Kazakhstan is a Central Asian country with a fast growing economy and reputation for welcoming foreign direct investment. Ranked 25th out of 190 economies in terms of the ease of doing business according to the World Bank, Kazakhstan is currently 64th on paying taxes index.
With one of the most advanced tax systems across the CIS, Kazakhstan continues to improve its taxation environment, constantly looking to best global practices to implement new tax mechanisms and regulations.
In the last two decades, Kazakhstan has achieved significant results in creating a favourable investment climate by promoting the protection of investors’ rights and taxpayer interests.
The government has set up a number of specialised institutions to promote and protect investment and establish direct dialogue on key strategic issues between the state bodies and foreign investors, such as the Kazakh Invest National Company, Foreign Investors’ Council chaired by the President of the Republic of Kazakhstan and an Investment Ombudsman.
A number of large taxpayer platforms such as the Association of Taxpayers of Kazakhstan, the Atameken National Chamber of Entrepreneurs, American Chamber of Commerce and European Business Association of Kazakhstan play active and vital roles in building dialogue with the state authorities to protect the rights and interests of businesses, ensuring business representatives are involved in the process of developing and improving the national legislative framework.
During the last several years, the government of Kazakhstan has made a concerted effort to improve and modify its tax system, and within the framework of its implementation of a National Plan "100 Concrete Steps to realise Five Institutional Reforms” developed and adopted a new Tax Code effective from 2018.
The new Tax Code declares its conceptual basis as the protection of the interests of responsible taxpayers by adopting an approach whereby all issues and ambiguities not covered by tax law should be ruled in favour of the taxpayer.
Key tax system modernisation trends
The main trends and key directions of fundamental tax reforms in Kazakhstan over the last few years include:
- the introduction of the principle of good faith whereby taxpayers are positioned as acting in good faith, with a shift of the burden of proof of violations to the tax authorities and treating all legislative uncertainties in favour of taxpayers;
the simplification and automation of tax administration procedures by the following key elements:
- implementing electronic audit (e-audit) and horizontal monitoring concepts to minimise the need for direct contact between the tax authorities and taxpayers as well as to increase transparency in interaction with the state authorities and mitigate potential tax risks for taxpayers;
- introducing special, voluntary VAT control accounts for VAT-payers to monitor the movement of VAT payments to the budget, suppliers and customers and to simplify the VAT refund tool;
- shifting to electronic VAT invoicing (e-invoicing) and using “virtual warehouses” to increase business transaction transparency and ease the monitoring of the movement of goods in Kazakhstan;
- simplifying tax reporting to reduce the time-consuming nature of tax processes and make the overall tax reporting process itself more straightforward;
- allowing tax reporting to be submitted and signed electronically;
- subjecting tax reporting filed by taxpayers, its suppliers and contractors to cameral controls and cross-checks by the tax authorities, with the obligation of the taxpayers to explain any discrepancies revealed and the right to submit additional tax returns if needed. This allows to eliminate the determined violations without charging administrative fines for understatement of taxes as it could be charged upon the standard tax audit;
- having the tax authorities apply a risk management system to assess risks and categorise taxpayers as high, medium or low risk with respect to tax audits. A number of risk management system criteria are confidential while others are stipulated in the Tax Code;
- decreasing the frequency of tax disputes by implementing the concept of preliminary tax audit acts issued before a final act to promote taxpayer dialogue during tax audits and allow the appeal of disputable issues prior to the issuance of a final act upon the results of tax audit.
the expansion of the tax preference and incentive system for the support of investment in government-approved preferred areas of the economy, to develop industry and technology sectors as well as upgrade existing production facilities, including tax incentives for capital expenses through their full deduction, subject to certain criteria, and grant tax preferences for taxpayers operating in:
- qualified investment projects;
- special economic zones, of which there are currently 13 operating in Kazakhstan in various priority economic areas, including textile and petro-chemistry production, and technology creation;
- the Astana-Hub international technology park.
