Azerbaijan: April Tax and Investment Update

Further to our February update, below is a summary of ongoing debates and tax developments in Azerbaijan. In late February, the Parliament confirmed the “package” of investment-promoting preferences and exemptions valid over seven years in respect of PIT/CIT/VAT/Property & Land Taxes, as well as Customs Duties, for entities and individuals granted an Investment Promotion Certificate (IPC).

Tax (and Customs) has figured prominently in the continuing economic policy review addressing the wide-ranging consequences of low oil and gas prices and the challenge of developing the non-oil sectors. For example, at a recent conference marking the 15th anniversary of the establishment of the Ministry of Taxes, titled “The Azerbaijani Tax System: Realities and Prospects”, the various business and Government participants highlighted a wide range of issues, including:

• Limiting the amount of 1,000 manats for cash payments within a single transaction (creation of the National Payment System of Azerbaijan was scheduled to be completed in the first quarter of 2016. This system should make it possible to develop non-cash payments and reduce the cost of services on card transactions).
• (Non)applicability of VAT to national/international e-commerce.
• Developing an investment tax system in order to support non-oil and gas business.
• Exempting enterprises processing agricultural products from taxation, as an incentive for the large investments required.
• Applying a broad tax amnesty to aid in the return of funds that entrepreneurs took out of the country.
• Respecting international agreements on protection of investments and ensuring stability in the tax burden.
• Expediting/respecting VAT refund on exports (in 2015, 2,190 bln AZN refunded, according to the Ministry of Taxes).
• Addressing the causes of and approach to tax appeals (which in the past year amounted to approximately 90,000, although it is claimed by the Ministry of Taxes that there has since been a fall, owing to reduction in the scale of their inspections).
• The rise in voluntary compliance to 70% (approximately), a consequence of the 2011 Ministry of Taxes introduction of the concept of taxpayer service and of its continuous refinement.
• The need for continuous monitoring of preferences and exemptions in order to ensure that they help to stimulate the economy.
• The need to improve tax accounting, including through the (impending) introduction of e-accounting.

In March, Deputy Minister of Taxes Sahib Alekperov emphasized the scale of State support for entrepreneurship development, as follows:

• Threshold increase for the applicability of the simplified tax system (legal entities using simplified tax system are exempt from VAT, income tax, property tax, individuals from VAT, income tax), plus the new lower rates.
• Relatively simple business registration system.
• Suspension of business inspections for two years from 2015.
• Suspension of on-site tax audits of small enterprises.

Tax Policy

A policy statement by the Ministry of Taxes followed in April, with policy goals including:

• Stabilizing income tax rates, benefits and salary payment system, with assistance of universal filing.
• Gradually shifting the tax burden from production to consumption.
• Stimulating non-cash payments.
• Enhancing the taxpayer service system, including the improvement of e-services, thus achieving an increase in the level of voluntary compliance.
• Expanding “partnership relations” between taxpayers and tax authorities.
• Improving tax administration by ensuring transparency and minimizing direct contact between tax authorities and taxpayers.

Tax Administration

The Ministry of Taxes is maintaining an emphasis on professional development. Its latest program in April involved application of the IMF Tax Administration Diagnostic Assessment Tool (TADAT) methodology, inaugurated in 2013 and used to evaluate the professionalism of Tax Administration against “best international practice” (TADAT key partner and financing organizations include the EC, IMF/WB, and Governments of UK, FRG, Japan, the Netherlands, Switzerland, and Norway).

Business Concerns

Notwithstanding the Ministry of Taxes agenda, business continues to encounter specific difficulties with the tax system, including: (1) tax disputes, resolution procedures and processes; (2) VAT – refunds policy, administration; (3) treaties’ implementation; and (4) incentives’ policy.

Thus, the volume of non-reconciled disputes is high and recourse to the courts is growing, even if the results are less than satisfactory due to inconsistency within the judiciary. There is scope for the introduction of new specialist procedures and institutions, as in other jurisdictions within the region and beyond. This is also a subject where ITIC has vast experience that could be utilized.

Concerning VAT, the refund system works tardily at best. Special provision should be introduced for exporters, owing to the proportion of their VAT refund receivables to their working capital. Further, complications with the timeliness of output VAT recognition need to be addressed, since these frequently cause late adjustments and risk of penalty.

Azerbaijan’s tax treaties generally provide for reduced withholding tax rates on royalty, interest and dividend income. However, these are available only under a complicated and time-consuming refund system. The system could be improved by allowing the withholding tax agent in Azerbaijan to apply the reduced rate upfront.

Given the need for accelerated diversification of the Azerbaijan economy and the global competition for investment, there is scope for a review of incentives policy backed by an analysis of best international practice.

Further amendments to the Tax Code will be designed to stimulate economic diversification. These include exemption from VAT for import and sale of a wide range of goods and services involved in agriculture, along with an increase in the tax rate on land not used for its intended (agricultural) purpose.

