Nothing principally new has been added to the forthcoming tax legislation. Kazakhstani citizens have been promised tax reductions and administrative improvements. This has all been promised before (both pledges for improvements and tax breaks). Another issue is: how effective will the current campaign be?
What exactly did the President in his annual [state of the nation] address and the government in its Action Plan 2006-08 promise?
“Utilization of a flexible tax regime and budget policy is very important in order to stimulate diversification and the development of new industries in our economy, as well as for the attraction of foreign capital and know-how,” stated President Nursultan Nazarbayev, who promised the following:
• Beginning in 2007, the VAT rate will decrease by 1%, with a further decrease of 1-2% during 2008-09.
• From 2008, social tax will decrease on average by 30%, so that a stimulus will be created for employers to increase the salaries of their employees.
• Starting from 2007, a fixed income tax rate of 10% will be introduced for all individuals. However, instead of paying taxes based on multiples of a monthly index as before, for the purpose of preserving the salaries of low-income persons, a zero-tax rate will be applied on all salary earned below the monthly minimum wage level.
• As of 1st January 2007, a low flat tax will be applied on all small business entities.
Aside from the above, the President instructed the government to do the following:
• Develop a plan on the creation of a Special Tax Service Department within the Tax Committee under the Ministry of Finance, which will be responsible for auditing in partnership with “international audit firms, which have no conflict of interest” those “tax revenues paid by the [nation’s] largest taxpayers.”
• Establish a single register of state property, including the “defining of clear goals for its usage and criteria for [assessing] it effectiveness.”
• Within 2006, develop and present for discussion a set of additional measures directed toward increasing responsibility for execution of contractual obligations.
• Make suggestions for the improvement of antimonopoly legislation and cultivating competition.
The President instructed the National Bank of Kazakhstan (NBK) and the Financial Supervisory Agency to develop a law “On protection of the rights of investors, stockholders and proprietors who are minority shareholders within a corporation”.
Generally, in combination all these proposals should ideally contribute to the effective implementation of tax policy and improve fiscal discipline.
A week after the President’s address, the government stated that changes and amendments to the tax code could already be introduced by April of the current year.
At the same time, Vera Khnuk, director of the Tax Policy and Prognosis Department under the Ministry of Economy and Budget Planning, stated during a “roundtable” on 6th March that as a result of the [proposed] decrease in the VAT rate, the republican budget would lose KZT 30 bln, and due to that in the social tax (in 2008 the average decrease will be 30%), regional budgets would lose KZT 100 bln.
However, these “losses will be compensated through an increase in the tax base.” Besides, as was noted by a representative of the Economy Ministry, revenues received from the natural resource sector at present are “enough to cover the necessary expenses of the state.”
According to Ms. Khnuk, introduction of the fixed income tax rate for all individuals in 2007 will not affect the amount of remuneration received by employees paid out of the state budget, “If the income tax rate has before been from 6-8% for these employees, and now will be 10%, the losses would be compensated through an increase in salaries. None of the state employees will lose any of his or her income.” As promised in the state of the union address, beginning from 2007, salaries of state employees will be increased by an average of 30%.
Ms. Khnuk called the decrease in the VAT rate and social tax a “so-called” advance to taxpayers, “The state hopes that as a result of these concessions, discipline will improve, and that there will be fewer cases of tax evasion and under-the-table payments.”
As well, as per the words of an Economy Ministry representative, Kazakhstan “already has one of the lowest tax burdens among the post-Soviet states, and stands at only 23% of GDP.”
Representatives of the Ministry of Economy and Budget Planning explained the upcoming changes to Exclusive.
In the opinion of the specialists from the Economy Ministry specialists, the individual flat income tax rate of 10%, to be introduced from next year, should stimulate the population to improve their own financial position. “Due to the fact that a portion of the population receives income that is subject to a lower tax rate which will be newly introduced, using a minimum wage instead of a monthly index is planned, as this [amount] is to be considered as a nontaxable portion of the income. This will decrease the size of the taxable amount, and will lead to a situation in which the tax burden will be the same as before the reform for this portion of the population,” ministry representatives explained.
