Chapter 4. Kazakhstan’s tax policy

Kazakhstan’s ambition of joining the top 30 most developed countries by 2050 will largely depend on its ability to create an investment-stimulating business environment, putting in place the ingredients necessary for the private sector expansion, including, more importantly than ever, diversification of investment into non-extractive industries. Kazakhstan’s tax regime is one of the key policy instruments that can either encourage or discourage investment. Kazakhstan has been offering generous tax incentives to make the investment climate more attractive. Despite on-going efforts aimed at rationalising investment incentives, the taxation regime remains somewhat complex, the country applying tax reliefs that vary depending on the type of investment, its location or activity. There is uncertainty as to whether they meet their intended objectives. In general, there has been inadequate analysis to assess their effectiveness. Establishing mechanisms to regularly evaluate the costs and benefits of tax incentives would help assess them against their intended policy objectives as well as the associated fiscal cost.

Kazakhstan’s tax framework is another policy instrument that can either encourage or discourage investment. It also an important component of the Declaration on International Investment, which includes the Instrument on International Investment Incentives and Disincentives. The latter encourages Adherents to ensure that incentives as well as disincentives are as transparent as possible so that their scale and purpose may be easily determined. The Instrument also provides for consultations and review procedures among Adherents to facilitate international co-operation in this area. Kazakhstan has constantly improved its tax framework and the country now relies on a well-developed system that has been adjusted over time depending on specific economic and social circumstances. To attract investors, the country has offered tax and other non-tax incentives to make the FDI climate more attractive. While the merits of tax investment incentives will depend upon the specific objectives of the incentives, the type and mix of incentives provided and the design of the incentives, there is a danger that the benefits of such incentives are likely to be limited, and could contribute to a harmful ‘race to the bottom’ among countries competing to attract investors. This is especially the case where tax investment incentives have been introduced without a comprehensive assessment of their costs and benefits. Most recent reforms have seen efforts by the authorities to rationalise their investment tax incentives.

Kazakhstan’s tax framework

The taxation regime in Kazakhstan is regulated by the Tax Code, which is relatively new (having been rewritten in 2009). Kazakhstan was the first of the CIS countries to adopt a comprehensive Tax Code in 1995. The 1995 Tax Code combined all existing legal framework for taxation except for customs duties, contributions for social insurance, and state duties. There were almost 50 different taxes before the tax reform and only about a dozen after the reform (Witt and McLure, 2001). The 1995 Code provided the basis of a modern tax system in Kazakhstan.

Since then, the tax system has changed several times, dynamically responding to the changing priorities of the government. One set of substantive changes was introduced through the adoption of the new Tax Code in December 2008.1 Designed during the era of elevated commodity and oil prices, the Code aimed at diversifying the economy away from the natural resource extraction. To achieve this, the Code of 2008 attempted to shift the tax burden to the Subsurface users by raising taxes on the sector, while significantly reducing the statutory corporate tax rate and simplifying the tax system outside the subsurface production. At the same time, the Code eliminated subsurface contract stability provisions from many subsurface use contracts.2 Table 4.1 below presents a detailed overview of Kazakhstan’s tax system in effect at the end of 2016, including the taxation of subsurface users.