ITIC-Endorsed Event: Transfer Pricing Excellence 2016

ITIC is pleased to be a supporting partner for the Axiom Groupe’s upcoming conference, Transfer Pricing Excellence 2016, to be held on 19-20 May 2016 in Barcelona, Spain. The conference will focus on:

• Framework of the recent BEPS Developments
• Taxation of Dividends and Interest: Preparing for Changes in
• Various Jurisdictions
• Working with External Tax Services Providers
• Understanding Transfer Pricing issues related to Financial
• Services Transactions
• Effective Implementation of Centralisation of Activities
• Advanced Transfer Pricing Negotiation and Dispute
• Resolution Strategies
• Scrutinising Cross Border Loss Utilisation Regimes
• Transfer Pricing Aspects of Intangibles
• Implementing End to End Transfer Pricing Execution
• Transfer Pricing Negotiation & Dispute Resolutions Strategies
• Business Reorganisation & Restructuring
• Multi Country Transfer Pricing – Compliance with BEPS

Tax Administration Challenges in Developing Countries

Dave Hartnett is former Permanent Secretary for Tax of Her Majesty’s Revenue and Customs in the United Kingdom and currently serves on ITIC's Board of Directors. The commentary below is excerpted from remarks he recently delivered at an ITIC Diplomatic Dialogue luncheon in the House of Lords in London. The development of an effective, honest, knowledgeable, and trusted tax administration is crucial and a top priority for developing countries worldwide. Tax administration must be free of corruption and able to address all the challenges that come its way. These challenges may involve tax collection, management of taxes and duties at borders, introduction of an effective Value Added Tax or sales tax, and administration of developing law. 

It is important for developing countries to have a full understanding of the BEPS reforms, and the OECD is to be commended for its achievements to date, but putting in place an effective and efficient tax administration must be the first step.

Aggressive tax avoidance and the unwillingness of some tax practitioners to work with tax administrations is still a major issue, particularly in parts of Africa. At the same time, there is a concern on the part of some business leaders in some developing countries that they are being asked to operate to a higher standard than other taxpayers.

In some countries, the tax administration has lost the trust and respect of its citizens and business alike due to a range of factors including: failure to tackle corruption inside the organization, failure to address dishonest competition – e.g., computer parts imported as fruit to evade duties, bribery of judges, cash wages in brown envelopes to avoid withholding, and governments all too ready to criticize tax administrations in order to court public opinion.

In one country the parliament has voted to suspend all tax audits except those of MNEs; the result is that most tax is paid by MNEs, hence a huge perception of unfairness. In many cases, MNEs are audited to meet the needs of the Finance Ministry, with audit becoming a tax-raising process rather than a checking procedure.

The IMF and other advisory bodies have produced helpful guidance on priority steps to ensure a skilled, effective and efficient tax administration. Among the top priorities is fair remuneration for tax officials.

Beyond that important practical step, though, is the need to achieve an appropriate fit between the capability and capacity of a tax administration and what it is required to do. Addressing transfer pricing and thin capitalization issues, for example, may not always be the most important demands on limited resources.

On the individual level, the goal should be a perceived sense of fairness in the tax system so that, for example, employees within a withholding system do not feel they are the only individuals paying tax.

On the corporate level, it is critically important to maintain and develop the dialogue between business and governments that ITIC has pioneered and facilitated for many years. Business has a role to play in developing the skills of tax administrations – showing how accounts are prepared, revealing how intra-group cross-border charges are calculated, demonstrating how tax computations are put together, and so on. Demystifying these processes will go a long way toward decreasing suspicions and building trust with tax administrations.

Reforming the Tax System in Ukraine

On 9 March, ITIC President Daniel Witt and Senior Advisor Douglas Townsend attended a roundtable discussion in London on Reforming the tax system in Ukraine: Defining a roadmap to improve the business climate, sponsored by EY, Adam Smith Conferences, and the UK TaxPayers’ Alliance. The roundtable, chaired by ITIC Board member Chris Sanger (Global Head of Tax Policy, EY) featured keynote presentations by the renowned economist Arthur Laffer and Ms. Nina Iuzhanina, who chairs the Verkhovna Rada’s Tax and Customs Policy Committee in Ukraine.

The roundtable discussed the potential of tax reform to help ameliorate (if not reverse) Ukraine’s precarious economic state. The consensus of the discussion was that the December 2015 tax reform would fall short; that further tax reform would be inescapable; and that it must be part of wider public policy reforms if real progress were to be achieved.

Fact-Finding Mission Conducted for Kazakh Officials

On 8-12 March, ITIC Kazakhstan organized a fact-finding mission for officials from the State Revenue Committee of the Kazakh Ministry of Finance. The following Kazakh officials met with officials at the Federal Tax Service of Russia to exchange information and share experiences as Kazakhstan begins implementing best practices and following OECD norms:

• Aisulu Burambayeva (Deputy Head of the Special Department)
• Aliya Alenova (Senior Expert of the Special Department)
• Agera Rakhmetova (Senior Expert of the Special Department)
• Daniyar Khassenov (Expert of the Special Department).

During their visit, the delegation met with Mr. Alexander Yegorychev (Head of the Cross Audit Department), who discussed legal aspects of tax monitoring; Mrs. Y. Khomyakova (Deputy Head of the Tax Monitoring Section of the Cross Audit Department), who discussed the procedure of issue of the motivated opinion and reconciliation process; and Mr. Ruslan Rudzhabov (Head of the Tax Control over Prices Section of the Transfer Pricing Department), who spoke about transfer pricing administration practice.

On 11 March, ITIC organized a roundtable for the Kazakh officials with representatives of Russian and Kazakh companies currently participating in a Horizontal Monitoring pilot program. During the roundtable, Mme. Aisulu Burambaeva reconfirmed her intention to hold another roundtable discussion with ITIC sponsors once the State Revenue Committee’s Special Department’s concept paper on Horizontal Monitoring is ready for discussion.