Azerbaijan.US
Azerbaijan has begun implementing a new tax compliance mechanism known as horizontal monitoring, a reform aimed at reducing pressure on businesses and limiting the use of financial penalties.
The changes, introduced under amendments to the Tax Code, allow businesses to disclose potential tax risks in advance, significantly altering how tax oversight is carried out. As a result, on-site tax inspections will be conducted only in exceptional cases.
According to official data cited by lawmaker Vugar Bayramov, the number of on-site tax inspections has already been declining for several years. In 2024, just 384 on-site inspections were conducted among more than 800,000 active taxpayers nationwide. This represents a 29 percent decrease compared to 2023 and a fivefold reduction compared to 2018.
Fewer Penalties for Transparent Businesses
One of the key features of the new system is a more flexible approach to financial sanctions. Under the revised rules, businesses that voluntarily disclose tax risks in advance will not face financial penalties.
However, if undisclosed risks are later identified by tax authorities, a 25 percent financial penalty will apply.
Tax authorities will monitor submitted information electronically throughout the monitoring period. The system emphasizes early consultation and risk prevention, rather than punitive enforcement after violations occur.
Who Can Participate
Participation in horizontal monitoring is open to medium-sized and large businesses that maintain automated accounting systems and have implemented internal control mechanisms. The framework is designed to promote transparent cooperation between businesses and tax authorities, aligning Azerbaijan’s tax administration with international compliance practices.
As part of the reform, participating companies will also be given the option to calculate depreciation on fixed assets using either the declining balance method or the straight-line method, providing additional flexibility in financial planning.
Improving the Business Climate
Experts note that horizontal monitoring is expected to contribute to stronger financial discipline, improved corporate governance, and greater predictability for businesses operating in Azerbaijan. The reform reflects a broader shift away from frequent inspections toward trust-based compliance and regulatory dialogue.
By limiting inspections and rewarding transparency, the new framework is intended to create a more stable and business-friendly tax environment, particularly for companies with complex operations and higher compliance risks.
