INSIGHT: Changes to Azerbaijan Tax Code for 2020

The Parliament of Azerbaijan passed a law amending the Tax Code of Azerbaijan (TCA) on November 29, 2019. The amendment law brought in several changes of a substantive nature—from changes to taxpayers’ record-keeping obligations to the introduction of new terms like “risky taxpayers” and “sham transactions,” as well as changes of a technical nature, such as provisions concerning simplified tax and excise rates. This Insight focuses on the substantive changes to the TCA.

Value-Added Tax: Time of Supply

The cash method for the recognition of taxable supply replaces the previous system employing dual cash and accrual accounting.

Previously, timing for recognition depended on whether the payment was received within or after 30 days from the date of taxable supply. If payment was made within the 30-day period, the timing was linked to the date of payment (cash method). If the payment was made after that period, the date of submission was the electronic tax invoice date (accrual method).

Now, timing for taxable transactions must be determined based on the date of payment for supplied goods, works or services. The precise date depends on the nature of payment:

• cash payments—date payment received;
• non-cash payments—date funds received to the bank account;
• mutual settlements—date obligation discharged or settled;
• accounts receivables—date claim expired;
• in-kind or barter transactions—date assets acquired (bartered);
• gratuitous alienation—date of such alienation;
• right of claim assignments—date right of claim assigned.

Record-keeping Obligations

Three main provisions were introduced in respect of the record-keeping obligations of taxpayers.

First, the amendments abolish the previous system requiring value-added tax (VAT)-payers to prepare both an electronic VAT invoice and an electronic commercial invoice upon the taxable supply. Now, VAT-payers are only required to submit electronic commercial invoice to their customers upon the supply.

Secondly, taxpayers purchasing goods from persons that are not registered as taxpayers are now required to issue so-called purchase acts and, within five days from such purchase, “electronic purchase acts.”

Thirdly, taxpayers that conduct taxable and tax-exempt transactions, or transactions that are not subject to profit tax, must keep separate records of income and expenses incurred in connection with these transactions.

“Risky Taxpayers” and “Sham” Transactions

A “risky taxpayer” is a person that:

• meets the criteria prescribed by the Cabinet of Ministers of Azerbaijan (yet to be published); and
• is deemed to be a risky taxpayer by the decision of the Ministry of Economy.

The definition also includes in this category a person that conducts “sham” and/or “risky” transactions. While “risky” transactions are not expressly defined, “sham” transaction (literal translation: “non-commodity transaction”) is a transaction which has been identified during tax control measures and which has been carried out to conceal another transaction for the purposes of making a profit without actually supplying goods, works and services.

Consequences

Some of the key tax implications from undertaking sham transactions include:

• Non-deductibility of expenses: For profit tax purposes, it will not be possible to deduct expenses based on documents executed as part of a sham transaction. The expenses will need to be deducted in accordance with “market price” and related TCA provisions.
• Inability to claim input VAT: For VAT purposes, it will not be possible to claim input VAT based on documents executed as part of a sham transaction and/or risky transaction.
• Beneficiary responsible for tax obligations: The actual “beneficiary” from a sham transaction may be held responsible for fulfillment of tax obligations. A “beneficiary” is a physical person who actually receives income from activities carried out as part of a sham transaction for the purpose of making a profit. The definition includes an actual owner of a legal entity making profit (income), undertaking sham transactions, or exercising control over a taxpayer receiving income from undertaking sham transactions.

Meanwhile, some of the key tax implications from being a risky taxpayer include:

• Desk/on-site audits: The tax authority is entitled to conduct desk/on-site audits of risky taxpayers.
• Independent calculation of taxes by the tax authority: The tax authority has the right to independently calculate the taxes of risky taxpayers prior to the payment of such taxes.
• Preliminary audit upon claim of overpaid tax refund: The claim of a risky taxpayer for refund of overpaid taxes will be subject to prior desk/on-site audit and operative tax control measures of their activities. The refund must be made within 45 days from the date of completion of the above measures.

Multinational Enterprise Group

The amendment law introduces the concept of a multinational enterprise group (MNE group).

An MNE group is defined as a group of companies that includes two or more enterprises that are resident in different countries or includes an enterprise that is resident in one country and operates in another country through a permanent establishment. A constituent entity of an MNE group includes the enterprise, subsidiaries and affiliates of this enterprise, as well as its branches and representative offices.

The constituent entity that is the resident of the Republic of Azerbaijan (i.e., the reporting entity) must make a filing with the tax authority if the total income of an MNE group in a fiscal year exceeds 750 million euros ($825 million). Failure to make the filing is punishable by a financial sanction to the amount of 500 manat ($295).

The MNE group definition and the prescribed transactional threshold are in line with the provisions set out in Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report, OECD/G-20 Base Erosion and Profit Shifting Project. Having said that, the filing form, deadlines and filing procedure are yet to be published, so it is not entirely clear whether the requirements will be in line with the master and local file templates established by Action 13.

Miscellaneous Provisions

Other notable provisions include:

• Centralized registration of natural monopolies: entities operating under a special tax regime; entities employing on average 251 or more employees; entities with an average residual value of fixed assets in the balance sheet exceeding 5 million manat (approx. $2.9 million).
• Banks and credit organizations must submit monthly information about the transactions of their account holders that are VAT-registered taxpayers.
• Taxpayers are now entitled to request reconciliation acts with respect to calculated, recalculated, paid and overpaid taxes, contributions for compulsory state social insurance, unemployment insurance and compulsory medical insurance, interest, financial sanctions and administrative fines.
• Revision of tax liability provisions. The previously existing provision entitling the tax authority to recalculate taxes and impose financial sanctions onto the taxpayer within three years after the end of the taxable reporting period is unchanged. However, now the amendment law extends this period to five years for cases involving receipt of relevant information from the competent authorities of foreign countries. Furthermore, the amendment law expressly links the commencement of this period to the date preceding the date on which the tax authority decided to conduct an on-site tax audit.

Planning Points

The tax authorities are continuing the trend of taking assertive measures aimed at curbing tax evasion and tightening administration of taxpayers. In addition, the amendment law highlights the tax authority’s commitment to the international tax enforcement by introducing provisions on exchange of information and cross-border cooperation with foreign tax authorities. That said, since these provisions are too general at this stage, the actual practical implications remain to be seen.

The introduction of the MNE group concept comes at the second anniversary of implementing transfer pricing rules in Azerbaijan. This further signifies the tax authority’s goal toward implementing a globally integrated approach aimed at combating base erosion and profit shifting.

The changes to record-keeping obligations such as elimination of electronic VAT invoice are aimed at easing the administrative burden on taxpayers. These amendments are generally welcome and long overdue since the previous practice resulted in more duplicate paperwork.

The biggest change in the amendment law was the mandatory imposition of the cash method for VAT purposes. On the one hand, it can be argued that taxpayers benefit from cash flow by allowing them to defer the tax point and their VAT liability until their customers pay them. On the other hand, in general, the cash method is regarded to be more difficult to administer compared to the accrual method. Therefore, it remains to be seen whether the benefits of the implemented amendment will outweigh potential practical challenges.

Kamil Valiyev is a Partner and Ali Babayev is an Associate at MGB Law Offices, Azerbaijan.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.