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Azerbaijan: Tax Reform Proposed

(Aug. 31, 2016) On August 4, 2016, the President of Azerbaijan, Ilham Aliyev, issued a decree approving the Basic Principles of the Tax Reform Planned for 2016 and Guidelines for Streamlining Tax Collection. The decree orders the Taxation Ministry to draft, within the next three months, a detailed proposal that would bring current tax legislation in line with the approved Principles. (President of Azerbaijan Approved Directions for the 2016 Tax Reform, VESTI.AZ (Aug. 5, 2016) (in Russian).)

Reportedly, the reform will focus on changing the existing process of tax administration and collection. It will result in using simplified tax declaration forms; the development of new methods for risk assessment; and the improvement of services provided to taxpayers, including the creation of a call center at the Tax Ministry where, among other services, taxpayers would be able to register a business, establish a tax identification, receive copies of documents, and report the termination of or change in their business activities. (E. Rustamova, Tax Reform Will Discipline Azerbaijani Bureaucrats, ECHO.AZ (Aug. 10, 2016) (in Russian).)

Extension of the use of electronic payments and gradual restriction of cash payments is one of the Basic Principles. The document provides for the adoption of a regulation that would precisely list activities where operations without using electronic cash registers would be allowed. Fixed monthly tax liability will be established for such businesses. (United States-Azerbaijan Chamber of Commerce (USACC), Azerbaijan Announces Massive Tax Reform (Aug. 8, 2016).) The Principles foresee the possibility of conducting electronic audits and web registration and publication of audit findings, together with the introduction of the voluntary tax disclosure concept. It is proposed that the number of reasons for unscheduled inspections and reviews will be decreased. For example, desk tax audits by the tax authorities would be prohibited after 30 days from the filing of a tax return by the taxpayer. (Id.)

The calculation of value-added tax will also change. Instead of the current unified 18% VAT tax rate applicable to all taxable goods and services, lower tax rates will be introduced for some specific categories of goods, such as food and clothing for children and school supplies, and for certain services, including medical services, for socially disadvantaged groups of the population. Different taxation rules will be introduced for the production and processing of agricultural products, as well as for retail and wholesale trade operations. The current calculation of VAT, which takes into consideration the value of annual retail sales, will be changed in order to be based on the amount goods are marked up for sale. (Tax Reforms Will Simplify Business in Azerbaijan, GAPP.AZ (last visited Aug. 26. 2016) (in Russian).) The Principles prescribe that nonresidents of Azerbaijan will be able to receive VAT refunds due them at any border crossing point when exiting the country, not just at the national airport in the capital city as is currently the practice. (USACC, supra.)

Another declared goal of the reform is to bring Azerbaijani tax legislation in line with international law. This will require introducing tax transfer pricing, Common Reporting Standards, and effective tax controls over the activities of tax residents in offshore and low-tax jurisdictions and amending anti-avoidance rules. (Id.)

The United States-Azerbaijan Chamber of Commerce has characterized the reform as a “positive initiative that will enhance Azerbaijan’s attractiveness as a destination for investors.”  (Id.)