By TBY | Azerbaijan | Jun 26, 2014
A tax audit is an investigation into the background of business activity, accounting, documents, and tax returns of an individual or business by a tax agency. The idea of a tax audit normally conjures up feelings of anxiety even in people who believe their tax documents are perfectly in order.
The Azerbaijan Tax Code envisages the following types of tax audits:
2.On-site tax audit (field audit)
A mail audit is the simplest type of audit and does not require the taxpayer to meet with a tax auditor(s) in person. Upon the identification of any discrepancy, the tax authorities send a letter, either to an e-mail box of a taxpayer or a written letter, requiring the person to take certain actions, such as the provision of documentation, or the correction of a discrepancy, for example.
Mail audits are carried out based on tax reports/declarations available to the tax authorities, such as documents and information that reflect the calculation and payment of taxes, and documents on a taxpayer’s activity.
Mail audits are conducted within 30 days from the date when documents providing the basis for a tax calculation and payment are provided by the taxpayer. If it is identified that there is any inconsistency or mistake made by a taxpayer, the tax authority has the right to request additional information, documents, or explanations. If during a mail tax audit it is identified that taxes were incorrectly calculated by a taxpayer, the tax authorities will send a decision within five days of the assessment of taxes by the tax authorities. A taxpayer has the right to dispute the results of the mail audit.
A field tax audit is conducted at the premises of a taxpayer. There are two types of field audit:
The tax authorities inform the taxpayer in writing about the planned tax audit no later than 15 days before the date of the inspection.
A planned tax audit is limited to:
• The last three calendar years for profit, income, property, road, and land taxes;
• The last three years, including the year when the audit is performed, for other taxes (including VAT and excise tax, for example).
Planned audits are conducted no more than once a year. Planned audits may not last for more than 30 days; however, in exceptional cases an on-site tax audit may be extended for another 90 days.
Unplanned audits are conducted at the site of a taxpayer without any prior notification. Unplanned audits may be initiated in the following cases:
1. Untimely provision of information to the tax authorities as well as non-submission of reports after their requirement by the tax authorities;
2. If incorrect or distorted information is identified in the tax audit report;
3. If overpaid VAT amounts related to taxes, financial sanctions, and interest were allocated for the payment of other taxes, financial sanctions, and interest, etc. (in this case an unplanned tax audit is conducted with regard to the VAT operations of a taxpayer).
4. Upon application for a refund of overpaid taxes, financial sanctions, or interest;
5. If the taxpayer is suspected of tax evasion;
6. Based on the decision of a court or law enforcement agency (in case of criminal issues);
7. In case of the failure to provide the documents specified in Article 42.4 of this Code in the due period stipulated by this Article, or the provision of doubtful or distorted information required to implement tax control and implementation of enquiries made under international treaties;
8. In the event of the liquidation or reorganization of the taxpayer legal entity, for example; or
9. At the request of a taxpayer who disagrees with the results of a previously conducted tax audit.
With a project that was funded by the European Commission, the Azerbaijani tax authorities introduced the most advanced system of e-audit in the CIS. The application of the e-audit in Azerbaijan will improve tax administration and simplify the submission of e-statements. A new system will also prevent tax avoidance and support an increase of budget receipts and transparency, as well as improve the analytical, technological, and methodical approaches while auditing in large- and medium-sized enterprises. Currently, e-audits are beginning to be implemented in Azerbaijan.
FREEZING OF TAX AUDITS
The tax authorities may suspend (freeze) planned and unplanned tax audits for up to nine months in the following cases:
• If during a field tax audit, a taxpayer cannot be located at the address registered with the tax authorities or it is impossible to locate the taxpayer and identify the location or the seat of the entity;
• In case of the temporary disability of the head (or deputy) of a taxpayer or an individual entrepreneur;
• If an invited expert or examination is initiated by the tax authority; or
• In case documents or responses to the tax authorities’ request are being awaited from foreign countries in order to conduct the tax audit unbiased and fully.
TAX AUDIT FINDINGS REPORT (TAX AUDIT ACT)
The findings, including but not limited to the understatement of taxes identified by tax auditors during a tax audit, are included into the tax audit finding report—named as the “Tax Audit Act”—and provided to a taxpayer or his/her authorized representative within five days from the date of issuance of such a Tax Audit Act. If a taxpayer agrees with the content of the Tax Audit Act, it may sign stating that it agrees with the contents (including the findings if any). If a taxpayer disagrees with the Tax Audit Act, it has a right to review the findings and dispute or provide comments (if any) within 30 days after receipt of the audit.
DISPUTING A TAX AUDIT ACT
If a taxpayer does not agree with the results of the tax audit and/or contents of a Tax Audit Act, it has a right to dispute a Tax Audit Act and outline its arguments in its non-agreement letter by providing additional documentation to the tax authorities. The tax authorities will then review the arguments provided by the taxpayer together with the taxpayer, or its representatives, within 15 days after the receipt of such explanation. Thereafter, the tax authorities shall decide one of the following within 10 days:
A. Application of taxes, financial sanctions, etc.
B. Refusal of application of taxes, financial sanctions, etc.
C. Conduct of an additional tax audit.
If it was decided by the tax authorities to apply taxes or financial sanctions, then the taxpayer must be notified within 10 days.
DISPUTING A DECISION OF THE TAX AUTHORITIES
A taxpayer has a right to appeal the decision of the tax authorities to the Ministry of Taxes within three months. Alternatively, the taxpayer has a right to appeal to the Court. The higher tax authority shall review the received complaint and provide its written response within 30 days after the receipt of a complaint. Filing a complaint with the tax authority as well as to the Court freezes the obligation to pay financial sanctions; however, the assessed taxes shall be paid to the State Budget.
APPEAL COMMITTEE & COURT
After the above resources are exhausted, there is also one more step before appealing to the court. It is the Appeal Committee. The Appeal Committee’s purpose is to re-analyze previously submitted complaints upon the submission of a written application (together with other documents and follow-on requirements). Submission of the application to the Appeal Committee can be done electronically. The Appeal Committee is headed by the first deputy of the Minister of Taxes, Natiq Aliyev.
OUR SERVICES REGARDING TAX AUDIT SUPPORT & APPEAL SERVICES
Two people with identical situations can walk into an audit and come out with very different results. The loser can end up owing much more in taxes. The winner can end up owing fewer taxes or even no taxes. KPMG Azerbaijan’s Tax and Legal team can assist you with the below in regard to tax audit support services:
• Conduct of Tax Health checks to identify risks and opportunities;
• Review of letters received from the tax authorities regarding mail audits and preparation of responses;
• Assistance during the conduct of a field tax audit, including conduct of field tax audits at the premises of KPMG Azerbaijan (instead of the client), including meeting and discussions with tax auditors, responding to the questions of tax auditors during a tax audit, arguing the position of the clients, arranging meetings with a head of the tax audit department prior to the issuance of a Tax Audit Act, and reviewing of a draft Tax Audit Act;
• Review of assessments made by a Tax Audit Act and assistance in the preparation of a rejection letter to the assessments made in the Tax Audit Act;
• Preparation of a complaint letter regards the decision of the tax authorities;
• Preparation of a complaint letter to the Ministry of Taxes;
• Preparation of an appeal letter to the Appeal Committee; and
• Appealing the decision of the tax authorities in court.
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