Most provisions of the New Tax Code and the Tax Amendments took effect on 1 January 2018. Below we summarize some of the most important changes introduced by the New Tax Code and the Tax Amendments:
2. Principle of Good Faith
A new principle of good faith was introduced to provide (among other things) as follows:
- it is presumed that the taxpayer has acted in good faith;
- all gaps and ambiguities in tax laws shall be interpreted in favor of the taxpayer;
- the burden of proving tax violations is imposed on the tax authorities; and
- if the taxpayer has relied on a clarification which was issued by the tax authorities and then subsequently cancelled, the taxpayer should be liable only for the amount of unpaid tax and not for default interest or penalty.
Introduction of the principle of good faith is an important development which is aimed at achieving the balance of interests of the taxpayer and the state. However, it remains to be seen how this principle will be applied in practice.
3. Frequency of Tax Amendments
Under the New Tax Code, from 1 January 2020:
- significant changes to the New Tax Code (such as introducing new taxes or increasing tax rates) will be possible not more than once a year, should be adopted not later than 1 July of the current year, and should take effect not earlier than 1 January of the following year;
- other changes to the new Tax Code (such as those relating to tax administration or improving the taxpayer’s position) are possible more frequently than once a year, but should be adopted not later than 1 December of the current year; and
- changes to the New Tax Code should be enacted only by a specific law dealing with taxation and may not be included in other laws.
4. Cross-Border Taxation
The New Tax Code introduces the following major changes dealing with cross-border taxation:
i. Capital Gain and Dividend Tax Exemptions. The New Tax Code preserves the existing capital gains and dividend tax exemptions which are available to shareholders that have held their shares for more than three years. But, it provides for the following changes in relation to these exemptions:
- The three-year holding period will not be interrupted by corporate reorganization of the shareholder (e.g., if the shareholder merges into another company).
- Before the New Tax Code was adopted, one of the conditions for applying the capital gains and dividend tax exemptions was that the company distributing the dividends (or the shares in which are sold) is not a “subsoil user”. The New Tax Code keeps this condition, but provides that companies extracting commonly occurring materials (e.g., sand) for their own needs will not be considered as “subsoil users”.
- Before the New Tax Code was adopted, dividends distributed by mining companies which are engaged in subsequent processing (as opposed to primary processing) of at least 35% of the minerals produced by them were exempt from withholding tax. The New Tax Code introduces the same exemption for withholding tax on the capital gain and, also, increases to the mentioned percentage threshold to 40% in 2019, 50% in 2020, and 70% in 2022.
- Taxpayers which have both income that is subject to income tax and tax-exempt income will enjoy the dividend tax exemption only if the share of the taxable income in the total income is less than 50%.
ii. Kazakhstan Source Income. Engineering and marketing services provided outside of Kazakhstan are now considered Kazakhstan source income which is generally subject to 20% withholding tax.
iii. Permanent Establishment. The definition of “permanent establishment” now covers commissionaires who act in Kazakhstan on their own behalf, but at the expense of principals (previously, only agents acting on behalf of principals constituted a permanent establishment). This change was made further to the recommendations of BEPS Action 7.
iv. Tax Exemption for Foreign Employees. Previously, foreign employees who were sent by a foreign service provider to Kazakhstani clients for up to 183 days during a consecutive 12-month period to perform service contracts were not subject to personal income tax in Kazakhstan. This exemption has now been removed and such employees should now start paying 10% income tax on their salaries earned while they are working in Kazakhstan. Most double tax treaties provide a tax exemption for this situation, but certain filing requirements would be necessary to apply such exemption.
5. Controlled Foreign Corporations
The following changes are introduced with respect to controlled foreign corporations (CFCs) (among others):
- A local tax resident (either a company or an individual) will be deemed to have a CFC if it has at least 25% in a CFC (the previous threshold was 10%). Also, while previously the threshold was determined only through direct or indirect shareholding, it now will also take into account the shares held by the individual’s close relatives.
- Previously, controlled jurisdictions included only tax havens which were specifically listed by the tax authorities. Now, such jurisdictions will also include any jurisdiction (regardless of whether it is included in the list of tax havens) in which the relevant company is subject to an average effective income tax rate of less than 10% for the reporting and two previous tax periods.
