08ASTANA1346, KAZAKHSTAN – GOVERNMENT MOVING FORWARD ON TAX CODE REFORM

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Reference ID Created Released Classification Origin
08ASTANA1346 2008-07-25 02:49 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO5765
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #1346/01 2070249
ZNR UUUUU ZZH
R 250249Z JUL 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 2831
INFO RUCNCIS/CIS COLLECTIVE 0575
RUEHAST/USOFFICE ALMATY 0612

UNCLAS SECTION 01 OF 03 ASTANA 001346 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID EINV PGOV KZ
SUBJECT:  KAZAKHSTAN - GOVERNMENT MOVING FORWARD ON TAX CODE REFORM 
 
ASTANA 00001346  001.2 OF 003 
 
 
Summary 
------- 
 
1.  Following presidential guidance, a Government of Kazakhstan 
(GOK) Tax Working Group quickly produced proposed amendments to the 
tax code.  USAID assistance in the areas of corporate income tax, 
value added tax (VAT) and the attendant administrative procedures 
was well received.  On June 18, Prime Minister Masimov chaired a 
round table presentation and discussion of the concepts included in 
draft tax code amendments.  The stated goals in drafting were that 
the tax code should comply with the principles of clarity, equity, 
transparency, and coherence and that the amendments should 
incorporate international best practice to support voluntary 
compliance, including in registration, assessment and payment of 
taxes.  In general, the proposals clearly move toward those goals. 
While specific rates were not mentioned, it is likely that the rates 
for corporate income tax will be significantly reduced.  End 
Summary. 
 
Tax Code Reform: A Government of Kazakhstan Priority 
------------------------ --------------------------- 
 
2.  In his annual address to the nation on February 6, President 
Nazabayev made reform of the tax code a priority task for this year. 
 In particular, he said: "The current tax code has played a positive 
role in economic growth; however, its potential is practically 
exhausted. The code includes over 170 privileges and preferences, 
which are constantly and unsystematically increasing. The government 
shall elaborate a new tax code. It shall facilitate modernization 
and diversification of the economy, withdrawal of businesses from 
the 'shadows,' as well as combine administration with the interests 
of tax-payers.  But most importantly, it shall envisage reduction of 
the total tax burden for non-primary economic sectors, particularly 
for small and medium sized-businesses.  The estimated budget losses 
shall be compensated by increased economic returns from the 
extractive sector." 
 
3.  On February 8, Prime Minister Masimov issued an order putting 
Deputy Prime Minister Orynbayev in charge of a 25-member, 
multi-agency Working Group ("the WG") led by the Ministry of Economy 
and Budget Planning (MEBP) and including all relevant ministries and 
agencies as well select representatives of the business sector to 
develop and submit the draft tax code for government consideration 
by July 1, 2008.  Organizing the WG process was completed by early 
April, when drafting began in earnest.  Given the short time frame 
the focus was on substantial amendments (as opposed to a new code) 
to the code which would bring it in line with the President's 
objectives of improving the efficiency and effectiveness of the 
system. 
 
4.  In early April, the WG presented a specific list of issues on 
which international expert assistance was requested, including a 
number of well-defined points of procedure and principles related to 
corporate income tax, taxation of the financial sector, and value 
added tax (VAT), with particular reference to improving VAT refunds. 
 Additional issues included enhanced self-assessment, sector 
specific issues for transport, real estate, agriculture, and support 
for small and medium enterprises (SMEs); and proposals to streamline 
and improve tax administration.  Following donor coordination 
discussions, a focused program of USAID technical assistance was 
agreed to in the areas of corporate income tax, VAT, and related 
changes for tax administration. 
 
USG Support: U.S.-Kazakhstan Program for Economic Development 
------------------------ ------------------------------------ 
 
5.  USAID collaboration with the Government of Kazakhstan (GOK) in 
the area of economic development is currently organized under the 
jointly-funded Program for Economic Development (PED).  In 2008, 
USAID is implementing nine projects under the PED including the 
"Economic Reform to Enhance Competitiveness" (EREC) Project, which 
has within its scope of work specific tasks to build capacity with 
MEBP in a variety of areas related to fiscal policy development and 
implementation.  In early March, USAID representatives and a 
technical team from the EREC Project met with MEBP to discuss the 
full range of EREC implementation issues within the frame of the 
PED. At that meeting, MEBP gave strong direction to prioritize USAID 
assistance via EREC on the tax code. 
 
6.  Given the accelerated time-line for preparing the new tax code, 
the EREC team operated in "drafting mode", focused on providing 
targeted, substantive reviews of proposed draft text for amendments 
to the tax code, as requested. Associated brief policy reviews 
incorporated a comparison to a range of international best 
practices, analysis of amendment effectiveness in achieving goals, 
and any possible recommendations for improvement designed to 
maximize effectiveness of assistance by ensuring that discussion 
targeted the identified needs of the Working Group. 
 