Table 4.1. Kazakhstan’s tax regime
Legal basis of taxation	The Code of the Republic of Kazakhstan “On taxes and other obligatory payments in the budget” (the Tax Code). Law No. 99-IV of the Republic of Kazakhstan of 10 December 2008
Tax Residency	A company is a tax resident if it is established under the laws of Kazakhstan, or its place of effective management is located in Kazakhstan.
	Tax residents are taxed on their worldwide income.
	Non-residents are taxed only on Kazakhstan source income.
Profit tax
Subjects to profit tax (article 147)	Subject to tax are resident, as well as and non-resident companies that operate through a permanent establishment, or receive income from Kazakhstan sources that are deemed payers of profits tax.
Tax rate	Standard rate		20%
	An additional branch profit tax applicable to after-tax profit of permanent establishments		15% (Could be reduced to 5% under an Agreement on the Avoidance of Double Taxation.)
	Producers of agricultural products, aquacultural (fishery) products, and for rural consumer co-operatives		6%
	Non-residents’ income from sources in Kazakhstan		15%
Depreciation rates of fixed assets	Tax Code, Article 120, defines maximum rate of depreciation of fixed assets
	Buildings, structures, except for oil, gas wells and transmission equipment		10%
	Machines and equipment, except for machines and equipment for oil and gas production, and also computers and equipment for information processing		25%
	Computers, software and equipment for information processing		40%
	Fixed assets not included in other groups, including oil, gas wells, transmission equipment, machines and equipment for oil and gas production		15%
	Entities implementing a priority project and not using special tax treatment apply depreciation rates in the amount of at least 50% of the maximum depreciation rates
Losses carried forward	10 years following the year in which the loss was incurred
Withholding Tax
(Article 194)
	Non-residents without a permanent establishment (PE) in Kazakhstan
	Dividend		15%
	Royalty		15%
	Capital gains		15%
	Income from providing services (other than insurance and international transportation services)		20%
	Insurance premiums paid under risk insurance contracts		15%
	Insurance premiums paid under risk re-insurance contracts		5%
	Income from international transportation services		5%
	Income generated by an entity registered in a country with preferential tax treatment		20%
	Other types of income received from a resident or non-resident with a permanent establishment		20%
	Capital gains generated at a public auction on a Kazakhstan or foreign stock exchange		Exempt
	Capital gains from the sale of shares (interest) in a Kazakhstan company; dividends paid to foreign shareholders where the Kazakhstan entity is not a subsurface user the Kazakhstan entity has held the shares for more than 3 years more than 50% of the value of the shares sold is not derived from the assets of Kazakhstan Subsurface users.		Exempt
Personal income tax
Tax rate (Article 158)	Flat rate for both resident and non-resident. (Re-introduction of progressive personal income tax rates is planned.)		10%
	Dividend income of tax resident individuals from sources within and beyond Kazakhstan		5%
	Dividend income where the legal entity is not a subsurface user taxpayer has been a holder of the shares or participatory interest for more than 3 years the value of the shares derived from the assets of subsurface users does not exceed 50% on the date of the dividends payment.		Exempt
Value-Added Tax (VAT)
Subject to VAT (Chapter 8, Article 228-229) Article 236)	Taxable items are: 1) taxable turnovers; 2) taxable import. VAT is chargeable on turnovers that take place in Kazakhstan, based on the place of turnover rules. The applicability is determined based on the deemed place of supply. The rules determining the place of supply are: Goods: The place where transportation commences if goods are transported or mailed The place where goods are transferred to the purchaser Works and services: The place where immovable property is located for works and services The place where works and services are actually carried out for works and services related to movable property The place of business or any other activity of the customer The place of business or any other activity of the service provider.
VAT registration	Required for all entities with cumulative taxable revenues in excess of 30 000 - times monthly accounting index. (approximately USD 342 000) during a calendar year. Optional for all other persons.
Tax Rate	Standard rate		12%
	Export sales of crude oil, natural gas and gas condensate		0%
	International transportation services (including the transportation of oil and gas via trunk pipelines)		0%
	Sales of goods on the territory of SEZs		Goods which are fully consumed during the implementation of activities on the territory of SEZs are taxed at 0%
	Imports of goods and equipment, included in the Article 255 of the Tax Code, e.g. medical devices and equipment		0%
	The list of exempt activities is specified in the Chapter 33 of the Tax Code and includes, among others, financial services, insurance services, medical services, sale and lease of land and land use rights, etc.		Exempt
Excise
Base of excise duties (Article 279)	Importation and sale of all types of spirits, alcohol, tobacco, petrol/gasoline (excluding aviation fuel), diesel, cars, crude oil and natural gas condensate.
Rates	Vary; see Article 280 of the Tax Code
Property Tax
Taxpayers (Article 394)	Resident Kazakhstan companies (except for state institutions) and non-resident companies operating in Kazakhstan through a PE or receiving income from Kazakhstan sources
Tax base	Average annual balance-sheet value, determined on the basis of the accounting records.
Rate (Article 398)	Standard rate		1.5%
	Individual entrepreneurs and legal persons which apply special tax regime on the basis of a simplified declaration		0.5%
	Legal entities, as defined in Article 134 of the Tax Code, except religious associations and entities whose main activity (services) is in the field of library services in accordance with Article 135 of the Tax Code		0.1%
	Legal entities specified in paragraph 1 of Article 135-1 and organizations located in the territory of FEZ that use in the implementation of activity envisaged in the FEZ territories, autonomous educational organizations		0%
Land tax
Taxpayers (Article 373)	Payers of land tax are physical and legal persons having taxable items: 1) on the right of ownership; 2) on the right of permanent land use; 3) on the right of primary unpaid temporary land use.
Tax rate (Articles 378-387)	The rate depends on the land’s use and the quality rating set by the Government, see Chapter 54 of the Tax Code.
Vehicle tax
	The rate depends on the vehicle type and engine size. See Chapter 51 of the Tax Code.
Fee emission to the environment
	Fee emission for emissions into the environment are charged for emission into the environment in order of special environmental management The object of taxation is the actual volume of emissions into the environment within and/or in excess of the established limits of emissions into the environment of: 1) ejection of pollutants; 2) discharge of pollutants; 3) wastes disposal of production and consumption; 4) sulphur disposal produced during oil operations.
