Benjamin Franklin, known in the history of the United States as one of the “founding fathers”, has an interesting quote: “ In this world, nothing can be said for sure except death and taxes ”. Based on this quote, the current blog post will provide information on the concept and characteristics of taxes, types, taxpayers of different types, etc.
I. What is a tax? Definition and Basic Features
Taxes mean payments transferred to the state budget and local budgets to finance the activities of the state. The existence of any state depends on taxes. Taxes are the main source of state budget revenues. Investments in the development of science, education, health, armed forces, law enforcement agencies, etc. are financed from the funds collected in the state budget, and the employment strategy in our country is determined.
Taxes also allow you to regulate the income of different groups of the population. In other words, taxes collected from working and income groups are spent on pensioners, the disabled, students, low-income and large families, as well as other categories of citizens in need of financial support and assistance. With the help of taxes, the state can also influence the economy, invest in the development of various sectors.
A. The main features of taxes
Definition of the tax has been given in the Article 11 of the Tax Code of the Republic of Azerbaijan as: “Tax is a mandatory, individual, gratuitous payment transferred to the state budget and local budgets in the form of alienation of taxpayers’ funds for the purpose of financing the activities of the state and municipalities, unless otherwise provided by this Code”. This definition given in the legislation distinguishes three main features of taxes. First of all, taxes are mandatory. Thus, Article 73 of the Constitution of the Republic of Azerbaijan states that it is everyone’s duty to pay taxes and other state payments in full and on time. Tax is an gratuitous payment. This means that, unlike duties and other payments, taxes are levied on you without any privileges, rights or services. In other words, you pay taxes not because the state gives or does something for you, but simply because you own something. For example, if you have a property, you pay different taxes on that property, and if you have income, you pay different taxes on that income.
B. Basic conditions for determining taxes
The tax is considered to be established if the taxpayer and the following elements of taxation are defined:
- object of taxation – income, profit, property, land, minerals, value added of goods (works, services), trade surcharge or other objects of taxation defined by this Code;
- tax base – a quantitative expression of the taxable part of the object of taxation;
- tax period;
- tax rate;
- tax calculation procedure;
- procedure and term of tax payment.
When determining a tax, tax exemptions may be determined on the grounds provided for by this Code.
II. Types of Taxes: Simplified, Profit, Value Added, Income Taxes
A. Profit tax
The difference between a taxpayer’s income (other than tax-exempt income) and deductible expenses is his profit. The tax paid on profit is called profit tax. Resident and non-resident enterprises in the Republic of Azerbaijan, as well as non-profit organizations earning income from entrepreneurial activities are payers of income tax. All income of a resident enterprise, as well as income received by it through its permanent representative offices outside the Republic of Azerbaijan, dividends, interest, royalties received outside the Republic of Azerbaijan and the difference between expenses deducted from income specified in the Tax Code of the Republic of Azerbaijan. Profit of a resident enterprise calculated in accordance with the above is subject to taxation.
A non-resident enterprise shall pay tax on profits earned from its activities through its permanent establishment in the Republic of Azerbaijan. In other words, in accordance with the Tax Code, all income received from an Azerbaijani source in connection with a permanent establishment is taxed after deducting the expenses incurred in obtaining that income.
In cases provided for in Article 125 of the Tax Code, the gross income received from an Azerbaijani source, which is not related to the permanent representation of non-resident legal entities, shall be taxed at the source of payment without deduction of expenses.
In accordance with the Tax Code of the Republic of Azerbaijan, the net profit of enterprises is generally taxed at the rate of 20%. According to the discounts made due to the promotion of micro businesses, micro businesses are taxed at a rate of 5% of profits. A non-resident is taxed at the rate of tax withheld at the source of payment from the gross income received from an Azerbaijani source, which is not related to the permanent establishment of the legal entity.
You can learn more about the calculation, payment and interest rate of income tax by following this link: https://www.taxes.gov.az/uploads/2021/buklet/MENFV.pdf
B. Simplified tax
Who are the payers of the simplified tax?
- Persons carrying out passenger and cargo transportation by motor vehicles in the territory of the Azerbaijan Republic (except for persons subject to voluntary VAT registration);
- Persons who are operators and sellers of betting games held in connection with sports games;
- Individuals who provide residential and non-residential premises;
- Individuals who provide land plots owned by them;
- Individuals who pay taxes at a fixed monthly rate and together with the mandatory state social insurance fee, except for individuals who hire employees during their activities.
Has the right to be a payer of the simplified tax:
- Persons who are not registered for VAT purposes and the volume of taxable transactions in any month (months) of a consecutive 12-month period is 200,000 manat or less;
- Persons engaged in public catering activities, the volume of taxable transactions of which exceeds 200,000 manat in any month (months) of a consecutive 12-month period.
2.1. No later than April 20 of each year, these persons must submit a “Simplified Tax Return” or a written statement that they will not exercise this right to the tax authority where they are registered. In this case, the chosen method does not have the right to change until the end of the calendar year.
2.2. If the declaration or written information is not submitted within the specified period, the tax authority shall apply the method chosen by the taxpayer in the previous tax year.
