Overview of corporate tax work
Type of work
In our view, corporate tax practice in Kazakhstan has not significantly changed in the last year. Tax lawyers were mostly involved in disputes regarding the appeal of additionally accrued taxes on the basis of audit results and less involved in tax consultancy and structuring.
As a rule, on the basis of audit results, the tax authorities charge additional amounts of corporate tax by reduction of expenses due to various reasons that were deducted by the taxpayer.
The Kazakh business sector still has another unresolved issue related to transactions with 'sham companies'.
Legally, a 'sham company' is defined as a legal entity established without the intention of performing entrepreneurial activity for criminal purposes and recognised as such by a court decision. If a taxpayer purchased goods or services from the company which was later recognised as a sham by the court, then upon adoption of the decision, the taxpayer will be obliged to exclude expenses related to such transaction from deductions and additionally pay CIT and VAT to the budget. Herewith, conscientious taxpayers are in fact deprived of the right to prove that the transaction actually took place and the goods were supplied, or services rendered.
In these circumstances, conscientious taxpayers would in fact pay taxes on transactions with the company recognised later as a sham twice: firstly for themselves; and secondly for the sham company thereafter.
Key developments affecting tax law and practice
Purely domestic changes
According to the policy on the integration of the tax and customs systems, the tax and customs authorities of Kazakhstan were joined in the unified State Revenue Body in 2014.1 The second step of this policy implementation is the joining of the Tax and Customs Codes (the "Unified Code"). At present, the unified main fiscal law of the country has been drafted and its adoption is expected in 2018.
The main purpose of joining the tax and customs systems is the development of the fiscal administration. In this regard, the Unified Code will provide for a single mechanism for the administration of taxes and customs payments, unification of tax and customs procedures and optimisation of administration business processes.
The main changes to the tax system of Kazakhstan have been introduced by the Unified Code:
1. Replacement of VAT by the Sales Tax
The complexity of the VAT administration as well as the administration of VAT return from the budget served as the main reason for the replacement of such tax. As reported by the Government, the budget is losing KZT 150–200bn annually due to unlawful VAT return from the budget.
However, the introduced sales tax also has significant disadvantages. In this regard, the final decision on the replacement of VAT by the Sales Tax has not yet been made. It is possible that VAT will be saved with the development of its administration.
2. Optimisation of special tax regimes for small and medium-sized businesses
The Government believes that the current special tax regimes are outdated and serve as a ground for illegal business, which as of today comprises 19.6% of business in Kazakhstan.
The main purpose of these changes is the introduction of transparency in the accounting of income and expenses of small and medium-sized businesses, while not increasing the tax burden.
3. Issues regarding optimisation of subsoil users' taxation as well as taxation differentiation of oil and gas companies and mining companies will also be considered within the Unified Code framework
Kazakhstan is not a member of the OECD. Herewith, the Government of Kazakhstan and the OECD concluded an Agreement on 'Cooperation Through the Global Links Program', providing for a two-year cooperation which includes the suggested Base Erosion and Profit Shifting actions. On the basis of such Agreement, the OECD will provide its recommendations to be considered and possibly recognised by Kazakh legislation.2 As of today, Kazakhstan is not considering any specific amendments to the current legislation in this respect.
In addition, please be informed that, at the end of 2015, Kazakhstan became a member of the World Trade Organization, which affected the fiscal regime regarding the import and export of goods.
One of the main purposes of Kazakhstan's economic policy is the diversification of the economy from resource-based to manufacturing in order to attract investors to the manufacturing industry, in particular the manufacturing of refined oil products, chemical industry products, pharmaceutical products, machinery and equipment, and the iron and steel industry, etc.3 In 2015, the Government introduced the following tax exemptions for investors performing projects in the specified industries:
- Exemption from corporate income tax by 100% from seven to ten years.
- Exemption from land tax from seven to ten years.
- Exemption from property tax from seven to eight years.
- Exemption from customs duties on import of spare parts to technical equipment, raw materials for five years.