The Current Situation 
--------------------- 
 
 
ASTANA 00001346  002.2 OF 003 

 
 
7.  On June 18, Prime Minister Masimov chaired a round table 
presentation and discussion of the draft tax code in Astana, which 
included the full range of GOK ministries and agencies, 
representatives of the Mazhilis and Senate, representatives of the 
business sector, and donors. Deputy Prime Minister Orynbayev made 
the lead presentation which focused on a summary of key changes 
under a number of headings, including implementation of the 
"directly applicable law" principle; corporate income tax; VAT; 
reform of small businesses taxation; reform of agriculture taxation; 
property tax for legal entities and individual entrepreneurs; social 
tax; optimization of tax concessions; reform of international 
taxation; reform of mineral resources users' taxation; and tax 
administration.  The stated goals in drafting were that the tax code 
should comply with the principles of clarity, equity, transparency, 
and coherence and that it should incorporate international best 
practice to support voluntary compliance, including in registration, 
assessment and payment of taxes.  In general the proposals clearly 
move toward those goals. 
 
8.  With regard to the corporate income tax, the key changes are to: 
adapt the tax code to the application of International Financial 
Reporting Standards (IFRS); cancel advance payments for corporate 
income taxes for SMEs; and increase the period for tax loss 
carry-forward to 10 years from the current 3 years. With regard to 
the VAT, the key changes are: a well-defined and phased approach to 
streamlining and speeding up refunds through the introduction of a 
risk assessment system for targeting audits; and a phased 
elimination of deferrals for imports of machinery and equipment not 
produced in Kazakhstan (by 2011) and of intermediate goods for 
industrial production not produced in Kazakhstan (by 2012).  With 
regard to tax administration, the key changes are to: increase the 
length of time for submission of tax returns while establishing a 
uniform period both for filing and payment; introduce a system of 
risk management for audit that meets international standards for 
clarity and transparency; and increase the automation of tax 
administration processes. 
 
9.  With regard to proposed changes for the reform of small business 
and agricultural taxation, of property tax for legal entities and 
individual entrepreneurs of social tax; and for the elimination of 
tax concessions and reform of international and mineral resources 
taxation, the proposals are broadly in line with the directions of 
tax policy recommendations developed since 2006 in collaboration 
with the World Bank under the Joint Economic Research Program (Tax 
Strategy Paper: Volume I "A Strategic Plan for Increasing the 
Neutrality of the Tax System in Non-Extractive Sectors; Volume II: 
Tax Administration Issues). 
 
10.  With regard to changes in taxation of mineral resource users, 
the proposed changes include replacement of royalty with a tax on 
mining operations (TMO) that shall be paid for each type of mineral 
resources produced in Kazakhstan.  The volume of hydrocarbons and 
the solid mineral resources (SMR) contained in the ore (concentrate, 
solution) will be taxed. Rates shall be established following the 
decision on how much the corporate income tax will be in the new tax 
code provided that the change in the total tax burden ensures 
acceptable profitability for mineral resources users (no less than 
10%); TMO rates for oil, including gas condensate shall be 
established as per ascending scale with consideration of the volume 
(recoverable reserves, production) based on the world price. For 
low-profitable, high-viscosity, watered, low-yield and worked-out 
deposits there shall be established decreasing coefficients to the 
TMO rates. For natural gas, including gas hydrocarbons, extracted 
together with the liquid hydrocarbons, the rate would be 15%. 
 
11. In the area of international taxation: the concept of 
"constructive dividends" (the amounts paid by a company to the 
shareholder, founder, participant or its interrelated parties for 
goods, works or services which violate the "arm's length" principle) 
will be introduced and tax agents will be allowed to independently 
apply the provisions of international agreements and take decisions 
on release from the tax or refusal at the moment of income payment 
to a non-resident, on the basis of the residency certificate. 
 
Opportunities and Risks 
----------------------- 
 
12.  The proposed changes to the tax code to be considered by the 
GOK in July are generally quite positive, although it remains to be 
seen whether they will be substantially revised during the period of 
government review.  While the government has yet to propose tax 
rates, it is likely that corporate income tax will be reduced from 
30% to 15%, that social tax will be changed from a regressive 5-20% 
tax to a flat 10%, and that there will be a declining VAT.  Current 
simplified regimes for SMEs, contrary to USAID advice, would remain. 
 
 
13.  In Kazakhstan, as throughout Central Asia and the former Soviet 
Union, there is often a significant gap between law and its 
implementation.  The current tax code is often not implemented 
according to its spirit, much less its letter, and there remain 
significant implementation risks with the new code. 
 
ASTANA 00001346  003.2 OF 003 
 
 
 
14. Representatives of Kazakhstan's business community have 
expressed their concern about not being involved in process of 
elaborating the amendments.  Their proposals notably include VAT 
exemption for businesses that provide services, granting 5-year tax 
exemptions to manufacturing businesses, reduction of the corporate 
income tax to 10%, and reduction of social tax to 5% or replacement 
of social tax with compulsory medical insurance. 
 
ORDWAY

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