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How is the inability to pay tax debt determined? – New rules
How is the inability to pay tax debt determined? – New rules
According to Article 85.6.2 of the Tax Code, if the taxpayer is unable to pay the tax debt in a single payment or there is a risk of bankruptcy, or the taxpayer does not have the ability to pay the tax debt in a single payment, the deadlines for fulfilling tax obligations can be extended beyond the time frame set by this Code. How is this regulated? Specialist Ziya Hamidli provides clarification on this issue.
In accordance with the Code, the Cabinet of Ministers of the Republic of Azerbaijan approved the "Rules for Determining the Ability of a Taxpayer to Pay the Tax Debt" with Decision No. 381 dated September 3, 2024. These rules establish specific procedures for assessing the payment ability of taxpayers applying for an extension of the deadline for fulfilling tax obligations.
According to paragraph 2.6 of the rules, if the taxpayer's tax debt exceeds 1.3 times the amount of free funds determined based on paragraphs 2.4 and 2.5 of these rules, this situation is considered as the taxpayer's inability to pay the tax debt in a single payment. The deadline for fulfilling the tax obligation can then be extended, depending on the taxpayer's choice, according to the procedures outlined in Articles 85.10.1-85.10.3 of the Tax Code.
The amount of free funds is calculated based on the average monthly income and expenses of profit (income) and simplified tax payers.
Calculation of Average Monthly Income and Expenses
According to paragraph 2.1.1 of the rules, the total income and total expenses (excluding depreciation expenses) indicated in the income (profit) tax declaration submitted by the taxpayer, based on the accounting method chosen for the previous reporting year, are divided by 12 (or by the number of months in which the taxpayer was operational during the previous reporting year if the taxpayer did not operate the entire year) to determine the average monthly income and expenses.
If the taxpayer did not operate for the entire reporting period, these figures are divided by the number of months in which they were active.
Example 1: "XX" LLC reported total income of 240,000 AZN and total expenses of 180,000 AZN for the previous reporting year.
Average monthly income: 240,000 / 12 = 20,000 AZN;
Average monthly expenses: 180,000 / 12 = 15,000 AZN.
According to paragraph 2.1.2 of the rules, for a simplified tax payer, the income and expenses are determined by dividing the total sales revenue (including non-sales income) and the expenses determined based on the documents provided by the taxpayer over 3 months.
Example 2: A taxpayer as a simplified tax payer reported income of 60,000 AZN and expenses of 45,000 AZN for the previous quarter.
Average monthly income: 60,000 / 3 = 20,000 AZN;
Average monthly expenses: 45,000 / 3 = 15,000 AZN.
In paragraph 2.1.3, it is stated that for a newly established taxpayer during the reporting period, the average monthly income and expenses are determined based on the actual performance indicators, divided by the number of months of operation. The taxpayer must attach supporting documents (electronic invoices, expense documents, etc.) to the declaration.
Example 3: A newly established business earned 20,000 AZN and incurred 10,000 AZN in expenses in the first two months.
Average monthly income: 20,000 / 2 = 10,000 AZN;
Average monthly expenses: 10,000 / 2 = 5,000 AZN.
Determination of Free Funds
According to paragraph 2.4 of the decision, the taxpayer's free funds are determined as follows:
The average monthly income minus the average monthly expenses;
The remaining funds in the taxpayer’s cash or bank accounts are added.
Example 4: The taxpayer has an average monthly income of 15,000 AZN, average monthly expenses of 10,000 AZN, and a bank balance of 25,000 AZN. Let's calculate their free funds:
Free funds:
15,000 – 10,000 + 25,000 = 30,000 AZN.
Evaluation of the Ability to Pay the Tax Debt
According to paragraph 2.6 of the rules, if the taxpayer's tax debt exceeds 1.3 times the amount of free funds determined according to paragraphs 2.4 and 2.5 of these rules, this is considered as the taxpayer’s inability to pay the tax debt in a single payment. In this case, the deadline for fulfilling the tax obligation can be extended based on the taxpayer's choice, as per the procedures outlined in Articles 85.10.1-85.10.3 of the Tax Code.
In other words, if the amount of the tax debt exceeds 1.3 times the taxpayer’s free funds, this is considered as insolvency.
Example 5: The taxpayer has free funds of 50,000 AZN, and the tax debt is 70,000 AZN.
50,000 × 1.3 = 65,000 AZN
Since the tax debt of 70,000 AZN exceeds 65,000 AZN, the taxpayer cannot pay the debt in a single payment. In this case, the payment deadline is extended.
Consideration of Special Cases
According to paragraph 2.7 of the rules, in cases where taxpayers involved in state-supported projects, particularly those related to the reconstruction of liberated territories, have VAT debts, this situation is also considered as insolvency.