- To avoid double taxation, the taxable income of a CFC now will be reduced by income taxed in Kazakhstan or in the CFC’s jurisdiction at a rate not lower than 20%. Also, the taxable income of a CFC will be reduced by dividends paid to the CFC by Kazakhstani companies. Finally, income tax paid by a CFC in other jurisdictions at the rate lower than 20% will be eligible for offset against Kazakhstani income tax liability.
- Within 60 days of acquiring at least 25% in a CFC (and afterwards on an annual basis), a local resident should submit a standard form notification to the tax authorities on its participation in the CFC. Residents that owned at least 25% in a CFC prior to 1 January 2018 should submit the notification by 31 December 2018.
- Previously, only certain categories of taxpayers were entitled to refund of the difference between input and output VAT (others were entitled to refund only in relation to reverse charge VAT). VAT refund for other taxpayers was supposed to start on 1 January 2022. The New Tax Code cancels this rule, meaning that most VAT payers will not be entitled to VAT refund (but will continue to be entitled to offset of input VAT against output VAT).
- Certain types of VAT payers which issue electronic invoices now are given the right to use special bank accounts (“Controlled Accounts”) for purposes of receiving and making VAT payments. The advantage of doing so is the expedited refund of the difference between their input VAT and output VAT (15 business days instead of the usual range of 55-155 business days). Before the refund is granted, the tax authorities will need to conduct a tax audit to confirm that the Controlled Accounts have actually been used.
In addition to the VAT payers applying zero-rate VAT (e.g., exporters), the right to use Controlled Accounts is given to VAT payers purchasing or taking a financial lease of specified products (the list of which is to be approved by the Government) that are used in manufacturing other products. The purchased products must not be sold within two years from the date of their purchase.
7. Payroll Taxes
With effect from 1 January 2018, the rate of social tax is reduced from 11% to 9.5%. The rate of 11% will, however, be reinstated from 1 January 2025.
Also with effect from 1 January 2018, the rate of social security contributions is reduced from 5% to 3.5%, with the rate of 5% being reinstated from 1 January 2025.
8. Tax Benefits
The New Tax Code introduces the following changes in relation to tax benefits (among others):
- Special Economic Zones. Previously, participants of special economic zones could apply corporate income tax exemption if a specified portion of their total income (not less than 70%-90%) was received from eligible transactions. It was difficult for some companies to comply with this threshold requirement. To resolve the issue, the threshold requirement was replaced by the requirement to maintain separate tax accounting for taxable income and tax-exempt income.
- Priority Investment Projects. The following changes are introduced in relation to taxation of priority investment projects:
- Previously, corporate income tax, property tax and land tax exemptions for entities carrying out such projects were available only for newly created entities. Now, they are also available for existing companies (subject to signing an investment contract with the Government).
- Previously, investors could apply the exemptions only if a specified portion of their total income (not less than 90%) was received from eligible transactions. This threshold requirement was replaced by the requirement to maintain separate tax accounting for taxable income and tax-exempt income.
- Previously, priority investment contracts could be signed only in relation to creation of new production facilities (subject to the established minimum investment). Now, they may also be signed in relation to expansion and modernization of existing facilities provided that the amount of investment is not less than five million monthly calculation indices (approximately USD 36 million as of the date of this Legal Alert). Such contracts are eligible for corporate income tax exemption for up to three years following commissioning of the relevant assets.
9. Subsoil Users
The following changes are introduced for subsoil users:
- No Discovery Bonus. The commercial discovery bonus will be removed with effect from 1 January 2019.
- No Excess Profits Tax for Mining Companies. The excess profits tax for mining companies was removed from 1 January 2018.
- New Subsoil Rental Payments for Mining Companies. New subsoil rental payments are introduced for mining companies. The payments range from 15 to 60 monthly calculation indices (approximately USD 110-430 as of the date of this Legal Alert) during the exploration stage to 450 monthly calculation indices (approximately USD 3,250) per one square kilometer during the production stage.
- Alternative Subsoil Tax. In relation to deep and continental shelf deposits, an alternative tax is introduced instead of the minerals tax, historical costs, and the excess profits tax. Taxpayers may opt to apply the alternative tax on a voluntary basis.