- setting tax preferences for participants of Astana International Financial Centre (fin tech, insurance, investments, market activities);
adherence to current market trends related to the development of technology and digitalisation, including
- the implementation of e-commerce taxation rules;
- the introduction of so-called “google tax” in the form of VAT on digitalised income received from performing services in Kazakhstan (this has not been implemented yet, but changes to the Kazakhstan tax law in this regard are anticipated).
- tax streamlining, giving taxpayers the opportunity to restructure their tax functions according to their business needs and specifics by replacing groups of taxes with single alternatives, at their discretion;
the improvement of international tax collaboration by:
- expanding the number of countries with which Kazakhstan has double tax treaties (DTTs) in place. That number is currently 54, of which 53 are already in force. The DTT between Kazakhstan and Cyprus was signed recently in May 2019 and is currently under the process of ratification by the Kazakhstan state authorities;
- membership of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS);
- implementing Controlled Foreign Companies taxation rules (pursuant to the BEPS action plan);
- acceding to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) – Kazakhstan signed the MLI on 25 June 2018, citing a number of reservations and notifications. As it is still being under ratification by the state authorities, the MLI has not yet entered into force for Kazakhstan.
In overall, Kazakhstan tax reforms in recent years have had a positive impact on the business environment as they have tried to eliminate legislative uncertainties and promote the transparency of tax administration processes, applying new technology and automation approaches.
However, in our practice we still see certain areas requiring further action from the state authorities and business representatives to establish practices in line with the declared concepts and principles.
The problem areas and general issues still being faced and requiring resolution include:
- ambiguities remaining in tax law:
- taxpayers’ pro-active and consolidated positions in terms of participating in the discussion of amendments and changes of tax legislation may help resolve this issue.
- a large number of tax disputes still exist:
- newly introduced mechanisms such as horizontal monitoring, e-audits and preliminary tax audit acts, whose goal is to reduce the number of tax disputes, need to be extensively implemented on practice.
- “path dependence” effect incurred with respect to the tax authorities’ aggressive attitude and position towards taxpayers during tax audits:
- the period of transition to the “good faith” concept needs to develop in conjunction with the corresponding mechanism of institutional fiscal policy and court system reforms;
- the mechanisms for the tax authorities to accept liability for incorrectly accrued additional taxes and the burden of proof need to be put into practice.
- increasing rates of fines together with the high level of criminalisation of certain tax violations:
- the threshold for criminal liability for the tax violations shall be defined depending on several criteria, including direct intention, scale and nature of business activities, amount of turnovers and total tax burden of the taxpayer.
- gaps between the prescribed mechanisms, including the automation and facilitation of certain tax processes, and their practical implementation:
- pilot implementation periods for new technology products on varying focus groups need to be extended prior to going live for all taxpayers;
- it shall be preliminary confirmed that common level of technology development in related areas shall satisfy the characteristics of introducing innovations.
Kazakhstan is currently working hard on establishing faith in the authorities and developing a sustainable tax system, which involves transparent administration mechanisms and a favourable business environment in a range of areas.
The tax authorities, together with business representatives are focused on bringing together their efforts to build a robust system of collaboration and open dialogue on issues affecting both the national economy and the interests of business structures.
The principal area where improvements in the effectiveness, fairness and investor-friendliness of the taxation environment lie in the administration of the Tax Code and consistent, predictable and transparent application of its provisions. Inconsistent and unpredictable application of laws across regions of Kazakhstan and the continuing criminalisation of certain tax offences remain the most material areas of concern for foreign and domestic investors alike.
Should Kazakhstan, under its new president and administration, be able to more effectively address these concerns in the coming years, the country will genuinely be able to herald itself as the most investor-friendly destination in the ex-Soviet Union.
Karina Kalimzhanova, Manager, Tax and Legal Department, Deloitte