Azerbaijan Joins Global Efforts to Combat Tax Avoidance by Ratifying the Multilateral Convention (MLI)

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Baku, June 25, 2024 — In a significant step towards enhancing international tax compliance, the Republic of Azerbaijan has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This ratification marks Azerbaijan’s commitment to the global initiative aimed at curbing tax avoidance strategies employed by multinational enterprises.

The MLI, developed under the auspices of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, introduces provisions that prevent enterprises from exploiting gaps and mismatches in tax rules to shift profits to low or no-tax locations. By modifying existing bilateral tax treaties, the MLI allows for quicker implementation of international tax standards without renegotiating each treaty individually.

Key Implications for Businesses in Azerbaijan

  1. Prevention of Treaty Shopping: The convention implements measures to prevent businesses from using treaty networks to shift profits to reduce tax liabilities artificially. Companies operating in and from Azerbaijan will need to reassess their tax strategies to comply with these new regulations.
  2. Principal Purpose Test (PPT): The introduction of the PPT by the MLI means tax benefits under the treaties can be denied if transactions primarily aim to gain these benefits. Azerbaijani businesses must now demonstrate that their cross-border arrangements have substantial economic justification beyond obtaining tax advantages.
  3. Stricter Permanent Establishment (PE) Criteria: The MLI tightens the criteria under which a business’s foreign operations are considered to have a taxable presence in another country. This adjustment ensures that profits are taxed where substantial economic activity is conducted, impacting Azerbaijani companies with international operations.

What This Means for Our Clients

The ratification of the MLI by Azerbaijan requires businesses to closely examine their international tax arrangements. HGNS Counselor Law Firm is ready to assist our clients with navigating these new requirements, ensuring compliance, and optimizing their tax strategies under the revised treaty framework. Our team of experts will provide guidance on how these changes could impact your business operations and planning.

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