Caucasus and Central Asia in the Globalization Process
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Valuation of Inventory
Lower of cost or market; FIFO; LIFO; Average. Historic cost; weighted average historic cost;
FIFO; LIFO.
Methods of Fixed Assets
Depreciation
Depreciated by group method on a declining
balance basis, using the depreciation rates set
by the Government.
Ten groups of depreciable assets are established
for depreciation purposes depending on the
useful life. Only the straight-line method may be
used for buildings, installations, transmission
devices with a useful life over 20 years (groups
8-10). Both straight-line and reducing balance
methods may be used for other assets.
Methods of Intangible
Assets Amortization
Amortized by group method on a declining
balance basis at a rate of 10% per annum (25%
for geological surveying and exploration).
Linear method, default rate is 10 %.
Deductions Subject to
Certain
Limitations
Business trips, interest and repair expenses
Deductibility of representational expenses is
limited to 4% of payroll expenses. Some
advertising expenses are deductible at 2% of
profit for the past
year. Repairs of fixed assets
at 10% of historical cost, warranty costs at 10%
of cost of goods. 50% of cost of operational
lease and fueling.
Non-deductible Items
Entertainment and meal expenses and various
other expenses that are not deemed to be
connected with the company’s economic
activity.
Contractual penaties and fines, training
employees abroad, interest for companies with
50 % or more foreign ownership, payments to
non-residents in offshore locations, reinsurance
payments unqualified foreign reinsurers.
Non-deductible Items
Subject to Capitalization
Repair expenses in excess of certain limits
established by legislation.
Acquisition or construction of fixed assets;
expenditures on extensions, further equipping,
modernization and reconstruction works.
Source: ITIC, Some Fiscal Parameters of the Investment Climate in Select Countries of Eurasia, ITIC Special Report, May 2006,
p.10-13.
Table 2: Transfer Pricing Rules in Azerbaijan and Russia
AZERBAIJAN
RUSSIA
Controllable
Transactions
- Transactions between related parties;
- Barter transactions;
- Export-import transactions;
- When price deviates by 30% from other
prices for similar goods, works or services
applied by the taxpayer within 30 days after
occurrence of the ransaction.
-
Transactions between related parties;
- Barter transactions;
- Export-import transactions;
- Transactions where the price deviates
by 20 % from other prices for similar
goods, works or services.
Safe Harbor
30 %
20 %
Methods
Cost plus;
Resale price.
Comparable uncontrolled price;
Resale price; Cost plus.
Penalties
General penalty regime applies - 25 percent of
under-paid taxes.
General penalty regime applies – 20 or 40
percent of under-paid taxes.
Disclosure Requirements
No specific disclosure required.
No specific disclosure required.
Documentation
Requirements
No statutory requirements, but recommended.
No statutory requirements,but recommended.
Advance Pricing
Agreement
Not available
Not available
Statute of Limitation
3 years from tax year-end.
3 years from tax year-end.
Source: Bill Page, “An Overview of Transfer Pricing Law in the CIS”, Some Fiscal Parameters of the Investment Climate in
Selected Countries of Eurasia, ITIC Special Report, May 2006, p.6-7.
There are some differences in transfer pricing
legislation and practices in Azerbaijan and Russia.
In Russia for example, legislation and practice is
evolving rapidly, but in Azerbaijan, transfer
pricing rules are still in initial phase of
development and tax authorities raise transfer
pricing issues only when they detect obviously
abusive pricing.
1
1
Bill Page, “An Overview of Transfer Pricing Law in the
CIS”, Some Fiscal Parameters of the Investment Climate in
Selected Countries of Eurasia, ITIC Special Report, May
2006, p.6.
II International Congress
289
Russia using more sophisticated rules and
familiar methodologies of the OECD guidelines to
determine arm’s length prices: (1) comparable
uncontrolled price method; (2) resale price
method; and (3) cost plus method. Preference is
usually given to the first method while the other
two methods may be used only in absence of
comparables or information about relevant prices
in that market. Transfer pricing rules in
Azerbaijan explicitly allow the use of an expert
for the determination of the market price.
