Azerbaijan
This report analyses the implementation of the AEOI Standard in Azerbaijan with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Azerbaijan’s legal framework implementing the AEOI Standard is in place but needs improvement in order to be consistent with the requirements of the AEOI Terms of Reference. While Azerbaijan’s international legal framework to exchange the information with all of Azerbaijan’s Interested Appropriate Partners (CR2) is consistent with the requirements, its domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) has deficiencies significant to the proper functioning of the AEOI Standard. More specifically, Azerbaijan does not fully incorporate some of the due diligence procedures and there is a deficiency relating to the enforcement framework.
Overall determination on the legal framework: In Place But Needs Improvement
Effectiveness of AEOI in practice
Azerbaijan’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). Azerbaijan is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
Azerbaijan commenced exchanges under the AEOI Standard in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Azerbaijan:
enacted Limits and Regulations for provision of information on financial transactions carried out by legal entities and individuals of foreign states in the territory of Azerbaijan to the competent authorities of those countries approved by the Cabinet of Ministers in the decision No. 211 as amended on 22 June 2018 and 15 September 2021; and
made reference to the Law of the Republic of Azerbaijan on the Prevention of the Legalisation of Criminally Obtained Funds or Other Property and the Financing of Terrorism (AML law), for the purposes of the identification of Controlling Persons under the AEOI Standard.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 July 2017. Reporting Financial Institutions were required to complete the due diligence procedures on all Preexisting Accounts by 30 June 2018.
With respect to the exchange of information under the AEOI Standard, Azerbaijan is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2018.
Table 1 sets out the number of Financial Institutions in Azerbaijan that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Azerbaijan requires the reporting of Financial Accounts held by all non-residents and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Azerbaijan’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by Azerbaijan in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Azerbaijan’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard in Azerbaijan:
the State Tax Service (the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Azerbaijan’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place through an online portal; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Azerbaijan’s legal frameworks implementing the AEOI Standard concluded with the determination that Azerbaijan’s domestic legal framework is In Place But Needs Improvement and its international legal framework is In Place. This has been taken into account when reviewing the effectiveness of Azerbaijan’s implementation of the AEOI Standard in practice.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Azerbaijan are below, organised per Core Requirement (CR) and sub-requirement (SR), as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Determination: In Place But Needs Improvement
Azerbaijan’s domestic legislative framework is in place and contains many of the key aspects of the CRS and the Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures, but it needs improvement in relation to the due diligence procedures to be applied (SR 1.2) and the framework to enforce the requirements (SR 1.4). Most significantly, Azerbaijan’s legislative framework sets a threshold for the identification of Controlling Persons that differs from the one defined in its legal framework implementing the Financial Action Task Force (FATF) Recommendations.
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Azerbaijan has defined the scope of Reporting Financial Institutions in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Azerbaijan has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in a manner that is largely consistent with the CRS and its Commentary. However, a deficiency has been identified. More specifically, Azerbaijan’s legislative framework sets a threshold for the identification of Controlling Persons that differs from the one defined in its AML law.
This element of the due diligence procedures is material to the proper functioning of the AEOI Standard.
Azerbaijan should amend its domestic legislative framework to ensure that the approach to determine Controlling Persons under the AEOI Standard is aligned to its approach to determine beneficial owners under its domestic AML/KYC Procedures.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Azerbaijan has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Azerbaijan has a legislative framework in place to enforce the requirements in a manner that is largely consistent with the CRS and its Commentary. However, a deficiency has been identified. More specifically, Azerbaijan’s legislative framework does not contain provisions imposing sanctions on Account Holders and Controlling Persons for the provision of a false self-certification. This is a key element of the required enforcement framework and is therefore material to the proper functioning of the AEOI Standard.
Azerbaijan should amend its domestic legislative framework to include sanctions on Account Holders and Controlling Persons for the provision of a false self-certification.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Azerbaijan’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Azerbaijan’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Azerbaijan and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Azerbaijan has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Azerbaijan put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Azerbaijan’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Azerbaijan are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Azerbaijan’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). Azerbaijan is encouraged to continue its implementation process to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Azerbaijan implemented all of the requirements in accordance with expectations. The key findings were as follows:
Azerbaijan implemented an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources, such as its tax register and internal database, information received from Financial Institutions and industry associations, information from third parties and service providers, information received from exchange partners and any other reliable information sources. Azerbaijan’s compliance strategy facilitates compliance and incorporates a credible approach to enforcement. Azerbaijan intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
Azerbaijan has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources, such as its internal tax database, information from the Central Bank, the Banking Association and the Foreign Financial Institution list for FATCA purposes. Azerbaijan is taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. Azerbaijan intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing Azerbaijan’s compliance strategy appears to have the necessary powers and resources to discharge its functions. With respect to resourcing, Azerbaijan has assigned the equivalent of eight full time staff to monitor and ensure compliance by Reporting Financial Institutions, which have access to IT systems and tools to conduct risk assessments. Overall, they appear to have effectively implemented an operational plan to verify compliance with the requirements, incorporating appropriate compliance activities.
It appears that Azerbaijan effectively enforces the requirements, including through the inspection of records of Reporting Financial Institutions and the application of dissuasive penalties and sanctions for non-compliance. During desk-based reviews and onsite audits Azerbaijan has taken an effective action to ensure self-certifications are obtained as required. It also appears that Azerbaijan is ready to take effective action to address circumvention of the requirements if such circumvention is detected and to follow up on undocumented accounts.
