Tax Code of Azerbaijan: 2022 Tax Amendments

 

At the end of 2021, the package of proposed changes to the Tax Code of the Republic of Azerbaijan was approved and is effective since 1 January 2022. 

The main changes and innovations include income received from the source outside of Azerbaijan during payments to countries with preferential taxation (tax havens), controlled foreign companies and their taxation, certain concessions and regulations in the fields of mineral resources and oil & gas, determination of the excise bearing turnover, as well as on-site tax inspections.

 

Controlled foreign company and its taxation

 

From January 1, 2022, the concept of a controlled foreign company and the new Article 14-2, respectively (The controlled foreign company and its taxation clause) have been added to the Tax Code.

The added controlled foreign company concept defines that, profit of an company registered in a country (territory) which is not considered a resident of the Republic of Azerbaijan for tax purposes, in countries with preferential taxation, i.e. the tax rate is 2 times or more lower than the rate specified in this Code and (or) in a country where there is a law on the confidentiality of financial information or information about companies that are allowed to maintain confidentiality about the actual owner of the property or the recipient of income (profit)/beneficiary are taxed in the Republic of Azerbaijan in the following cases:

1. If a person who is considered a resident of the Republic of Azerbaijan himself or together with an independent resident or non-resident persons have the right to vote directly or indirectly in a foreign company for more than 50 percent or possess more than 50 percent of its charter capital or have the right to receive more than 50 percent of the profits of that foreign company;
2. if the tax actually paid on the profit of a controlled foreign company is 2 or more times less than the corporate income tax payable on that profit in Azerbaijan;
3. if more than 30% of the annual income of a foreign company consists of the following income:

1. interest on financial assets;
2. royalties received from intellectual property;
3. income from the sale of shares and stakes;
4. income from financial leasing;
5. income from insurance, banking and other financial operations;
6. income from companies that receive income from goods and services that do not create any economic value.

 

The form and procedure for submission of the certificate on the controlled foreign company by the resident individuals and legal entities to the tax authority shall be approved by the body (institution) determined by the relevant executive authority. When the profit of a controlled foreign company in accordance with this Article is taxed in the Republic of Azerbaijan, double taxation from the same object of taxation shall not be allowed and the amount of tax paid (deducted) from that profit shall be taken into account.

 

According to the new addendum, the following income received from a controlled foreign company is not included in the taxable income of the controlled foreign company:

• dividends received from a controlled foreign company;
• if the resident company is a subsidiary of the controlled foreign company, the taxable profit related to the resident company from the generalized (consolidated) profit of the controlled foreign company;

• Income received through the permanent establishment of a controlled foreign company in the Republic of Azerbaijan, as well as income received from a company established in the Republic of Azerbaijan and taxed in the Republic of Azerbaijan.

 

Tax Inspection

 

According to the Tax Code of Azerbaijan 2022 Amendments, the documents that affect the calculation of taxes by the taxpayer and differ from the documents submitted during the inspection must be submitted within 30 working days from the date of appointment of the additional tax inspection.

If it is decided to conduct additional tax inspections, then the scheduled inspection shall be considered a continuation of the previous on-site tax inspection and may be conducted only once, not exceeding 60 business days. No decision may be made to conduct an additional tax inspection based on the results of the additional tax inspection.

 

Off-site Tax Inspection

 

Off-site tax inspection within 60 working days from the date of submission by the taxpayer of the tax return for the purpose of tax reporting, as well as a letter of calculation of current tax payments in respect of income and income tax return (excluding income tax at the source of payment and income tax return of a private notary). in the case of declarations, as well as references on the calculation of current tax payments, within 30 working days. If relevant information on foreign income is received from the competent authorities of foreign countries, the off-site tax inspection covers the period of 3 years prior to the date of the decision of the tax authority to conduct such inspection and is carried out within 30 working days from the date of receipt of information. Upon expiration of this period, the declaration provided for in the first and second sentences of this Article, a certificate on the calculation of current tax payments or information obtained from abroad, as well as in case of revealing additional documents or other information of known source for tax assessment after the completion of the off-site tax inspection a repeated off-site tax inspection may not be conducted on the revised declaration issued on the notification sent to the taxpayer within 5 working days and the updated report within 10 working days.