According to Article 85.6.2 of the Tax Code, if the taxpayer is unable to pay the tax debt in a single payment or there is a risk of bankruptcy, or the taxpayer does not have the ability to pay the tax debt in a single payment, the deadlines for fulfilling tax obligations can be extended beyond the time frame set by this Code. How is this regulated? Specialist Ziya Hamidli provides clarification on this issue.
In accordance with the Code, the Cabinet of Ministers of the Republic of Azerbaijan approved the "Rules for Determining the Ability of a Taxpayer to Pay the Tax Debt" with Decision No. 381 dated September 3, 2024. These rules establish specific procedures for assessing the payment ability of taxpayers applying for an extension of the deadline for fulfilling tax obligations.
According to paragraph 2.6 of the rules, if the taxpayer's tax debt exceeds 1.3 times the amount of free funds determined based on paragraphs 2.4 and 2.5 of these rules, this situation is considered as the taxpayer's inability to pay the tax debt in a single payment. The deadline for fulfilling the tax obligation can then be extended, depending on the taxpayer's choice, according to the procedures outlined in Articles 85.10.1-85.10.3 of the Tax Code.
The amount of free funds is calculated based on the average monthly income and expenses of profit (income) and simplified tax payers.
Calculation of Average Monthly Income and Expenses
According to paragraph 2.1.1 of the rules, the total income and total expenses (excluding depreciation expenses) indicated in the income (profit) tax declaration submitted by the taxpayer, based on the accounting method chosen for the previous reporting year, are divided by 12 (or by the number of months in which the taxpayer was operational during the previous reporting year if the taxpayer did not operate the entire year) to determine the average monthly income and expenses.
If the taxpayer did not operate for the entire reporting period, these figures are divided by the number of months in which they were active.
Example 1: "XX" LLC reported total income of 240,000 AZN and total expenses of 180,000 AZN for the previous reporting year.
Average monthly income: 240,000 / 12 = 20,000 AZN;
Average monthly expenses: 180,000 / 12 = 15,000 AZN.
According to paragraph 2.1.2 of the rules, for a simplified tax payer, the income and expenses are determined by dividing the total sales revenue (including non-sales income) and the expenses determined based on the documents provided by the taxpayer over 3 months.
Example 2: A taxpayer as a simplified tax payer reported income of 60,000 AZN and expenses of 45,000 AZN for the previous quarter.
Average monthly income: 60,000 / 3 = 20,000 AZN;
Average monthly expenses: 45,000 / 3 = 15,000 AZN.
In paragraph 2.1.3, it is stated that for a newly established taxpayer during the reporting period, the average monthly income and expenses are determined based on the actual performance indicators, divided by the number of months of operation. The taxpayer must attach supporting documents (electronic invoices, expense documents, etc.) to the declaration.
Example 3: A newly established business earned 20,000 AZN and incurred 10,000 AZN in expenses in the first two months.
Average monthly income: 20,000 / 2 = 10,000 AZN;
Average monthly expenses: 10,000 / 2 = 5,000 AZN.
Determination of Free Funds
According to paragraph 2.4 of the decision, the taxpayer's free funds are determined as follows:
The average monthly income minus the average monthly expenses;
The remaining funds in the taxpayer’s cash or bank accounts are added.
Example 4: The taxpayer has an average monthly income of 15,000 AZN, average monthly expenses of 10,000 AZN, and a bank balance of 25,000 AZN. Let's calculate their free funds:
Free funds:
15,000 – 10,000 + 25,000 = 30,000 AZN.
Evaluation of the Ability to Pay the Tax Debt
According to paragraph 2.6 of the rules, if the taxpayer's tax debt exceeds 1.3 times the amount of free funds determined according to paragraphs 2.4 and 2.5 of these rules, this is considered as the taxpayer’s inability to pay the tax debt in a single payment. In this case, the deadline for fulfilling the tax obligation can be extended based on the taxpayer's choice, as per the procedures outlined in Articles 85.10.1-85.10.3 of the Tax Code.
In other words, if the amount of the tax debt exceeds 1.3 times the taxpayer’s free funds, this is considered as insolvency.
Example 5: The taxpayer has free funds of 50,000 AZN, and the tax debt is 70,000 AZN.
50,000 × 1.3 = 65,000 AZN
Since the tax debt of 70,000 AZN exceeds 65,000 AZN, the taxpayer cannot pay the debt in a single payment. In this case, the payment deadline is extended.
Consideration of Special Cases
According to paragraph 2.7 of the rules, in cases where taxpayers involved in state-supported projects, particularly those related to the reconstruction of liberated territories, have VAT debts, this situation is also considered as insolvency.