AZE - TAX CHANGES 2026

TAX CHANGES EFFECTIVE 1st JAN’ 2026

New concepts introduced in respect to audits and monitoring

The concept of “voluntary disclosure of information”, which is provided in newly presented version of the Tax Code, has been expanded. To encourage voluntary disclosure of information (even where prior tax audits have taken place) and to introduce a new method of “parallel monitoring”, the following new definitions/concepts have been given:

“Voluntary disclosure of information” - refers to taxpayer’s voluntarily reporting to the tax authorities inconsistencies that were not originally identified during an on-site tax audit or parallel monitoring.

The concept of “parallel monitoring” has been added to the Tax Code with the intent to allow tax authority establish a database of willing participants of this program, then conduct parallel monitoring of those taxpayers approved for this purpose in accordance with the relevant established procedure (pending details).  One of the benefits which stands out that participants of this project will not be subject to desk or field tax audits.  Application to become a member of this program is absolutely voluntary, yet only those who respond to the following criteria on the date of application will be admitted:

1. If a taxpayer is classified as a medium or large business entity;

• Medium business entity – the entity with staff members from 51 to 250 employees and annual turnover from 3,000,000 azn to 30,000,000 azn
• Large business entity – the entity with staff members exceeding 250 employees azn and annual turnover exceeding 30,000,000 azn

2. If a taxpayer maintains accounting and tax records using software designed to automate accounting and (or) tax records;
3. If a taxpayer exercises internal control system and related policies and procedures

As part of reforms aimed at creating a more favorable business environment for entrepreneurs and simplifying tax administration, a “parallel monitoring” is being introduced as a mechanism widely used in international tax control practice. The new approach is meant to create a transparent and trust-based mechanism for cooperation between medium/large taxpayers and tax authorities. This, in turn, would provide broader protection of taxpayers' rights.

The main conditions for applying the parallel monitoring concept are: taxpayer status as a medium or large business entity, use of an automated accounting system, and the existence of an internal control mechanism. The main obligations of a taxpayer under this concept are to self-report to the relevant authorities on any tax inconsistencies.  Under this concept, field tax audits of participants in parallel monitoring program should only be conducted in exceptional cases. The idea is that when a taxpayer self-reports on inconsistencies, financial penalties would not be applied. However, should such inconsistencies be discovered at later stages by the Tax Authorities, financial penalties of 25% from undeclared amounts will be imposed.

The founding fathers of this concept believe that it should create a number of advantages for all engaged in the process. For example, reducing number of tax audits should lower the administrative burden and minimize tax risks through a preliminary consultation mechanism. At the same time, mutual trust with tax authorities is expected to strengthen, transparency will increase, and the level of financial discipline and corporate governance among entrepreneurs should improve. Participants in “parallel monitoring” will also be given the opportunity to choose the method of calculating depreciation of fixed assets. As a result of the measures taken, it is expected that tax discipline and the effectiveness of tax administration must improve, budget revenues will become more stable and sustainable in the long term, and a modern model of tax administration based on trust between taxpayers and the state authorities will be established.

Fictitious Transactions

Another change was introduced in respect of definition of “fictitious transactions”. The scope “of the fictitious transaction” meaning has been clarified and extended to include transactions 'carried out as part of a phantom and/or fake transaction'. The updated wording is offered hereinbelow:

• A fictitious transaction is defined as any transaction identified during tax audit as being carried out with or without the aim of concealing a real transaction and is conducted with the aim of obtaining a profit (income) without actual delivery of goods, performance of work or provision of services.