 

On-site Tax Inspection

 

On the basis of the decision of the higher tax authority, covering the period checked by the previous on-site tax inspection, regardless of the terms of fulfillment of the tax liability specified in the Tax Code in the following cases on-site tax inspections are executed:

• when taxpayers who do not agree with the results of the tax inspection request in writing to conduct an extraordinary on-site tax inspection;
• in case of non-submission of documents by the taxpayer during the on-site tax inspection and appeal of the decision of the tax authority to hold the taxpayer liable for violation of the tax legislation based on the results of the tax inspection to the higher tax authority by submitting documents;
• when the decision of the tax authority to hold the taxpayer liable for violation of the tax legislation as a result of the tax inspection is appealed to the higher tax authority by submitting documents other than those submitted by the taxpayer during the on-site tax inspection.

When taxpayers who do not agree with the results of the tax inspection request in writing to conduct an extraordinary mobile tax inspection, the tax inspection may not be conducted by the officials of the tax authorities who conducted the previous inspection.

 

Clarification of Excise Turnover

 

In this regard, a new Article 186-1 has been added to the Tax Code of Azerbaijan 2022. This article defines the followings:

1. If a tax has been calculated for the manufacturer of excisable goods for the release (shipment) of goods outside the premises of production, the excise tax calculated in the event of deterioration or expiration of the goods or their return for other reasons shall be reduced during the reporting period.
2. In case of return of excisable goods by the producer of excisable goods outside its production premises due to deterioration or expiration of their use, the taxpayer shall apply to the tax authority for registration of these goods and reduction of the assessed tax. Within 5 working days from the date of application, these goods shall be acted with the participation of the responsible persons of the tax authority.
3. Reduction of excise tax on spoiled or expired products shall be carried out during the reporting period when the relevant act is drawn up, and when the tax report is submitted, the act drawn up shall be submitted to the tax authority. In case of destruction of spoiled or expired products, the offset excise tax shall be calculated in the budget during the production of those products.

 

Electronic Commodity-Transport Invoice and Electronic Waybill for Trucks

 

After that, in accordance with the Law of the Republic of Azerbaijan "On Road Transport", an electronic invoice for the transportation of goods and an electronic waybill for trucks will be compiled. The form, application, registration and use of the electronic commodity invoice and the electronic waybill for freight transport will be approved by the body (institution) determined by the relevant executive authority.

 

Tax Preference

 

This exemption covers taxpayers for other mineral resources, except oil & gas. Thus, the amount of mining tax assessed by a taxpayer for a calendar year is reduced by not more than the amount of land tax assessed and paid by him for that calendar year for the land on which these minerals are extracted.

For this purpose, no later than March 31 of the year following the reporting year, the taxpayer shall electronically submit to the tax authority the information on the land plot and minerals extracted from that area, determined by the body (institution) determined by the relevant executive authority. The tax reduction shall be carried out in the month in which the relevant information form is submitted.

 

Restriction of income from Azerbaijani sources in countries with preferential taxation

 

To persons established (registered) in countries or territories with preferential taxation, including their branches or representative offices in other countries, as well as bank accounts in countries or territories with preferential taxation, permanent establishments of residents and non-residents in the Republic of Azerbaijan, as well as for direct or indirect payments made by unregistered resident individuals at tax authorities, the following shall not be considered as income from an Azerbaijani source:

1. when the principal amount of the debt is refunded (excluding interest);
2. when making payments to correspondent accounts opened by resident banks;
3. If the payment amount is refunded to the bank account of the person who paid from the bank account in the preferential taxation country within 1 year, including the date on which the funds are returned to the account from the date of payment accordingly;
4. in case of receipt of e-commerce services by individuals who are not registered with the tax authority;
5. when payments are made by individuals not registered with the tax authority in countries or territories subject to preferential taxation for the purchase of goods (works, services), including movable or immovable property, for personal consumption in countries or territories subject to preferential taxation;
6. when making payments related to the acquisition of debt securities;
7. Payment of interest and dividend income on investments in the Republic of Azerbaijan and deposits placed with financial institutions in the Republic of Azerbaijan;
8. in case of payment of salaries and pensions of residents of countries or territories with preferential taxation;
9. when paying fees and other charges to the competent state authorities, when making payments related to obtaining permits and certificates

