Adopting OECD-Style Norms
Azerbaijan, although not an OECD member, is poised to embrace OECD-style transfer pricing norms. The Ministry of Taxes has initiated discussions with the OECD to introduce more comprehensive transfer pricing regulations. While no specific deadline is set, the expectation is that Azerbaijan will align with OECD principles and models in the future.
Transfer Pricing Provisions
Azerbaijan’s current transfer pricing provisions were initially introduced in tax legislation in 2001 and have seen multiple revisions. These rules focus on determining prices for goods, work, and services, emphasizing arm’s-length pricing for related-party transactions. Tax authorities have limited experience with transfer pricing, typically challenging costs, interest rates, or service mark-ups not conducted at arm’s length.
Related Party Criteria
In Azerbaijan, individuals are considered related under several circumstances, including share ownership of 20% or more, hierarchical subordination, control by a third party, or control over a third party.
Relatively New Concept
Transfer pricing is relatively new to Azerbaijani tax law, with limited prohibitions in the pre-tax code legislation. The present requirements were integrated into tax legislation in 2001, with tax authorities adjusting profits by disallowing deductible costs or challenging non-arm’s-length interest rates or service mark-ups.
Enhancing the Tax System
Azerbaijan has introduced significant tax system revisions to combat tax fraud, expand the revenue base, and enhance tax administration. These changes, effective from January 1, 2022, include controlled foreign corporation (CFC) laws and transfer pricing modifications.
Advance Pricing Agreement (APA)
No Formal Procedures Azerbaijan currently lacks procedures for acquiring Advance Pricing Agreements (APAs). However, obtaining a formal opinion from tax authorities on transfer pricing matters is possible but non-binding.
General Tax Audits
Azerbaijan does not have defined transfer pricing audit procedures in the tax code. Price control typically occurs during general tax audits.
While Azerbaijani law does not mandate transfer pricing documentation, companies not maintaining such documentation face a higher risk of comprehensive transfer pricing audits.
Understanding the Business
Assessing industry-specific value drivers provides insights into common industry profitability. A detailed description of the local entity’s management structure, organization chart, business strategy, and involvement in business restructurings or intangibles transfers is required.
Assessing Significant Activities
A functional analysis evaluates activities and responsibilities of related parties involved in intercompany transactions, tangible and intangible assets used, and risks assumed, consistent with OECD Guidelines.
Determining Market Prices
Azerbaijani tax code lists methods for determining ‘market price,’ with the Comparable Uncontrolled Price (CUP) method taking precedence. If these methods do not apply, an ‘expert’ may determine market prices.
Considering Discounts and Mark-ups
Tax authorities consider common discounts or mark-ups when assessing market prices. The tax code outlines circumstances for discounts and mark-ups, and only transactions conducted under comparable conditions are considered.
Conduct of Parties
Inter-company legal agreements formalizing business relationships have a lower priority since the OECD’s 2017 Guidelines prioritize the ‘conduct of parties.’
While no statutory requirement exists for TP documentation, contemporaneous preparation is advisable to mitigate risks.
Language and Deadlines
Foreign-language documents must be translated into Azerbaijani. Notifications must be prepared in Azerbaijani.
Reporting Entity Details
Entities based in Azerbaijan must submit a CbC notification, specifying their role as the ultimate parent entity (UPE), surrogate parent entity (SPE), or indicating the UPE or SPE of the MNE and its financial year. The deadline is June 30th of the preceding year.
Azerbaijani tax law requires retaining accounting and tax records and papers for