Experts in the Economy Ministry believe that the individual flat income tax rate, together with a decrease in social tax in 2008, will lead to the halving of the overall tax burden as applied to labor, which as a result will effect “legalization of wages, stopping the practice of paying salaries in envelopes.”
Besides, this will decrease the tax burden for those companies having considerable wage costs. Ministry specialists predict that this will stimulate development of innovation companies with large scientific and engineering personnel.
In speaking about VAT, representatives of the ministry note that this is not the first attempt at tax liberalization since the country’s independence. The government has carried a policy of lowering the VAT rate, beginning from 2001, when this tax was decreased from 20% to 16%, and later on to the current 15%.
The ministry specialists predict that this “tendency could further continued up to 2010, when we would most likely decrease the rate down to 10%. But, before doing this, we need to assess the effectiveness of such steps as have already been taken.” In their opinion, the lower VAT will broaden the investment opportunities of companies by freeing up capital, which can be directed toward modernization of production facilities.
The ministry believes that for small businesses operating in a special tax regime, the associated decreases could become a “source for many new and successful larger companies… This special tax regime will allow creation of a buffer of small businesses, increasing the effectiveness of the market mechanism of natural selection.”
The issue on taxing dividends is a special issue. In the opinion of a considerable number of shareholders, funds invested into the charter capital of companies are doubly taxed. First, the organization in which the capital has been invested is taxed. Second, the beneficiary of the investment is taxed again. The ministry considers that such a system of taxation places equity and debt investors onto unequal footings. Such a practice is not a Kazakhstani invention, as many countries are busy trying to eliminate this problem.
In Kazakhstan, a low tax rate on dividends has been applied, which has softened the effect of double taxation, but has not eliminated the issue itself. In 2007, an elimination of the tax on dividends has been proposed, which would lead to only one party being subject to taxation, being those organizations into which capital has been invested. The ministry has assured Exclusive, “This measure will make long-term investment profitable, and operations in business more transparent, thus driving the Kazakhstan Stock Exchange, allowing Kazakhstani companies to make investments abroad, which includes those dedicated to the attraction of new technologies.”
The ministry promises, “In perspective, improvement in tax policy does not leave behind the individual in favor of the corporation.” Besides increasing the lowest tax bracket for individual taxable income from 6% to 10%, the government is planning to introduce individual tax declarations. Preparations for their introduction will start from 2008. Simultaneously, such expenses as private medical expenses, tuition fees, and additional insurance coverage can be used as deductions from the income of individuals, so long as documented proof is available. “Partially this will allow the solving of employment problems,” states the ministry.
Another important constituent of the tax policy is its administration, which cannot be solved so easily, as the specialists admitted.
The ministry is using data from the World Bank, according to which during the period of 2002-05 the portion of Kazakhstani companies complaining about corruption during the filing of taxes increased from 15% to 19%. In addition to this fact, one can interject the problem of individual interpretation of the tax code for the purpose of calculating additional taxes. The possibility for tax control bodies to place additional burdens onto taxpayers decreases the capability of the latter to protect their legal rights and interests.
On 6th March in Astana, the Ministry of Economy and Budget Planning, along with state bodies, business associations and experts organized the [abovementioned] roundtable for the purpose of analyzing Kazakhstani tax legislation.
Participants noted that despite the efforts taken, the tax legislation of Kazakhstan “still contains provisions that can be interpreted in a variety of ways.” This increases those risks connected with the accuracy of handling tax obligations. At the roundtable, the organizers presented an analytical report, 80 pages of which contained enumerations of each article that may be interpreted variously. Eventually, as a result, these problematic articles decrease the effectiveness of tax administration and promote corruption. The experts developed 58 proposals for bettering tax regulation, particularly as applied to the article on the order of filing tax reports, that on reporting deductible expenses on consolidated annual revenue, and in general the mechanism for calculating taxes.
The Economy ministry believes that the problem of tax administration can be partially resolved by applying information technologies, the use of which is widely planned. These measures will “exclude personal contact between the tax agency and taxpayer as much as possible.” The use of information technology allows the digitization of tax system administration, beginning from the registration of a taxpayer all the way to the creation of a highly secure database, which then can be utilized in interactions with other state bodies for discovering cases of tax avoidance.