Azerbaijan: Transfer pricing rules; effective for 2017 | KPMG | BE

Azerbaijan: Transfer pricing rules introduced; effective for 2017

Azerbaijan: Transfer pricing rules; effective for 2017

Changes made to the Azerbaijani tax code regarding a transfer pricing regime are effective from 1 January 2017.

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Implementing regulations were published on 27 January 2017. 

Overview of transfer pricing measures

Among the changes affecting multinational companies are measures concerning “controlled transactions.” The tax authorities may control prices in transactions (controlled transactions) between:

  • An Azerbaijani company and a foreign related company
  • A permanent establishment (PE) of a foreign company and either the non-resident company itself or any other representative office, branch, and other division in other countries
  • A resident of the Republic of Azerbaijan and/or the PE of a non-resident in Azerbaijan and entities incorporated (registered) in countries with a preferential tax regime (the list of countries with preferential tax regimes has not yet been announced)

There is no size threshold for controlled transactions. All controlled transactions must conform to the Azerbaijani transfer pricing requirements.

 

There is a “related party” (either an individual or legal persons) when:

  • One party to the transaction 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
  • One individual to the transaction is subordinate to or is under the direct or indirect control of the other person
  • Both parties to the transaction are under the direct or indirect control of the same third party
  • Both parties to the transaction have a direct or indirect control over the same third party
  • The parties are “family members”

Transfer pricing methods

The transfer pricing methods available are broadly based on the guidelines of the OECD but with some specific local rules. The following transfer pricing methods are available to Azerbaijani taxpayers:

  • Comparable price method (CUP)
  • Resale price method
  • Cost plus method
  • Profitability method
  • Profit split method

The Azerbaijani tax law establishes a strict hierarchy of methods, according to which the CUP method is strongly preferred. Only if it is not possible to apply the CUP method can other transfer pricing methods be considered. These transfer pricing methods are applicable in determining income/expenses for corporate income tax purposes only. 

The tax authority will respect the taxpayer’s pricing when the pricing equals the mean average—that is, the sum of all comparables divided by the total number of comparables—of the comparable range or when the pricing falls within the range.  When the tax authority makes adjustments to the transfer price, the pricing will automatically be adjusted to the mean average of the comparable range. The tax authority will also impose a penalty of 50% of the adjusted tax liability for any adjustments made during an audit. 

KPMG observation

In light of these provisions, it is prudent to consider transfer pricing well in advance of finalizing prices, as any adjustments and penalties may be substantial. 

Transfer pricing reporting requirements

The taxpayer must submit a report on controlled transactions exceeding a limit of AZN 500,000 (approximately U.S. $296,000) for the calendar year. The report must be submitted by 31 March of the year following the calendar year of the transactions. Failure to submit the report will result in a penalty of AZN 500. 

The notification must include a list of controlled transactions as well as information about any self-adjustments to prices made by the taxpayer.

Transfer pricing documentation

During a tax audit, the taxpayer is required to provide transfer pricing documentation to support the selected transfer pricing method and its application. Documentation must be prepared in the Azerbaijani language.

Preliminarily agreement of the transfer pricing method

The taxpayer may apply to the tax authorities for the preliminary determination of the transfer pricing method to be used in controlled transactions. The taxpayer must submit a request at least three months prior to conducting the transaction. The method recommended by the tax authorities is binding. There is no user fee for a request made to the tax authorities (it is “free of charge”).   

KPMG observation

The changes introducing new pricing and documentation requirements are in their first year of implementation, and it is likely that preparation of first time documentation will be time-consuming. Companies need to consider beginning preparation of the transfer pricing documentation for any controlled transactions as soon as possible.

 

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group:

Medina Efendiyeva | +99412 404 8910  or  +99412 404 8911 | mefendiyeva@kpmg.az

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