The Tax Code of the Republic of Azerbaijan was amended with effect on January 1, 2013. While overall there are more than 100 amendments, for some matters, the revisions have been considerable.
The draft amendments were circulated among consultants and industry specialists for some time prior to being approved into law. A matter of particular interest to the general public was the proposed reduction of personal income tax rates. As the package was approved, other important amendments were introduced into Azerbaijani tax law.
Tax Risks & Partnership Agreements
The Tax Code now incorporates definitions of tax risks and their minimization. Importantly, taxpayers can now enter “voluntarily” into tax partnership agreements (“agreements of intent”) with the tax authority for the minimization of tax risks. We understand such agreements to provide a basis for the taxpayer and the authority to agree in advance on the tax treatment of a transaction (activity by the taxpayer) to determine the taxpayer’s tax obligations.
The amendments do not refer to any approved form of a tax partnership agreement, nor do they provide for a procedure to enter into the agreement or outline the substance of it. According to the implementing Presidential Decree, these are to be addressed by the Cabinet of Ministers before March 2013. A form of the taxpayer’s application to enter into the tax partnership agreement is to be approved by the Ministry of Taxes.
The tax authorities are now precluded from collecting tax debts, interest, and sanctions from a taxpayer without first allowing the taxpayer to appeal the assessment that a taxpayer does not agree with in court. Such an appeal can be filed within 30 calendar days of receipt by the taxpayer of a tax assessment notice; failing an appeal, the assessment is implemented by banking and similar financial (credit) institutions. A taxpayer that appeals a tax (interest and sanction) assessment must now allocate (freeze) from its accounts funds the amount of 105% of an appealed assessment.
An office (chamber) audit can now be conducted based on the information of the taxpayer’s activities from “known sources” (along with the tax returns, reports, and other documents filed by the taxpayer available to the tax office). Cases in which a tax assessment (supposedly, contrary to a taxpayer’s determination of his or her own tax liability) can be carried out by the tax authority now include the taxpayer’s failure to submit documents (other than a tax return), where such are required by the tax office to verify the assessment.
A field (onsite) tax audit can be suspended for a period of up to nine months in cases where the taxpayer is absent from the address registered with the tax authority or locating the taxpayer is impossible, upon temporary disability of a head of the taxpayer or disability of a sole proprietor, upon involvement of a specialist and expert invited by the tax authority, before the documents in relation to the audit are received from a foreign country, or before a court issues an order for the seizure of documents and items that the taxpayer refused to release during the audit.
Large- & Special-Regime Taxpayers
The Tax Code now defines large- and special-regime taxpayers (previously, such taxpayers were determined based on the criteria established by the Cabinet of Ministers).
Large taxpayers include those (i) with owned assets valued for each of the last three years at more than AZN2.5 million and an annual turnover for the last three years in excess of AZN1.25 million; or (ii) with the aggregate of tax and non-tax payments for each of the last three years of more than AZN500,000; or (iii) natural monopolies or taxpayers with dominant positions in a market as well as their subsidiaries, and Azerbaijani tax residents.
Special-regime taxpayers are those operatingpursuant to production sharing, main export pipeline, and similar agreements approved into law as well as oil and gas, oil and gas export operations, and special economic zone laws subject to special tax regimes and, also, diplomatic and similar missions, consular sections, and other official representations of foreign countries in Azerbaijan.
Exemptions & Rate Reductions
A long-awaited personal income tax reduction has been approved. Although the highest tax rate bracket in Azerbaijan remains higher than in other CIS and neighboring countries that introduced flat income tax rates, it has been reduced from 30% to 25%. The upper threshold for the lower tax rate bracket at 14% has been increased to AZN2,500 (monthly) from AZN2,000; threshold amounts applicable to annual income were likewise increased.
By a separate act, a long-standing exemption for the income tax of interest payable by banks and financial (credit) institutions on deposits with them of individuals was prolonged for another calendar year.
Industrial and technological parks are now subject to a preferential tax treatment.
Earnings retained for the construction and maintenance of infrastructure in an industrial and technological park are not subject to the profits (corporate income) tax. Similarly, income from activities in industrial and technological parks of the residents of such parks is exempt from taxation for a period of seven reporting years starting with the year of registration at the park; this exemption also applies in relation to the personal income tax of sole proprietors operating in industrial and technological parks. Imports for technological and industrial parks are not subject to the value-added tax (VAT); the same exemption applies to imports by park residents for a period of seven years.
The Tax Code now clarifies that the services of an insurance agent and insurance broker are to be covered by the definition of financial services; this would not make such services subject to VAT.
A new threshold amount has been introduced for businesses to become VAT payers. This amount is now the same for sole proprietors and entities and is set at AZN120,000 of any taxable (VAT-able) transaction(s) during any month(s) of any consecutive 12-month period.
VAT offsets are now limited in time to three years.
All tuition fees are now exempt from VAT (as opposed to only pre-school tuition fees previously). This exemption continues to be an exemption without a credit, i.e., input VAT by an educational institution typically would not be offset (unless other circumstances prescribed by the Tax Code apply).
Importantly, the Tax Code now explicitly exempts the “supply of participation shares or shares of an entity” from VAT; previously, this exemption applied as a matter of practice.
Another important amendment regarding VAT is in relation to the time of supply for VAT purposes. If the payment for the supply is made within 30 days of the actual supply, then the time of supply is the date of payment; otherwise, the time of supply is the date of submission of a VAT electronic invoice or, failing which, the date of actual supply (commencement of shipment if such is a part of the supply). Previously, taxpayers did not have the 30-day period before the VAT was due to the budget.
The tax authorities can now obtain and share pursuant to “international agreements for tax matters” information on the bank transactions of Azerbaijani taxpayers.
Payments for activities in Azerbaijan in relation to culture, arts, theater, cinema, radio, music, sports, engineering, architecture, and science are now specifically included into the list of types of income in the Tax Code that are sourced from Azerbaijan. We understand the revision is intended to capture the Azerbaijani income of visiting performers, artists, sportsmen, and scholars, among other purposes. Following a decision of the Constitutional Court earlier in 2012, confirming the right of the authorities to apply “market price” rent for tax purposes, the Tax Code now explicitly recognizes the right of the tax authorities to apply market rates to rent for immovables (except for residential premises). Importantly, under the Implementing Decree, the State Committee of the Republic of Azerbaijan for Property Matters is required to submit monthly to the Ministry of Taxes information to the state immovables register on the immovables of registered taxpayers. Likewise, the Ministry of Justice must submit monthly to the Ministry of Taxes information on notarized transactions in relation to the sale and purchase of immovables.
Fixed assets now include assets with a value in excess of AZN500 as opposed to AZN100 previously. Property and land tax exemptions are provided for industrial and technological parks. Considerable revisions have also been introduced to highway taxes.
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