As of January 1, 2009, the new Tax Code was enacted in Kazakhstan by Law No. 100-IV dated December 10, 2008 (the "Tax Code") and subsequently amended by the Law of Kazakhstan Concerning Amendments to Certain Tax-Related Legislative Acts of the Republic of Kazakhstan dated December 2, 2009 (the "Tax Code Amendments"). The Tax Code Amendments became effective on December 13, 2009 and are applicable from January 1, 2010, except certain provisions that are to be enacted according to a specific procedure.
Purpose of Amendments
According to official reports of the Kazakhstan Government, the purpose of such amendments is to (i) better administer the tax system in Kazakhstan; (ii) extend the rates of the corporate income tax and mineral extraction tax for the years 2010-2012 at the level of 2009; and (iii) satisfy financial requirements of the government budget.
The tax system in Kazakhstan has several different components, which are summarized below for both businesses generally and subsoil users.
Corporate Income Tax (the "CIT")
The CIT applies at the rate of 20% to resident and non-resident juridical persons organized or conducting business in Kazakhstan through a permanent establishment. In general, the CIT is imposed on an annual basis on the taxable income of corporate taxpayers, income taxed at source or net income of a non-resident acting through a branch.
Value-Added Tax (the "VAT")
VAT is payable by legal entities and individual businessmen registered as VAT payers with the tax authorities and persons importing goods in Kazakhstan. For the purpose of calculation of the VAT, a fixed rate of 12% applies and the amount of tax depends upon the amount of taxable turnover or taxable import.
Mineral Extraction Tax (the "MET")
The MET applies to any person extracting minerals within the Kazakhstan territorial limits. The MET is a tax which a mineral company normally pays in cash. However, in certain events, the Government may adopt a resolution permitting such tax to be paid in kind (crude). This tax is payable at the approved rates and depends upon the value of produced raw materials (for crude oil, gas condensate, natural gas), or upon physical quantity of minerals in the raw materials (for metals and gemstones), or upon physical quantity of extracted natural resources (for widespread mineral deposits).
Excess Profits Tax (the "EPT")
The EPT is a tax payable by mineral companies except companies which operate under production sharing agreements, contracts for the extraction of widespread mineral deposits and contracts for the construction and operation of underground facilities not associated with exploration and production. The EPT applies to a portion of net income exceeding 25% of the deductions fixed for calculation of this tax.
Rent tax is paid by individuals and legal entities selling crude oil, gas condensate and coal for exportation. This tax may be paid in cash or in kind (minerals). The rate of tax is determined at the preset scale and depends upon the world price per barrel of the product, except coal, which is subject to one fixed rate.
Subscription Bonus and Commercial Discovery Bonus
As a general rule, mineral companies operate under three types of contracts: (i) contracts for exploration of mineral resources (with the aim of finding minerals within the contract area); (ii) contracts for the production of mineral resources (with the aim of extracting minerals), and (iii) contracts for the combined exploration and production of the mineral resources (both activities).
Subscription bonus is a fixed one-time payment which is to be effected by mineral companies for purchase of the right to use subsoil within the contract area. The amount of the subscription bonus depends upon the type of activity under the contracts, the kind of the mineral resources, and whether or not the mineral reserves are approved or not.
Commercial discovery bonus is paid by mineral companies for each commercial discovery of the mineral resources within the contract area. The rate of this bonus is fixed at 0.1% of the volume of the recoverable mineral reserves. If a mineral company has had a commercial discovery but does not intend to produce mineral resources, such company is not required to pay the commercial discovery bonus.
By nature and content, all amendments to the Tax Code may be divided into two categories: (i) change of rate, and (ii) change of administration and application (calculation) of taxes. Below we provide a brief description of the most essential amendments to the Tax Code and the table of amendments as to each tax for detailed review.
Change of Rate
The current CIT rate is 20%. Pursuant to the Tax Code before amendment, this CIT rate was to be reduced to 17.5% in 2010 and 15% in 2011. However, the Tax Code Amendments fix the CIT rate for 2010-2012 at the level of 2009, i.e. 20% until December 31, 2012. Then, the CIT rate will be reduced to 17.5% in 2013 and 15% in 2014.
Initially, upon enactment of the Tax Code, the Government of the Republic of Kazakhstan planned that the tax burden for mineral companies would be increased in 2009 through an adjustment of the CIT and MET rates. It was expected that the increase of the tax burden for mineral companies resulting from an increase of the MET rate would be balanced (compensated) by a reduction of the CIT rate. This would allow for the gradual reduction of the tax burden for all sectors of the economy, save for the extracting industries.
