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In which cases do banks not tax goods and services received from offshore companies?
In which cases do banks not tax goods and services received from offshore companies?
When payments are made to countries and territories with preferential tax regimes, those funds are subject to withholding tax at the source in accordance with Article 125-1 of the Tax Code. However, according to legal requirements, in certain cases banks are not obliged to withhold this tax. Expert Anar Bayramov explains the relevant cases and legal grounds.
According to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, when individuals who are not registered with the tax authorities make payments outside the Republic of Azerbaijan in countries or territories with preferential tax regimes for the purpose of purchasing goods (works, services), including movable or immovable property for personal consumption, such amounts are not subject to withholding tax at the source under Article 125-1 of the Tax Code.
Example 1: Let us assume that a citizen travels to Monaco, which is considered a preferential tax territory. During the trip, the citizen purchases computer equipment for personal use and pays using a bank card. In this case, although the payment is transferred to a company located in a preferential tax territory, according to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, the bank, acting as a tax agent, does not withhold tax at the source from this transfer and does not remit it to the state budget.
It is important to note a subtle but critical difference here: the clause refers not to purchases "from" or payments "to" preferential tax countries or territories, but rather to purchases and payments made in such countries or territories for personal consumption. This means that if a citizen purchases goods or services for personal use while physically present in an offshore jurisdiction and makes a non-cash payment using a bank card within that jurisdiction, the bank, acting as a tax agent, cannot withhold tax at the source under the requirements of the Tax Code.
However, if a citizen purchases goods from a company located in a preferential tax country without physically traveling to that country and makes a bank transfer for the payment, the bank must withhold tax at the source in accordance with Article 125-1 of the Tax Code.
Example 2: Assume that a citizen orders a car worth USD 20,000 from Hong Kong, which is considered a preferential tax territory, for personal use. The supplier ships the vehicle to the citizen in Azerbaijan. The citizen wants to make the payment through the bank based on documents provided by the supplier. In this case, the bank is obliged to withhold 10% tax at the source—i.e., USD 2,000—and transfer it to the state budget in accordance with Article 125-1 of the Tax Code.
However, during audit inspections, it is often observed that banks, referring to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, do not withhold tax at the source for such payments made by citizens to countries or territories with preferential tax regimes. This misapplication creates a serious risk of financial sanctions for banks during field tax audits.
When payments are made to countries and territories with preferential tax regimes, those funds are subject to withholding tax at the source in accordance with Article 125-1 of the Tax Code. However, according to legal requirements, in certain cases banks are not obliged to withhold this tax. Expert Anar Bayramov explains the relevant cases and legal grounds.
According to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, when individuals who are not registered with the tax authorities make payments outside the Republic of Azerbaijan in countries or territories with preferential tax regimes for the purpose of purchasing goods (works, services), including movable or immovable property for personal consumption, such amounts are not subject to withholding tax at the source under Article 125-1 of the Tax Code.
Example 1: Let us assume that a citizen travels to Monaco, which is considered a preferential tax territory. During the trip, the citizen purchases computer equipment for personal use and pays using a bank card. In this case, although the payment is transferred to a company located in a preferential tax territory, according to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, the bank, acting as a tax agent, does not withhold tax at the source from this transfer and does not remit it to the state budget.
It is important to note a subtle but critical difference here: the clause refers not to purchases "from" or payments "to" preferential tax countries or territories, but rather to purchases and payments made in such countries or territories for personal consumption. This means that if a citizen purchases goods or services for personal use while physically present in an offshore jurisdiction and makes a non-cash payment using a bank card within that jurisdiction, the bank, acting as a tax agent, cannot withhold tax at the source under the requirements of the Tax Code.
However, if a citizen purchases goods from a company located in a preferential tax country without physically traveling to that country and makes a bank transfer for the payment, the bank must withhold tax at the source in accordance with Article 125-1 of the Tax Code.
Example 2: Assume that a citizen orders a car worth USD 20,000 from Hong Kong, which is considered a preferential tax territory, for personal use. The supplier ships the vehicle to the citizen in Azerbaijan. The citizen wants to make the payment through the bank based on documents provided by the supplier. In this case, the bank is obliged to withhold 10% tax at the source—i.e., USD 2,000—and transfer it to the state budget in accordance with Article 125-1 of the Tax Code.
However, during audit inspections, it is often observed that banks, referring to sub-clause 5 of Article 13.2.16.14-2 of the Tax Code, do not withhold tax at the source for such payments made by citizens to countries or territories with preferential tax regimes. This misapplication creates a serious risk of financial sanctions for banks during field tax audits.