Friday, 2 June 2017

Azerbaijan tax reform includes new transfer pricing and anti-avoidance rules

Substantial changes to Azerbaijan’s tax code – including the introduction of a transfer pricing regime, rules governing payments to residents located in jurisdictions with a preferential tax regime and enhanced powers granted to the tax authorities – generally apply as from 1 January 2017. The rules were approved by parliament on 23 December 2016 to reflect the reforms included in a presidential decree dated 4 August 2016.
The concept of transfer pricing is formally introduced into the tax code, including relevant definitions (previously, the tax authorities were entitled to adjust the contract price in certain cases where a transaction was not carried out on arm’s length terms, but there were no comprehensive transfer pricing rules). The new rules are in line with the OECD’s transfer pricing guidelines.
Permissible transfer pricing methods include the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods. (The rules give priority to the cost plus method where this method may be applied.)
The transfer pricing rules apply to “controlled transactions,” which are transactions that take place between the following parties:

  • An Azerbaijan resident and a nonresident related party;
  • An Azerbaijan permanent establishment (PE) of a nonresident and the nonresident (or its PE, branch office or any other division in a foreign country); and
  • An Azerbaijan resident or Azerbaijan PE of a nonresident and an entity established (registered) in a country with a preferential tax regime.

Parties (whether individuals or legal persons) will be considered to be related in the following situations:
  • One person directly or indirectly holds at least 20% of the shares or voting power in the other person;
  • One person reports to, or is under the direct or indirect control of, the other person;
  • Both persons are under the direct or indirect control of a third person;
  • Both persons have direct or indirect control of a third person; or
  • The persons are family members, as defined in the tax code.
Transfer pricing documentation requirements also are introduced. A taxpayer must submit a report on its controlled transactions where the aggregate amount of such transactions in a calendar year exceeds AZN 500,000. The report must be submitted by 31 March of the year following the year of the transactions (i.e. the first reports will be due by 31 March 2018 for the 2017 calendar year). Failure to submit the report may result in a penalty of AZN 500.
Taxpayers also will be required to provide supporting transfer pricing studies and other related documentation during a tax audit.

Source & more info: Deloitte