Value Added Tax
and Excise
Jeyhun Mammadov
Fall 2018/2019
Principles of VAT
“
3
Value added tax – characteristics
▪
▪
▪
▪
Consumption tax
Independent of the economic success and status of the
taxpayer
It taxes the pure usage of income similar to a transaction tax
In contrast to direct tax, it distinguishes between person who
is liable and on whom it is imposed
These are main characteristics of VAT
4
VAT CONCEPT
VAT is that tax:
• should be charged at each stage of the production and distribution
process
• but the total tax due should be borne by the final consumer of the
product.
5
Value added tax – methods of calculation
▪
▪
Transaction based method (invoice-credit method)
▪ Tax charge is shown on each invoice
▪ Purchaser credits that tax
Entity based method
▪ VAT is calculated on all allowable purchases
Almost all jurisdictions operate on invoice-credit method
6
Concept of VAT
100AZN+18AZN
150AZN+27AZN
200AZN+36AZN
Payment
Payment
Payment
Work/Service
+ VAT
Work/Service
+ VAT
Work/Service
+ VAT
Invoice
+18% VAT
18AZN
+18% VAT
27AZN
Payment
Work/Service
+ VAT
Invoice
Invoice
-18% VAT
18AZN
250AZN+45AZN
-18% VAT
27AZN
+18% VAT
36AZN
Invoice
-18% VAT
36AZN
+18% VAT
45AZN
STATE BUDGET
a)
b)
c)
Taxpayers, who are registered for VAT are required to charge VAT on their sales
and must account for this output tax to state authorities, but
Such taxpayers are allowed to recover from state budget the input tax which they
pay to their own suppliers, so that
in effect, VAT registered taxpayers suffer no VAT and the total VAT is borne by
the consumer at the end of the distribution chain.
7
VAT concept in Azerbaijan
Output Value
Added tax
The amount of tax
calculated from taxable
turnover
Input VAT
-
The tax amount which is
creditable according to
submitted electronic tax
invoices or documents reflecting
the payment of VAT at import.
Payable Value Added Tax
The difference between Output VAT
amount and Input VAT amount.
8
Concept of VAT – example
A Ltd owns a quarry, where it extracts stone and sells it to B Ltd for 10,000AZN plus VAT. B Ltd converts
all of the stone into paving slabs and sells these slabs to C Ltd for 18,000AZN, plus VAT. C Ltd owns a
garden centre, where the paving slabs are sold to the general public for a total of 32,000AZN, plus VAT.
Show how VAT is charged and collected at each stage of this process, assuming that VAT is to be
calculated at 18% throughout.
A Ltd
B Ltd
C Ltd
Cost price
Selling price Output
Paid to the
before VAT Input VAT before VAT
VAT
state
10,000
1,800
1,800
10,000
1,800
18,000
3,240
1,440
18,000
3,240
32,000
5,760
2,520
5,760
9
Worldwide VAT rates
Rus–
20%
Can –
5% GST
EU avg –
9.7%-21%
Az, Geo,
Tur – 18%
US – 2,5%
to 8% ST
Kz–
12%
Ch –
6%-17%
Jap – up
to 5%
In –
5%-28%
Nig–
5%
Ken–
16%
Md–
20%
Ag–
21%
SA–
17%
Aus – 10%
GST
10
Taxable person VAT payer
11
Taxpayer for VAT
▪ Any person registered or to be
registered for VAT purposes
▪ A person importing taxable goods
▪ Non-resident person who
performs work and services in
Azerbaijan
▪ Unincorporated Partnership
▪ Producers of excise goods
▪ Person engaged in construction
activity, who doesn’t exercise a
right for simplified taxation
12
VAT REGISTRATION
Revenue limit
Entities engaged in business
activity, whose volume of taxable
operations in any month of
consecutive 12-month period
exceeds 200,000 AZN.
Application for
registration
10 days after the first day of the
following month when total value
of operations exceeds 200,000
AZN
Transactional
registration
If the volume of a transaction
exceeds 200,000 AZN, that
transaction is VAT-able and a
party for that transaction shall
be registered for VAT
Registration timing
Before the date of the VAT-able
transaction
Voluntary registration
A person engaged in business who
does not need to be registered
may voluntarily apply for
registration with the purposes of
VAT.
