The taxation system in Kazakhstan has suffered from a wide variety of taxes and regulations, all of which have been subject to a range of interpretations by different officials.
The new tax code which was issued recently, and largely comes into force on 1 July 1995, should address many of these issues. It reduces the number of taxes and contributions from over 40 to less than 20. The detailed regulations and legislation are however still being prepared, so there is currently considerable uncertainty over how the code will be applied in practice.
The following summary of taxation in Kazakhstan includes the provisions of the new code. The summary is intended for general guidance purposes only and detailed advice should be obtained in respect of the application of the code to particular situations of transactions.
Income Tax for Legal and Physical Persons
The new tax code prescribes a tax base similar to that in western countries, upon which tax is levied at a rate of 30% (unless the income is derived from the utilisation of land when a 10% rate applies). Expenses are generally deductible to the extent that they relate to the realisation of taxable income. The deductible expenses of most significant to international investors are:
- interest up to the level of 150% of the rate set by:
- the National Bank of Kazakhstan for Tenge-denominated loans;
- the World Bank for dollar-denominated loans;
- doubtful debts;
- research and development costs;
- depreciation (see further below);
- repairs (up to 10% of the amount still available for tax depreciation at the end of the year, with the excess being capitalised and depreciated in future years); and
- labour costs.
Gains and losses arising from foreign exchange differences in the course of business activity are neither taxable nor deductible.
Fixed assets are depreciated using a "pooling" basis. Assets are allocated to one of five pools (though certain assets, such as buildings, will each have their own pool) and depreciated using a reducing balance method at prescribed rates for each pool. The rates vary between 7% and 20% per annum. Intangible assets may also be depreciated. This represents a significant improvement from the existing system.
Tax losses incurred after 1 July 1995 will be available for carryforward for up to five years, regardless of the type of business. As loss carryforwards are currently limited to companies involved in material production and then only for three years, this is also a development to be welcomed.
Taxpayers may choose either the cash or accruals method for tax accounting, but all income and expenses must be accounted for in Tenge using the official rate of exchange on the date of the transaction. An inflation adjustment is to be prescribed in the Instructions to limit the effects of inflation and any consequent devaluation of the Tenge that may occur.
Local companies are required to make monthly advance payments of income tax based on their financial profit for the previous month. Tax returns should be filed by 31 March of the following year; local enterprises should pay any remaining tax due and non-resident taxpayers must pay all tax due by 10 April of the following year. All tax payments must be made in Tenge.
The new accounting code which is due to come into force on 1 January 1996 has yet to be finalised. The extent to which the new tax and accounting codes will agree is not yet apparent. The new tax code currently states that the calculation of the tax base need only be done at the end of the calendar year, and it is understood that only accounting (financial) records need be maintained during the year.
There continue to be substantial fines and penalties for the late payment of tax and any under declaration of income, regardless of the reason.
In 1995 there will be two tax periods and two tax returns will be required; the first will cover the period to 30 June 1995 under the old tax laws, and the second the period to 31 December 1995. It is expected that the first tax return (and tax thereon) will be due in early September 1995. This will place a significant additional burden on taxpayers during the year of transition.
The definition of a permanent establishment under the new tax code is very wide and includes, for example, the provision of consultancy services. Branches of foreign companies are, in addition to income tax, subject to a branch profits tax at the rate of 15% of net income.
The following withholding taxes apply to payments to non-residents:
dividends and interest 15% insurance premiums 5% telecommunications and transport services 5% royalties, provision of services 20%
Kazakh entities that do not withhold tax from payments to non-residents become liable themselves to account for the tax due.
In 1994 Kazakhstan renounced the double taxation treaties negotiated by the former USSR with effect from 1 January 1995. It appears that under the terms of various friendship treaties concluded by the Republic of Kazakhstan, treaties with Germany, France, Japan and possibly Canada require notice of termination and as a result will remain in force until 31 December 1995. New treaties with Poland, Hungary and Italy have been concluded and have entered into force. Treaties with the UK and USA have been concluded but await ratification. The rates of withholding tax and branch profits tax are generally substantially reduced under the terms of the double tax treaties negotiated by Kazakhstan.
Income tax paid outside Kazakhstan may be credited against income tax payable in Kazakhstan up to the level of the Kazakh tax due on that income.
Individual Income Tax
Individuals present in Kazakhstan for more than 183 days in, broadly, any 12 month period are deemed to be resident for Kazakh tax purposes and subject to tax on their worldwide income. Individuals present in Kazakhstan for less than 183 days are non-resident and subject to tax only on Kazakh-source income. The code imposes income tax and a requirement to file a tax declaration on any employee working in Kazakhstan in a tax year; this is clearly an onerous provision, particularly as few double tax treaties are in force. Whether the strict requirement will be interpreted more liberally in the Instructions is unclear.
Employment income is taxed according to a progressive system, with a top rate of 40%, currently on income over around $200 per month. Benefits in kind are generally taxable.
Local companies and permanent establishments in Kazakhstan are generally required to withhold income tax from the payment of wages and salaries to their employees. Such entities are also generally required to make contributions to the Employment Fund, Social Insurance Fund and Pension Fund totalling up to 32% of the employee's gross salary; other individuals are themselves required to contribute a total of 5% of their gross income to these funds. Contributions to the Transport Fund will no longer be required.
Value Added Tax (VAT)
VAT is applied at a rate of 20% on turnover arising from the sale of goods, works and services within the Republic of Kazakhstan, subject to a number of exemptions, including financial services and leases of land or buildings.
VAT is now also applied to the import of goods. The export of goods is zero rated. VAT on the acquisition of most fixed assets may now be reclaimed.
As noted above, taxpayers are able to use the cash or accruals method for both VAT and income tax purposes.
VAT registration is required when turnover in any month exceeds 1000 monthly minimum wages (around $4,000). The new code also provides for a system of voluntary registration. Following registration, VAT must generally be accounted for monthly.
Various goods (mainly alcohol, tobacco and luxury items) are subject to excise taxes if they are produced in or imported into Kazakhstan.
The issue or transfer of ownership of shares is subject to a tax on securities transactions at rates of between 0.1% and 0.5% of the sale price, or face value in the case of an issue of securities.
A special regime for the taxation of mineral resource users is prescribed in the code. It is anticipated that in the near future this will be supplemented by a Presidential Edict covering the taxation of the oil and gas sector.
Those in possession of land or making use of land are subject to a land tax. The tax is assessed by reference to the area, quality, type of land and the district or city in which the land is located.
Owners and users of vehicles are subject to a tax on vehicles assessed by reference to the kilowatt power of the vehicle.
Those owning or having rights over property are subject to a tax on property assessed by reference to the value of the property at a rate of either 0.1% or 0.5%.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Jonathan Wale on +7 3272 622 101, or enter text search 'Coopers & Lybrand'and 'Business Monitor'.