Azerbaijan Joins OECD Framework & Two-Pillar Tax Reform Deal

By: Stephanie Soong

Azerbaijan has officially joined the OECD inclusive framework on base erosion and profit shifting and has committed to implementing a sweeping two-pillar global tax overhaul plan, according to an OECD announcement.

The OECD confirmed on December 16 Azerbaijan’s decision to join the inclusive framework, a group of OECD and non-OECD jurisdictions that was created in 2016 to implement and evaluate the adoption of key measures under the base erosion and profit-shifting project. The group is also responsible for setting standards under action 1 of the BEPS project, which focuses on ways to address the tax challenges of the digital economy. Azerbaijan is the framework’s 142nd member.

Azerbaijan, which had a GDP of $54.6 billion in 2021 according to the World Bank, is also the 138th framework member to commit to a political agreement to implement the global tax deal, which follows up on action 1. Pillar 1 of the plan calls for the formulaic reallocation of a portion of residual profits that the largest multinational enterprises earn in the countries in which they have sales. Those market jurisdictions would then have a taxing right over those residual profits, called amount A.

The new taxing right requires countries to ratify a new multilateral convention. That convention would require all signatories to remove any existing digital services taxes and other similar unilateral measures they may have adopted absent a multilateral approach to tax cross-border activity without permanent establishment. Countries also must refrain from adopting such measures in the future. The inclusive framework has yet to finalize a list of unilateral measures. The group is also aiming to sign a multilateral convention by mid-2023 so the rules can take effect in 2024.

Pillar 1 also calls for amount B, which would provide a streamlined and simplified application of the arm’s-length standard for baseline marketing and distribution activities.

Pillar 2 would ensure large MNEs pay a minimum level of tax, primarily through global anti-base-erosion rules, based on a minimum effective tax rate of 15 percent. Several countries in the inclusive framework have already moved to adopt pillar 2 rules. Most recently, the EU on December 15 formally adopted a directive for domestic adoption of the rules in each member state. The OECD expects pillar 2 rules to start taking effect in 2023.