Rates (Article 495)	Payment rates are determined based on monthly calculation index established by the Law on the national budget for the first day of the tax period subject to the provisions of paragraph 7 of Article 495 of the Tax Code.
Rent tax on exports
Taxpayers	Individuals and legal entities that implement: crude oil and raw mineral oil, except for subsurface users which exporting quantities of crude oil and gas condensate with PSAs concluded before to January 1, 2009; the list of legal entities is established by the competent authority in the area of oil and gas, these legal entities have to implement customs procedure for export of crude oil determined by the authorized body in the area of oil and gas and previously have to be placed under customs procedure for processing outside the customs territory coal
Taxable items	Volumes of crude oil and refined oil products and coal traded for export
Tax base	The value of exported crude oil and refined oil products is based on the actually export volume of crude oil and refined oil products and world prices. Rent tax calculation on export of coal is based on the value of exported coal calculated on the basis of coal actually sold for export.
Tax rates	Crude oil and refined oil products	The scale is provided depending on world prices. Rates varied from 0 to 32%.
	Coal	2.1%
Anti-avoidance rules
Transfer pricing (The transfer pricing law, Article 3)	Control of transfer pricing is carried out for the following transactions: International business transactions: The export of goods from the territory of the Republic of Kazakhstan is carried out in accordance with the customs legislation of the Customs Union and (or) the Republic of Kazakhstan, also the export of goods is carried out from the territory of the Republic of Kazakhstan to the territory of another State - a member of the Customs Union The importation of goods into the territory of the Republic of Kazakhstan is carried out in accordance with the customs legislation of the Republic of Kazakhstan, also the importation of goods is carried out into the territory of the Republic of Kazakhstan from the territory of another State - a member of the Customs Union Committed in the territory of the Republic of Kazakhstan is directly related to international business transactions: Realizable minerals produced by the subsoil user, which is one of the parties one of the parties has tax exemptions one of the parties has a loss on data of tax returns for the last two tax periods preceding the year of the transaction
Thin capitalization (Article 103)	The deduction of interest is limited either by the market rate or specific debt-to-equity formula
CFC rules	CFC rules apply to residents with at least a 10% shareholding in an entity established in non-transparent jurisdiction. Related parties are physical and legal entities with a special relationship which has an impact on the economic results of transactions between them, including if a person is large shareholder (owns10% or more percent of voting shares)
Legislation	Law “On taxes and other obligatory payments in the budget” (the Tax Code). Law No. 99-IV of the Republic of Kazakhstan of 10 December 2008. Law No. 291-IV of the Republic of Kazakhstan on Subsurface and Subsurface Use, 24 June 2010.
	In addition to the taxes and obligatory payments stipulated by tax legislation, all subsurface users are required to pay special taxes and other obligatory payments. These include: signature and commercial discovery bonuses reimbursements of historical costs mineral production tax excess profits tax
Signature and commercial discovery bonuses
	Signature bonus is a one-time fixed payment for the right acquisition to use the subsurface in the contractual territory, as well as the expansion of the contractual territory See Article 314 of the Tax Code to determine the amount. Examples: For oil contracts with approved reserves – 2800-fold amount of monthly calculation index established by the Law On Republican Budget For oil production contracts, where reserves have not been approved 3000-fold amount 2800-fold amount of monthly calculation index established by the Law On Republican Budget
	Commercial discovery bonus is a fixed payment that is payable by subsurface users when a commercial discovery is made in the contract territory. A tax base for the assessment of the commercial discovery bonus shall be the value of the volume of mineral reserves approved by the state body authorized for these purposes. The rate of the commercial discovery bonus is fixed at 0.1%
Reimbursements of historical costs
	The payment for compensation of historical costs is a fixed payment for reimbursement of total costs incurred by the state for geological surveys of contractual territory and exploration of field before the conclusion of the subsurface use contract. The obligation to reimburse historical costs arises from the date the confidentiality agreement is concluded between the subsurface users and authorized state body on subsurface study and usage. (See Chapter 44 of the Tax Code.)
Excess Profit Tax (EPT)
Legislation	The order 1330, of September 1997, established the Procedure for Determining the Internal Rate of Return for the Calculation of Excess Profits Tax. The detailed method for calculating EPT was approved by Order 41 of the Ministry of Finance of the Republic of Kazakhstan On the Taxation of Subsurface Users dated 29th December 1997 (Instruction 41).
Tax base	The object of EPT taxation is a part of the net income determined for each individual subsurface use contract for the tax period, which exceeds 25% of the deductions determined for EPT purposes.
Tax rate	Scale of distribution of net income for the EPT purposes, % tax deduction.	% for computation of maximum amount of net for EPT purposes	Rate (%)
	Less or equal to 25%	25	Not established
	from 25% to 30% inclusive	5	10
	from 30% up to 40% inclusive	10	20
	from 40% up to 50% inclusive	10	30
	from 50% up to 60% inclusive	10	40
	from 60% up to 70% inclusive	10	50
	More than 70%	Any excess	60
Mineral Production Tax (MPT)
	MPT rates apply to the value of taxable volume of recovered resources contained in raw materials, where value is based on the world price. Rate depends on the type of extracted mineral raw materials.
Tax rate	Crude oil and gas condensate	5% to 18% (see Article 336 of the Tax Code) Can be reduced by 50% in case of sale and (or) transfer of crude oil and gas condensate production in the domestic market of Kazakhstan, including in-kind payment of (MPT), the rent tax on exports, royalties and shares of Kazakhstan under production sharing recipient on behalf of the state or to use its own production needs if supplied to domestic refineries in a sale/purchase or tolling agreement.
	Minerals	Depends on the type of mineral; e.g. rate for copper is 5.7%, gold silver, platinum, palladium – 5%, iron ore – 2.8%, uranium – 18.5% , etc. (Article 339 of the Tax Code)
Stability of Tax Regime
	The Tax Code of 2008 abolished the stability of the tax regime for Subsurface use contracts other than production sharing agreements (PSA) signed with the government prior to January 1, 2009 which passed the obligatory tax inspection, and contacts signed by the President. All other subsoil users, including those with contracts concluded before 2009, are subject to taxation in accordance with the tax law that is in effect at the time when a particular tax liability arises.
Source: Ministry of Finance of the Republic of Kazakhstan, December 2016.