- Deduction of Exploration Expenses. It is now possible to deduct (through depreciation) exploration expenses incurred from 1 January 2018 under one subsoil use contract from the taxable income under another contract (according to the share of income of such other contract in the total income of the subsoil user under all subsoil use contracts).
10. Tax Administration
The following changes are introduced in relation to tax administration matters:
- Statute of Limitation. From 1 January 2020, the general statute of limitation will be reduced from five to three years. The five-year period will, however, be preserved for the 300 largest taxpayers which are subject to special tax monitoring, as well as for subsoil users.
- Horizontal Monitoring. New rules on horizontal monitoring will take effect from 2019. They allow taxpayers meeting certain criteria (to be approved by the State Revenues Committee of the Ministry of Finance) to sign an agreement for exchange of information with the tax authorities (which will allow the tax authorities to access business and tax accounting systems of the relevant taxpayers). Doing so will have the following advantages:
- As a general rule, taxpayers subject to horizontal monitoring will not be subject to tax audits (instead the tax authorities would issue tax recommendations based on review of the data provided by taxpayers).
- Taxpayers subject to horizontal monitoring are entitled to automatic refund (i.e., refund without a tax audit) of up to 90% of the difference between input VAT and output VAT.
- If a tax violation is discovered by the tax authorities in the course of horizontal monitoring, only the tax and default interest will be payable, and there should be no administrative fine.
- Taxpayers subject to horizontal monitoring will be entitled to request the tax authorities to issue clarifications regarding past or proposed transactions. It is not clear, however, whether such clarifications are intended to be binding.
iii. E-Audit. New rules on electronic tax audits will take effect from 2019. Under these rules, taxpayers will be allowed to make a standard form submission of tax information (which is commonly known as the standard audit file or SAF-T) to the tax authorities. This is intended to reduce the timing of tax audits (up to 10 calendar days instead of the usual 30 business days) and to avoid personal contacts of the taxpayer with the tax authorities. Detailed implementing procedures are to be adopted by the State Revenues Committee of the Ministry of Finance.
11. Transfer Pricing Reporting Requirements
In line with BEPS Action 13, the Tax Amendments introduce the following three-level transfer pricing reporting system (which will replace the current system that applies only to the 300 largest taxpayers):
- Master File. From 2019, the tax authorities may require submission of a master file providing a high-level overview of the multinational group’s business. This requirement will generally apply to Kazakhstani entities of the group (or foreign companies with a branch, representative office or permanent establishment in Kazakhstan) if: (a) these entities have had controlled transactions; and (b) as a general rule, the total revenue of the group (according to its consolidated financial statements of the preceding year) is not less than EUR 750 million. The master file must be submitted within 12 months after receiving a request to do so from the tax authorities. The template of the master file is to be approved by the State Revenues Committee of the Ministry of Finance.
- Local File. From 2019, a local reporting system will be introduced to provide detailed information on material intercompany transactions involving local members of the multinational group. This requirement will generally apply to Kazakhstani entities of the group (or foreign companies with a branch, representative office or permanent establishment in Kazakhstan) which: (a) have had controlled transactions; and (b) had revenue of not less than 5 million monthly calculation indices (approximately USD 36 million). The local file must be submitted within 12 months after the expiration of the relevant financial year. The template of the local file is to be approved by the State Revenues Committee of the Ministry of Finance.
- Country-By-Country Reporting. With retroactive effect from 2016, a resident of Kazakhstan that is the ultimate parent company of a multinational group will need to file a country-by-country report (the “CbCR”) on, among other things, global allocation of income, taxes paid by group members, and business activities in the countries in which the group operates (in certain situations, this obligation may be imposed on other members of the group with a presence in Kazakhstan). This requirement applies only if the total revenue of the group is, as a general rule, not less than EUR 750 million. The CbCR must be submitted within 12 months after the expiration of the relevant financial year (meaning that the report for 2016 was due by 31 December 2017). The template of the CbCR is to be approved by the State Revenues Committee of the Ministry of Finance.
From 2018, an entity which needs to file one or several of the above reports will need to submit a standard-form notification on participation in the multinational group of companies no later than 1 September following the end of the reporting year.