Effective date
▪ On the first day of the following
month when application
submitted; or
▪
From the indicated in the
application (should not exceed
3 years backdated period)
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VAT registration – exercises
📖
Examples
(a) Jale is a sole proprietor with a
taxable turnover of 115,000AZN per
annum. Is she required to register for
VAT?
(b) Parviz and Davud are in partnership,
operating a business with a taxable
turnover of 250,000AZN per annum. Is
anyone required to register?
(c) Sevil is a sole proprietor with a
taxable turnover of 100,000AZN per
annum. She is also in partnership with
Sevinj, operating a business with a
taxable turnover of 130,000AZN per
annum and sharing profits equally. Is
anyone required to register?
Solution
(a) No. Jale's taxable turnover does not
exceed the registration threshold.
(b) Yes. The partnership of Parviz and
Davud is one "person" for VAT
purposes and has a taxable turnover
exceeding the registration threshold.
Therefore the partnership must
register.
(c) No. Sevil as a sole proprietor is one
person, whilst the partnership of Sevil
and Sevinj is another, quite separate,
"person". Neither of these persons has
a taxable turnover exceeding the
registration threshold so neither of
them is required to register.
14
VAT registration – Exercise
Kazim begins trading on 1 January 2016 . Taxable turnover during the first two years of trading
is as follows:
2016,
AZN
2017,
AZN
January
4,800
January
13,800
February
5,100
February 16,400
March
5,800
March
16,100
April
6,600
April
17,600
May
7,400
May
18,100
June
7,900
June
18,900
July
8,300
July
18,200
August
8,500
August
18,900
September
9,200
September 19,800
October
10,500
October
20,100
November
11,900
November 20,300
December
11,200
December 22,700
The VAT registration threshold is 200,000 AZN. State the date on which Kazim must register for
VAT.
15
VAT registration – Exercise
At the end of each month, cumulative taxable turnover during the previous 12 months (or
since the start of trade, if less) are as follows:
2016,
January
February
March
April
May
June
July
August
September
October
November
December
AZN
4,800
9,900
15,700
22,300
29,700
37,600
45,900
54,400
63,600
74,100
86,000
97,200
2017,
January
February
March
April
May
June
July
August
September
October
November
December
AZN
126,200
137,500
147,800
158,800
169,500
180,500
190,400
200,800
211,400
221,000
231,400
242,900
The registration threshold is passed at the end of August 2017 . Kazim must notify the tax
office by 10 September 2017. Registration will probably take effect from 15 September 2017.
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Deregistration from VAT
•
If the taxpayer ceases to provide with VAT-able transactions, the
taxpayer is obliged to apply to the tax administration on cancellation of its
VAT registration;
o Deregistration is effective from the last day of ceasing VAT-able
transactions.
•
If the volume of VAT-able transactions are less than 100,000 AZN for the
preceding 12 calendar month period, taxpayer may apply for the
deregistration, once 1 year period passes after initial registration;
o Deregistration is effective from the day of application for
deregistration.
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TAX BASE
•
•
•
•
•
•
•
•
•
Provision of goods, works and services;
Margin on sale of agricultural goods produced in Azerbaijan;
Taxable import;
Provision of goods, works and services in Azerbaijan by the Partnership;
Supply of goods, performance of works and provision of services to its
own employees or for non-economic activity;
Barter (swap) operations;
The use of goods (works, services) for non-commercial activity, their loss,
damage, write-off of residual value of undepreciated assets or theft of
goods, if the input VAT was paid for them;
On deregistration, the goods that remain in the ownership at the time of
cancellation are considered as realized at such time and to be a taxable
operation;
Sale of goods in Azerbaijan that were exempt from VAT on import.
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VAT exemptions – general rules
Export of goods and
services
Sales subject to other
transactional taxes
Due to social, cultural
or economic reasons
Business suppliers which transfer
goods across the border shall not
be subject to additional domestic
VAT to avoid a distortion of the
competition on foreign markets.
Transfer of immovable property:
because the transfer of land and
buildings is basically subject to
real estate transfer taxes.
Granting and negotiation of
credits, accounts or deposits,
postal services, social security
work, education, etc.
Further tax relief on
export
Insurance and reinsurance,
Letting housing space
and health care
Input VAT relief from former
acquisitions remains in the hands
of the supplier.
as well as the turnover from
betting and lottery activities,
again because of other
transaction taxes.
the main reason for the
exemption of VAT in tax
regulations is to grant a relief for
private consumers.
