22 June Weekly Round-Up

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Check out the 22 June edition of the Weekly Round-Up for more information on the following stories:

  • ITIC Mid-Year Board Luncheon/Diplomatic Dialogue Held in London
  • ITIC Participates in Congressional Roundtable on Illicit Trade
  • Comments Invited on New IGF-OECD Draft Toolkit
  • IMF Concludes Sri Lanka Article IV Consultation
  • WCO Holds Customs Workshops in Azerbaijan
  • Kazakhstan Signs OECD Multilateral Competent Authority Agreement
  • Transfer Pricing of Cash Pooling Arrangements (via

Azeri Minister of Taxes Outlines New Challenges

In a recent article for the Intra-European Organisation of Tax Administrations (IOTA), Azeri Minister of Taxes Fazil Mammadov analyzed the new challenges faced by Azerbaijan’s Tax Service due to sluggish global growth and its negative impact on resource economies. He depicted Azerbaijan’s response in terms of developing a sustainable national economy.

According to Minister Mammadov, new trends in the national economy and the need to build a knowledge-based modern economy have set a new agenda for tax authorities. This agenda requires enhancing the regulatory role of tax policy; creating an affordable, transparent and attractive tax environment; upgrading the tax administration; improving entrepreneurial services; and establishing a modern corporate governance system.

Azerbaijan: Update on WTO Accession

The Working Party on Azerbaijan’s accession to the World Trade Organization (WTO) met in Geneva on 22 July and expressed hope that the accession negotiations (which began in 1997) would be completed in the near future. During the Working Party meeting, Azerbaijan’s chief negotiator discussed:

  • The adoption of a national strategic roadmap to diversify Azerbaijan’s economy and tackle the challenges caused by the decline in oil and gas prices.
  • Azerbaijan’s commitment to enact all possible measures and intensify the accession process.
  • New legislative developments, including the adoption of an anti-dumping law, safeguards and countervailing measures (entering into force 90 days after promulgation on 15 July 2016).
To assist in analyzing Azerbaijan’s compliance with the WTO’s foreign trade rules, the Working Party sought clarification on a range of issues including: taxation, customs valuation, trade-related investment measures, privatization plans, IPR, technical regulations and standards, trade in services, and agricultural support.The Working Party invited Azerbaijan to submit written replies to members’ questions, an updated Legislative Action Plan, and copies of relevant draft and adopted legislation. It also encouraged intensification of related bilateral market access negotiations.The Working Party aims to meet next in early 2017.

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.

Azerbaijan: Tax and Investment Update

On 29 January 2016, the World Bank made an important announcement related to the IMF/World Bank mission to Azerbaijan. The Bank’s statement read in part:
In response to numerous media inquiries, the World Bank would like to clarify the following: The World Bank is discussing with the Government of Azerbaijan a set of medium- and long-term measures to move to a new private-sector led growth model and increase the country’s resilience to external shocks, including low oil prices and pressure on the local currency. The Government of Azerbaijan is developing a comprehensive program of structural reforms, and the World Bank, as a long-term development partner of Azerbaijan, stands ready to provide necessary support.

On 2 February 2016, the Ministry of Taxes advised that the Ministry held a meeting on 1 February with a delegation from the World Bank, chaired by Deputy Minister of Taxes Sahir Mammadkhanov, who reviewed the current economic situation and economic development indicators. He noted several positive points despite global difficulties, including the country's macroeconomic stability, the process of modernization of the tax system, improvement in the technological capacity of the tax administration, and progress made in building e-government. World Bank Economist for the South Caucasus Region Shankar Rashmi in turn commented on the need for structural reforms, accelerated diversification into non-oil sectors, modernization and innovation in tax administration, and the potential for tax incentives to stimulate investment.


On 3 February 2016, the IMF issued a press release which concluded that: “Looking ahead, economic growth and balance of payments pressures are likely to remain major challenges for the authorities in the near term. However, the authorities are well placed to overcome these challenges, provided they further strengthen their policy response and given Azerbaijan’s substantial buffers. Policy priorities include formulating and pre-announcing a multi-year fiscal consolidation plan, bolstering the monetary policy framework to support the move to exchange rate flexibility, strengthening the financial sector and supervision, and undertaking structural reforms to make the economy more diverse. In this regard, we support the government’s intention to further reduce public investment to more sustainable levels in 2016, with greater focus on project efficiency. The authorities and IMF staff have agreed to maintain a close policy dialogue and to increase technical assistance support.”

A Presidential Decree for the Promotion of Investment issued on 18 January 2016 established  a procedure for "Issuing the Investment Promotion Certificate," according to which the Cabinet of Ministers defines the list of economic spheres, minimum amount of investment, and administrative-territorial units for investments on the basis of proposals made by the Ministry of Economy, and submits certificate recommendations to the President. The decree also stipulates the development mechanism and regulatory and legal instruments related to the promotion of investments, and instructs the Ministry of Taxes and the State Customs Committee to take measures to apply the benefits defined in the Investment Law.

Concerning implementation of the Investment Promotion Decree, the Parliament is to consider the following changes to the

A. Tax Code


  • PIT: Exemption from income tax related to annual bank interest income as well as dividends paid by an issuer of investment securities for three years, effective from 1 February 2016. In addition, 50% of the profit of individual entrepreneurs who have obtained the Investment Promotion Certificate (IPC) will be exempt from income tax for seven years.
  • Profit Tax: The profit of entities that have obtained an IPC will be exempt from income tax for seven years.
  • VAT: Any entity or individual entrepreneur having obtained an IPC will be exempt, for the period of seven years, from VAT upon confirmed import of equipment, technological equipment and devices.
  • Property Tax: Any entity or individual entrepreneur that has obtained an IPC is exempt from property tax for seven years.
  • Land Tax: Any entity or individual entrepreneur that has obtained an IPC is exempt from land tax for seven years.

B. Customs Law

  • Technology and technological equipment imported by entities and individual entrepreneurs engaged in investment activity, as well as by resident entities and individual entrepreneurs of industrial or technology parks conducting scientific research and development, shall be tariff-exempt for seven years.

The fifth annual Baku Tax Conference on 18 January 2016 provided useful insights into the role of tax and investment policy in meeting challenges posed by current market conditions. The general topic of the meeting was “Transparency and Compliance in the Tax System”, with the first part of the conference concerning tax management in Azerbaijan, followed by tax administration and development of communication between taxpayers and tax authorities. Topics addressed included future tax reforms and appropriate tax models; improving controls in the area of compliance; innovative services to increase transparency; criminal tax cases; tax incentives for attracting investment; and tax transparency – the new global reporting standard.

According to official participants, any changes to the Tax Code would be primarily aimed at reducing tax rates and simplifying tax administration; they noted in particular that no excise increase of on imported goods is expected (rates fixed since January 2015).

Business participants emphasized the importance of transferring the tax burden from business to consumers – potential measures discussed included an increase in the rates of ‘sin taxes’ and more ‘progressive’ PIT and property tax structures.  As for incentives, participants discussed several possibilities: VAT zero rate or exemptions for tourism, agriculture, and food-processing; ‘holidays’ for regional development investments and/or those with foreign operations contributing more than 50% of turnover; the creation of an ‘offshore’ zone in Azerbaijan, exempting from tax those persons registered in AZE but carrying out activities abroad. Finally, accelerated depreciation allowance and the introduction of ATRs also were proposed.