- Guarantee of stability of taxes and other obligatory payments to the budget in case of their increase.4
Kazakhstan is keen to develop a financial hub in the Central Asian Region. Hence, at the end of 2015, the Astana International Financial Center was established, which will be effective 1 January 2018. As it stated, the Financial Center was established for the maintenance of capital market and Islamic financing, development of new elite financial services as well as 'private banking'. It also provides for asset management and the introduction of a liberal tax regime in the Center. It also enables the creation of an offshore financial market as well as the introduction of investment residence following the Dubai example. English will be the official language of the Center.
The Financial Center will have specific legal regime, i.e. its own legislation (the acts of the Financial Center) based on the provisions and precedents of the law of England and Wales.
The court of the Center will not be part of the court system of Kazakhstan, but its decisions will have effect on the whole territory of the country, as the judges will serve the judges of the common law (the citizens of England, Australia and Singapore etc.).
The Financial Center will have a specific tax regime which provides:
- exemption from corporate income tax on income from financial services (brokerage, dealer services, investment management of assets, etc.);
- exemption from corporate income tax on income from legal, accounting, audit and consultancy services;
- foreign employees of the Financial Center will be exempted from personal income tax; And
- exemption from land tax, property tax and other exemptions.5
New concepts were also introduced on the protection of rights of investors and entrepreneurs:
- Investment ombudsman.
- Business ombudsman.
The main purpose of ombudsmen is the protection of rights and representation of interests of entrepreneurs and investors before the state authorities, including the State Revenue Bodies. Ombudsmen are directly accountable to the President of Kazakhstan.6
- Special Investment Court Board.
Investment disputes and disputes related to investments including, among others, tax disputes, are subject to the jurisdiction of the Board. It is expected that the introduction of a separate board of judges will enable investors to have a more competent consideration of their cases by judges of the Astana Court and the Supreme Court of Kazakhstan in an expedited manner.7
Developments affecting attractiveness of Kazakhstan for holding companies
We have not observed any developments or changes affecting holding companies.
As a rule, Kazakhstan serves as a place for operating companies, such as companies engaged in deposit development. However, holding companies are generally located in jurisdictions with a more predictable economic and political situation; for example, the Netherlands, UK, UAE, etc.
Since 2009, Kazakhstan has had exemptions from tax on dividends and capital gain tax on the sale of shares upon the observance of a three-year holding period. We believe that by introduction of these tax exemptions, the Government intended to develop business through Kazakh holding companies. However, in our view, investors are not yet ready to use Kazakhstan as a holding jurisdiction.
Industry sector focus
As aforementioned, we believe that tax exemptions affected companies involved in the processing industry.
The year ahead
The main problem regarding the tax climate in Kazakhstan, which as a result is reflected in its investment climate, in our opinion, is law enforcement.
Despite the fact that the tax legislation in Kazakhstan is one of the most advanced among the CIS countries, in practice, the taxpayers, in particular foreign investors, are regularly confronted with inconsistent interpretation of the law and its selective application by the State Revenue Bodies.
Courts that are applied to by taxpayers for protection of their rights mostly adopt decisions a priori in favour of the budget.
As we noted above, earlier this year the Special Investment Court Board was established, which, inter alia, is entitled to consider disputes between the tax authorities and investors. In spring of this year the Board considered the largest tax dispute involving a subsoil user. The case, in our view, was considered fair, and a decision was made in favour of the subsoil user.8
We hope that this case law will continue to change the judicial practice regarding tax disputes in the country. This development, in our view, will show an improvement in the tax and investment climate in the country.
1 The Nation Plan – 100 specific steps on the implementation of five institutional reforms of the Head of the State Mr. Nazarbayev N., May 2015.
2 The Report of the First Vice Minister of the National Economy Mr. Kussainov M. on the conference organised by the Association of Taxpayers of Kazakhstan regarding the new Tax and Customs Code.
3 The Letter of the Ministry of the national economy of Kazakhstan dated 14 August 2015 placed at the Minister's blog.
4 The Entrepreneurial Code of the Republic of Kazakhstan dated 29 October 2015 No. 375-V.
5 The Constitutional Law of the Republic of Kazakhstan, dated 7 December 2015 No. 438-V 'On the International Financial Center, Astana'.
6 See endnote 4.
7 The Civil procedure code of the Republic of Kazakhstan dated 31 October 2015 No. 377-V.
8 The Decision of the Supreme Court of the Republic of Kazakhstan dated 27 April 2016 on case No. 6001-16-00-2/2.
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