Azerbaijan transfer pricing laws align with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within the Tax Code.
Arm’s Length Principle
Azerbaijan’s transfer pricing rules generally follow the OECD guidelines and require transactions between related parties to be on arm’s length terms. This means prices in controlled transactions must reflect what would have been charged between independent parties in comparable conditions. To calculate taxes properly, Azerbaijan uses market (arm’s length) prices, which are determined based on comparable transactions, public data sources, or recognized valuation methods.
Related Party Definition
Under the Tax Code of Azerbaijan, two parties are considered related if:
- One person owns at least 20% of another person’s shares or voting rights, either directly or through others.
- If one is in a position of authority over the other or has control over them.
- Parties are related if both are controlled by the same third person or if they together control another person.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Azerbaijan are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
The tax authority – State Tax Service (STS) can choose one of these methods to calculate the tax for deals between related parties or with companies in low-tax countries (tax havens).
Comparability Analysis
The search period for comparability analysis involves examining the year of the controlled transaction along with the two previous years. The average values from these three years are then used to establish the Arm’s Length Range, with data for all relevant indicators required for each year. If any price, margin, or other indicators in a controlled transaction fall outside this Arm’s Length Range, tax authorities will recalculate the taxes based on the median value of the range.
Documentation Requirements
Azerbaijan does not have special regulations for transfer pricing documentation, but the companies are required to inform the tax authority of related-party transactions by submitting a transfer pricing report. This is applicable if the total number of transactions within one year is more than 500,000 manats. However, starting January 1, 2022, certain cross-border transactions must be reported even if the amount is below that threshold. Each enterprise must submit its report by March 31 of the following year. If an STS audit is conducted on a company, it can also request this information. Refusal to provide the report may incur a 2,000 manat fine.
Country-by-Country Reporting
A company in Azerbaijan that is the head of a multinational group must file a Country-by-Country (CbC) report if the group’s yearly income is over 750 million euros. The report is due by the end of the following year.
- If the parent company or a designated substitute (surrogate parent) is not based in Azerbaijan, the Azerbaijani company must file the report if:
- The parent isn’t required to file one in its country,
- Its country doesn’t have an agreement with Azerbaijan to share the report, or
- Azerbaijan’s tax authority says the parent country hasn’t met its reporting duties.
If there are multiple group companies in Azerbaijan, one must be chosen to file the report. If the surrogate parent files the report properly and on time, the Azerbaijani company doesn’t need to file it.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
If a transaction is worth at least 10 million manats, a taxpayer can ask the tax authority (STS) for an advance ruling, which means asking how the tax will apply to that transaction. If all documents are provided, the STS must answer within 30 days. The ruling only applies to the taxpayer who requested it and can’t be used by others. It stays valid for three years unless the law changes. If the STS refuses to give a ruling, the taxpayer can appeal the decision.
Mutual Agreement Program (MAP)
In Azerbaijan, it is the responsibility of the Taxpayers to approach the State Tax Service (STS) with tax disputes that relate to international treaties, through the Mutual Agreement Procedure (MAP). Issues that MAP can look at include tax treaty misinterpretations and transfer pricing which may have gone wrong such as tax adjustments by foreign tax authorities. Also, in this country, it is the companies’ right to enter into Advanced Pricing Agreements (APAs), which are a part of the MAP process. Once an agreement is reached through MAP, the STS ensures it is implemented, which may involve tax refunds or additional payments.
Approach to Transfer Pricing Audits
Azerbaijan’s tax code does not have specific rules for transfer pricing audits. Instead, price checks usually happen during regular tax audits.
Penalties
If the tax authority finds during an audit that a company reported less income than it should have, the company may have to pay more tax. In that case, the company can be fined 50% of the unpaid tax, and interest of 0.1% per day will be added until the full amount is paid. The CbC report must be submitted using a specific form that provides all the required information. You can find the form in Decision No. 1 of the Ministry of the Economy from April 28, 2020. If the report is not filed correctly or on time, a fine of 500 manats will be charged.
Taxation at a Glance
Azerbaijan has three tax systems: The statutory framework which covers most businesses including corporate income tax and VAT; the Production Sharing Agreement framework which we see for oil and gas companies that have special tax breaks under production sharing agreements; also, the Hydrocarbon Grant Agreement which is for hydrocarbon exploration and extraction contracts and has tailored tax terms. Each of these frameworks has different tax rules based on the type of business or agreement.
The currency of Azerbaijan is the Azerbaijani Manat. The official name of the Azerbaijan Tax Authority is the State Tax Service.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 20% |
VAT | 18% |
Withholding tax on dividends to non-residents | 10% |
Withholding tax on interest to non-residents | 10% |
Withholding tax on royalties to non-residents | 10% |
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