08ASTANA2226, KAZAKHSTAN: PROPOSED TAX CODE CHANGES COULD IMPACT OIL

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Reference ID Created Released Classification Origin
08ASTANA2226 2008-11-10 02:15 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO6949
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHPOD RUEHPW RUEHROV RUEHSR
RUEHVK RUEHYG
DE RUEHTA #2226/01 3150215
ZNR UUUUU ZZH
O 100215Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3791
INFO RUCNCIS/CIS COLLECTIVE 0787
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0186
RUEHKO/AMEMBASSY TOKYO 0896
RUEHIT/AMCONSUL ISTANBUL 0098
RUCNDT/USMISSION USUN NEW YORK 2020
RUEHNO/USMISSION USNATO 2354
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0351
RUEKJCS/SECDEF WASHDC 0268
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 0885

UNCLAS SECTION 01 OF 02 ASTANA 002226 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  PROPOSED TAX CODE CHANGES COULD IMPACT OIL 
AND GAS SECTOR 
 
REF: ASTANA 01910 
 
ASTANA 00002226  001.2 OF 002 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  In September, the Ministry of Finance submitted 
several proposed changes to the tax code to Parliament.  If 
Parliament adopts the amendments, the changes will take effect 
January 1, 2009.  A major objective of the new tax code is to 
increase tax revenues from the extractive industries.  The new tax 
code would lower corporate income taxes, the crude oil rent tax, and 
the value added tax, while introducing new taxes for mineral 
extraction and excess profits.  Business associations and investment 
advisors are concerned that the new tax code will undermine tax 
stability clauses in existing and future contracts.  The government 
has said it will guarantee tax stability only for Tengizchevroil 
(TCO), which has a tax and royalty contract, and for existing 
production sharing agreements (PSAs), if the contracts are ratified 
by legislative acts of the Kazakhstani parliament.  END SUMMARY. 
 
3.  (U) According to Tomas Balco, Senior Manager for 
PricewaterhouseCoopers, the government's stated objectives for 
amending the tax code include: 
 
- reducing the tax burden for non-oil and gas industries; 
- supporting economic diversification; 
- curtailing the shadow economy; 
- optimizing tax incentives; 
- improving recovery of value-added tax (VAT) refunds; and 
- increasing tax revenues from the extractive industries. 
 
LOWER TAXES FOR CORPORATE INCOME, RENT, AND VALUE ADDED 
 
4.  (U) The new tax code would lower corporate income tax rates to 
15% over a period of three years (to 20% in 2009, 17.5% in 2010, and 
15% in 2011).  The maximum rent tax on exported crude oil and gas 
condensate would be lowered to 32% (down from 33%) and this maximum 
rate would only apply if the price of oil is greater than $200 per 
barrel.  Furthermore, companies subject to both the crude export 
customs duty and the rent tax would receive a tax credit so as to 
avoid double taxation.  The VAT would decrease to 12% and geological 
exploration and prospecting operations would no longer be exempt. 
 
NEW CORPORATE TAXES INTRODUCED 
 
5.  (U) A new mineral extraction tax would replace royalty payments 
in oil and gas contracts.  Under the new tax code, the government 
will assess oil and gas condensate production at 7% to 20%, 
depending on annual volumes.  The tax rate will be 50% lower for 
domestic sales of crude oil and gas condensate.  The mineral 
extraction tax for natural gas will range from 0.5% to 1.5% and for 
minerals from 0.3% to 17%.  The tax base for the mineral extraction 
tax will be the average world price of the relevant natural resource 
for the reporting quarter. 
 
6.  (U) The proposed new excess profits tax would likely hit 
extractive industries hardest.  Companies with profits greater than 
25% would have to pay an excess profits tax based on a progressive 
sliding scale, with a maximum tax rate of 60% applied to profits 
exceeding 70%. 
 
CHANGES TO TAX STABILITY MAY AFFECT INVESTMENT CLIMATE 
 
7.  (SBU) The new draft tax code would supersede tax stability 
clauses for all contracts except Tengizchevroil's tax and royalty 
contract (TCO) and existing PSAs, provided those contracts are 
ratified by legislative acts of the Kazakhstani parliament.  Almas 
Zhaiylgan, a lawyer in Almaty with the firm DentonWildeSapte, was 
skeptical that many investors would benefit from the government's 
guarantee.  According to Zhaiylgan, "It is unclear why Parliament 
 
ASTANA 00002226  002.2 OF 002 
 
 
must pass a separate law approving government contracts.  This 
appears to be an attempt to eliminate tax stabilization for all but 
those very few contracts ratified by Parliament." 
 
8.  (SBU) PricewaterhouseCoopers' Balco, a lawyer and chartered 
accountant, said, "The proposed changes to tax stability are of 
great concern to the established investor community, both foreign 
and domestic, since this would be a significant policy change by the 
Government of Kazakhstan.  The question is, will the Government 
honor its commitments or will it sacrifice tax stability and rattle 
investor confidence in order to meet short-term financial goals?" 
 &
#x000A;9.  (SBU) COMMENT. It is often necessary and even wise for a 
government to revise and update its tax code from time to time; that 
alone is no cause for concern to companies doing business in 
Kazakhstan.  Indeed, the new tax code would actually lower many 
taxes, such as the corporate income tax, and rationalize several 
others.  The real issue for investors -- here as elsewhere -- is the 
stability and predictability of the tax regime.  Should the 
government take steps to undermine or challenge the tax stability 
clauses in TCO's contract or the Kashagan PSA, as it has done by 
imposing Kazakhstan's new crude export duty on the Karachaganak PSA, 
that would raise serious concerns.  That said, Prime Minister 
Masimov has repeatedly reassured us that the government will respect 
contract sanctity.  He has told us that he has personally advised 
the international oil companies to have their contracts ratified by 
parliament to provide legal certitude that their tax stabilization 
clauses will remain in effect and not be impacted by the new tax 
code.  END COMMENT. 
 
HOAGLAND

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