VAT, GST and Sales Tax in Azerbaijan

Summary

Name of the tax Value-added tax (VAT)
Local name lav Dyr Vergisi (DV)
Date introduced 1-Jan-92
Trading bloc membership None
Administered by Ministry of Taxes (http://www.taxes.gov.az)
Rates
Standard 18%
Others 0% and exempt
Number format Tax identification number (TIN) with 10 digits
Return period Monthly
Thresholds
Registration Taxable turnover exceeding AZN200,000 for a period of 12 consecutive months
Recovery of VAT by non-established businesses  No

Scope of the tax

VAT applies to the following transactions:

  • The supply of goods, works and services performed in Azerbaijan
  • The importation of goods

Goods. The transfer of goods is deemed to occur at the place where they are made available. If the conditions for the supply involve lifting and transporting the goods, the transfer is deemed to occur where the lifting or transportation of the goods begins. However, if the supplier is to install the goods, the transfer is considered to occur at the place where the goods are installed.

Works and services. The following are the rules for determining the place where works are performed or services are rendered:

  • The place where immovable property is located if the works (services) are directly connected with that property, such asconstruction, construction and assembly, repair, reconstruction works, agency and expert services with respect to real property, and similar works (services)
  • The place where works (services) are actually rendered if they are connected with movable property
  • The place where services are actually rendered if they are ren­dered in the areas of culture, arts, physical fitness or sports, or in similar areas
  • The place where the transportation occurs if the works (ser­vices) are connected with such transportation
  • The place where the purchaser of works or services is located or registered, established, or, if the services are directly associ­ated with the permanent establishment of the purchaser, where the permanent establishment is located

The place of location, registration or establishment of the recipi­ent of the following services:

  • Transfer or assignment of patents, licenses, trademarks, copy­rights and other similar rights
  • Rendering of consulting, legal, accounting, engineering, adver­tisement, data processing and other similar services
  • Services involving the providing of personnel
  • Rental of movable property (except for vehicles belonging to transportation enterprises)
  • Services rendered by an agent engaging a person to provide taxable services on behalf of a principal
  • Provision of telecommunication services (receipt, distribution, transmission of signals, documents, pictures, sounds or any type of information through telegraph, radio, optical or other electromagnetic systems, including granting or acquisition of such transmission, receipt or distribution rights)
  • Radio and television broadcasting, and provision of postal ser­vices
  • Provision of services through computers, the internet and other electronic networks, email and other similar applications, or granting rights for the use of such networks or services

The place of works or services that cannot be determined based on the above tests is deemed to be the place where the person performing a work or rendering a service conducts the activity.

Who is liable

Taxable persons that are engaged in an entrepreneurial activity and that have taxable turnover during a period of 12 consecutive months exceeding AZN200,000 must register with the tax authorities as VAT payers within 10 days following the end of the 12-month period.

Any persons registered or to be registered as VAT payers are considered VAT payers. Consequently, a taxpayer is any individ­ual entrepreneur or legal entity that makes taxable supplies of goods (works or services) or that conveys goods across the cus­toms border of Azerbaijan in an amount exceeding AZN200,000.

Moreover, if a taxpayer performs one single transaction in an amount exceeding AZN200,000, then the taxpayer is liable for VAT registration with the tax authorities before the transaction is performed.

Group registration. Any joint economic activity conducted with­out the formation of a separate legal entity is deemed an indepen­dent person for VAT purposes. As a result, the Azerbaijan tax law does not provide for group registration.

Non-established businesses. The provision of services in Azerbaijan by a foreign legal entity that does not have a perma­nent establishment in Azerbaijan (a non-established business) and that is not registered for VAT in Azerbaijan to a person reg­istered or to be registered for VAT purposes in Azerbaijan (tax agent) is subject to VAT based on a reverse-charge mechanism (RC VAT). In such a case, the tax agent must calculate and pay VAT from the amount to be paid to the non-established business. The tax agent should be able to recover the RC VAT paid on services/works purchased from nonresident suppliers if it is reg­istered as a VAT payer and if the nature of the transaction is recoverable for VAT purposes.

Tax representatives. Not applicable.

Reverse charge. See “Non-established businesses” above.

Digital economy. No special rules apply to digital goods and ser­vices.

Registration procedures. The application for VAT registration should be filed in the form stipulated by the tax authorities, and the registration process should be completed within five days upon the submission of the application. Electronic submission is permitted.

Late-registration penalties. If a taxpayer subject to VAT registra­tion does not register for VAT purposes and carries out taxable activities, the taxpayer is subject to a financial sanction equaling 50% of the VAT amount payable to the state budget for the entire period during which the taxpayer carried out activities without VAT registration.

Deregistration. If a taxpayer ceases its activity in connection with VAT, then the taxpayer shall be obliged to place an application to terminate its VAT registration. The termination shall enter into force from the date VAT-related activities ceased.

VAT rates

The standard rate of VAT is 18%. Certain supplies are zero-rated or exempt from VAT.

