AZERBAIJAN EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE ANNUAL REPORT Azerbaijan EITI Report for the year 2015 Table of Contents INTRODUCTION .................................................................................................................................... 8 Background ............................................................................................................................................ 8 Scope of work ........................................................................................................................................ 8 Confidentiality of data ............................................................................................................................. 9 Approach and Methodology ................................................................................................................... 9 Accounting policy ................................................................................................................................. 10 1. EITI REQUIREMENT 1 .................................................................................................................... 11 2. EITI REQUIREMENT 2 .................................................................................................................... 12 2. Background ...................................................................................................................................... 12 2.1. Legal and Fiscal Regime......................................................................................................... 13 2.1.1. Legal regime ........................................................................................................................... 13 2.1.2. Fiscal regime ........................................................................................................................... 16 2.1.3. The structure of the government budget system .................................................................... 17 2.1.4. Roles and responsibilities of the relevant Government agencies ........................................... 19 2.1.5. Ongoing reforms in the extractive industry ............................................................................. 22 2.2. Allocation of licenses ............................................................................................................... 22 2.3. Register of licenses ................................................................................................................. 23 2.4. Contracts ................................................................................................................................. 24 2.5. Beneficial ownership ............................................................................................................... 24 2.6. State participation in extractive industry ................................................................................. 25 2.6.1. Background ............................................................................................................................. 25 2.6.2. Relationship between state-owned enterpirses and Government agencies ........................... 25 2.6.3. Payments to the State Budget by state-owned enterpirses .................................................... 27 2.6.4. Financial performance and production data of state-owned enterprises ................................ 28 2.6.5. Joint Ventures, associates and subsidiaries of state-owned enterpirses ............................... 29 2.6.6. Loans and guarantees received by state-owned enterprises ................................................. 32 2.6.7. State-Owned Enterprise activities in foreign markets ............................................................. 32 3. EITI REQUIREMENT 3 .................................................................................................................... 33 3.1. Overview of the Mining Industry .............................................................................................. 33 3.2. Production volume .................................................................................................................. 37 3.3. The share of the export in the extractive industry ................................................................... 38 4. EITI REQUIREMENT 4 .................................................................................................................... 39 4.1. Taxes and revenues to be covered in the EITI Report ........................................................... 39 4.1.1. Significant payments ............................................................................................................... 39 4.1.2. The allocation and payments made to government and their description .............................. 39 4.1.3. Reconciliation results .............................................................................................................. 40 4.1.4. Extractive Companies ............................................................................................................. 43 4.2. Sale of the state’s share of production .................................................................................... 45 4.3. Infrastructure provisions and barter arrangements ................................................................. 45 4.4. Transportation revenues ......................................................................................................... 46 4.5. Transactions related to State-owned enterprises ................................................................... 50 4.6. Sub-national payments ........................................................................................................... 50 Moore Stephens Azerbaijan Page 2 Azerbaijan EITI Report for the year 2015 4.7. Level of disaggregation ........................................................................................................... 50 4.8. Data timeliness ........................................................................................................................ 51 4.9. Data quality and assurance .................................................................................................... 51 5. EITI REQUIREMENT 5 .................................................................................................................... 52 5.1. Distribution of extractive industry revenues ............................................................................ 52 5.2. Sub-national transfers ............................................................................................................. 53 5.3. Revenue management and expenditures ............................................................................... 54 6. EITI REQUIREMENT 6 .................................................................................................................... 54 6.1. Social expenditures ................................................................................................................. 54 6.2. Quasi-fiscal expenditures ........................................................................................................ 55 6.3. Contribution of the extractive industry to the economy of Azerbaijan ..................................... 56 6.3.1. Industry and Field structure of GDP ........................................................................................ 56 6.3.2. The state revenue from the mining industry ........................................................................... 57 6.3.3. Employment in the extractive industry .................................................................................... 60 6.3.4. Key regions (areas) where production is concentrated .......................................................... 61 6.3.5. Other information .................................................................................................................... 62 7. RECONCILIATION RESULTS ......................................................................................................... 64 7.1. Reconciliation by revenue stream (foreign companies) .......................................................... 64 7.2. Reconciliation by extractive Company (foreign companies) ................................................... 65 7.3. Reconciliation by extractive companies (local companies)..................................................... 67 7.4. Reconciliation by revenue stream (local companies) ............................................................. 68 7.5. Payments made to Government according to PSA ................................................................ 69 7.6. Adjustments ............................................................................................................................ 70 8. SPECIAL AUDIT PROCEDURES .............................................................................................. 72 9. RECOMMENDATIONS AND RESULTS .................................................................................... 73 9.1. Lessons learned from the 2015 reconciliation ........................................................................ 73 9.2. Follow up of the recommendations of the 2014 EITI Report .................................................. 74 ANNEXES ............................................................................................................................................ 77 Annex 1. Statement of the EITI