The new amendments were published on December 25, 2016. The amendments have been made to several provisions of the Tax Code, including those relating to transfer pricing, tax rulings, obtaining information from financial institutions for the purpose of complying with international obligations, such as those relating to FATCA, tax audits and inspections, withholding taxes and application of VAT on e-commerce transactions. These amendments will enter into force in January 1, 2017. Below we provide more detailed information on these amendments.
The following are some of the most important amendments to the Tax Code:
1. The Tax Code defines “income” as a gross income (Section 13.2.12).
2. A payment made by an Azerbaijani resident or Azerbaijani permanent establishment of a non-resident to a person incorporated in a tax preferential jurisdiction is considered an income from an Azerbaijani source (Section 18.104.22.168-1). The list of tax preferential jurisdiction is set by the relevant government authority (the Azerbaijani President). The purpose of this provision is to tax such payments – the Tax Code introduced 10% withholding tax on those payments.
3. New Sections 13.2.49-1 and 77-1 provide for issue of tax rulings – formal opinion of a tax authority on tax implications of a future transaction. The issue of tax rulings is governed in more detail in new Section 77-1 of the Tax Code.
4. Section 13 now contains definitions of “production of agricultural products”, “sale of agricultural products”, “whole sale”, “retail”, “electronic audit” and some other definitions. The Section introduced the definition that can be translated into English as “trade margin” – the difference between sale price and “price paid to a supplier” (essentially, purchase price). The trade margin does not take into account a VAT.
5. New section 13.2.65 defines a “transfer price” as the average price obtained by dividing sum of comparable prices in transactions executed on the same terms by number of such transactions (TP = Sum of Comparable Prices in Similar Transactions / Number of Those Transactions), and the price determined pursuant to Section 14-1. The transfer pricing matters are governed in more detail in Sections 14 and 14-1 of the Tax Code.
6. The Tax Code defines “tax advantage” and “tax avoidance scheme” (Sections 13.2.69-13.2.70). Tax advantage is avoiding taxes or payment of taxes on time by executing transactions, which do not involve change in underlying economic terms. Underlying economic terms mean volume, price, time period for execution and terms of a taxable transaction (Section 13.2.71). Tax avoidance scheme means a transaction or operation have the purpose of obtaining a tax advantage.
7. Section 14-1 set out the methods for calculating “transfer prices”. Two of the four methods are calculated using the method for establishing “market price” of a product or service as set forth in Section 14 of the Tax Code. The Tax Code, therefore, makes distinction between “market price” and “transfer price” and as is apparent, the reason for this is that transfer price applies to specific situations as defined in Section 14-1.2. Specifically, the tax authority may take transfer price as a basis for calculating a person’s income and taxes in case of transactions between: (i) a resident and its related non-resident, (ii) non-residents PE in Azerbaijan and itself or the non-resident’s branches, rep offices and other divisions outside Azerbaijan, and (iii) between Azerbaijani residents or non-resident’s PE in Azerbaijan and persons incorporated in a tax preferential jurisdiction.
There are conditions for applying a transfer price. Among those conditions is that a value of a transaction to which a transfer price regulation can be applied must exceed AZN 500,000.
A taxpayer is entitled to produce evidence confirming his estimate of the transfer price.
The Tax Code authorizes the relevant executive authority (the Ministry of Taxes) to set forth the procedure for determining and applying a transfer price.
8. Under Section 16.1.4 a tax payer must submit to tax authority, among other things, information on transactions to which a transfer price can be applied. The information must be submitted not later than March 31 of the year following the year for which the information must be submitted.
9. Amendments to Section 16.1.8 have the effect of broadening types of businesses that can accept cash without having to install check machines. Specifically, with few exceptions retail and public service (such as restaurants) must install check machines and issues checks. Other businesses, mostly service businesses, may use other types of checks as evidence accepting cash. The new Law On Non-Cash Transactions has entered into force. The Law also sets out certain requirements with respect to cash transactions and require that certain operations be conducted only through bank transfers.
