Worldwide: Kazakhstan's Compliance With The "Most Favored Nation" Policy

Last Updated: 3 August 2016
Article by Maxim Sukhoterin

On October 18, 2011, the heads of several CIS member states signed a treaty (hereinafter, "Treaty") to establish a free trade zone. Among its signatories were Kazakhstan, Russia, Belarus, Ukraine, Kyrgyzstan, Armenia, Moldova, and Tajikistan (Uzbekistan also joined the Treaty later on).

Oddly, when the Treaty came into effect, these countries started imposing export duties in the trade between them, although the prior Free Trade Agreement of 1994 had exempted almost all export, provided that the goods were produced in the member states.

Reference information.

In Annex No.1 to the Treaty, the parties consolidated mainly the same rates for export customs duties, as prescribed by national laws of these countries with the export of goods to any other third country.

For example, Annex 1 to the said Treaty provides for the export customs duty for scrap and waste ferrous metals in the amount of 15%, but not less than EUR 20 per 1 ton.

However, similar rate of export customs duty on specified goods provided for in national legislation of Kazakhstan (the decision of the Government of the Republic of Kazakhstan No. 520 dated June 7, 2010) (but with one condition: the export is exempted from the payment of duty for scrap exported to European Union countries).

The situation is similar with the Russian export customs duties.

The moment that with the adoption of the new Treaty on the free trade zone the trade between the CIS countries has become far less flexible, as it was in the period of the Agreement on the establishment of a free trade zone, we will leave without consideration in this article.

However, given the Treaty was ratified by Kazakhstan under the relevant Act dd. October 25, 2012 and entered into force on December 8, 2012.

From that moment, the customs authorities of Kazakhstan began to levy customs duty on the export of goods in these countries, while, as noted above, during the period of the Agreement on Free Trade Area dd. ​​April 15, 1994 in the CIS countries export duties were not levied (in case of provision of a certificate of the origin of goods).

Now, on the example of export of scrap and waste of ferrous metals (export of this product is quite common, in addition, scrap metal is subject to export duties), let's consider the use by Kazakhstan of the most favored nation treatment as one of the most important principles of international trade.

In the theory of international trade the regime of the most favored nation treatment is an economic and legal term meaning the establishment of international agreements and the provision of agreements in which each contracting party undertakes to give the other party, its individual and legal persons similar favorable conditions in the sphere of ​​economic, trade and other relations such as it provides or will provide in the future to any third State or to its individual or legal persons.

With reference to the Treaty on free trade area the regime of the most favored nation treatment is set in paragraph 3 and paragraph 4 of Article 2 of the Treaty:

"If the Party using the export duty in accordance with Annex 1 to this Treaty cancels or reduces its level in relation to a third country, this change applies to the Parties.

Unless otherwise provided in the Treaty, customs duties are not applied in a manner which would lead to an increase in discrimination between the Parties and third countries".

As mentioned above, the provision contained in the national legislation of Kazakhstan that the export of scrap and waste of ferrous metal in the European Union is exempted from payment of export customs duties, whereas the Treaty has provided a 15% customs duty on export of scrap was the indicator, which spawned the need for the application of the regime of the most favored nation treatment.

In other words, based on the meaning of paragraphs 3 and 4 of Article 2 of the Treaty, during the collection of export duty on scrap and waste of ferrous metals in the countries – parties to the Treaty there was the existence of discrimination between the parties to the Treaty and third countries (in this case, the European Union countries), which was unacceptable, because it was contrary to the principle of the most favored nation treatment set in its paragraphs.

It should be noted that the Ministry of Economic Development and Trade of the Republic of Kazakhstan (the central state body  of Kazakhstan, which forms the tax, customs and foreign trade policy), having carefully studied the position of the largest Kazakh Association for scrap procurement – Association "Republican Union of Secondary Metallurgy Industrialists" concerning this issue was forced to send in address of the customs control Committee of the Ministry of Finance of the Republic of Kazakhstan an explanation, pointing to the inadmissibility of levying export duties on ferrous scrap in case of its exports to the countries – parties of the Treaty on free trade zone in connection with the application of the most favored nation treatment.

