On the mechanisms for expanding the tax base

Abstract

Resource-dependent economies face critical challenges in achieving fiscal sustainability as commodity price volatility threatens long-term economic stability. Azerbaijan, historically reliant on oil revenues, exemplifies this vulnerability, necessitating strategic diversification of its fiscal base to ensure macroeconomic resilience. This study examines Azerbaijan's tax base expansion initiatives implemented between 2015 and 2025, focusing on the transition from hydrocarbon-dependent revenues to a diversified, broad-based taxation system. Despite growing recognition of fiscal diversification imperatives in resource-rich nations, limited empirical evidence exists on the effectiveness of comprehensive digital transformation strategies in expanding tax bases in the country, as well as post-Soviet economies. We employed a mixed-methods approach combining quantitative fiscal data analysis with policy document review, evaluating three primary reform dimensions: digitalization initiatives (electronic invoicing, e-reporting systems, automated VAT refund mechanisms), taxpayer base formalization, and tax expenditure rationalization. We examined registered taxpayer growth patterns, sectoral revenue contributions, and compliance indicators across the study period. It was found substantial progress in tax base expansion, evidenced by consistent increases in non-oil tax revenues and enhanced formalization across trade, construction, and services sectors. Digital infrastructure implementation significantly improved compliance rates and reduced revenue leakage. However, persistent challenges include substantial informal economy segments escaping taxation, and regional disparities in compliance effectiveness. In general, Azerbaijan's multi-dimensional reform strategy demonstrates viable pathways for resource-dependent economies pursuing fiscal diversification. Sustained progress requires continued digitalization investments, targeted regional capacity building, and enhanced institutional trust mechanisms to further formalize economic activities and broaden the tax base.