Tax Developments in Azerbaijan and Issues for Foreign Investors

The quantity of the Tax Code of Azerbaijan has doubled with regard to the variety of phrases and pages since its efficient date of Jan. 1, 2001. For comparability, different codes (such because the Code for Civil Process, Employment Code, and Civil Code) have been expanded and modified at most by about 20% to 30% from their authentic quantity. Taxation, being by nature very dynamic, shouldn’t be comparable with these different areas; nevertheless, such an excessive distinction within the variety of adjustments could present sure indications.

The tax code, which was based mostly on the IMF draft tax code of “Taxastan,” has been repeatedly amended virtually on a yearly foundation so as to meet modern financial and enterprise wants, and significantly worldwide tax developments. Nevertheless, the construction and the variety of articles (225) has been nearly maintained, which has created additional conceptual, structural, and interpretational problems. Not like Azerbaijan, different international locations utilizing comparable tax legislation codecs, comparable to Kazakhstan, Georgia, and Kyrgyzstan, have adopted modernized new tax codes.

Quick-forwarding to Oct. 26, 2022, Azerbaijan formally joined the OECD/G-20 BEPS venture as an affiliate member. Earlier than such official endeavor, worldwide measures comparable to switch pricing guidelines, a general-anti avoidance rule, and country-by-country reporting mechanism had been adopted. On March 12, 2021, Azerbaijan signed the Multilateral Competent Authority Settlement on the Change of Nation-by-Nation Reviews—commencing the automated trade of knowledge AEOI customary voluntarily and quickly since 2017 and delivering the primary exchanges in 2018.

As an preliminary step in opposition to offshore revenue shifting, an extra 10% withholding tax deduction from funds made to low-tax jurisdictions has been relevant since 2017. Efficient from 2022, as an extra measure, managed overseas firm guidelines had been launched into the tax code and the laws relating to its process, and submitting types had been adopted on April 19, 2022 by the Ministry of the Financial system.

As a small rising Eurasian economic system keen to draw overseas funding and develop worldwide tax cooperation, Azerbaijan has been profitable within the worldwide tax improvement space, with 55 efficient double tax treaties already and several other extra at present being negotiated. The overwhelming majority of DTTs are based mostly on the Group for Financial Co-operation and Improvement customary treaty types.

We are able to see a fast, and on the identical time piece-meal, integration into the worldwide tax regime and harmonization of tax legislation measures. One of many important areas nonetheless pending enchancment, readability, and simplification, is the decision of tax disputes—each conceptually and procedurally.

Conversely, in mild of underdeveloped tax legislation ideas, such haphazard and numerous worldwide initiatives might be seen as arming tax authorities with an extra arsenal. In opposition to the backdrop of 85% to 90% of tax disputes being determined in favor of the tax authorities by the courts, the implementation of recent developments will probably be beneath strict scrutiny.

It’s due to this fact necessary to be attentive within the administration of tax affairs and to not assume the identical understanding of ideas and particulars as might be anticipated in worldwide follow. I’ll elaborate on this with sure examples beneath.

Some Points to Think about

Implementation of Double Tax Treaties

The place no taxes are to be paid in Azerbaijan beneath a DTT, a previous approval mechanism is utilized beneath the Guidelines of Administration of Worldwide Agreements on the Elimination of Double Taxation. If a overseas resident intends to learn from treaty exemptions, it should apply with kind DTA-03 and procure a “permission letter” from the tax authority earlier than the precise transaction. If no such permission letter is obtained, taxes should be deducted and paid in Azerbaijan.

Below the explanatory assertion of the state tax service, in case of quarterly funds, the place such DTA-03 utility is lodged 20 days earlier than the top of the identical quarter, all funds in the identical quarter (together with these previous to the appliance date) can be thought-about as coated beneath the identical utility for exemption functions.

Nevertheless, the nonresident is allowed to demand the refund of such funds, once more through one other comparable process, by acquiring the approval of the tax authority utilizing kind DTA-05 submit transaction.

All these processes are accompanied by sure technical difficulties in follow—comparable to translation of paperwork, overview of passport copies of staff to find out everlasting institution issues, actual matching of figures on invoices, contracts, financial institution cost paperwork, and purposes for the refund.

In keeping with the explanatory assertion, the appliance kind DTA-05 shall be rejected the place the paid withholding taxes of the nonresident in query have already been thought-about as a tax-deductible expense of the resident taxpayer.

Anti-Avoidance

A tax avoidance scheme is outlined as “any transaction or operation performed for the needs of acquiring tax profit,” the place “tax profit” is “avoidance of paying taxes within the quantities and durations outlined by the tax code, the place no precise financial figures are altered.” This imprecise anti-avoidance formulation within the tax code clearly lacks conceptual basis and is extraordinarily large. By definition, many real tax planning schemes can be coated by this clause, even when they’ve substantiated financial substance or enterprise wants, and neither within the legislation nor within the case legislation (which doesn’t exist on this regard), have extra checks or doctrines been developed.

One other comparable idea distinctive to native follow is the notion of “high-risk taxpayer” and “high-risk transactions,” primarily supposed to remove “no-commodity transactions,” the place taxpayers merely switch funds with out exchanging any service or items. To be able to be thought-about as excessive–threat transactions, such transactions should serve to hide one other transaction and procure revenue with out precise supply of products, providers, and works. Taxpayers concerned in high-risk transactions are thought-about as high-risk taxpayers.