It is necessary to mention another aspect

Kazakhstan is a party to bilateral agreements on free trade zone with Georgia and Azerbaijan (these countries are not parties to the Treaty on the free trade zone, but are parties to the Agreement on the Free Trade Area dd. ​​April 15, 1994), according to which the export customs duties shall not be charged to the export of goods (including scrap) in these countries, as evidenced by the letter of the Ministry of economic development and trade of the Republic of Kazakhstan dated January 28, 2015 and the customs control Committee of the Ministry of Finance of the Republic of Kazakhstan dated February 20, 2013 and April 15, 2014.

These agreements include:

  1. Agreement between the Government of Kazakhstan and Georgia on Free Trade dd. November 11, 1997, ratified by the Law of the Republic of Kazakhstan dated June 23, 1999 No. 395;
  2. Agreement between the Government of Kazakhstan and Azerbaijan on free trade dd. June 10, 1997, ratified by the Law of the Republic of Kazakhstan dated June 23, 1999 No. 394.

These agreements are currently in force.

Accordingly, the regime of the most favored nation treatment specified in paragraph 3 and 4 of Article 2 of the Treaty on the free trade zone it can also be concluded that the levying of customs duties when exporting goods to the countries – parties of the Treaty on Free Trade Zone with simultaneous exemption from such duties for the export of goods to Azerbaijan and Georgia also violates the principle of most favored nation.

Therefore, collection of export customs duties on goods exported from Kazakhstan to the countries – parties of the Treaty on free trade zone, with the simultaneous exemption from taxes on goods exported to Georgia or Azerbaijan, is also contrary to international treaty having precedence over national law by virtue of paragraph 3 article 4 of the Constitution of the Republic of Kazakhstan.

The Ministry of Economic Development and Trade of the Republic of Kazakhstan this time did not recognize the violation of this regime (as evidenced by the response of the Ministry dated January 28, 2015 an appeal of the Association "Republican Union of Secondary Metallurgy Industrialists ") as an unconvincing ground, although it is clear that the recognition by the Ministry of actual fact would mean abandoning the collection of export duties, refund of overpaid taxes from the budget in connection with the violation of fundamental principles of international trade, etc.

At the same time, it should be noted that on July 27, 2015 Kazakhstan joined the World Trade Organization (WTO), signed a corresponding protocol of accession of the Republic of Kazakhstan to the Marrakesh Agreement on establishment of the World Trade Organization dd. April 15, 1994.

October 12, 2015 the President of the Republic of Kazakhstan signed the Law on Ratification of this Protocol.

Thus, since the ratification of the said Protocol the General Agreement on Tariffs and Trade (GATT) becomes binding for Kazakhstan, with all its annexes, which is the founding document of the WTO.

The very first article of the GATT is called "general regime of the most-favored nation treatment" which precisely regulates the regime of the most favored nation treatment:

"ARTICLE I. GENERAL REGIME OF THE MOST FAVORED NATION TREATMENT 1. With respect to customs duties and charges of any kind imposed on the import and export, or in connection with it, or imposed on the international transfer of payments for imports or exports, and on the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2  and 4 of article III, any advantage, favor, privilege or immunity granted by any contracting party to any product originating from or destined for any other country shall be immediately and unconditionally provide to the similar product originating from or destined for the territories of all other contracting parties".

The inclusion of this regime in the very first article of the GATT shows the extreme importance of this principle for international trade.

From this point, any reduced customs duty or exemption from its payment in respect of whatever country must necessarily extend to 161 countries – members of the WTO.

That's why I think it is very important for Kazakhstan to carefully analyze all international agreements concluded with the participation of Kazakhstan, which reduce the rate of customs duty or wholly exempt a particular goods from taxes when exported to certain countries (imported from those or other countries) (as in the example with Azerbaijan, Georgia, etc.) and, if necessary, to denounce such international agreement, since by virtue of the regime of most-favored nation treatment such benefits should be automatically extended to 161 countries included in the WTO.

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.

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