In recent years, there have been a number of improvements in Kazakhstan’s tax framework. A number of analyses have noted that Kazakhstan’s tax laws are among the most comprehensive of the former Soviet Union states (World Bank Group, 2015). Continuous improvement of the tax institutional framework has also been part of the government’s reform agenda. In August 2014, the Tax and Customs administrations merged to form the new State Revenue Committee (SRC).The World Bank Group (WBG) has been providing technical assistance in respect of the integration of the two fiscal agencies, streamlining the SRC operations, and developing the SRC strategy. As reported by the WBG, good progress has been made by Kazakhstan in improving taxpayer services and reducing the burden of taxpayer compliance.

Firms have nevertheless complained about an overly bureaucratized attitude of tax officials toward businesses, where repetitive tax inspections and varied interpretations of rules are sometimes common place. In the course of the discussions the OECD Secretariat had with Kazakhstan’s tax authorities, tax officials recognized that one of their main areas of concern was indeed the “differences in interpretations of legal provisions between taxpayers and the administration”. In this regard, the government has a major role to play in developing guidance targeting both tax officials and investors. It is important for the tax regulations to be clearly and objectively defined and explained in order to ease compliance and to decrease unnecessary disputes between taxpayers and tax authorities. Overly complex or unpredictable rules, ambiguous criteria that leave room to subjective interpretation introduce opportunity for rent seeking on the part of investors and invite corrupt behaviour on the part of public officials. Transparent, uniform, rule-based systems, with a uniform approach and interpretation of the tax provisions, allow investors to have a clearer understanding of the tax environment they would be investing in and give them far less to fear from the lack of a level playing field.