 

New Requirements for Taxpayers

 

The taxpayers (except for taxpayers operating in the oil and gas sector or belonging to the public sector) shall submit the following information on goods to be imported by them to the tax body where the taxpayer is registered, in the form determined by the relevant executive authority, before the date of import of goods:

1. on the place of storage (unloading) of goods used on the basis of property, lease or other property rights and (or) registered with the tax authorities as an economic entity (object);
2. on the contract concluded between the parties and the place of storage of the goods in case the goods are transferred to responsible protection or storage in places belonging to other persons;
3. about the persons who ordered the goods if they were delivered on the basis of the order (TIN if the customer is a taxpayer, name, surname, patronymic and FIN if the customer is an individual) and the amount of the order for each customer

 

Procedure for recording of income and expenses

 

According to the Amendments to the Tax Code of Azerbaijan 2022, micro-business entities, depending on their choice, must keep records of income and expenses by the cash or accrual method,; however, and small, medium and large businesses must only use the accrual method for the recording of income and expenses as accounting principle.

The accrual method is applied to medium and large businesses from January 1, 2022, and to small businesses from January 1, 2023.

 

Requirements for Payment Instructions of VAT Payers

 

According to the addition, taxpayers registered for VAT purposes will have to submit to the tax authority electronically the information on creditor and debtor debts for the tax year approved by the body (institution) determined by the relevant executive authority on the same day as their declarations.

When making a payment transaction between taxpayers, the following information must be indicated in the payment order submitted to the bank carrying out the transaction or to other persons carrying out banking operations:

1. For operations to be issued an electronic invoice - the series and number of the electronic invoice. When paying for goods (works, services) received from the same taxpayer on a regular and permanent basis during the calendar month and issued with electronic invoices, for such transactions - the agreement concluded between the parties or the date and number of the annex to that agreement;
2. on foreign trade activity - serial and number of the customs declaration, date and number of the invoice document related to purchase of works and services;
3. for debt payments - the date and number of the loan agreement or debt repayment claim concluded between the parties, indicating the purpose of debt repayment;
4. on advance payments - the date and number of the claim or the agreement concluded between the parties or the annex to the agreement, indicating the purpose of the advance payment

 

Delay for Tax Liabilities

 

According to the new text of Article 85.9 of the Tax Code of Azerbaijan 2022 Amendments, the taxpayer must submit a written application to the tax authority on the type (s) of tax in order to extend the period of fulfilment of the tax obligation. This requirement applies to the following debt amounts:

1. Debt of a taxpayer who is a micro and small business entity from 2,000 to 20,000 manats,
2. Debt of a taxpayer who is a medium business entity from 20,000 to 100,000 manats
3. If the debt of a large business entity is from 100,000 to 300,000 manats,

The documents containing the following information shall be attached to the application by the taxpayer:

1. In any case where the payment of tax liabilities is allowed for a later period, the balance of funds in the taxpayer's cash, current or other accounts in national or foreign currency, the name and amount of debt, as well as the last one, indicating the TIN of debtors and creditors references on bank account operations during the year;
2. References of the relevant state bodies on the occurrence of the event in relation to the damage caused to the taxpayer as a result of a natural disaster and other force majeure and on the amount of damage caused as a result

In addition, 2 new cases have been identified for the late fulfilment of tax obligations:

• 85.6.3. In case of submission of a certificate confirming the debt of the customer issued by the body (institution) determined by the relevant executive authority on the state order executed by the taxpayer in connection with the execution of state orders in accordance with the Law of the Republic of Azerbaijan "On Public Procurement"; When applying for, regardless of the amount of debt, only the documents provided for in Article 85.9.1 of this Code shall be attached)
• 85.6.4. only when the taxpayer provides seasonal goods, works or services

 

Requirements for Pledge and Guarantor

 

If the amount of tax liability exceeds the upper limit of the amounts specified in Article 85.9, as amended, according to the category of business entities, any of the following documents shall be attached to the application by taxpayers in addition to the documents specified in Article 85.9:

1. bank guarantee;
2. surety agreement. Under this agreement, the principal must be a person registered with the tax authority for at least one year, have no debts to the state budget, are not a risky taxpayer, and have assets that are not legally loaded in accordance with the law.
3. pledge agreement. The contract must contain the necessary information about the property to be pledged as security for the tax liability in accordance with the law. 50 percent of the total market value of the pledged property must exceed the amount of the debt.

