On 23 December 2016, the President of the Republic of Azerbaijan signed the Law on Amendments to the Tax Code of the Republic of Azerbaijan (the Law). The Law introduced major and revolutionary changes into the tax system of Azerbaijan.
Please see some of these changes below:
- Advance Tax Ruling - taxpayers will now be able to seek and obtain formal advance tax rulings from the tax authority on specific transactions, which will bring certainty to their tax planning and substantial mitigation and even avoidance of potential tax sanctions.
- Transfer Pricing - a brand-new Article 14-1 has been added to govern transfer pricing rules. This article will enable the tax authority to assess notional taxes based on one of four formulas listed in the article covering certain related-party transactions and dealings with offshore (tax heaven) jurisdictions. The list of such offshore jurisdictions will be published and updated annually.
- Tax Avoidance - the tax authority will now be entitled to scrutinize aggressive tax planning practices and assess taxes based on factual economic indicators by ignoring such tax avoidance mechanisms and pricing. Also it is stipulated that detection of tax avoidance is one of the major objectives of tax audits.
- Exchange of Information - financial institutions will be obligated to exchange financial information of their clients with the tax authority. This will enable the tax authority to implement its obligations under the relevant information exchange treaties (e.g. FATCA). Also, the Law allows the tax authority to monitor financial institutions to ensure that they properly observe their duties.
- Exemption from Taxes of Interest on Bank Deposits and Dividends from Investment Securities - the earlier 3-year exemption period has been increased to seven years. This will mean that the exemption will be valid until 1 February 2023.
- Decrease of Annual Depreciation Rate for Machines and Equipment - it has been decreased to 20 percent from 25 percent, while the depreciation rate will remain at 25 percent for high technology processing machines.
- Withholding Tax for Payments to Offshore Entities - all direct and indirect payments made to offshore (tax heaven) entities by resident entities and permanent establishments of non-resident entities will be subject to 10 percent withholding tax.
- Withholding Tax for Transfers to Non-Resident Web Wallets - 10 percent withholding tax will apply to any transfers to such web (bitcoin) wallets and local banks processing such payments will be obligated to withhold and pay this tax.
- Limitation of VAT for Sale of Locally-Produced Agricultural Products - now VAT will only apply to the retailer's margin rather than to the whole price of a product.
- VAT Exemptions - sale of poultry and sale of toxic assets of insolvent banks will be fully exempt from VAT for 3 years.
- Taxation of E-Commerce - provision of works and services by means of e-commerce will be subject to VAT, while sale of tangible goods will not be taxable. Hence, VAT is likely to apply to various downloads (e.g. applications, music, video, etc.) offered by non-resident providers. VAT will have to be discharged by registered taxpayers or by banks processing such payments if the buyer is not a registered tax payer.
- Taxation of Cash Withdrawals - local banks will have to withhold 1 percent tax from cash withdrawals made by resident entities and individual entrepreneurs.
The Law will become effective on 1 January 2017.
This LEGAL ALERT is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.