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VAT exemption –
Azerbaijan
Followings are exempt from VAT:
1. Purchase of privatized assets. Rent payment for the state owned assets;
2. Financial services;
3. Import or provision of national and foreign currencies, as well as securities;
4. Import of gold by CBAR and SOFAZ, as well as import of other securities by CBAR;
5. Investment of property as the share capital;
6. Payment of fees for permits, licenses and services provided by government authorities or by
special notaries;
7. Publication of media products;
8. Publication of education books or literature for kids;
9. Funeral services;
10. Import of goods, provision of services to fulfill obligations of CBAR and SOFAZ;
11. Transfer of any assets to the state authorities according to the Production Sharing
Agreements;
12. Underground transportation services;
13. Education services;
14. Transfer of assets between branches of organization, and from one legal entity to another
one (according to the decision of the state authorities);
15. Import of technologies, equipment and plants by the managing organization or the operator
of the technological park;
16. Import of technologies, equipment and plants by the residents of the technological park for
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seven years after registration on the technological park;
17. Sale of participating interest in the legal entity, or shares of it;
Exemption from
VAT - continue
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
Sale of agriculture products by farmers – for 5 years since January 1, 2014;
Import of defense products, and equipment for production of them;
Import of products by humanitarian organizations;
Donation or charities made by states, governments or by international organizations;
Import of goods for personal use (non-commercial import);
Import of goods and equipment for export purpose oil & gas industry;
Import of goods into special economy zones (except those that subject to excise tax);
Import of fixed assets that subject to lease agreement;
Import of technology, equipment and plants by persons obtained investment incentives
document – for 7 years after receiving such document;
Import and sale of wheat, production and sale of flour and bread;
Import of goods by the resident of industrial park – for 5 years from May 1, 2016;
Import and sale of breeding animals;
Import and sale of seeds and seeds;
Import and sale of mineral fertilizers, pesticides;
Import of seeds growing, poultry and beekeeping equipment and machineries;
Import of veterinary medicines and drugs;
Import and sale of agricultural irrigation systems and other facilities, machinery, equipment;
Import of raw materials and materials determined by the relevant executive authority;
Provision of non-operating (toxic) assets within the restructuring and recovery measures of
banks that have lost their repatriation – for 3 years from January 1, 2017;
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Sale of poultry meat - for 3 years from January 1, 2017;
Import of aircrafts, their spare parts, engines and power equipment for civil aviation purposes.
Tax implications of
exemption from VAT
The tax implications of a supply of goods or services being exempt are as follows:
a)
VAT cannot be charged on an exempt supply.
b)
A person who makes only exempt supplies cannot register for VAT, charges no
output tax, is not a taxable person and cannot reclaim input tax.
c)
In effect, a person making only exempt supplies is in an identical position with regard
to VAT as the final consumer at the end of a distribution chain.
d)
Input VAT can be treated as tax deductible for corporate tax purposes
22
Zero rate (0%) VAT
Following work, services and transactions are taxed at 0% rate:
1.
Goods and services intended for use of diplomatic and consular representations;
2.
Import of goods; provision of goods, works and services to the recipients of financial aid
(grants) received from abroad;
3.
Export of goods; and services as determined by the place of purchaser;
4.
International and transit cargo (except for international postal services), and passenger
transportations. Provision of works and services for international and transit flights;
5.
Supply of gold and other valuables to the Central Bank of the Azerbaijan Republic;
6.
Provision of goods, work and services by contractors to the resident of the industrial parks;
and by sub-contractors to the contractor of the industrial parks.
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Zero rate (0%) VAT – implications
The tax implications of a supply of goods or services being zero-rated are as follows:
a)
The supply is a taxable supply but the VAT due is calculated at 0%.
b)
A person who makes only zero-rated supplies is usually register as a taxable person.
Having registered (and this may be done voluntarily if taxable turnover is less than the
threshold) the person will then be able to reclaim input tax.
