On April 13, 2017 AmCham Tax and Customs Committee hosted its regular meeting for this month. Mr. Nuran Kerimov, President of AmCham opened the meeting welcoming the audience and introduced new Committee Chairman Ms. Arzu Hajiyeva and Deputy Chairman Mr.Jeyhun Mammadov. Ms.Arzu Hajiyeva welcomed everybody and thanked guest speakers: Mr. Zaur Fatizada General Director of the Department for International Cooperation and Tax Monitoring in Financial Institutions and Mr. Ulvi Yusifov, Director of International Cooperation Department within Department for International Cooperation and Tax Monitoring in Financial Institutions of the Ministry of Taxes of the Republic of Azerbaijan for joining committee. The committee format was interactive.
Mr.Zaur Fatizada made a short statement on behalf of Minister of Taxes and thanked the committee for invitation. Meanwhile he noted the importance of the new tax trends and expressed his believe in future open discussion and possible amendments to the transfer pricing legislation. He also mentioned that this topic is new both for taxpayers and government officials.
The first issue raised by Mr.Arif Guliyev from PwC was about collision in the tax code between transfer pricing articles and market price notion. The second question was regarding the threshold of the transfer pricing documentation as 500.000 limit on transactions, whether it is a price written on contract between parties or not. Mr. Fatizada replied that the Ministry probably will take the position to consider the limit for threshold as the transfer price detected by the parties rather than the contract price.
Then, Mr. Rashad Abbasov from PwC asked the question related to collision between articles 1.2 and article 7.5 in transfer pricing guidelines, whereas 500.000 threshold could be violated by tax authorities and implemented on transactions less than that fix amount. In this regard our guest from Ministry of Taxes replied as if no collision exist between those articles and its 7.2 article only considers the possibility of implementing transfer pricing methods in field audit due to taxpayers’ fraudulent transactions.
Furthermore, Mr.Rizvan Qayibov from PwC raised the question regarding the transfer pricing methods 4 and 5 and the issues of filling the TP reference. Mr.Fatizada replied that certain lines in reference could be skipped related to prices if method number 5 was selected and also clarified that decision number 55 (20%) mentioned in the guidelines is not applied to the groups global turnover.
Later, the question was raised regarding the sequence of methods implementation in Azerbaijan and other countries. If there is different preference of methods in other states, would that be acknowledged by tax authorities or they would be asked to use Cup Method. In this regard Ministry officials replied that national law prevails and taxpayers should prove his choice of different method, without infringing post adjustment issues in bilateral treaties.
Another question was raised by Najla Asadova of EY on application of deemed profitability of 20% under 4th and 5th TP methods that could be rejected by tax authorities of other states as deemed profitability is not determined based on comparability analysis which is the core principle of TP. Mr. Fatizada responded that for very specific cases where the deemed profitability could be applied, Ministry of Taxes would follow TP regulations as envisaged with respect to deemed profitability. However Mr. Fatizada emphasized that the purposes of the taxpayers and the tax office is to conduct TP study and determine comparable transaction to complete TP study based on comparability analysis and referring to deemed profitability only in very extreme cases where no comparable transaction could be located.
Ms. Narmin Aslanova from Deloitte posed the question about order 55 and conditional profitableness of 20% and issues of it implementation. Mr. Zaur Fatizada clarified that using this provision is last resort if none of methods could be implemented which is nearly impossible. The second question was regarding the use of TP data bases and whether taxpayer should use the same base that used MOT to avoid misunderstanding in TP. Mr.Zaur Fatizada stated that in this case taxpayer will use the same data base as MOT and added that MOT will use desk audits for checking TP. A question on databases for transactions where local party is being tested was raised by Najla Asadova of EY. Specifically, the question concerned the possibility to look into the neighbouring markets for testing local party of the transactions. Mr. Zaur Fatizada responded that neighbouring markets should not be used as comparable for the purposes of testing local party pf the transactions. He also emphasised that at this point no public information is available at the local market, the Ministry of taxes would keep taxpayers updated on any changes with this fact.
During the meeting Mr. Nuran Kerimov asked about future plans and training of Transfer Pricing. Mr. Fatizada gave information about certain trainings which were conducted internally and almost 50 tax officers are taking part in that training program, meanwhile MOT is about to start TP twinning with EU and started cooperation with developed countries that have improved TP legislation.
Next issue was about black list of offshore countries and its confirmation, to what MOT replied that this list is under discussion in the government.
There was a question about comparison of transactions between unrelated parties and use of external/internal transactions. Mr. Ulvi Yusifov replied that in that case parties should look for internal comparable, and if not found for external between independent sides.
Another question from PwC was about service providence from headquarters to its affiliate and whether TP will be used in this case, to what Mr.Fatizada replied that cost allocation in frames of services would be the topic of TP studies.
The last question was raised by Mr. Arif Guliyev about PSA agreements and application of TP to subcontractors. Mr. Fatizada replied that those PSA that are exempted by law will not be a subject of TP.
Ms. Arzu Hajiyeva thanked everybody for productive discussion and expressed gratitude to Mr. Zaur Fatizada and Mr.Ulvi Yusifov for coming.