Weekly actual topics in Azerbaijan (August 5-9)
The draft law "On Transfer Pricing" will be re-submitted to the government of Azerbaijan after revisions.
As the head of the Legal Department of the Ministry of Taxes of Azerbaijan Samira Musayeva said, the bill should be improved in accordance with the proposals, and special attention should be paid to the intersection of transfer and market prices.
"The project was developed a year ago. Then, it was submitted to the government, which returned it for revision in accordance with the conclusions of relevant government agencies and offers made by entrepreneurs. The bill still needs to be improved as there is also the economic side of the issue - with regards to protecting the rights of taxpayers and ensuring tax administration efficiency," Musayeva said.
According to international practice, she said, the introduction of tax control over transactions of head companies and subsidiaries of interdependent companies is a moot point. Some countries cancel transfer pricing after a year of its adoption.
"It has not justified itself in view of the fact that the legal regulation was flawed, although transfer pricing is relevant and prioritized for us, and we do not want to repeat the mistakes of other countries. This issue requires a comprehensive approach, and it will be improved by taking into account the interests of all parties," the department head said.
The law will enter into force in 2014, he said, depending on the progress of discussions and conclusions, as transfer pricing affects the interests of all entrepreneurs, as well as the country's image.
"Transfer pricing as well as partnerships in evaluation of the tax system and overall image of the country is one of the important issues in terms of compliance with international obligations," Musaeva said.
According to the tax law, market prices are used only for the purposes of taxation, and the goods (works, services) are considered by actual selling price. If the purchase price of the goods (works, services) is greater than 30 percent of the market price and the cost refers to the cost deducted from the income, the cost of these goods (works, services) refers to the costs deducted from income at market prices, and taxes are re-calculated in the following cases:
- If the unreasonable increase of the actual purchase price of purchased goods (works, services) is discovered;
Taxation of transfer prices in Azerbaijan was originally planned to be introduced in the tax code, but it was later decided to regulate this matter through a separate law.
The world practice provides five basic methods for determining transfer prices for the purpose of taxation.
In Azerbaijan, this area is currently regulated by Article 14 of the Tax Code. In the case of the new law's adoption, the application of this provision will be extended. The law will specify the specific mechanisms of transfer pricing taxation.
Transfer prices are formed during transactions between subsidiaries of large companies and lead to an artificial increase in costs. This process has turned into a negative trend with regards to tax evasion.
The problems arise when companies resell products at low prices to their affiliated companies, which then re-sell them at the market price as well as when taxation differs from country to country.
Given that these factors affect state revenues for income tax, the results from the use of this type of tax will be felt at least one year after the entry of this law into force.