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Timing of the taxable operation
Payment is
made no later
than 30 days
after the
taxable
transaction
NO
e-VAT Invoice
issued within 5
days after the
taxable
transaction, or
shipment of
goods
NO
Supply of
goods
involves their
shipment
YES
YES
YES
Date of
the
payment
Date of the
e-VAT
invoice
Date of the
Shipment
of goods
NO
Date of the
supply
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Timing of the taxable operation – exercise
The company AXE provided cleaning services to company BBS on the date
of March 18, 2018. The e-VAT invoice was issued on April 1, 2018 and
company BBS made a payment to company AXE on April 25, 2018.
Determine the date of the taxable operation.
The payment was made later than 30 days (38th day after provision of
services). The e-VAT invoice also was issued later than 5 days after
rendering the service – it was issued on 14th day after the taxable transaction.
Hence, the date of the taxable operation is the date of the transaction – 18th
of March, 2018.
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Place of supply
Supply of goods:
• the place, where they are transferred – where the transportation or shipment starts.
In case of installation involved, the place of installation.
Supply of work and services:
• If work and services directly connected to the immovable property, the place where
immovable property located;
• If works connected to movable property, the actual place of services (works);
• The place where art, cultural, sport, educational and similar type services actually
provided;
• If services connected to the transportation, the place of transportation service
provided;
• Location of the buyer of the services for certain services;
• Place of activity of the supplier of work and services
The place of work and services are determined based on the above order, if more
than one applies.
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Place of supply – work and services determined by
the location of supplier
Supply of following work and services determined by the location of a supplier:
• transfer of ownership or rights on the use of patents, licenses, trade marks,
copyrights and other similar services;
• provision of advertisement, legal, accounting, engineering services as well as data
processing and similar services;
• provision of workforce;
• leasing of movable property (except of vehicles of transportation companies);
• services of agent who on behalf of the main party of agreement invites legal or
natural persons for the provision of services specified in this article;
• Telecommunication services;
• Radio, TV and postal services;
• Computer, Internet and other electronic network, services provided by e-mail or
other electronic means; or transfer of rights for such services;
• Provision of e-commerce; electronic lotteries, other competitions or contests.
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tax rate
VAT rate on taxable transactions and taxable
import is 18%
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Value of taxable supply
Value of a taxable operation is:
•
Amount, which is paid or payable to taxpayer by customer or any other person;
•
Market value of goods, works and services, if taxpayer receives, or is entitled to
receive goods, work or services in exchange for a taxable supply;
•
Cost of goods, work or services, in case of:
•
(i) their supply to its own employees or for free or in barter (swap)
operations;
•
(ii) use of goods (works, services) for non-commercial activity, their loss,
damage, write-off of residual value of undepreciated assets or theft of
goods, if the input VAT was paid for them;
•
(iii) on deregistration.
In all above cases the value should be calculated:
o
without the consideration of VAT;
o
including other taxes, fees and other fees, except for the road tax.
30
Value of taxable supply
•
The value of a taxable supply is the amount on which the VAT charge is based and
this is normally equal to the price (before VAT) charged for the supply.
•
For example, if supply is made at a price of 1,000AZN plus VAT at 18%, the value
of the supply is 1,000AZN and the "consideration" given for the supply is
1,180AZN.
•
The VAT component of the consideration can be found by multiplying the
consideration by the "VAT fraction". With a standard rate of 18%, this is 18/118.
𝑉𝐴𝑇 = 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 ∗
18
118
31
Value of taxable supply – examples
EXAMPLE A
On 1 August 2017, a supply is made with a value of 200AZN. Calculate the VAT
charged and the consideration for the supply.
Solution
The VAT charged is 36.00AZN (200 x 18%) and the consideration paid for
supply is 236.00AZN.
EXAMPLE B
On 2 January 2018 , a 18%-rated supply is made for a consideration of 1,062AZN.
Calculate the VAT element and the value of the supply.
Solution
The VAT element is 162.00AZN (1,062 x 18/118) and the value of the supply is 900.00AZN.
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Mixed and composed supply
Composed supply
•
Supply of goods, provision of work and services that is supplementary to the
main supply shall be considered a part of such operations.
•
Provision of work and services by an exporter, which are supplementary to
the import of goods, shall be considered as a part of the import of goods.
Mixed supply
•
If the operation that involves independent elements can be divided into
taxable and VAT-exempted operations, those shall be considered as
separate operations.
Or
• A "mixed supply" occurs if a mixture of goods and/or services is invoiced
together at a single inclusive price.