Examples of zero-rated supplies

  • Goods and services intended for the official use of the diplo­matic and consular representative offices of international agen­cies and foreign states accredited in the Republic of Azerbaijan, as well as for the personal use of the diplomatic, administrative and technical personnel of these representative offices (includ­ing family members living with them), who are not citizens of the Republic of Azerbaijan
  • Exportation of consulting, legal, accounting, engineering, advertisement and other services
  • Importation of goods, supply of goods, and performance of works and provision of services to recipients under grants, with the proceeds of grants received from abroad
  • International or transit transportation of cargo or passengers; provision of works or services that are directly connected with international or transit flights, except for international postal services

Examples of exempt supplies

  • Provision of financial services
  • Contribution of property to an enterprise’s charter fund (capi­tal) in the form of participation share, except for imported property (if the contribution of property in the form of a par­ticipation share is not directly connected to the acquisition of other property in exchange)
  • Sale or purchase of all types of mass media products and the publishing of mass media products (except for advertising activities)
  • Transportation of passengers by subway
  • Production of textbooks for schools, literature for children and state publications funded by the state budget
  • Provision of paid educational services (except for the provision of services in connection with other activities)

If it is stipulated that specific production needs cannot be met by local resources for a specific period, the relevant executive authority shall be entitled to grant a VAT exemption for imported goods and equipment to meet those needs.

Option to tax for exempt supplies. Not applicable. E. Time of supply

The proper period to recognize VAT accrual is determined as fol­lows:

  • If the payment for goods, works or services is received within 30 days of the completion of the transaction, the date of pay­ment is the time of a taxable operation.
  • If the payment is made more than 30 days after the completion of the transaction, the time of a taxable operation is the issuance date of the electronic VAT (eVAT) invoice. If the eVAT invoice is not issued within five days of the completion of the transac­tion, the time of the taxable operation is:
    • The date of payment if the payment is received within 30 days
    • The date of completion of the transaction if the payment is received after 30 days
  • In case of cancellation of registration, the date preceding the date of cancellation

For advance payments, the taxable transaction is considered to occur at the time of payment. If two or more payments are made with respect to a taxable activity, each payment is deemed to be a separate transaction, up to the limits of the payment amounts.

For bartered goods and services, or for the provision of goods, works or services by a taxpayer to its employees or other indi­viduals free of charge, the time of supply is the date of supply of such goods, works or services.

Continuous supply of services. If services are rendered on a regu­lar or continuous basis, the time of rendering services is when an electronic VAT invoice is issued for any part of the operation. If payment has been made first, the time of rendering services is when payment is made for any part of the operation.

Imported goods and services. For taxable importations, the time of a taxable operation is when the use or consumption of the imported goods or services begins.

Recovery of VAT by taxable persons

If VAT is paid through an electronic transfer (no payments in cash) to a VAT deposit account directly from a deposit account or bank account of a payer in accordance with the eVAT invoices, the eVAT invoices serve as the basis for a VAT credit. According to the Constitutional Court decision dated September 2015, the VAT credit should be allowed only in case the principal amount for the supplies of goods or the provision of services is paid.

In addition, import documents issued by customs authorities that substantiate the amount of import VAT paid, regardless of the form of payment, serve as grounds for a VAT credit.

Non-recoverable input VAT. In general, no credit of input VAT paid is allowed with respect to entertainment and food expenses (except for expenses for healthful and dietary meals, milk and other similar products and for food expenses for ship personnel in sea transport within norms set by the relevant executive authority) or for expenses connected with the accommodation of employees and other expenses of a social nature.

Possible deduction for nonrecoverable VAT. VAT paid that is not recoverable may be deductible for profit tax purposes in cases where the nature of the transaction is deductible. Moreover, if the taxpayer qualifies for only a partial exemption (see below), the unrecoverable input VAT can be deductible for profit tax pur­poses in case the nature of the transaction is also deductible.

Partial exemption. If a taxpayer conducts both taxable operations and exempt operations in the same reporting period, the VAT credit is determined on the basis of the proportion between the taxable and total turnover.

Refunds. An excess of VAT credit amount over the output VAT amount charged during the accounting period may be carried forward for the following three months and applied against VAT due during that period. Any remaining balance after three months is refunded within 45 days after the expiration of that period on the basis of the taxpayer’s application for a refund.

Preregistration costs. Not applicable.

Recovery of VAT by non-established businesses

Azerbaijan does not allow the recovery of input VAT incurred by businesses that are neither established in Azerbaijan nor regis­tered for VAT there.

Invoicing

In general, persons registered as VAT payers and conducting tax­able transactions must issue electronic VAT invoices to the per­sons to whom they provide goods or services. Persons not registered for VAT purposes may not issue VAT invoices. A taxpayer must prepare and issue to a purchaser of goods or services an electronic VAT invoice within five days after the delivery of goods or provision of services.

Foreign-currency invoices. For tax purposes, the payment to the supplier shall be re-calculated in manats (AZN) at the exchange rate established by the Central Bank of the Azerbaijan Republic for the date when the operation was carried out.

Electronic invoices. The eVAT invoice as described by the tax authority is the only electronic invoice.

Proof of export. The invoice, delivery note and agreement serve as proof of export.

VAT returns and payments

VAT returns. Each taxpayer must file a VAT return on a monthly basis. The return must be filed by the 20th day of the month fol­lowing the accounting month. The payment of VAT must be made by the same day.

VAT on imports must be calculated and collected by customs authorities at the time of importation.

Special schemes. Not applicable.

Electronic filing. Electronic filing is available. Annual returns. Not applicable.

Penalties

Late submission of a VAT return is subject to a financial sanction in an amount of AZN40.

If the VAT amount indicated on a VAT return is understated or VAT payable to the state budget is evaded by failure to submit the VAT return, the taxpayer is subject to a fine equal to 50% of that understated or evaded tax. An additional amount may be calcu­lated by the tax authorities as part of an audit.