Tax legislation updates

An up-to-the-minute guide to developments in the legislation of the Republic of Azerbaijan.

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EY Flash news: Tax favorable/preferential jurisdictions – July 2017

As we have informed you before, the list of countries and territories with preferential taxation is to be approved on an annual basis by the President of Azerbaijan in accordance with the Law on “Amendments to the Tax Code” (“Law”) dated 16 December 2016. Please note that for the purpose of implementation of the Law, the abovementioned list has been approved by Presidential Decree on 11 July 2017. The Decree establishes the list of countries and territories subject to preferential taxation during 2017 and is effective as of 11 July 2017. It should be noted that in accordance with Article 14-1.2.3 of the Tax Code, transactions carried out between residents of Azerbaijan or PEs of a non-residents in Azerbaijan and entities incorporated (registered) in countries with preferential taxation are considered controlled transactions and taxes from such transactions may be subject to calculation based on transfer prices determined as per Article 14-1 of the Tax Code and “Regulations on determination and application of Transfer Prices” approved by the Ministry of Taxes on 27 January 2017.

Furthermore, please note that the same list will be used for the purposes of the Article 125.1.9 which provides for withholding of 10 per cent tax from the gross amount of the payments stipulated in Article 13.2.16.14-1, i.e. payments made by residents of Azerbaijan or PEs of nonresidents in Azerbaijan to entities incorporated (registered) in countries with preferential taxation as defined in the list.

For your reference the said list of countries/jurisdictions you may find below.

List of countries and territories with preferential taxation

Andorra

Liechtenstein

Angila

Macau (China)

Antigua and Barbuda

Maldives

Antilles (Netherlands)

Marshall Islands

Aruba

Men Islands

Bahamas

Monaco

Bahrain

Montserrat

Barbados

Nauru

Belize

New Jersey

Bermuda

Niue

British Virgin Islands

Palau

Cayman Islands

Panama

Cook Islands

Saint Vincent and the Grenadines

Costa Rica

Samoa

Dominica

Seychelles

Gibraltar

St. Kitts and Nevis

Grenada

St. Lucia

Guernsey

Turks and Caicos Islands

Hong Kong (China)

Vanuatu

Liberia

Virgin Islands (US)

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Rules on determination and application of Transfer Price – April 2017

In this issue, we would like to elaborate on set of legislative changes on determination and application of Transfer Price introduced in the Tax Code of Azerbaijan as of 1 January 2017, and followed with adoption of the Rules “On determination and application of transfer price” (“Rules”) by the Ministry of Taxes. The Rules became effective on 8 February 2017.

What transactions could be subject to Transfer Price?

Transfer Price could be applied with respect to the transactions between the following parties (“Controlled Transactions”) and could be considered solely for determination of Profit Tax:

  • Transaction between a resident of the Republic of Azerbaijan and related non-resident party of such Azerbaijani resident;
  • Transaction between a permanent establishment of a non-resident in the Republic of Azerbaijan and such non-resident itself or any representative office, branch and other division of such non-resident located in other countries;
  • Transaction between a resident of the Republic of Azerbaijan and (or) permanent establishment of a non-resident in the Republic of Azerbaijan and persons established (registered) in the countries with preferential tax regime.

Note: The list of countries with preferential tax regime is yet to be announced.

Transactions that are not covered with the above relations are considered as uncontrolled transactions in the Rules.

What are the Reporting and Documentation requirements?

With respect to transactions between the above parties, a taxpayer should submit a Notification in the form approved by the Ministry of Taxes, if the total turnover of a taxpayer with any such separate party exceeds 500,000 AZN during the calendar year.

The Notification should be submitted not later than 31 March following any reporting year.

In order to determine whether for Profit Tax purposes the Controlled Transaction should be assessed based on actual or Transfer Price, the taxpayers should apply a process of Compatibility Analysis. The documentation on such analysis could be provided to the tax office to justify applied pricing during the on-site tax audits or desk audits of Profit Tax Return.

Responsibility for application and reporting of Transfer Price

The penalty for non-submission of the Notification is AZN 500.

The financial sanction for additional accrual of Profit Tax due to correction of Transfer Price during the on-site tax audits is 50% of additional tax accrual.

How is the Transfer Price determined? What are the Transfer Pricing Methods?

The taxpayer should conduct a Comparability Analysis in respect of its Controlled Transactions to identify if the price applied in such transaction could be considered similar to that applied in the comparable uncontrolled transactions, or if otherwise calculate and apply Transfer Price for the purposes of determination of Profit Tax.

For the purposes of Comparability Analysis, the taxpayer should determine Transfer Pricing method that would determine and allow comparison of the result of the transaction. For the purposes of Comparability Analysis, the Rules stipulate five common Transfer Pricing Methods:

  • Comparable Uncontrolled Price method (“CUP”)
  • Resale Price method
  • Cost Plus method
  • Transactional Net Margin method
  • Profit Split method

The CUP method is considered priority method in all circumstances there is valid reason and option to apply such method.

For the purpose of Comparability Analysis, a taxpayer could consider internal or external comparable uncontrolled transactions concluded

As with any new regulations, there are certain areas in the still open for discussion and requiring additional clarification from the Tax Office.

EY Assistance

EY is the leader in transfer pricing services both in the CIS market and globally. EY has been serving the clients in various industries across the globe and the CIS to support the companies in the first and following years of Transfer Pricing regulations adoption.

If your operations in Azerbaijan involve Controlled Transactions EY can assist you with the following actions for 2017 and onwards to comply with the Rules:

  • Diagnostics of the Controlled Transactions
  • Functional Analysis to establish comparable search criteria
  • Identification of Transfer Pricing methodology
  • Economic Analysis to identify comparable market information
  • Preparation of documentation package on the results of the studies conducted
  • Preparation and Submission of Notification on Controlled Transactions

EY has developed approach and integrated team of Transfer Pricing, Tax and Legal specialists to assist you with all steps of your first year Transfer Pricing compliance and help to establish consistent approach for future periods.

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