It is noted that Azerbaijan does not have a jurisdiction-specific list of Non-Reporting Financial Institutions and Excluded Accounts for ongoing monitoring.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
With respect to the Financial Account information collected and sent by Azerbaijan, the presence of the key data points of the Tax Identification Numbers and dates of birth appeared to be in line with most other jurisdictions.
Feedback was also received from Azerbaijan’s exchange partners indicating that, compared to what they generally experience in relation to information received from all of their other exchange partners, they achieved a relatively lower level of success when seeking to match information received from Azerbaijan with their taxpayer database. Furthermore, eight exchange partners highlighted issues with respect to the information received, such as missing addresses and dates of birth and invalid Tax Identification Numbers. Follow-up discussions confirmed that Azerbaijan is aware of these issues and is seeking to improve the situation.
Based on these findings it was concluded that, overall, Azerbaijan is meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. It was also noted that there is room for improvement with respect to addressing the issues raised by Azerbaijan’s exchange partners. Azerbaijan is encouraged to continue its implementation process accordingly, including by addressing the recommendation made.
Azerbaijan should continue to address the issues raised by its exchange partners.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, it appears that Azerbaijan implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. While no such notifications have yet been received, Azerbaijan has the necessary systems and procedures to process them as required. It also appears that Azerbaijan will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that Azerbaijan is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Azerbaijan is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Azerbaijan’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Azerbaijan has shown improvement over time and is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Seven exchange partners highlighted particular issues with respect to preparation and format of the information sent by Azerbaijan (representing 10% of its partners). These generally related to a duplicated file reference number and CRS XML Schema validation issues. More generally, eight (or 11%) of Azerbaijan’s exchange partners reported rejecting more than 25% of the files received, of which four (or 6%) reported rejecting more than 50% of files received, due to the technical requirements not being met. This is a very high amount when compared to other jurisdictions, although it has reduced over time. It was noted that Azerbaijan has already successfully addressed most of the issues.
Based on these findings it was concluded that Azerbaijan is partially meeting expectations in relation to sorting, preparing and validating the information. However, significant issues have been identified, including with respect to validating the data and following up with issues when files are rejected. Azerbaijan should therefore continue its implementation process accordingly, including by addressing the recommendations made.
Azerbaijan should continue to work with its exchange partners to address the issues raised.
Azerbaijan should review its systems and procedures to sort, prepare and validate the information to ensure they meet the requirements of the AEOI Standard.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Azerbaijan linked to the CTS.
Based on these findings it was concluded that Azerbaijan is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Azerbaijan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from Azerbaijan’s exchange partners did not raise any concerns with respect to the timeliness of the exchanges by Azerbaijan and therefore with respect to Azerbaijan’s implementation of this requirement.
Based on these findings it was concluded that Azerbaijan is fully meeting expectations in relation to exchanging the information in a timely manner. Azerbaijan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Azerbaijan’s exchange partners did not raise any concerns with respect to Azerbaijan’s use of the agreed transmission methods and therefore with Azerbaijan’s implementation of this requirement.
Based on these findings it was concluded that Azerbaijan is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Azerbaijan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
11 exchange partners highlighted delays in the sending of status messages by Azerbaijan, representing 12% of its partners. This represents a relatively high proportion of partners, although it has improved over time. It was noted that Azerbaijan has contacted the exchange partners to address the issues to ensure that status messages are sent in accordance with the requirements and that most of the status messages have now been successfully sent.
Based on these findings it was concluded that, overall, Azerbaijan is meeting expectations in relation to the receipt of the information. It was also noted that there is room for improvement with respect to preparing the files in accordance with the CRS Status Message XML Schema and related User Guide. Azerbaijan is encouraged to continue to ensure the ongoing effectiveness of its implementation, including by addressing the recommendation made.
Azerbaijan should continue to engage with its exchange partners to address the issues raised.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Azerbaijan appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by Azerbaijan’s exchange partners and therefore with respect to Azerbaijan’s implementation of these requirements.
Based on these findings it was concluded that Azerbaijan appears to be meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. Azerbaijan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
Assessed jurisdiction’s comments on the assessment of effectiveness in practice
Azerbaijan would like to express its high appreciation for the support and assistance provided by the Global Forum.
Azerbaijan, as a member of the Global Forum since 2013, has always remained committed to international standards and treaty obligations in international tax matters. It shall also be mentioned that the Republic of Azerbaijan, being a developing country that does not host a financial centre had no obligation to implement automatic exchange of information (AEOI) under Common Reporting Standard (CRS), nonetheless it has signed the declaration committing itself to AEOI from 2018 in accordance with the provisions of Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information on 1 June 2017.
During the last period, for the purpose of achieving OECD standards Azerbaijan improved its internal IT systems, changed compliance policies and communication strategies and shaped a new AEOI professional team.
Azerbaijan is confident that the AEOI Effectiveness in practice report is a fair and accurate picture of the implementation of the standard. Azerbaijan is satisfied with the conclusion that its implementation of the AEOI Standard is “On track” and is consistent with the requirements of the AEOI Terms of Reference. Azerbaijan is committed to address the recommendations made in the nearest future.