However, in accordance with the Law of the Republic of Azerbaijan “On Public Procurement”, in connection with the implementation of state orders, the above-mentioned no additional documents are required.

In addition, it is noted that the invalidation of the pledge agreement in the manner prescribed by law does not cancel the tax liability of the taxpayer. Expenses related to the registration of the pledge agreement are paid by the taxpayer;

4. written consent to the registration of movable and immovable property owned by the taxpayer and suitable for sale. The agreement must contain the necessary information about the property, 50 percent of the total market value of the property must be more than the amount of debt.

If the taxpayer's application is granted, the property specified in the agreement shall be registered by the tax authority during the period of extension of the tax liability, with the right of use of the taxpayer retained. During the period of prolongation of the tax liability, the tax authority shall not apply to the court for the sale of such property by auction, and the taxpayer shall provide such property with the consent of the tax authority.

 

The period of fulfilments of the tax liability may not be extended in the following cases

 

• when a criminal case is filed against a taxpayer for violation of tax legislation;
• if the taxpayer is a risky taxpayer;
• when the amount of tax liability is disputed by the taxpayer in court or administratively;
• if the amount of tax liability is less than the following limits for the category of business entities:

- If the debt for micro and small businesses is less than 2,000 manats;

- If the debt for taxpayers who are medium-sized businesses is less than 20,000 manats;

- When the debt for a large business entity is less than 100,000 manats.

• In accordance with the Law of the Republic of Azerbaijan “On Public Procurement”, a certificate confirming the debt of the customer issued by the body (institution) determined by the relevant executive authority on the state order executed by the taxpayer in connection with the execution of state orders is submitted by the taxpayer only in cases when the provision of seasonal goods, works or services is carried out, the period of registration of the taxpayer with the tax authority is less than 3 years.

If 75% of the deferred debt is repaid by the taxpayer during the deferred period, the deferral shall be deferred for a period not exceeding 6 months on the basis of the taxpayer's application, and the deferral shall be not exceeding 6 months within the calendar year which may be increased by the decision of the higher tax authority for the period of absence.

In case of extension of the period of fulfillment of the tax obligation by the decision of the tax authority, no interest shall be accrued from the date of application for the debt and during the period of extension of the period.

If a taxpayer incurs a new tax debt during the period for which the tax debt has been deferred by a decision of the tax authority, that tax debt shall be paid to the state budget in accordance with the general procedure established by the Tax Code.”;

The body (institution) designated by the relevant executive authority shall consider the taxpayer's application within 30 days from the date of receipt of the application and other documents and prevent accidents or other occurrences at natural and disaster potential facilities, except for cases that do not allow extension of the tax liability period. in case of damage to the taxpayer as a result of force majeure (in this case, the taxpayer must submit certificates of the relevant state bodies on the occurrence of the event and the amount of damage), if the taxpayer is in danger of bankruptcy balance of funds in the taxpayer's cash desk, current or other accounts in national or foreign currency, name of debtors and creditors, TIN with reference to receivables and payables), "On public procurement" Submission of only seasonal goods by the taxpayer upon presentation of a certificate confirming the debt of the customer issued by the body (institution) determined by the relevant executive authority on the state order executed by the taxpayer in connection with the execution of state orders in accordance with the Law of the Azerbaijan Republic , decides to extend the period of fulfillment of the tax obligation or to refuse to extend the period of fulfillment of the tax obligation in case of performance of works or provision of services. The decision of the body (institution) determined by the relevant executive authority to extend the period of tax liability, the reason for the extension, the amount of tax debt, the type (s) of deferred tax, the term and procedure for payment, as well as collateral, bank guarantee, taxpayer's property entries must be made about the listed movable and immovable property and the guarantor;

The decision to extend the period of fulfillment of the tax liability shall come into force from the date specified in this decision. However, the period of extension of the tax liability on the basis of the decision of the tax authority is not included in the 5-year period for claiming the tax debt. That is, the tax authorities have the right to deduct the calculated (recalculated) amount of taxes, interest and financial sanctions within 5 years after the end of the tax reporting period.

