Transfer Pricing in Azerbaijan. What is it and do I require it?
From local legislation to alignment with global standards

TP legal sources in Azerbaijan

​

• Tax Code of the Republic of Azerbaijan

• Transfer Pricing and Application Rules (Board Resolution of 27 January 2017, with later amendments, including 2022 changes on documentation).

• Secondary regulations and administrative guidance

 

Scope

​

TP rules apply to “controlled transactions” between related parties.

​

Transactions between Azerbaijani residents and non-resident related parties

​​

• Transactions between a resident company and its foreign permanent establishment (or vice versa)

• Certain transactions between Azerbaijani related residents, where price manipulation could affect tax outcomes

• Transactions with parties in low-tax or preferential jurisdictions (where applicable rules treat them as controlled even if formal-related-party tests are not met)

​​

The OECD Transfer Pricing Guidelines are used as the main conceptual reference for comparability analysis, selection of methods and interpretation of the arm’s-length principle.​

​

The tax authorities have also contracted access to global commercial databases (e.g. through an agreement with Thomson Reuters), which is an obvious signal that benchmarking is expected to be done to international standards.

​

By joining the OECD/G20 Inclusive Framework on BEPS in 2022, Azerbaijan committed to implement the minimum standards. This has driven certain pressure to ensure the rules are not just on paper but actively enforced.

 

Transfer pricing report / controlled transactions report

​

Where the AZN 500,000 threshold is exceeded, the taxpayer must file a TP report (sometimes referred to as a controlled transactions report) with the tax authority.

​

This report typically:

​

• Lists all controlled transactions above the threshold

• Sets out the selected TP method for each category

• Summarizes key assumptions, analysis and pricing outcomes

• Provides financial data supporting the tested margins

 

Objective: It acts as the first level of transparency, enabling the local tax authority to risk-assess the taxpayer and decide whether to request more detailed documentation.

​

Master File – What it is and what the authorities want to see

​

Azerbaijan’s TP framework formally requires a Master File, broadly following the OECD standard. It is prepared at group level and must be submitted within a specified period (typically 60 days) after request by the tax administration.

 

Reviewing the Master File, the local tax authorities' objective:

​​​

• Where the key functions, assets and risks are located within the group

• The group’s overall TP policy – for intangibles, services, financing, goods, etc.

• Whether the Azerbaijani entity’s role and profitability are consistent with its place in the value chain

• Organizational structure and ownership

• Description of the group’s business lines, value chain and main profit drivers

• Overview of intangible assets, R&D and legal ownership vs. economic ownership

• Overview of intra-group financing arrangements

• Consolidated financial statements and allocation of income by region

​

The Master File assists the tax authorities to understand whether the profits concentrated in jurisdictions with real substance, or in low-tax locations unsupported by people, assets and risk.

 

Local File

​

The Local File is an Azerbaijan-specific document focusing on the resident entity and its controlled transactions. It is also prepared in line with OECD Action 13 and submitted on request.

​

Objective of the Local File:

​

• What exactly does the Azerbaijani entity do? (people, functions, assets, etc)

• Which related-party transactions are material, and how are they priced?

• Why is the chosen TP method appropriate given the facts and alternatives?

• How were comparables selected, and does benchmarking make sense?

• Are the resulting margins/mark-ups reasonable when compared to independent businesses?

• Detailed functional analysis of the Azerbaijani entity

• Description of each category of controlled transaction (goods, services, royalties, loans, etc.)

• Selection and application of TP methods (tested party, profit level indicator, etc.)

• Benchmarking studies (search strategies, comparable companies or transactions, arm’s-length ranges)

• Entity-level financial statements, segmented where necessary

 

The ultimate goal is to to move from high-level risk assessment to transaction-by-transaction verification.

​

• The Azerbaijan entity’s profit level reflects its real contribution

• The tax base in Azerbaijan is not eroded by underpricing of outbound transactions or over-pricing of inbound ones

• Any year-end adjustments are consistent with the arm’s-length principle and local rules

​

Country-by-Country Reporting (CbCR)

​

In line with BEPS Action 13, Azerbaijan has implemented Country-by-Country Reporting for large multinational groups. CbCR applies where the group’s consolidated revenue is at least EUR 750 million, and the designated Azerbaijani reporting entity (or local surrogate) must file annually.

​

Objective is:

​

From CbCR data, the tax authority wants to see:

​

• Where the group’s income, employees and assets are located

• Whether high profits in low-substance jurisdictions indicate potential profit shifting

• Which groups and jurisdictions warrant coordinated risk-based audits

• Provide a global map of value vs. profit vs. tax

• Help Azerbaijan cooperate with other jurisdictions through information exchange

• Feed into risk scoring, so limited resources are focused on the highest-risk groups

​

Role of benchmarking

​

Benchmarking is the process of selecting comparable uncontrolled transactions and deriving an arm’s-length range of prices or profit margins. 

Azerbaijan does not require domestic comparables; foreign data can be used when it is more reliable, which is important in a relatively small market.

​

The tax authority’s access to commercial databases (via arrangements such as the Thomson Reuters agreement) means they can replicate or challenge your benchmarking, rather than relying solely on taxpayer-provided studies.

 

Ultimate goal of benchmarking it to transform the arm’s-length principle from an abstraction into numbers, and to provide objective, market-based evidence that your intra-group prices are reasonable. Also:

• Define an acceptable profit range for the Azerbaijani entity

• Give both taxpayers and authorities a transparent, defensible basis for resolving disputes

 

Across all TP tools – TP report, Master File, Local File, benchmarking and CbCR – the Azerbaijani authorities are essentially asking the same set of questions:

​

• Where is value really created?

  • Do people, functions and decision-making in Azerbaijan match the profits booked here?

• Are intra-group prices distorting the Azerbaijani tax base?

  • Under-priced exports, over-priced imports, excessive royalties or interest, etc.

• Is Azerbaijan’s share of group profit fair compared with other jurisdictions?

• Are intangibles and risks allocated in substance, not just on paper?

  • Who actually develops and manages intangibles? Who truly bears risks?

• Is the group using low-tax jurisdictions or complex structures to shift profit artificially?

• Are the taxpayer’s TP policies consistent over time and supported by documentation, or do they change opportunistically?

​​

Summary:

 

Tax authorities are trying to figure out whether companies are paying the right amount of tax in Azerbaijan or quietly moving profits elsewhere—and whether what’s on paper matches what’s really happening in practice.

​

If a business structure looks like it exists mainly to reduce tax, it may be challenged.

 

The goal is to make sure profits are taxed where real work and decisions happen—not where they are just moved on paper.

​

These rules also play an important role in fighting money laundering. By requiring companies to clearly show who owns them, who controls them, and how money flows, it becomes much harder to hide illegal funds behind complex structures or fake transactions.

​

In short, OECD standards help authorities:

​

See who is really in control

Understand where money is coming from and going

Spot structures that don’t have a real business purpose

​

Thus, although it may look like this is all about tax, the bigger picture is about transparency, accountability, and keeping the financial system clean—not just collecting more tax.