Tax investment incentives

Empirical evidence finds that taxes matter for investment (OECD, 2015), although the efficacy of tax investment incentives will depend upon the specific objectives of the incentives, the type and mix of incentives provided and the design of the incentives. There is also some evidence to suggest that tax incentives are likely to be more effective as a country becomes more economically developed, however, this may simply reflect the fact that more developed countries are also likely to demonstrate many of the other attributes that contribute to an attractive investment environment. Since the provision of tax incentives involves government foregoing revenue, the benefits of associated with tax incentives need to be weighed against the costs, including their revenue costs.

Tax incentives have been routinely used by Kazakhstan to attract investment in general, and foreign direct investment in particular. Tax incentives have been seen by the authorities as a way to attract investment into non-oil sectors, aiming primarily at the economic diversification away from subsurface production. With mineral prices continuously depressed, the Kazakh authorities decided in 2014 to introduce a new package of incentives aimed at attracting foreign investment into the non-oil sector, to give another boost to the economic diversification of the country. As a result, Kazakhstan’s tax system remains characterised by many exemptions, particularly in the area of corporate income tax (CIT) and VAT. This incentives regime, which currently includes common incentives, available to all taxpayers, and a separate set of measures targeted at investment into government-identified priority sectors and Special Economic Zones (SEZs), is summarized in Table 4.2 below.

Table 4.2. Investment Incentives
General/common incentives
Types of investment projects Article 283 of Entrepreneurial Code	Investment preferences are provided for: 1) investment projects: exemption from customs duties and value added tax on imports state in-kind grants 2) investment priority projects: exemption from customs duties state in-kind grants tax preferences investment subsidies 3) investment strategic projects: tax preferences
Exemption from customs duties Article 287 of Entrepreneurial Code	Exemption from customs duties on imported components, spare parts, and raw materials. Exemption from customs duties on imported manufacturing equipment over the duration of the investment contract but not to exceed 5 years after the registration of the investment contract. Exemption from customs duties on imported spare parts for equipment for up to five years are provided to legal entities of Kazakhstan depending on investment in fixed assets. Exemption from customs duties is provided over the duration of the investment contract but not to exceed 5 years after initial operation of fixed assets under the work programme.
State in-kind grants Article 288 of Entrepreneurial Code	State in-kind grants may include: land, buildings, structures, machinery and equipment, computers, measuring and control devices and equipment, vehicles (excluding cars), industrial and household equipment. State land grants are provided for the temporary free use, or granted on the basis of temporary free use with subsequent free transfer to ownership or land use subject to fulfilment of the investment obligations under the investment contract. The maximum size of the public in-kind grant cannot exceed 30% of the volume of investment in fixed assets of the legal entity.
Investment tax benefits Article 290 of Entrepreneurial Code	Tax preferences are available to legal entities of the Republic of Kazakhstan, implementing investment projects, including priority investment projects and strategic investment projects. The types of tax preferences are: 1) investment priority projects: The decrease of calculated corporate income tax by 100 %; The application of the coefficient 0 to land tax; Tax calculation on property at the rate of 0 % to the tax base. 2) investment projects: Exemption from value added tax on imported components, spare parts, and raw materials under investment projects 3) investment strategic projects: The decrease of calculated corporate income tax by 100 % from activities under the investment strategic project.
Investment rebate Article 291 of Entrepreneurial Code	Investment subsidy is provided through the compensation of up to 30% of actual expenses on construction works and purchase of equipment, excluding value added tax and excise duties on the basis of supporting documents, but not exceeding the cost of prescribed pre-project documentation with the state expertise in the order established by the legislation of the Republic of Kazakhstan. Investment subsidy is provided in accordance with the decision of the Government of the Republic of Kazakhstan to the investor implementing priority investment project. Payment of investment subsidies is subject to the fulfilment of investment obligations by the investor.
Non-tax benefits	Stability is guaranteed in the following circumstances: Legislation on employment of foreign labour force in accordance with the Code of the Republic of Kazakhstan "On taxes and other obligatory payments to the budget" (Tax code); The application of "One window" concept.
Conditions for granting investment preferences Article 286 of Entrepreneurial Code	Investment project implemented by a newly created legal entity on certain priority activities, the list of which is approved by the Government of the Republic of Kazakhstan, and providing implementation of investments in the amount of not less than 2 million monthly accounting index established by the law on Republican budget and valid on the date of application for investment preferences. State registration of a legal entity made no earlier than 24 calendar months before the date of application for investment preferences; The recipient is the newly created legal entity of the Republic of Kazakhstan, which carries out investments in the amount of not less than 2 million monthly accounting index established by the law on Republican budget and valid on the date of application for investment preferences
List of priority activities	Decree of the President of the Republic of Kazakhstan No. 874, dated 1 August 2014 establishing priority sectors for priority investment projects. Six priority areas, divided into 14 priority sectors are defined: Priority sectors: 1. Metallurgy: - Steel industry - Non-ferrous metallurgy 2. Chemical industry: - Agricultural chemistry - Chemicals for industry 3. Petrochemical industries: - Oil refining - Oil and gas chemistry 4. Mechanical engineering: - Automobile industry - Electrical equipment - Production of agricultural machinery - The production of railway equipment - Mining equipment - Oil and gas production equipment 5. Production of construction materials: - production of construction materials 6. Food industry: - Food production
Incentives in Special Economic Zones (SEZ)
Qualification criteria	To qualify, a legal entity must: Be registered by the tax authorities in the territories of SEZs. Have no structural subdivisions beyond the boundaries of the territories of the SEZs At least 90% of aggregate annual income must constitute income earned from activities in the SEZ consistent with the objectives of the SEZ’s formation. For a legal entity in the ‘Park of Innovative Technologies’ – at least 70% of the aggregate annual income must constitute income earned from activities in the ‘Park of Innovative Technologies’.
Tax incentives	Exemption from corporate income tax Exemption from land tax Exemption from property tax 0% VAT on goods fully consumed during realisation of activities corresponding to purposes of creation of the SEZ and included in the list of goods established by the government Exemption from land use fee for the period specified in the contract of temporary paid land-use (lease), but not exceeding the term of the special economic zone,
Special tax regime for agricultural sector
	Corporate income tax, value-added tax, social tax, property tax, and vehicle tax payable is reduced by 70% for producers of agricultural products.
Source: Government of Kazakhstan, December 2016.

