Merchandise Trade

 

 

• Azerbaijan's exports remain heavily dominated by oil and petroleum-based products. According to latest available data, exports had an estimated value of USD15.2 billion in 2017, accounting for 40.5% of GDP, with chemical, industrial and fuel being the most important export product (90%). Azerbaijan's overdependence on hydrocarbons has made it difficult to expand other sectors of the economy. As a result, other product exports remain relatively small, totalling around USD1.3 billion. Of that, agriculture is an important component of Azerbaijan's non-oil economy and has significant potential to boost export revenue for the country. Following the privatisation of farm properties in the post-Soviet economy, the focus of Azerbaijan's agriculture shifted to producing profit-yielding crops, such as grain, potatoes, fruits, vegetables and berries.


• The value of total imports in Azerbaijan is estimated at USD8.8 billion in 2017, accounting for 40.5% of GDP based on available data. This figure is high by historical standards, with imports expanding from 20.7% of GDP in 2010. The secondary economic sector in Azerbaijan remains largely underdeveloped. The country is thus heavily dependent on manufactured products imports.


• Azerbaijan applied for World Trade Organization (WTO) membership in June 1997 and currently holds observer status. It uses the internationally accepted classification system whereby the value of goods for customs procedures is determined in line with the general principles of the WTO. Regionally, the average tariff rate in Azerbaijan is high, at 5.2%, which is the third highest out of eight states within Caucasus and Central Asia. This is relatively uncompetitive in relation to a regional average of 3.9%. In the long term, a reduction or a removal of tariffs for some countries trading with Azerbaijan is likely, given the country's ongoing WTO accession and simultaneous pursuit of increased cooperation with the European Union (EU) – one of its major trading partners.


• Azerbaijan has shown a preference for bilateral agreements over multilateral trade associations and unions. For instance, Azerbaijan declined to sign an association agreement with the EU in the framework of the Eastern Partnership in 2014. Instead, it signed an agreement to simplify the visa regime with the EU, so the European Neighbourhood Policy functions more as a political arrangement rather than leading to a free trade agreement (FTA). Likewise, the country has made clear its plans to stay outside the EU and has also chosen to remain outside the Commonwealth of Independent States Free Trade Area (CISFTA).


• Azerbaijan has signed bilateral investment treaties with 48 countries and agreements on the avoidance of double taxation with 53 countries – 49 of which have been enacted to date and are in force.

Sources: WTO – Trade Policy Review, Azerbaijan Export and Investment Promotion Foundation, Ministry of Taxes of the Republic of Azerbaijan, Fitch Solutions

Multinational Trade Agreements

Active

1. The Russia-Azerbaijan FTA: This agreement came into force on February 17, 1993. Trade volumes in 2014 stood at an estimated USD2 billion. Russia is a net exporter to Azerbaijan.


2. The Georgia-Azerbaijan FTA: This agreement came into force on July 10, 1996. Azerbaijan is Georgia's second largest trade partner. The trade turnover between Georgia and Azerbaijan stood at about USD1.8 billion in 2018. Georgia exported goods worth more than USD586 million to Azerbaijan, while it imported over USD502 million worth of Azerbaijani goods and services. Azerbaijan mainly exports petroleum, petroleum oils and gases, gypsum, anhydrite, plaster, and other products to Georgia. Motor cars, live bovine animals, bars and rods of iron, and cement are the most imported goods from Georgia to Azerbaijan.


3. The Ukraine-Azerbaijan FTA: This agreement came into force on September 2, 1996. Trade volumes between the two countries stood at an estimated USD824.8 million in 2018. Key areas include agricultural products, machinery, boilers, articles of iron and steel, and other manufactured goods. Azerbaijan exports raw materials, such as fuel products, to Ukraine.


4. The Uzbekistan-Azerbaijan FTA: This agreement, set up in 2015, stresses the importance of expanding bilateral relations between the business communities of both countries and the implementation of joint projects to enhance economic cooperation.


5. Black Sea Economic Cooperation (BSEC) Organisation: The BSEC Organisation came into existence on May 1, 1999 as a unique and promising model for regional multilateral political and economic cooperation. The member states are Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Serbia, Turkey and Ukraine. Areas for cooperation include agriculture and agro-industries, banking and finance, combatting crime, culture, customs, education, emergency assistance, energy, environmental protection, the exchange of statistical data and economic information, healthcare and pharmaceuticals, information communication technologies, institutional renewal and good governance, science and technology, small and medium enterprises, tourism, trade and economic development, and transport. This agreement continues to bolster trade between the member states.

Under Negotiation

1. A bilateral FTA with Mainland China: An FTA between the two countries is still under negotiation. The impact of regional integration is significant, especially for small, open economies – such as Azerbaijan – entering into an FTA with a large economy, such as mainland China. At the same time, the FTA will have mutual economic and geopolitical benefits for both parties, as mainland China is a significant global consumer of fuel products and raw materials, which constitute over more than 90% of Azerbaijan's export basket.


2. The CISFTA: CISFTA is a free trade area that came into force in September 2012 between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Ukraine. Azerbaijan's economy will benefit from the country entering the free trade zone (FTZ). The nation's products – particularly its fruits and vegetables, which are already popular in CIS countries – will be much easier to export. The FTZ area was designed to reduce all trade fees on a number of goods between participating countries. Overall, the move will induce investment in Azerbaijan's economy, ease trade and stimulate employment.