2
When determining the market price for
comparable transactions, the tax authorities often
meet with difficulties, in particular due to the lack
of official data regarding market prices. In some
cases, it is hard for the tax authorities to assess the
impact of variables like volume discounts, credit
terms and quality differences in determining arm’s
length prices even for commodities like metals
and crude oil. Generally the burden to prove that
prices do not meet the arm’s length principle is the
responsibility of the tax authorities. However, in
Russia where litigation on transfer pricing is
increasingly common, the taxpayer still has to be
prepared to provide the tax authorities or the
courts with sufficient evidence that their market
price estimations are reasonable.
3
Azerbaijan has a special tax audit or penalty
regime established to address transfer pricing
issues. General penalty regime applies 25 percent
of under-paid taxes. In Russia, general penalty
regime applies 20 or 40 percent of under-paid
taxes. Finally, Azerbaijan and Russia have no
specific disclosure requirements, documentation
requirements and advance pricing agreement.
Statute of limitation of these countries is 3 years
from tax year end.
c. Double Tax Treaties
Double tax treaties are of tremendous
importance to businesses with an international
dimension. Without them trade would be stifled
and economies would likewise be affected. It is
because of this that treaties often assume huge
importance when developing tax strategies.
4
Double tax treaties are viewed as beneficial by
most states because they allow business to transact
with a degree of certainty both on the part of the
individuals, partnerships or corporate entities and
the government of that state in which that business
entity operates. The perceived benefits of double
tax treaties can be identified as; clarification of
2
Page, (2006), p.7.
3
Page, (2006), p.7.
4
Roy Saunders,“Understanding Double Tax Treaties”, http://
www.itpa.org/open/archive/saundersunder.rtf (28-03-2007)
taxing rights of each State, avoidance of double
international juridical taxation, and prevention of
fiscal evasion with anti-avoidance provision.
5
Table 3. Double Tax Treaties of Azerbaijan and Russia
AZERBAIJAN
RUSSIA
C
O
U
N
T
R
IE
S
Austria, Belarus,
Georgia, Germany,
Kazakhstan,
Moldova, Norway,
Russian Federation,
Turkey, Ukraine,
United Kingdom,
Uzbekistan
Albania, Armenia, Autralia, Austria,
Azerbaijan, Belarus, Belgium,
Bulgaria, Canada, China, Crotia,
Cyprus, Czech Republic, Denmark,
Egypt, Finland, France, Germany,
Hungary, Iceland, India, Indonesia,
Iran, Ireland, Israel, Italy, Japan,
Kazakhstan, Korea, Kuwait,
Kyrgyzstan, Lebanon, Lithuania,
Luxembourg, Macedonia, Malaysia,
Mali, Moldova, Mongolia, Morocco,
Namibia, Netherlands, New Zealand,
North Korea, Norway, Philippines,
Poland, Portugal, Qatar, Romania,
Slovak Republic, Slovenia, South
Africa, Spain, Sri Lanka, Sweden,
Switzerland, Syria, Tajikistan,
Turkey, Turkmenistan, Ukraine,
United Kingdom, United States,
Uzbekistan, Vietnam, Yugoslavia.
Source: ITIC, Some Fiscal Parameters of the Investment
Climate in Select Countries of Eurasia, ITIC
Special Report, May 2006, p.22, 25-26.
Russia has signed double tax treaties with 67
countries while the Azerbaijan has signed with 12
countries. These tax treaties ensuring the people
and businesses of those countries pay an amount
equal to the tax of only one country. Russian
legislation currently states that the double tax
treaties of the former USSR are still valid.
d. Energy Related Taxes
Oil and gas extraction plays a dominant role
as a source of export earnings and, to a lesser
extent, employment in many developing countries.
But the most important benefit for a country from
development of the oil and gas sector is likely to
be its fiscal role in generating tax and other
revenue for the government. To ensure that the
state as resource-owner receives an appropriate
share of the economic rent generated from
extraction of oil and gas, the fiscal regime must be
appropriately designed.
6
5
Saunders (2007)
6
Emil M. Sunley, Thomas Baunsgaard and Dominique Simard,
“Revenue from the Oil and Gas Sector: Issues and Country
Experience”, Post-Conference Draft: June 8, 2002, IMF
Conference on Fiscal Policy Formulation and Implementation
in Oil Producing Countries, June 5-6, 2002, p.1.
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