In December 2016 available incentives included:

General/common tax incentives, available to all investors, including:
- Exemptions from customs duties on imported equipment and parts
- State in-kind grants
- Investment allowances for industrial facilities and their subsequent reconstruction and upgrade.
Targeted incentives for priority investment projects into activities established by Decree No. 874 of the President,3 including:
- Tax incentives
- Tax holidays for 10 years
- Exemptions from land tax for 10 years
- Exemptions from property tax for 8 years
- Investment subsidies of 30% of actual expense for installation and construction works, and equipment acquisition
Special tax regime for agricultural sector: income taxes, value added tax, social tax, property tax, and vehicle tax are reduced by 70% for producers of agricultural products.

The government is well aware of the importance of non-fiscal measures in the overall investment-attractiveness of the country and the ultimate success of the diversification efforts. Several non-fiscal measures have been adopted, including visa-free entrance for citizens of 19 countries in 2016, exemption from quota and work permit requirements for foreign individuals in entities holding an investment contract for the implementation of priority investment projects, exemption from local market tests for employers to hire foreign employees to work in SEZs. Additional measures, as discussed in Chapter 5, include state support to different types of firms and activities which may, for instance, involve financial and in-kind support.

Non-tax incentives
- exemption from quota and work permit requirements for foreign individuals of entities holding an investment contract, as well as some of their contractors and subcontractors
- a stability regime to apply in the event of changes in tax legislation
- application of the “single window” principle, under which one competent authority – the Investment Committee of the Ministry for Investments and Development – provides the bulk of services, limiting the investor contact other state authorities and reducing the number of documents to be submitted.

Investment incentives are also available to businesses locating in Special Economic Zones (SEZs), in which they enjoy exemptions from corporate income tax, land and property tax, and zero-rated VAT on goods fully consumed during realization of SEZ activities. The first law creating SEZs was adopted in January 1996 to accelerate the country’s economic development and its integration into the world economy by attracting investment and encouraging export-oriented production. Since then the legal framework has changed several times, responding to the changing priorities of the government. The SEZs are now primarily governed by the Law “On Special Economic Zones in the Republic of Kazakhstan” No. 469-IV of 21 July 2011. In 2016, Kazakhstan had 10 SEZs. The existing SEZs can be broadly subdivided into three categories: industrial and manufacturing (e.g. “Astana-New city”, “National Industrial Petrochemical Park” in Atyrau region; “Ontustik” in Sairam district of South-Kazakhstan region; development of the chemical and petrochemical industries in the Pavlodar region); service (e.g. “Burabay” in Akmola region), and technical innovation (e.g. “Informational Technical Park” in Almaty).