Right here once more, we see large standards. The next circumstances might be completely extraordinary enterprise circumstances however, on the identical time, the taxpayers could also be considered high-risk taxpayers:

• People who’re the top of the chief physique of greater than 5 authorized entities, and the authorized entities during which they’re the top of the chief physique;
• The place the quantity of products imported or bought on the market functions for the final six months is not less than thrice greater than its turnover for the related interval (apart from circumstances the place the products are ordered prematurely and are to be delivered by the taxpayer inside the interval specified within the contract, in addition to relying on the seasonal nature of the products)
• Different authorized entities that are integrated or managed by high-risk taxpayers.

These might be thought-about as particular avoidance guidelines, on their face serving to adjust to worldwide avoidance guidelines and practices. Nevertheless, not like well-known avoidance ideas, such guidelines lack conceptual advantage; it isn’t clear beneath which check and standards such circumstances might be characterised as high-risk transactions or high-risk taxpayers.

Everlasting Institution

Among the many most debated worldwide tax points are these associated to the standards for “everlasting institution.” Normally, consultant places of work of multinational enterprises conduct market analysis, promoting, and associated consultant features. Nevertheless, the boundary between such operations and precise enterprise operations shouldn’t be all the time decided in follow. It has been the longstanding place of the tax authority that assortment of knowledge for gross sales functions or market analysis is a part of enterprise operations, and due to this fact might be characterised as a everlasting institution when period necessities are met.

Efficient from 2022, the tax code has been amended to incorporate “assortment of consumer data and group of labor with the purchasers on behalf of the enterprise in Azerbaijan” to quantity to performing enterprise features of the corporate, that’s, giving rise to a everlasting institution in Azerbaijan.

In follow, market analysis and evaluation, or sure points of consultant features, might be deemed to fall beneath “assortment of consumer data” (database) and “group of labor with the purchasers,” respectively. Nevertheless, the OECD Commentary doesn’t outline “auxiliary and preparatory” works to incorporate these actions, and additional, it mentions supplying of knowledge, gathering market knowledge, with out limiting consumer data, as examples of circumstances the place no everlasting institution is deemed to be created.

Because the boundary has now been clarified, within the absence of a DTT in place it might be dangerous to be concerned in such operations. We have to see how this clause will probably be interpreted sooner or later.

From the above examples, and quite a few sensible conditions, significantly the place particular particulars have turn into of the utmost significance, we will observe the distinctive native utility of worldwide tax measures.

Factors to Think about for International Enterprises

• Many newly launched mechanisms (switch pricing, country-by-country reporting, managed overseas firm guidelines, and so on.) nonetheless require correct tax administration and will trigger misunderstandings between a overseas enterprise and tax officers (capability constructing on the tax authority continues to be being carried out);
• The Ministry of the Financial system, which oversees the state tax service, is modernizing the tax system and administration, and likewise hears tax appeals from the state tax service. The place a case fails at state tax service stage, the ministry is often most well-liked over the courts in tax disputes;
• Multinational enterprises ought to verify the DTT and its contents, since DTT texts differ. Within the absence of a DTT, be extraordinarily cautious in regards to the features of the consultant workplace in Azerbaijan (features in actuality and features/job positions of staff, nature of native agreements);
• The place a DTT is in place, plan using treaty advantages months prematurely, for the reason that process and group of an utility for acquiring a permission letter from the tax authority might be delayed;
• The place a DTT is in place, contemplate the treaty advantages and utilization kind within the related contracts with the resident entities, specializing in acquiring documentary and knowledge help from them, in addition to discussing and deciding the scenario the place DTA-03 fails and the resident entity intends to specify withholding tax funds as its tax deductible expense;
• Taxpayers needs to be able to adjust to the brand new necessities, tax submitting and reporting obligations (types, process, and deadlines), stemming from worldwide tax developments lately launched within the tax code, significantly contemplating deadlines, since these would should be aligned with the top workplace and its submitting deadlines;
• Taxpayers mustn’t take as a right that an internationally well-known idea will probably be identically utilized domestically—they need to all the time search and study native follow through official clarification letters from the tax authority;
• Be aware that official clarification letters won’t all the time be very particular and will not have a tendency to offer clear solutions or interpretation, since solely courts are licensed to formally interpret the legal guidelines. The place official place or calculation of taxes prematurely is required, the advance tax ruling (which is a legally enforceable determination) mechanism might be utilized.
• The place longstanding native follow would trace at a specific place or consequence—for instance, that almost all of tax refund purposes are rejected or delayed, sure conditions are thought-about as not falling beneath the value-added tax 0% regime—even the place these are supported by proof from tax consultants (often accountants), taxpayers mustn’t take as a right the identical consequence or base their authorized place on this. The tax administration is repeatedly bettering and intending to listen to authorized arguments.

Azerbaijan is and profitable in worldwide tax cooperation. The expectation is that the velocity of elementary tax developments in Azerbaijan—ideas, rules, due course of, tax administration— ought to match that of worldwide tax developments.

Specifically, a contemporary tax code, and doctrinal case legislation within the space of taxation, can be very a lot welcome.

This text doesn’t essentially mirror the opinion of Bloomberg Business Group, Inc., the writer of Bloomberg Regulation and Bloomberg Tax, or its house owners.

Writer Data

Farid Nabili is managing accomplice at Caspian Authorized Heart, a legislation and tax advisory firm in Baku, Azerbaijan. Nothing on this article is meant to be authorized recommendation or relied upon as authorized suggestion, opinion or assertion. All opinions are these of the creator and should not related to Caspian Authorized Heart.

The creator could also be contacted at: f.nabili@caspianlegalcenter.az