3. EU-Azerbaijan PCA: The EU's bilateral trade relations with Azerbaijan are governed by a PCA which has been in force since 1999. In terms of trade, these are non-preferential agreements – ensuring most-favoured nation treatment and prohibiting quantitative restrictions in bilateral trade. Azerbaijan would benefit from this agreement, since the EU accounts for over more than 50% of Azerbaijan's total trade volumes. The PCA envisages progressive regulatory approximation of legislation and practices to the most important EU trade-related standards, including technical regulations, intellectual property rights protection and customs issues. This should lead to better access to EU markets for goods. Ratification is contingent on the Azerbaijani government's willingness to change regulations in line with EU standards. The EU has shown its willingness to negotiate a deep and comprehensive FTA with Azerbaijan, contingent on the country joining the WTO.

Sources: WTO Regional Trade Agreements database, European Commission, BSEC, Fitch Solutions

​​​​Foreign Direct Investment

• Value Added Tax: 18%
• Corporate Income Tax: 20%

Source: Ministry of Taxes of the Republic of Azerbaijan

Important Updates to Taxation Information

• In December 2019 the Law of the Republic of Azerbaijan on Amendments to the Tax Code of the Republic of Azerbaijan was adopted. The law is effective from January 1, 2020.

  According to the Law, recognition of taxable turnover for VAT purposes mainly has been shifted to the cash basis method. Beginning from 1 January 2019, new incentives for micro, small, and medium enterprises were introduced in the Tax Code of the Republic of Azerbaijan.

• The Ministry of Taxes reported in February 2019 that further economic reform of the tax code was intended to fight tax evasion, eliminate the shadow economy and improve tax administration with the aim of expanding the possibilities for small businesses and reducing the overall tax burden. Furthermore, the government has agreed the criteria for classification of entrepreneurs based on the average number of employees and annual income: micro, 1-10 employees and income of up to ANZ200,000; small, 11-50 employees and income of ANZ200,000-3 million; medium, 51–250 employees and income of ANZ3-30 million; and large, 251 employees and upwards of ANZ30 million.


• According to the Azerbaijani government, there are three distinct tax regimes that are applicable in the country: the statutory regime; the regime applicable to oil hydrocarbon companies and mining companies operating under production sharing agreements (PSAs); and the regime for companies working under host government agreements (HGAs). Each agreement has its own separate tax regime. The Ministry of Taxes publishes a tax article covering the tax regime for that particular agreement because there are differences between agreements, besides differing tax rates (for example, taxation of foreign subcontractors) and reporting requirements. Furthermore, tax protocols for each PSA and HGA outline specific guidance regarding how to pay the taxes and file reports. PSA contractor parties and foreign subcontractors are subject to tax only on their corporate income. Contractor parties pay profit tax on income derived from hydrocarbon activities, and foreign subcontractors are subject to tax only on income from services and mark-up on goods supplied in Azerbaijan. Local subcontractors are subject to the statutory tax regime. No corporate tax is applicable to HGA subcontractors. HGA participants pay tax only on their transportation income.

Foreign Worker Permits

Foreign nationals travelling to Azerbaijan to take up employment have to obtain work and temporary residence permits. The State Migration Service issues these for a period of up to one year. The term of validity can be extended every year for another period of up to one year. Work permits are not required by:

• Permanent residents
• Persons engaged in entrepreneurship activities in Azerbaijan
• Staff of diplomatic missions, consulates and international organisations
• Heads and deputy heads of organisations established by international agreements
• Persons employed by relevant executive authorities
• Persons on secondment in certain statutorily listed areas for no more than 90 days a year
• Heads and deputy heads of branches and representative offices of foreign legal entities in Azerbaijan
• Heads and deputy heads of legal entities founded in Azerbaijan by a foreign legal entity or a foreign individual
• Some other categories of foreign nationals

Localisation Requirements

Azerbaijan operates a quota for migrant workers, set at 12,000, and the government encourages businesses to hire from the domestic labour pool unless specialist skills are required that cannot be supplied by the Azerbaijani labour market. This makes it more difficult to import skilled foreign workers as there is an imposed limit on work permits for expatriates. Generally, in order to obtain a work permit in the country, a foreigner must have at least five years of experience in the field. This blocks the flow of unskilled workers from abroad and encourages more effective use of local labour. On the positive side, the process of obtaining permits for foreign workers has been streamlined since the introduction of the one-window service, whereby applications are submitted to one government department – the State Migration service – which then works with other agencies to issue work permits and other necessary documentation. This eases the bureaucratic burden of employing foreign workers.

Visa/Travel Restrictions

Citizens of the following nine countries can visit Azerbaijan without a visa for up to 90 days: Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine and Uzbekistan. Citizens of the following countries can obtain a visa for Azerbaijan on arrival, valid for 30 days, at any international airport: Bahrain, mainland China, Indonesia, Israel, Japan, Kuwait, Malaysia, Oman, Qatar, Saudi Arabia, the Republic of Korea and the United Arab Emirates.

Sources: Government websites, Azerbaijan Export and Investment Promotion Foundation, Republic of Azerbaijan Ministry of Foreign Affairs, Fitch Solutions

Sovereign Credit Ratings

Sources: Moody's, Standard & Poor's, Fitch Ratings

Competitiveness and Efficiency Indicators

Sources: World Bank, IMD, Transparency International

Fitch Solutions Risk Indices

Source: Fitch Solutions
Date last reviewed: May 31, 2020

Hong Kong’s Trade with Azerbaijan