15. Azerbaijan. Statutory rules

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1 15. zerbaijan Introduction The transfer pricing concept is relatively new to zeri tax law, although in the pretax code legislation there were some limited transfer pricing regulations focused principally on circumstances where goods, work, or services were sold at or below cost or bartered/transferred without charge. The current transfer pricing rules were introduced in the current tax code effective from 1 January 2001, and have been amended several times since then. These rules mainly focus on the determination of prices on the sale of goods, work, or services and establish the principle of arm s-length pricing for transactions between related parties and, in certain instances, the approach for making adjustments to transfer prices. In practice, the tax authorities have limited experience in dealing with transfer pricing, mainly making adjustments to taxpayers profits by disallowing certain deductible costs or challenging interest rates or the mark-up on services that were not, in their opinion, incurred or charged on an arm s-length basis. Statutory rules Scope Under the tax code, market price is defined as the price for goods, works, or services, based on the relationship of demand and supply. contractual price should be deemed the market price between counterparties for tax purposes, unless the contract or transaction falls under one of the exceptions below. Under the tax code, the tax authorities may apply market price adjustments in the following cases: Barter transactions. Import and export operations. Transactions between related persons. Transactions in which the prices within 30 days deviate by more than 30% either way from the prices set by the taxpayer for identical or homogeneous goods, works, or services. property of an entity was insured for the amount exceeding net book value of such property. 263

2 zerbaijan Related parties Persons are considered related in the following cases: If one person holds, directly or indirectly, 20% or more of the value or number of shares or voting rights in the other entity, or in an entity that actually controls both entities. If one individual is subordinate to the other with regard to official position. If persons are under the direct or indirect control of a third person. If persons have a direct or indirect control over a third person. Pricing methods The tax code lists the following methods for determining the market price : Comparable uncontrolled price (CUP) method. Resale price method. Cost-plus method. The tax code establishes the priority of pricing methods to be used by the tax authorities to determine market prices, according to which the CUP method should be used first before all other methods. If the determination of the market price is not possible under any of the methods above, the market price should be determined by an expert. Comparability factors In determining the market price, the tax authorities are required to take into account usual discounts from, or mark-ups to, prices. In particular, the tax code gives specific circumstances of how the discounts or mark-ups can be caused, such as deterioration of the quality of goods or the expiry of a product s life. In addition, the tax code sets out the commonly accepted principle that, for the purposes of determining the market price, only transactions carried out under comparable conditions should be taken into account. In particular, the following factors should be evaluated: Quantity (volume) of supply. Quality level of goods and other consumption indicators. Period within which liabilities should be fulfilled. Terms of payment. Change of demand for goods (works, services) and supply (including seasonal fluctuations of consumer demand). Country of origin of goods and place of purchase or procurement. In the Profits Tax section of the tax code, there is a separate list of comparability factors that should be looked at to identify borrowings that can be treated as taking place under comparable circumstances. In particular, borrowings should take place in the same currency and be under the same terms and conditions. 264 International Transfer Pricing 2013/14