2.3. A taxpayer who starts a new activity during the year shall apply the method specified in the application for tax registration.
You can learn more about the rules of calculation and payment of simplified tax by following this link: https://www.taxes.gov.az/uploads/2021/buklet/SV.pdf
C. Value Added Tax (VAT)
Value added tax (VAT) applied in the Republic of Azerbaijan since 1992 has replaced the turnover tax as an indirect tax. VAT is the difference between the amount of tax assessed on taxable turnover and the amount of tax to be reimbursed in accordance with the electronic tax invoices issued or documents proving the payment of VAT on imports.
A person who registers or is required to register for VAT purposes is a VAT payer. Who must register for VAT:
- The volume of taxable transactions in the framework of entrepreneurial activity in any month (months) of a consecutive 12-month period, as well as the total value of transactions under one transaction or contract is more than 200,000 manat;
- Engaged in building construction activities;
- If one of the participants in the joint venture is a VAT payer, keeping records of that activity;
- Persons who are producers of goods subject to excise and compulsory labeling must be registered for VAT.
You can also apply for VAT registration on a voluntary basis. To do this, you can voluntarily apply to the tax authority with which you are registered with the “Application for registration of a taxpayer for VAT purposes”.
The tax rate applied to the provision of goods (works, services) is 18 percent. In addition, there are cases when VAT is applied at a discounted 0 (zero) interest rate set out in Article 165 of the Tax Code and exempted from VAT set out in Article 164 of the Tax Code.
For more information on Value Added Tax, you can go to this link: https://www.taxes.gov.az/uploads/2021/buklet/EDV.pdf
D. Income tax
Resident and non-resident individuals are payers of income tax. The income of a resident individual consists of the income he receives inside and outside the republic. The income of a non-resident individual shall consist of the income he / she receives from the sources of the Republic of Azerbaijan. Revenues include:
- income from employment;
- income from non-employment activities;
- all other income, except for tax-exempt income and increase from revaluation of fixed assets (assets).
The object of taxation of residents’ income is taxable income, which consists of the difference between the total income of residents for the tax (calendar) year and the amount deducted from income for that period. If the source of payment is taxed, the object of taxation is taxable income.
Fees (excluding expenses) charged by a private notary for notarial acts performed within a month, as well as for services provided in connection with notarial acts, are subject to taxation. Taxable income of a non-resident taxpayer operating through a permanent establishment in the Republic of Azerbaijan is the difference between the total income received from Azerbaijani sources in connection with a permanent establishment during a certain period and the amount deducted and deducted from income in that period.
The total taxable income of a non-resident at the source of payment is the object of taxation at the place of payment, regardless of the amount deducted from the income.
For more information on income tax, you can go to this link: https://www.taxes.gov.az/uploads/2022/bukletler/fizikishexslerinGV.pdf
III. Rules for using the e-taxes website
A modern Electronic Signature Certification Services Center (Asan SXM) has been established under the Ministry of Taxes and accredited by the Ministry of Communications and Information Technologies. Asan SXM has the ability to provide services through electronic signature cards, which we call “Digital ID”. These cards support all operating systems (MS Windows, Unix, Mac OS). In addition, Asan SXM provides Mobile Signature (“ASAN İmza”) service through Mobile-ID Center and Mobile Operator. A special SIM card is used for this service. This SIM card is a physical carrier of both the phone number and the electronic signature creation data. To take advantage of this technology, the user must obtain an ASAN İmza (Mobile Signature) SIM card from the mobile operator and activate the ASAN İmza (Mobile Signature) service by obtaining an advanced certificate from the Easy Certification Services Center (ECSC) of the Ministry of Taxes. He can then securely access online services and easily sign documents online and send them to the Ministry of Taxes. You can also use a Digital ID card to access the system and sign documents.
A. Online clerical work
In the “Internet Tax Office” of the Ministry of Taxes of the Republic of Azerbaijan 01.03. Since 2010, an online clerical subsystem has been established for citizens and taxpayers to apply to the tax authorities online. This system provides electronic document exchange between citizens and taxpayers and tax authorities.
The online clerical subsystem has been integrated into the internal clerical system of the Automated Tax Information System (AVIS) of the Ministry of Taxes. Therefore, users can track the movement of documents sent within the tax authority online and learn the phone number of the executor from the system and have the opportunity to establish a direct telephone connection with him.
Any document sent through the system has official status. There is an “individual electronic box” (e-Box) for each user. Documents sent and received from the tax authorities and other taxpayers are collected in this e-Box. The use of e-Boxes between taxpayers and tax authorities reduces time and resource losses compared to sending documents on paper, which is the traditional method. Correspondence between the tax authorities and the owners of the e-Box is carried out in electronic form (except in cases where it is required to be sent on paper). Therefore, it is recommended for taxpayers to regularly check the e-Box through the “Online Clerical” system.
Document in the instruction means application, complaint, inquiry, proposal, gratitude, letter, etc. understood.
To get acquainted with the rules of using the system and infographics, go to this link: https://www.e-taxes.gov.az/help/
As an ACON team, we are pleased to provide tax and accounting consulting services to local and foreign investors when setting up or investing in the Republic of Azerbaijan!