General provisions on taxation Overview of Azerbaijan taxation system

Definition

WHAT IS TAX?

Tax is a compulsory, individual and non-refundable payment made to the state or local budget in the form of collection of monetary means from taxpayers with the purpose of providing the financial basis to the state and municipal activities. Failure to pay taxes is punishable by law.

Main purposes

• Revenue - taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems;

• Redistribution - normally, this means transferring wealth from the richer sections of society to poorer sections;

• Re-pricing - taxes are levied to address externalities; for example, alcohol is taxed to discourage alcoholism, and a carbon tax discourages use of carbon-based fuels;

• Representation – The government tax citizens, and citizens demand accountability from their rulers as the other part of this bargain.

Taxation systems

• Progressive tax - is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases;

• Regressive tax is the opposite of progressive tax where the effective tax rate decreases as the amount to which the rate is applied increases;

• Flat tax - is a tax system with a constant tax rate.

Taxation systems

• Direct taxes - direct tax is one paid directly to the government by the persons on whom it is imposed;

• Indirect taxes – are the taxes collected by an intermediary (e.g. a retail store) from the person who bears the ultimate economic burden of the tax (e.g. the customer).

Taxation systems

• Territorial taxation - taxation only of in-country income;

• Worldwide taxation (residency) - taxation of all income of residents and/or citizens

• Exclusionary taxation - specific inclusion or exclusion of certain amounts, classes, or items of income in/from the base of taxation

Territorial taxation

• Hong Kong is an example of a territorial tax system.A few countries tax only income earned within their borders. For example, the Hong Kong imposes income tax only on income earned from a business or source within Hong Kong. Such systems tend to tax residents and nonresidents alike.

Worldwide (residency) taxation

• Most income tax systems impose tax on the worldwide income of residents, and impose tax on the income of non-residents from certain sources within the country. For example Azerbaijan and Russian taxation regime.

Exclusionary taxation

• Many systems provide for specific exclusions from taxable (chargeable) income. For example, several countries, notably Cyprus, Netherlands and Spain, have enacted holding company regimes that exclude from income dividends from certain foreign subsidiaries of corporations.

International taxation

• International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country's tax laws

Elements of taxation

• Subject of taxation;• Basis for taxation;• Tax period;• Tax rate;• Tax calculation procedure;• Tax payment procedure and timing.

AZERBAIJAN TAXATION SYSTEM

Taxation regimes in Azerbaijan

There are four different taxation regimes in the Republic of Azerbaijan which are as follows:•Statutory taxation regime governed by the Tax Code of Azerbaijan;•The taxation regime established by the existing Production Sharing Agreements (PSAs);•The taxation regime established by two existing Host Government Agreements (“HGAs”) – Main Export Pipeline (Baku-Tbilisi-Jeyhan) HGA and South Caucasus Pipeline (Shah Deniz Gas) HGA;•The taxation regime governed by the Law of Azerbaijan dated 14 April 2009 on “Special economic zones”

Tax legislation of Azerbaijan

• The Constitution, the Tax Code, and other legislative acts adopted in compliance with them

• Only the following may contain provisions regarding taxation: – Code on Administrative Offences and Criminal Code;– Provisions concerning the priority of tax obligations;

included in the legislation on bankruptcy and insolvency;

– PSAs and HGAs;– Legislation concerning the State Budget;– Legislation on special economic zones.

Statutory taxation

Main types are:

• State taxes

• Taxes stipulated by the laws of Nakhichevan Autonomy Republic

• Municipal (local) taxes

State taxes

• Personal income tax;• Profit tax;• Value added tax;• Excise tax;• Assets (property) tax of enterprises;• Land tax of enterprises;• Road tax;• Mining tax;• Simplified tax.

Municipal taxes

• Land tax of individuals;

• Assets tax (property);

• Mining tax of individuals on construction materials with local importance;

• Profit tax of enterprises owned by the municipalities.

PSA taxation

• More than 20 PSAs signed. The most famous ones are ACG, Shah-Deniz, etc;

• PSAs have a status of law and prevail over statutory legislation in case of conflict;

• Provide highest legal protection against possible legislative changes;

• Provide simplified accounting and taxation rules;• Free of any currency restrictions;• Free of licensing requirements.