Travel expenses on business trips in the territory of the Azerbaijan Republic are related to expenses deducted from income within the norm determined by the body (institution) determined by the relevant executive authority on the basis of relevant supporting documents (excluding daily expenses). In case of non-submission of relevant supporting documents on hotel expenses during a business trip in the territory of the Azerbaijan Republic, 50 percent of the part of the 1-day norm of travel expenses determined for hotel expenses shall be deducted from income.

Losses incurred within the norms of natural losses determined by the body (institution) determined by the relevant executive authority, damage within the norms of natural losses and similar shortfalls are deductible for tax purposes.

 

Additional amendments on the application of the Transfer Pricing

 

According to the new amendments to the Tax Code of Azerbaijan 2022, taxes on transactions between a resident of the Republic of Azerbaijan and his representative office, branch and other division located in other states may also be calculated on the basis of the transfer pricing.

In the previous edition of the Tax Code, the transfer price is applied without any conditions to the following cases:

• between a resident of the Republic of Azerbaijan and non-resident persons mutually dependent on him, as well as any representative office, branch or other unit of that resident located in other states (territories);
• between the permanent representative office of the non-resident in the Republic of Azerbaijan and the non-resident himself or any of his representative offices, branches and other divisions located in other states, any other person interdependent with that non-resident and located in another state;
• between entities established (registered) in countries with preferential taxation with a permanent establishments of a resident of the Republic of Azerbaijan and (or) a non-resident in the Republic of Azerbaijan.

In other cases, transfer pricing is applied if the following conditions are met:

• If the persons traded in products traded on international commodity exchanges and (or);
• If the total income of a resident or non-resident permanent establishment of the Republic of Azerbaijan in the Republic of Azerbaijan during the tax year is more than 30 million manats and the share of transactions with each non-resident in total income (expenses) is more than 30 percent.

 

Expanding activities that are considered a permanent establishment

 

According to the new amendments, montage facilities and control activities related to such facilities are also considered permanent establishments. Also, a permanent establishment is a person who collects the customer base for a non-resident enterprise or a non-resident individual and organizes work with customers.

In addition, construction and repair sites, installation, assembly or prefabrication facilities, as well as control activities related to such facilities are carried out by a non-resident as a general contractor, in which he is involved and interdependent to carry out these activities and (and or) the duration of the activities of other subcontractors whose activities are supervised by the general contractor. The provisions of this Article shall apply if the period of validity of subcontractors exceeds 30 days;

Whether the joint implementation of any of the following types of activities in the Republic of Azerbaijan by a non-resident and its interdependent persons is for entrepreneurial purposes or the results of the joint implementation of any of these activities are not preparatory or ancillary and (or) the activities of such persons are treated as permanent establishments if their activities complement each other as part of a single business process:

1. exclusive storage or display of goods and products belonging to a non-resident enterprise;
2. maintenance of stocks of goods and products owned by a non-resident enterprise for the purpose of processing by another person and subsequent export from the Republic of Azerbaijan;
3. purchase of goods or collection of information by the non-resident enterprise only for itself;
4. any other preparatory or ancillary activity of the non-resident enterprise for itself;
5. Joint implementation of any of the activities specified in paragraphs 1-4.

Sanctions

 

According to the Tax Code of Azerbaijan, a tax report (including the auditor's opinion in cases where it is planned to be inspected by the auditor), as well as the total value of transactions based on transfer prices exceeds 500,000 manats and in cases provided for in the Tax Code a financial sanction in the amount of AZN 2,000 shall be imposed on a taxpayer who fails to submit a certificate for profit (income) tax return and a certificate on a controlled foreign enterprise within the specified period or provides incorrect information in the certificates.