3 Documentation requirements There is no statutory requirement in zeri law that requires transfer pricing documentation to be prepared, apart from a general requirement for taxpayers to maintain and retain accounting and tax records and documents. It is, however, clear that taxpayers that do not take steps to prepare documentation for their transfer pricing systems, in general or for specific transactions, will face an increased risk of being subject to an in-depth transfer pricing audit. Other regulations Currently, besides linked provisions stipulated in the tax code, there are no other specific regulations in zerbaijan relating to transfer pricing. Legal cases Very few court cases have been related to transfer pricing in zerbaijan. Burden of proof Under the tax code, the burden of proof rests with the tax authorities to demonstrate that the price charged by a taxpayer significantly fluctuates from the market price. Unless otherwise proved, prices set by taxpayers are deemed to be the market prices. However, if the documentation requested by the tax authorities is inappropriate or unavailable, then the tax authorities can determine the adequate pricing levels, whereby the burden of proof would be shifted to the taxpayer. Tax audit procedures Currently, the tax authorities do not have specific procedures in the tax code for conducting separate transfer pricing audits. Control over prices is primarily made in the course of tax audits. Revised assessments and the appeals procedure Taxpayers have the right to appeal to higher level tax authorities or to court. dditional tax and penalties There is no separate penalty regime for the violation of transfer pricing rules; however, transfer pricing adjustments made by the tax authority in the course of a tax audit that would increase the taxable revenue of the taxpayer (e.g. by disallowing the deduction of the costs in relation to excessive pricing levels), may lead to the underpayment of tax. In case of a successful challenge by the authorities, a penalty of 50% of the underestimated tax may be imposed on the taxpayer. In addition, an interest payment of 0.1% per day also would accrue until the tax is paid in full. Resources available to the tax authorities lthough the arm s-length principle has existed in the tax legislation since 2001, the enforcement of this principle is not common practice. bsence of statistical information for benchmarking purposes and the lack of modern information systems hamper the effective application of transfer pricing regulations in zerbaijan. 265

4 zerbaijan Use and availability of comparable information The tax code provides that comparables for the determination of market prices are to be taken only from official and open information sources. The tax code does not define or specify what sources are considered official and open, but gives examples of such possible sources databases of authorities in the specific market, information submitted by taxpayers to tax authorities, or advertisements. In practice, in the majority of tax audits where transfer pricing issues have been raised, the tax authorities have relied on information they collect from other similar taxpayers, or directly from alternative producers or sellers of similar goods in the local market (primarily, state-owned concerns). Information published by the State Statistics Committee has not been commonly used. Occasionally, the zeri tax authorities undertake extensive data- gathering involving comparables to obtain an in-depth knowledge of specific industry practices and pricing policies. The data obtained from comparables have been used in some cases to make transfer pricing adjustments on a single-transaction basis without regard to overall company profitability or multiple-year data. In that situation, taxpayers have been faced with considerable difficulty in challenging the position, as no specific data is provided on the comparables to allow verification and submission of counterarguments. Risk transactions or industries The types of transactions typically scrutinised by the zeri tax authorities in tax audits include: Sale/purchase of goods, where the supplier is an overseas entity, even unrelated to the taxpayer. Provision of centralised head-office services, and technical/management fees. Import transactions and recovery of related input value added tax (VT). Interest rates on inter-company loans. ll industries are subject to the transfer pricing regulations in zerbaijan. Limitation of double taxation and competent authority proceedings Currently, there are 40 effective double tax treaties with zerbaijan. However, there is no experience with the application of the transfer pricing provision in those treaties. dvance pricing agreements (Ps) Currently, there are no procedures in zerbaijan for obtaining an P. However, it is possible to obtain a written opinion from the tax authorities on transfer pricing issues. Such opinions are not binding. nticipated developments in law and practice The Ministry of Taxes has started consultations with the Organisation for Economic Cooperation and Development (OECD) on adopting new, more detailed transfer pricing regulations. The general expectation is that the OECD-type guidelines and models will be adopted in zerbaijan at some point in the future, but the government has not yet indicated a target date. 266 International Transfer Pricing 2013/14

5 Liaison with customs authorities The tax and customs authorities communicate with each other on various transfer pricing issues and have access to each other s respective databases. OECD issues zerbaijan is not a member of the OECD. However, as mentioned, the general expectation is that the OECD-type guidelines and models are expected to be adopted in zerbaijan. Joint investigations Usually, transfer pricing investigations are conducted by the tax authorities only. However, in some audits the tax authorities have engaged experts from other governmental bodies (e.g. the Ministry of Justice, the State Customs Committee), scientific research institutes and others. Thin capitalisation There are no thin capitalisation rules in zerbaijan. Management services Currently, there are no specific rules or unified practice with regard to the application of the transfer pricing rules to management service charges in zerbaijan. 267