10. Some of the amendments to Section 16.1.11, 23, 35 and 36 have the purpose of allowing a tax authority to demand from a financial institution (such as bank, securities trader, depositary) documents and information required under international treaties. These seem to aim to enable tax authority to comply with certain international instruments, such as FATCA related intergovernmental agreements.
11. Certain amendments have been made to provisions of the Tax Code relating to tax audits, including on-site tax audits. Those amendments, however, are not significant and, in particular, do not provide any additional guarantees for tax payers.
12. The amendments provide for financial penalties for failure by financial institutions to comply with laws and international agreements. In particular, there is a financial penalty in the amount of 100 AZN for failing to comply with laws or international agreements when opening bank accounts. A financial institution can be subject to the fine in the amount of AZN 1000 for failing to submit electronic reports as provided in Section 16.1.11-4 of the Tax Code. Those are reports relating to compliance issues.
13. New Section 71-1 provides for electronic invoices. The issue and use of electronic invoices must be determined by the relevant government authority (the Azerbaijani Cabinet of Ministers).
14. The amendments introduced voluntary disclosure – that is voluntary disclosure of violations of tax laws, which have not been detected during tax audit. In case of such disclosure, a tax payer must pay only accrued interest. Such tax payer is not subject to any penalties or fines (amendments to Section 75).
15. The amendment to Section 76.1 crystallizes the current practice. Under the current version of the article tax authorities may demand and financial institutions must provide information about accounts of a tax payer, who is being audited by tax authorities. There is no requirement that a tax payer be suspected of breaching any rules.
16. New Section 76-1 provides that a financial institution must provide to an authority of a foreign country information about financial operations of legal and physical persons of the foreign country through the relevant government agency. The section is similar to the deleted Section 76.2-1.
17. Section 77-1 governs advance tax rulings in more detail. A tax ruling can be obtained for a particular transaction and the minimum amount of the transaction must be at least AZN 10 million. There is, therefore, a significant threshold for making an application for a tax ruling. An applicant must provide documents regarding the contemplated transaction and its notes on legal consequences of a transaction. If the documents are complete a tax authority must issue its decision within 30 business days.
A tax ruling is effective only with respect to a transaction for which is was issued. Unfortunately, this provision limits the use of a tax ruling as precedents.
A tax authority may refuse a tax ruling under certain circumstances. In particular, if a transaction has the purpose of tax evasion, or a tax authority has issued opinion on the transaction, the transaction has been completed and there is decision of a tax authority or court on the transaction etc, a tax authority can refuse tax ruling.
A tax ruling is valid for 3 year from the date it is issued, unless changes in a legislation affect conclusions in the ruling.
18. Section 109.8 provides that checks issued via check machines or receipts cannot be considered evidence of an expense. This is rather interesting provision. Apparently, the purpose is to state that only “qaima-faktura” or “electronic qaima-faktura” can be considered prove of an expense.
19. Under Section 125.1.9 a payment by a non-residents Azerbaijani PE to a person registered in a tax preferential jurisdiction is subject to 10% withholding tax.
20. Under Section 125.1-1 a transfer of funds to an electronic wallet owned by a foreign person is subject to 10% withholding tax. This tax is withheld by the transferring financial institution.
21. New Section 130-1 provides that a relevant government authority (the Azerbaijani President) shall set the rules for recording of income and expenses by persons engaged in different sectors. The rules shall be specific to different business sectors. These regulations have not been published yet.
22. Sections 150.1.12 and 220.12 provide for a withholding tax of 1% for cash withdrawals by legal persons or sole proprietors from bank accounts. This means that any legal person or sole proprietor, who withdraws cash from his account would be paying 1% withholding tax. This tax is withheld by a paying financial institution.
23. Amendments to Section 153 provide that VAT on the sale of agricultural products is calculated from the trade margin on those products.
24. Amendments to Sections 168 and 169 require payment of VAT on services and works provided through e-commerce channels. If a non-resident offering the services or works online does not have tax registration in Azerbaijan, the transferring financial institution must accept VAT from a customer and pay to the state budget.
There are other amendments to the Tax Code concerning sale of land, simplified tax and other matters.