News

Amendments to the Tax Code of the Republic of Azerbaijan

As you may know, the Draft Law on amendments and additions to the 2022 Tax Code (TC) was submitted to the Milli Majlis for consideration (1-st reading).

We would like to bring to your attention the important changes and amendments. At the same time, we note that this is the first draft and other additional changes could be expected. We will keep you informed of any important changes in the future:

  • Calculation of taxes considering market prices, the level of prices applied to goods of the same or similar type (work, service) within 30
    days have been reduced to 10% for wholesale trade, and 20% for construction and manufacturing.

  • The list of controlled transactions for the application of transfer pricing has been expanded. The transfer prices will also apply to the following transactions:

-transactions between a resident of the Republic of Azerbaijan or a Permanent Establishment of a non-resident in the Republic of Azerbaijan and non-residents:

-if the persons have carried out operations on products traded on international commodity exchanges and (or);

-if the total income of a resident or a Permanent Establishment of non-resident exceeds 30 million AZN during a tax year and the share of transactions with each non-resident of total income (expenses) exceeds 30%.

  • A new Article 14-2 – “Controlled Foreign Company" has been added to the TC. According to it, an income of enterprise registered in countries (territories) will be subject to preferential taxation and that are not residents of the Republic of Azerbaijan is taxed in the Republic of Azerbaijan in the following conditions:

-a person who is considered a resident of the Republic of Azerbaijan, together with an interrelated resident or non-resident directly or indirectly has the right to vote more than 50% in a foreign enterprise or more than 50% of its authorized capital or has the right to receive more than 50% of the profits of that foreign enterprise;

-if the actual taxes paid on the profit of a controlled foreign company is twice or much lower than the corporate income tax payable on that profit in accordance with the tax legislation of the Republic of Azerbaijan; 

-if more than 30% of annual income of a foreign enterprise consists of passive (non-entrepreneurial) income, i.e. royalties, interest income, income from financial leasing, etc.

  • In accordance with the new changes in the duties of the taxpayer, medium and large business entities will submit financial statements to the tax authorities and their officials at the request of the tax authority.
  • New rules are applied to prevent the registration of goods in the name of cargo companies throughout import. After the changes, information on goods to be imported by taxpayers (except for taxpayers operating in the oil and gas sector or belonging to the public sector), on place of storage (unloading) of goods, persons ordering, etc., shall be submitted to the registered tax authority before the date of import.
  • Information on accounts payable and receivables for the tax year shall be submitted electronically to the tax authority on the same day (not later than March 31 of the year following the reporting year) by taxpayers registered for VAT purposes as specified in Article 149 of the TC.
  • The information on the norms of consumption of raw materials and materials required per unit of production by taxpayers engaged in production activities (except for micro and small business entities) must be submitted electronically to the tax authority by January 31 of each year.
  • The following details shall be specified in payment orders upon making payment through a bank by the taxpayer:

-for transactions with electronic tax invoice – series and number of the electronic invoice. For the transactions related to the payment for goods (works, services) received from the same taxpayer on a regular and permanent basis during the calendar month and supported with electronic invoices - the agreement signed between the parties or the date and number of the appendix to this agreement 

-for foreign trade activity - series and number of the freight customs declaration, date and number of the invoice related to purchase of works and services;

-for loan payments - the date and number of the loan agreement or debt repayment claim agreed between the parties, indicating the purpose of the loan repayment;

-for advance payments - the date and number of the advance request or the agreement (or the appendix to this agreement) signed between the parties with indication of a purpose of the advance payment.

  • Off-site tax inspections will be implemented within 90 working days from the date of submission of the corporate income tax report, and within 30 days for other declarations or certificate on calculation of the current income tax payments (excluding income withheld at the source of payment)
  • The following will be added to the conditions for creation of a Permanent Establishment:

-gathering of customer database and organization of work with clients for non-resident enterprises or non-resident individuals; 

-construction and repair sites, installation or prefabrication facilities, as well as control activities related to such facilities are carried out by a non-resident as a general contractor, the period of activity of other subcontractors under its control (if it exceeds 30 days);

-if the activities listed in Article 19.3 of the TC are not of preparatory or auxiliary activities or are intended for the implementation of entrepreneurial activities of interrelated persons.

  • The number of criteria for conducting on-site tax inspection will be increased:

-taxpayers who do not agree with the results of the tax audit results requesting in writing to conduct extraordinary on-site tax inspection;

-if appeal was submitted to the higher tax authority (by submitting documents that differ from those submitted by the taxpayer during on-site tax inspection) on the result of decision of the tax authorities (for violation of the tax legislation based on the results of the tax audit).

  • The roles of the tax authorities have been increased with operational tax audit measures in order to identify taxpayers whose business entity (object) is not registered with the tax authorities. 
  • The following financial sanctions have been added for violations related to provision of reports and other information:

-financial sanction for failure to submit a transfer pricing notification has been increased from AZN 500 to AZN 2,000.

-financial sanction of AZN 1,000 shall be imposed on a taxpayer for failure to submit the information on the norms of consumption of raw materials and materials required per unit of production within the specified period or for providing distorted information in the submitted form.

-financial sanction of AZN 2,000 shall be imposed for non-submission within the specified time or submission incorrect information is indicated in the notification on the controlled foreign enterprise; 

-financial sanction of 2% of the invoice value or invoiced part of the imported goods in respect of micro-business entities or 5% in relation to other persons shall be applied to the taxpayer who did not submit the information on imported goods or incorrectly submitted form. 

-financial sanction of AZN 100 shall be imposed for non-submission of information on account payable and receivables; 

-financial sanction of AZN 100 (for each payment order) for non-inclusion or inclusion of distorted information in the payment orders;

-financial sanction of 10% to be applied to the buyer for unofficial expenses by non-accounting of income and/or expenses was increased to 20%;

  • Tax rate on income of individuals who are not registered with the tax authority as taxpayers derived from the provision of goods referred in Article 3.5 of the Law of the Republic of Azerbaijan “On Cashless Payments” to be increased to 5% (from 2%).
  • Except micro-business entities, small (from January 1, 2023), medium and large (from January 1, 2022) entities should keep records of income and expenses for profit tax purposes only based on the accrual method.
  • In accordance with the amendment on the Article of expenses connected with the generation of income, the losses, damages and similar shortfalls incurred within the norms of natural losses established by the legislation shall be deductible for tax purposes.
  • The losses, damages and similar shortfalls incurred within the norms of natural losses established by the legislation shall not be considered as VATable transactions.
  • Freight forwarding services related to international and transit cargo transportation will be taxed at 0% VAT rate.
  • If the goods released into the territory of the Republic of Azerbaijan in the form of temporary import and placed under the special customs procedure of temporary import are subsequently changed its import regime to free circulation regime, the VAT paid upon import operations will be offset in the reporting month of such goods to be placed under free circulation regime.
  • Taxpayers engaged in wholesale and retail sale of agricultural products are not allowed to offset VAT paid for 2 consecutive years for agricultural products obtained after 1 January 2022.
  • Persons engaged in production activities with an average number of more than 10 employees (actually employed) per quarter will not be entitled to become simplified taxpayer.

 

20 Nov, 2021