases.? Operating leases are shown on the lessor?s balance sheet as an asset and are depreciated by the lessor, and are simply treated as an expense by the lessee.
To manage the risks related to keeping the leasing object with lessee balance sheet, which means that the lessee could potentially use it as ?property? to secure another credit transaction, resulting in it being registered as pledge and in the lessor having difficulties repossessing it if needed, the participants suggested that the leasing transaction should be registered in the pledge registry. This would require an appropriate point to be introduced in the Law on Leasing.
- Administrative Procedures Code
Bill Kennedy gave a short update on the work on the Administrative Procedures Code. The draft Code has been sent to Parliament after President?s signature. Parliament needs at least three month to review it, and in view of the forthcoming Parliament summer vacation, the experts of USAID Commercial Law project would try to continue facilitating the Code?s consideration into September-October.
He reported that their project was also working on Regulations establishing the Administrative Commission (the body that will form the supreme instance of administrative appeal). He also added that the project was conducting educational work ? publishing brochures on the proposed Administrative Procedures Code. The participants asked to send them the electronic version of these.
- Administrative Voilations Code.
Florentin Blanc reported on the status of reforming the Administrative Violations Code. He said that a new Code was being drafted, as the current one did not meet many of the contemporary realities as it had been adopted in the Soviet times. Finalizing the draft new Code, the President?s Office is willing to receive assistance from, and consult with international organizations. He invited everybody to either take part or to recommend people that could be useful to speak to in this connection.
Speaking on the Code, he observed that the new version would have more sanctions for State officials compared to the old Code, the new one would envision more guarantees both for the citizens and entrepreneurs.
The proposed new Code is still structured more like a coded of regulation of economic activity and is not always effective in covering issues. It does not always show the real interaction between citizens.
Speaking on IFC?s contribution, Florentin Blanc said that they suggested to introduce chapters on licensing, describing the duties and responsibilities of both the licensor and licensee, on information and registration. IFC will suggest that the Government should partly change the structure of the Code.
Fines will make another issue for IFC suggestions, as now there is no system in these.
IFC will also suggest be careful when tying everything to the minimum salary, as this has been growing fast lately, and to tie the penalties to inflation instead. Even if this will not be accepted now, it will make the basis for the future.
In the future it would be preferable not to try and include everything in the Administrative Violations Code and to have sanctions indicated in the specific laws.
A working session has in the meantime been held (27-28-29 April) with IFC?s support, and EBRD/TMSEF as well as USAID / ARD-Checchi Commercial Law project participation. The presidential working group was receptive to many recommendations and it is hoped that the final draft, to be prepared in May, will be a significant improvement.
Minutes taken by Anna Shoeva, IFC Tajikistan SME Survey and Policy Project
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