The Tax Code of the Republic of Azerbaijan (Tax Code) entered into force on January 1, 2001 is the principal law that regulates taxation of personal income, corporate profit, value added tax and other taxes. Other regulatory instruments relating to tax administration are the regulations issued by the Azerbaijani Cabinet of Ministers and the Ministry of Taxes aimed at implementing the Tax Code as well as the Azerbaijani Customs Code, which entered into force on January 1, 2012.
The Ministry of Taxes of the Republic of Azerbaijan (Ministry of Taxes) is the government authority charged with tax administration. The Azerbaijani Customs Committee is responsible for tax administration at the customs border.
Section 13 of the Tax Code lists the defined terms and provides their definitions. In particular, the Tax Code defines residents, non-residents, income (profit) from Azerbaijani source, financial services, dividends, royalties etc. Section 19 of the Tax Code defines a “permanent establishment” (PE). PE is place which a non-resident uses to conduct its business for a 90 days period within 12 months. A branch office, any office space, any division of a foreign entity in Azerbaijan may be considered a PE for tax purposes.
Azerbaijan has entered into double tax avoidance treaties with over 44 states. The full list of those states and the respective treaties can be viewed at the website of the Ministry of Taxes - www.taxes.gov.az34.
Agreements on exploration and production sharing relating to oil and gas fields (often referred to as “PSAs”) in Azerbaijan contain provisions governing taxation of proceeds from the production and sale of hydrocarbon products. PSAs have the status of law and their provisions take priority over other laws, including the Tax Code.
Corporate Profit Tax
Legal entities pay corporate profit tax at 20 percent of their net profit. A sole entrepreneur’s business income is taxed at the same rate. Net profit is the difference between a person’s revenues and deductable expenses and exclusions.
Under the Tax Code expenses incurred “in connection with making profit” – i.e., business expenses – may be deducted from profit. Despite the general provision in the Tax Code allowing deduction any “business expense”, it may sometimes become question of interpretation what constitutes a business expense. The Tax Code governs deduction of certain expenses, such as interest on loans from a foreign lender, amortization and depreciation, research and development, uncollected receivables, repair and renovation costs etc. The Tax Code allows for deduction of mandatory payments required by law from profit.
Personal Income Tax
Individuals pay personal income tax from their income. The Tax Code distinguishes employment income and non-employment income. Non-employment income, in its turn, is divided into two groups: income from business activities and non-business income. Any income from business activities, such as sale of goods or supply of services is considered a business income. Passive income, such as returns from investing in securities, is considered non-business income.
Employment income and business income is taxed on monthly basis. The portion of such income up to 2500 manats is taxed at 14 percent, while the portion of the income exceeding that amount is taxed at 25 percent. Employment tax is administered by way of withholding – i.e., an employer withholds taxes from the source and pays it to the state budget. The employee receives his/her salary net of taxes.
If the monthly salary of an employee is under 2500 manats, it is free from the income tax in the amount of the life minimum (Azerbaijani: yaşayış minimumu). The amount of the life minimum is determined by the parliament every year. For 2016 it is 146 manats.35 This is fairly a new provision introduced in October 2015. Before that, the amount of monthly salary which was entitled to the life minimum exclusion was 250 manats, and it was only about employable part of population.
Non-business income is taxed on yearly basis. 14 percent tax rate applies to the portion of annual non-business income up to 30,000 manats, while the portion of the income above 30,000 is taxed at 25 percent.
Withholding Tax and Non-residents
Income from Azerbaijani source of a non-resident operating in Azerbaijan without a PE is subject to the withholding tax. This means that a person in Azerbaijan, who makes payments to such non-resident, must withhold the respective tax from the payment and make the payment to the non-resident net of taxes. The general withholding tax rate that applies to a non-resident’s income is 10 percent. The withholding tax rate for royalties and rent is 14 percent. The double tax avoidance treaties to which Azerbaijan is a party may establish lower rates particularly for dividends and royalties.
Azerbaijani tax regulations do not govern issues of transfer pricing in detail. The key provision in the Tax Code relating to transfer pricing is Section 14 of the Tax Code entitled Market Price. This Section provides that the transaction price of goods or services is presumed to be market price, unless proven otherwise or indicated otherwise in Section 14. The tax authority may disregard the transaction price, instead determine the market price of goods or services, if, among others, those goods or services were part of transactions between “mutually dependent parties” – the term can be translated into English as “related parties”. Section 18 of the Tax Code defines related parties. It includes, a legal person, who controls or is controlled by another person, or is under common control with another person.
The Tax Code sets the “effect” requirement for applying market price (as opposed to transaction price) to transactions between related parties – more specifically, a tax authority may apply market price if relationship between related parties affects transaction prices between those parties.
The Tax Code contains rules for determining the market price. The tax authority would first need to look at market prices of similar goods or services prevailing within 30 days from (or after) the date goods or services under consideration have been traded or supplied. If it is impossible to determine the market price based on these criteria, the Tax Code allows the tax authority to determine a market price based on multiple criteria, such as ordinary expenses of producing goods or services, transportation, insurance and other similar costs and expenses, additional benefits and collection as may be made possible between mutually non-dependent parties in ordinary course of business. The Tax Code lists additional factors tax authorities would need to take into account, if they affect prices of goods or services. They include, volume of goods or services, timing of the transaction, payment terms, country of origin of the goods, terms of supply etc.
If it is impossible to determine the market price based on publicly available information relating to goods, works or services under consideration, the Tax Code lists the methods for determining market price for such goods. They include determining resale price or the price by way of adding “justified expenses and profit” of the seller or supplier.