 On imported goods, except for taxpayers operating in the oil and gas sector or belonging to the public sector, specified in the Tax Code of Azerbaijan, the goods to be imported by other taxpayers do not submit the form approved by the relevant executive authority (institution) or In accordance with the taxpayer submitting in a distorted form, a financial sanction in the amount of 2 percent of the invoice value of imported goods or its distorted part shall be applied to micro-entrepreneurship entities and 5 percent to other persons.

Failure of taxpayers registered for VAT purposes to submit information on creditor and receivable debts on the same day as the VAT return shall be subject to a financial sanction in the amount of 100 manats by the decision of the head of the tax authority (his deputy).

From January 1, 2022, a financial sanction in the amount of 100 manats shall be imposed on a taxpayer who fails to indicate or distorts the information to be indicated in the destination of payment orders issued to banks;

As a rule, if the taxpayer has one economic subject (object) and that economic subject (object) is outside the place of location of the taxpayer, the taxpayer shall be re-registered at the address of the economic subject (object). If a taxpayer has two or more economic entities (objects), that taxpayer shall be re-registered at the address where the center of economic interests is located. In other cases, if the taxpayer has a branch, representative office or other economic subject (object), the taxpayer shall be registered for tax both at its place of residence and at the address of its branch, representative office or other economic subject (object). To micro-entrepreneurship entities, non-profit organizations for failure to register the taxpayer's economic subject (object) with the tax authorities in accordance with the procedure established by the body (institution) determined by the relevant executive authority and (or) for providing distorted information on the business subject (object's) area and financial sanctions in the amount of 40 manats for persons engaged in non-entrepreneurial activities, and 400 manats for other persons;

 A financial sanction in the amount of AZN 100 shall be imposed on a taxpayer for sending such goods from one economic subject (object) to another economic subject (object) without drawing up an electronic invoice on intra-farm movement of excisable goods (except for oil products) is done.

 

Financial sanctions imposed on credit institutions and financial institutions

 

If legal entities and individuals engaged in entrepreneurial activity have funds in current or other accounts in national or foreign currency, for non-execution of their tax payment orders and orders of the tax authority:

- for non-timely execution of taxpayer's tax payment orders, as well as violation of the order of payments provided for in the Civil Code of the Republic of Azerbaijan - 50 percent of the amounts indicated in late payment orders or operations carried out in violation of the order;

- for non-execution of orders of the tax authority on deduction of tax debts, interest and financial sanctions from the taxpayer's account within 3 working days from the date of receipt, as well as violation of the order of payments provided for in the Civil Code of the Azerbaijan Republic; 50 percent of the amounts of operations carried out in violation of the order;

- Taxes, interest or financial sanctions imposed or recalculated by the tax authority in other cases, except for non-payment of taxes calculated and declared by the taxpayer within the specified period, as well as with the written consent of the taxpayer. issues an order with a writ of execution to a credit institution or a person conducting banking operations to freeze 105% of the amount of debt on current or other accounts in foreign currency for expenditure operations. In this case, credit organizations or persons conducting banking operations shall execute the taxpayer's payment orders, which provide for the withdrawal from the account of funds in excess of the funds frozen in bank accounts. For non-execution of orders of the tax authorities on freezing of these funds on expenditure operations at the time of receipt - 50 percent of the amounts specified in the non-executed order of the tax authority;

- If the taxpayer's funds in foreign currency in his bank account are not converted within 10 banking days from the date of receipt of the tax authority's order, the bank shall execute the order by converting frozen foreign currency funds at the exchange rate announced by the Central Bank of the Republic of Azerbaijan within the next business day. For violation of this requirement of the Tax Code - 50 percent of the amount specified in the disposal of the tax authority.

The amount of the financial sanction imposed shall not exceed 50 percent of the amount specified in those payment orders or impositions of the tax authority for non-timely execution of taxpayer's instructions on payment of taxes, non-execution of orders of the tax authority on deduction of tax debts, interest and financial sanctions from the taxpayer's account within 3 working days from the date of receipt, as well as violation of the Civil Code of the Azerbaijan Republic.