The tax year in Azerbaijan is the calendar year.
Resident enterprises and PEs of non-residents must file profit tax returns for a calendar year by 31 March of the following year. During liquidation of a legal entity or a PE of a non-resident, the tax return should be submitted within 30 days after the adoption of a decree on liquidation.
A non-resident that has no PE in Azerbaijan and receives income subject to WHT (except for dividends and interest) may file a tax return with respect to such income and expenses, connected with the generation of the income, for purposes of reassessment of profit tax at the rate of 20%.
If a taxpayer applies for an extension of time to file the profit tax return prior to the expiration of the filing deadline and at the same time settles the full tax amount due, the filing deadline may be prolonged for up to three months. The prolongation of the terms for filing the return will not modify the terms of tax payment.
Legal entities and entrepreneurs that withhold tax at the source of payment are obligated to file the WHT report with the tax authorities within 20 days following the end of the quarter.
Advance tax ruling
The Tax Code introduces the concept of advance tax ruling, which allows a taxpayer to apply to the tax office for determination of its tax liabilities and legal consequences in advance for taxable operations. A tax ruling can be obtained for a particular transaction of at least AZN 10 million. The state duty for such application is AZN 500.
Voluntary tax disclosure
Voluntary tax disclosure refers to situations where notification of a tax liability, not discovered during a field tax audit, is made by the taxpayer to the tax authorities after the audit. In this case, the taxpayer pays only the tax due (i.e. without payment of a financial sanction).
Payment of tax
Taxpayers must make advance quarterly tax payments of profit tax by the 15th day of the month following the end of the calendar quarter. Payments are determined either (i) as 25% of tax for the past fiscal year or (ii) by multiplying the amount of actual income through the quarter by a ratio of tax to gross income for the previous year.
The final payment of profit tax coincides with submission of the declaration of profit tax (i.e. 31 March).
Tax audit process
The ordinary on-site tax audit shall be conducted not more than once in a year.
Off-site tax inspection shall be conducted within 30 working days from the date when a tax return is provided by the taxpayer to the tax office. After the mentioned term expires, off-site tax inspection is not allowed for the tax return.
An extraordinary tax audit may be performed at any time under the following conditions:
- If the tax reporting documents required for the calculation and payment of tax are not submitted within the specified period and after notification of the tax authority.
- If incorrect information is found in the report made on the results of tax inspection.
- When overpaid amount of VAT, interest, and financial sanction is assigned for the payment of other taxes, interests, and financial sanctions or assigned as payments on future liabilities. In such cases, the scope of the extraordinary tax audit is limited only to the taxable VAT operations of the taxpayer.
- When application is submitted by the taxpayer to return overpaid amounts of tax, interests, and financial sanctions.
- When the tax authorities obtain information from a known source on hiding (decreasing) of incomes or object of taxation by the taxpayer.
- When, in accordance with criminal legislation, there is a decision of the court or law-enforcement agency on implementation of a tax audit.
- In case of failure to provide the documents specified in the Tax Code.
- In the event of application for liquidation, reorganisation of the taxpayer legal entity, or seizure of business operations of the natural person operating without formation of a legal entity.
- If taxpayer is considered to be a risky taxpayer.
Additionally, an extraordinary tax audit may be conducted in the following cases, covering the period inspected by the previous on-site tax audit:
- If taxpayers who do not agree with the results of the tax audit request to conduct an extraordinary on-site tax audit.
- If the taxpayer fails to submit documents during the on-site tax audit and the decision on the results of the tax audit is appealed to the higher tax authority by submitting the said documents.
- When the decision of the tax authority is appealed to the higher tax authority by submitting documents different from the documents submitted by the taxpayer during the on-site tax inspection.
Statute of limitations
Tax authorities are entitled to calculate and recalculate taxes, penalties, and financial sanctions of the taxpayer within three years after termination of the taxable reporting period and to impose calculated (recalculated) sums of taxes, penalties, and financial sanctions within five years after termination of the taxable reporting period.
In case the relevant executive authorities of foreign countries have provided information on income derived abroad, tax audits may cover a period of five years preceding the date of decision of the tax authority to conduct the audit.
There is no limitation in case of criminal investigation and cash claim of overpaid taxes.
Topics of focus for tax authorities
The main issues challenged by the tax authorities during a tax audit include, but are not limited to, the following:
- Disallowance of offset of VAT on temporary import.
- Challenging the secondment structure.
- Application of the 20% profit tax on 'deemed profit'.
- Taxes withheld on payments to non-resident suppliers in cases where income of non-residents is considered as Azerbaijani-source income.
- Application of VAT on market price of assets that were written off, disposed free of charge, or at a discount rate.
- Challenging the transfer pricing.
- Deductibility of the head office costs.
- Deduction of management services.
- Deduction of royalties.
- Deduction of service (specifically, consulting) fees without proper deliverable.