Since the CIT rate for 2010-2012 remained at the same level of 20%, the 2009 MET rate will also remain unchanged in 2010-2012 and will not increase until 2013. Whether the tax burden on subsoil users is increased or reduced will depend on the volume of production of minerals or on the volume of mineral reserves (depending on the type of mineral) and prices (for certain types of minerals).
Changes of Regulation and Application of Taxes
Taxation of Mineral Companies
Most of the essential amendments are related to the minerals sector and taxation of mineral companies. The most important amendments are described below:
In certain events, the Tax law permits to transfer, in full or in part, crude oil and natural gas in kind against payment of the MET, export rent tax, royalty and Kazakhstan share under production sharing agreements. The amount of the MET, export rent tax, royalty and Kazakhstan share under production sharing agreement that are payable in kind must be equivalent to the amount of such taxes in monetary form.
The amendments made to the law relate to oil production accounting procedures. Crude oil and natural gas that are transferred by the subsoil user against payment of said taxes must be accounted for separately. This affects only the accounting procedure for produced oil but does not entail increase of the tax burden on subsoil users for these taxes.
The uniform methodology of determining market prices for exchange commodities is provided, which sets forth the list of international exchanges, single sources of price publications, procedure for calculation of prices and price conversion in the national currency. This methodology is applied in order to calculate all special charges for mineral companies (rent tax, MET, subscription bonus and commercial discovery bonus).
In order to avoid double taxation of mineral companies, in case of a commercial discovery within the exploration contract, a mineral company is exempt from the subscription bonus under the production contract; but in such case, the commercial discovery bonus will be payable under such contracts.
Another change is that the taxable base for calculation of MET when a mineral company is selling (transferring) crude oil for further processing at the Kazakhstan refineries should be determined based on the price of oil purchased by such refineries. In such case, the fixed rate of MET is subject to a 50% reduction (0.5 factor). Pursuant to the Tax Code Amendments, the 0.5 reduction factor is also applied to assessment of MET for volumes of crude oil and gas condensate that are transferred in kind against payment of tax. This amendment is aimed to incentivize supply of fuel and lubricants to the domestic market, as such in selling crude oil and gas condensate in the domestic market of Kazakhstan, the taxpaying subsoil user will apply the rate reduced by half.
Procedure for calculation of the excess profit tax has changed. For the purpose of EPT calculation, some additional criteria were identified and introduced: the aggregate annual income under a subsoil contract, CIT for subsoil use and deductions for the purpose of EPT calculation.
For purposes of the CIT for subsoil users, sales revenue now includes only revenue of a mineral company derived during exploration and preparatory work; revenue derived from sales of mineral resources produced prior to commencement of production; and revenue derived from sales of a part of the subsoil right with respect to the part which exceeds expenses actually incurred by the mineral company prior to commencement of production.
Changes are made to the procedure for accounting for the fixed assets and capital assets for the purpose of determining deductions for CIT calculation. For example, deduction of fixed assets, capital assets and intangible assets commissioned by a mineral company between commercial discovery and commencement of production, construction in progress and social assets with the service life exceeding one year is not permitted, i.e. such assets can be deducted from costs after commencement of production.
The amount of CIT calculated by a non-resident legal entity acting through a permanent establishment is reduced by the amount of CIT withheld at source from the income of such non-resident legal entity. As such, we believe that a non-resident legal entity gets the so called "tax credit" that will be taken into account in further calculations of CIT.
In order to simplify the administration of taxes, some clarifying amendments as to international taxation were introduced, including: identification of the procedure and timeline for the issue of the certificate of residency in cases where international tax treaties are applied; simplification of the procedure for the determination of the period of permanent stay of natural persons in the Republic of Kazakhstan. Such approach is intended to improve tax administration for non-residents and avoid double taxation.
Joint Liability for Groups of Companies
According to the new amendments to the Tax Code, if a business unit (branch, representative office) of a legal entity is unable to discharge its tax liabilities, the tax debt may be enforced against the legal entity, which set up the unit within the Republic of Kazakhstan, and also against all other business units set up by such legal entity. Prior to the amendments, the tax authorities could impose the tax burden only on the company creating a business unit. Any other business units of such company were not incurring any tax liabilities.
The recent amendments are material and affect taxation of mineral companies, CIT and tax administration. While the amendments do not change the general concept of the Tax Code or introduce any new taxes, they have a material impact on the procedure for calculating tax liabilities for persons extracting mineral resources. Therefore, they are of great significance for a number of investors doing business in Kazakhstan.
Although the amendments related to VAT and other taxes are mainly of a clarifying nature, they nevertheless play a prominent role in better understanding of taxation and tax policy of the Republic of Kazakhstan.