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Mixed supply – example
EXAMPLE
A VAT-exclusive price of 720AZN is charged for a mixed supply of goods. The
goods concerned consist of 18%-rated goods which cost the supplier 125AZN
(excluding VAT) and zero-rated goods which cost the supplier 55AZN.
Calculate the output tax due, assuming a standard rate of 18%.
34
Taxation of non-residents – reverse charge VAT
•
If a business receives services (including those provided via e-commerce) in
Azerbaijan from non-resident, the tax-payer must operate the reverse charge
procedure and account for output tax at the appropriate rate for the services
concerned.
•
The VAT suffered by taxable persons as a result of this procedure is then treated as
input tax.
•
•
Tax to be paid and reported by 20th of the next month after transaction
•
The payment document is assumed as e-invoice, which gives a right for
reimbursement
If the VAT suffered by non-taxable persons, such turnover is not included into taxable
operations.
o Such tax shall be paid within 7 days after payment to supplier, and
o The tax amount to be reported to tax authorities by 20th of the next month after
transaction.
35
Deductible Input VAT
Deductible input VAT is determined by:
•
Received electronic invoices (e-invoices), and
•
Cashless payment (or by direct payments made in cash to the bank account)
made to supplier, and
•
Payment of VAT amount made to the VAT deposit account of supplier.
The timing of such deductible VAT is:
• On supply of goods, works and services conducted during an accounting period – einvoices issued during the period;
• On import of goods during an accounting period - at the time when customs duties
are collected on such goods pursuant to customs legislation;
• If two or more payments made – each payment assumed as separate VAT-able
transaction;
• If supplied goods, works or services are not charged to P&L account – the timing of
goods, works or services charged or assumed to be charged to P&L account.
36
Non-deductible Input VAT
VAT paid for the following supplies are not allowed to be treated as deductible input
VAT:
•
Meal and entrainment provided to employees;
•
Accommodation cost of employees;
•
Other social expenses of employees, (Article 109.3)
If a person provides non-taxable supply or VAT exempt activity only, no deduction is
available for input VAT.
If a person make both taxable and non-taxable (or VAT exempt) supplies, the volume of
deductible input VAT is calculated by proportion of them:
Residual input tax∗
Value of taxable supplies
Value of all supplies
37
Partial exemption – example
Problem:
During December 2017, Nargiz MMC makes supplies
as follows:
Standard-rated supplies (excluding VAT) 120,000AZN
Zero-rated supplies 80,000AZN
Exempt supplies 50,000AZN
The company suffers input tax as follows:
Attributed to taxable supplies 7,500AZN
Attributed to exempt supplies 8,500AZN
Unattributed 10,000AZN
Compute the VAT payable to the government for the
month.
38
Electronic tax invoice
▪ VAT-payers are obliged to issue
Place your screenshot here
an electronic tax invoice to the
receiving party.
▪ An electronic tax invoice to be
issued within 5 days after
supply of goods, work or
services.
39
Tax period
The tax period is a month
Tax declaration deadline
VAT declaration submission deadline for the month is
20th of the next month
Tax payment deadline
Same as the declaration submission deadline – 20th of
the following month
40
Penalties and interest
•
Incorrect tax return – a person who submits an incorrect tax return (or do not submit a
return) liable to pay 50% penalty on the understated tax amount;
•
Economic activity without VAT registration – a person who performs economic
activity without VAT registration, when it is mandatory liable to pay 50% penalty on the
amount of payable tax during that period;
•
Submission of electronic tax invoices – a person who submits electronic tax
invoices before registering for VAT purposes, or after deregistration from VAT, liable to
pay penalty of 100% of the VAT amount applied on the issued invoices;
•
Late payment of VAT to the deposit account – 50% penalty applies for the payment
of the VAT amount to the VAT deposit account later than the day of payment for the
supply;
•
Late payment of VAT to the state budget– 0.1% interest applies for the late payment
of interest, but not longer than for one year.
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Literature
▪
▪
▪
▪
Taxation Finance Act 2017, chapters 29 and 30
Tax Code of Azerbaijan Republic, chapters XI and XII
Link to EY Worldwide VAT, GST and Sales Tax guide
European Commission, November 28, 2006,
2006/112/EC, on the common system of value added tax
▪ European Commission, February 12, 2008, 2008/8/EC,
amending Directive 2006/112/EC as regards the place of
supply of services
42