【From CFTInet, Beijing 09/04/2000】 INDIVIDUAL TAXES
SIGNIFICANT DEVELOPMENTS
The only significant development since last year has been the change in general interpretation of the definition of "Azeri-souce "income .Previously ,it was generally understood in theory and practice that employment income earned by a foreign physical person working in a representative office of a foreign legal entity was not considered Azeri-source income .Based on several tax audits conducted by the tax authorities during 1998 ,it became clear that the interpretation of the tax authorities is that such income is considered Azeri-source and is therefore taxable from day one .At press time the tax authorities' position is being challenged in the courts .To be the prudent side and to avoid potential significant penalty exposure ,this summary follows the tax authorities' interpretation.
TERRITORIALITY AND RESIDENCE
Foreign citizens (i.e.expatriate employees )are subject to personal income tax in Azerbaijan as follows.
1. Foreign citizens permanently resident in Azerbaijan (i.e.physically present in the Republic for 183 days or more during a calendar year )are subject to income tax for that calendar year on worldwide income ,regardless of the source of the income .
2. Foreign citizens not permanently resident in the Republic of Azerbaijan (i.e .not subject to personal income tax only on income received from sources within the Republic of Azerbaijan.
It should be noted that the issue of “Azeri-source income ”specifically related to employment income of foreign physical persons working for foreign legal entities in Azerbaijan has been and still is hotly debated .In the past ,the general interpretation in Azerbaijan was that income derived ny expatriates working in a representative office (“RO”)or
branch office ("BO"was not considered income from a “source in Azerbaijan ，”Therefore ,such an expatriate was not subject to personal income taxation unless the expatriate exceeded 183 days in Azerbaijan in a calendar year However ,the State Tax Inspectorate now takes the position that income earned by an expatriate from an RO or BO in Azerbaijan is taxable from day one ,based on the argument that income derived from an RO
or BO is considered Azeri- source income .
EMPLOYMENT --TAXABLE BASE
The taxable base includes the following items of employment compensation
1. Base salary and any overtime payments .
2. Hardship and cost-of -living allowances
3. Allowances for children's education
4. Payment of family member's travel expenses on business trips .
5. Payment of Azeri tax on behalf of the employee
The taxable base does not include the following items.
1. Amounts paid by the employer for state or government social insurance or pensions
2. Provision of living accommodation (e .g .payment for an apartment by the company )
3. Provision of a company car
4. Business trip expenses (e.g .travel ,hotel meals )
For reporting purposes ,foreign currency income must be converted to manats using the National Bank of Azerbaijan's official rate on the date it is received .
TAX CREDITS --RELIEF FROM DOUBLE TAXATION
The personal income tax law provides that foreign persons persent in the Azerbaijan Republic for nor less than 183 days are subject to taxation in Azerbaijan on their world - wide income .However ,income tax paid by such persons in accordance with the legislation of a foreign state (i. e.. taxes paid withheld by employer in home country )should reduce the Azeri
taxes due on such income .
To provide further protection from double taxation ,the personal income tax law is subordinated to double taxation treaties that are properly in force .However ,the Republic of Azerbaijan does nor recognize any of the double taxation treaties of the former U.S.S .R,except for the treaty with
Germany .Currently ,Azerbaijan has signed and ratified treaties with Georgia ,Kazakhstan,Moldova ,Norway ,Pakistan ,Poland ,Russia ,Turkey ,the United Kingdom,and Uzbekistan.
TAX ADMINISTRATION
Return /Foreign physical persons expecting to stay in Azerbaijan for at least 183 days
Should submit a preliminary tax declaration to the tax authorities within a month of their arrival in Azerbaijan .Based on the current dispute regarding Azeri-source income and the requirements for withholking tax at the source of employment income in Azerbaijan ,the question of what should
be properly included in the preliminary declaration is the question of what should be properly included in the preliminary declaration is unclear .we recommend that this declaration include only nonemployment income .
An annual tax declaration must be filed no later than February 1 following the accounting year (i.e .the calendar year )This Return should indicate the
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