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17 November 2000
Following almost three years of drafting, numerous discussions and three parliamentary readings, the first codified digest of Azerbaijani tax law, the Tax Code of the Republic of Azerbaijan, was finally passed by the Parliament and signed into law by the president on July 11 2000. The Tax Code will take effect on January 1 2001, allowing the government and tax authorities an opportunity to prepare regulations elaborating on its general provisions. Until the new regulations have been enacted, the provisions of previously adopted tax regulations which do not conform with the code will be ineffective.
The Tax Code is divided into two main parts. The general section:
The specialized section of the code deals with each of the taxes imposed under the new regime:
The Tax Code elaborates on relevant provisions in the Azerbaijani Constitution. It stipulates a three-tiered tax system, with state taxes levied at the first level, taxes of the Nakhchivan Autonomous Republic within Azerbaijan levied at the second, and local or municipal taxes levied at the third. While certain taxes listed in the code are levied at one level only, other taxes are shared between the state and autonomous governments, and the state and municipal governments.
All taxes listed in the specialized section of the code are levied at state level with the exception of the following, which are payable at local level:
With the exception of highway taxes, which are payable at state level only, all other listed taxes may be levied at the second level.
Although the Constitution entitles the state, the Nakhchivan Autonomous Republic and local legislatures to impose any taxes which may be levied at their respective levels, the Tax Code appears to restrict the independent taxing powers of the autonomous republic by allowing it to impose only those taxes which are listed in the code. Similarly, municipalities may impose only those taxes which are set out in the code or in forthcoming tax legislation.
The Tax Code's section on defined terms is arguably more innovative than any other section. Certain terms (eg, 'realization event', 'taxpayer's family members', 'tax agent', 'non-commercial organization', 'charitable activities' and 'fair market value') are defined in Azerbaijani law for the first time. Other terms used under old tax laws, (eg, 'resident', 'permanent establishment', 'Azerbaijani source of income', 'dividend' and 'interest') have been re-defined.
For instance, an individual is deemed to be a resident for tax purposes if he or she is present in Azerbaijan for at least 182 cumulative days in any 12-month period (rather than in a calendar year, as previously). Definitions of 'resident' and 'non-resident' entities are also provided for the first time. Another innovation is that a permanent establishment of a non-resident is not considered to have been created until the non-resident has carried out business in Azerbaijan for at least 90 days in any 12-month period.
Since the new definitions may vary from those in existing double tax treaties, which are principally based on OECD model tax conventions, it remains to be seen whether they will help to provide a uniform approach in tackling cross-jurisdictional tax issues.
The collection of taxes is administered by the Ministry of Taxes and its divisions, which thus also exercises tax control. In certain cases, where a determination must be made as to the appropriate payment of customs duties, tax control is also exercised by the customs authorities. Tax control is exercised by means of private and on-site audits. While private audits are carried out routinely each time a taxpayer files a tax return, on-site audits, which may be regular and extraordinary, are carried out based on a substantiated decision of the relevant tax authority. The reference to regular on-site tax audits confirms the re-instatement of regular audits, which were repealed in April this year and then partially re-instated in June. However, the code stipulates that these audits must be completed within a three-month timeframe. Regular audits may not be carried out more than once a year.
Financial sanctions for the violation of tax laws may be directly enforced by the tax authorities in accordance with a procedure which is yet to be approved by the president or through a court. A taxpayer may appeal sanctions imposed by the tax authority to a higher tax authority or directly to a court. An administrative appeal to the tax authorities is not an impediment to a lawsuit. The burden of proof is on the taxpayer who challenges the calculations of the tax authority, but shifts to the tax authority if the taxpayer's own calculations are submitted. In the latter case, the taxpayer's innocence is presumed.
The Tax Code has introduced certain novelties with respect to each of the taxes levied in Azerbaijan. The most important relate to individual income tax, profits tax and VAT.
Individual income tax
The individual income tax rates (both effective and marginal) remain intact, with the highest marginal tax bracket at 35%. However, new provisions on exemptions have been adopted. For instance, with respect to individuals who enjoyed total exemption under old tax laws, income beyond a certain level is now subject to taxation. On the other hand, prizes awarded by lotteries which are conducted in compliance with Azerbaijani law are tax exempt. Previously, these prizes were only exempt if paid by state-run lotteries.
The profits tax rate also remains intact at 27%. Changes which the code has introduced should develop into effective tax planning tools. For example, the amount of five-year net operating loss deduction need no longer be taken in five equal installments. The general rate of withholding taxes is reduced by 5%. For instance, dividend and interest income tax rates are reduced from 15% to 10%, and the general withholding tax rate is reduced from 20% to 15%.
Permanent establishments will no longer enjoy tax-free transfers to their non-resident parents. These transfers will now be subject to 10% tax, which brings the effective rate of taxation of non-residents with permanent establishments in Azerbaijan to 34.3%.
The Tax Code reduced the rate of VAT from 20% to 18% and introduced a separate VAT registration requirement. It has also adopted a reverse-charge VAT as a mechanism to impose VAT on goods, works and services sold to tax agents in Azerbaijan by non-residents who are not required to undertake Azerbaijani VAT registration. A new set of rules for determining the place of supply of goods, services and works has also been established.
Finally, businesses that are not required to register for VAT purposes (with the exception of businesses which manufacture excisable goods, credit and insurance institutions, investment funds and professional participants of the securities market) may be subject to the simplified tax. Simplified tax is levied on a business's gross proceeds at the rate of 2% (as opposed to the previous 3%). It is expected that the majority of small businesses will be subject to the simplified tax.
The adoption of the Tax Code, which has far-reaching implications, may become a milestone in the history of Azerbaijani tax law. As the practice develops, tax practitioners, especially those dealing with tax structuring and planning, may be challenged by the important changes to the tax regime which it has introduced.
For further information on this topic please contact Daniel Matthews, Aykhan Asadov or Elvira Mamedzade at Baker & McKenzie by telephone (+99412 97 18 01) or by fax (+99412 97 18 05) or by e-mail (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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