The investor’s response to such a generous set of tax incentives is yet to be evaluated. FDI inflow data, as reported by the National Bank of Kazakhstan (see Figure 4.1), shows the share of FDI flows into mining and mining-related activities at 60% in 2014. The figure bodes well if contrasted against a decade-old composition of FDI flows. The concentration of FDI into the subsoil production was heavier in 2005, with 77% of total FDI going into mining and mining-related operation. However, when the comparison is made with 2012 performance, the picture is less reassuring; FDI inflows in 2012 were more balanced, with more than half of FDI flowing into the non-mining industries. Against the backdrop of considerable volatility in the commodity price cycle through this period and in the absence of any comprehensive evaluation of the effectiveness of Kazakhstan’s tax incentives it is difficult to draw any firm conclusions on the relationship between these tax incentives and recent levels of FDI investment in Kazakhstan.

Evaluation of the costs and benefits of tax investment incentives

Tax incentives can create inefficiencies and generate distortions in the allocation of resources between different types of taxpayers, different sectors or industries and different types of businesses in favour of those receiving preferred tax treatment. A large and complex array of incentives can add to the complexity of the tax system and can make it harder to comply with and administer the tax system. In addition, in the area of specific investment projects, exemptions may be provided in a non-transparent and discriminatory manner. Another concern over the use of tax investment incentives is the resulting forgone revenue. In 2012, the OECD recommended that Kazakhstan ensure that investment incentives, including in Special Economic Zones, are cost effective. The OECD called for a review by Kazakhstan of the existing investment schemes in light of the OECD Instrument on Incentives and Disincentives as part of the Declaration on International Investment and Multinational Enterprises, which recommends making investment incentives as transparent as possible so that their scale and purpose can be easily determined.

In 2013, in response to the OECD’s recommendation, the Ministry of Finance conducted an assessment of tax expenditures – revenue foregone – attributable to preferential tax treatment of taxpayers. The analysis showed that, based on the 2011 data, tax expenditures amounted to about 2% of GDP. In Kazakhstan, little analysis has nevertheless been conducted to understand the direct and indirect costs associated with the tax incentives. Nor has the effectiveness or cost-efficiency of existing tax incentive programmes in meeting their intended objectives – stimulating investment and driving it towards priority sectors – been properly assessed. Only limited data have been collected on the direct and social benefits to the economy generated by incentives-enticed investment. In the absence of any such analysis, it is difficult to conclude whether these tax incentives have been effective and efficient in attracting additional investment and any associated positive spillovers through technology and knowledge transfer. Cost benefit analysis is a key component of effective incentive administration. Box 4.1 presents core elements of costs and benefits of tax incentives that need to be analysed.

Box 4.1. Conducting an analysis of costs and benefits of tax investment incentives

When conducting cost-benefit analysis of tax incentives the following components of costs and benefits need to be included in the analysis.

Costs of a tax incentive programme include:

Primary revenue forgone due to tax incentives. The revenue losses associated with the tax incentives could represent a large revenue drain; this foregone revenue needs to be calculated and reported regularly. Estimates of revenues forgone due to tax incentives provide policy makers with the required inputs to inform policy decisions.

Tax planning opportunities. Tax incentives and preferential tax treatments give rise to unintended and unforeseen tax-planning opportunities. The effective tax rate differentials formed by tax incentives open up opportunities to shift taxable profits and deductions across entities with different tax treatments either domestically or internationally, resulting in significant revenue leakages.

Redundancy. The rationale behind tax incentives – to encourage new and additional investment – means that incentives need to be targeted effectively to avoid redundancy. If tax incentives are provided to taxpayers in relation to investments that would have otherwise occurred in the absence of the incentives, then the tax preference provided will provide the investing taxpayer with a windfall gain. Effective tax design can limit redundancy by better targeting incentives to new and additional investment, however, this can also lead to greater complexity and the associated increase in compliance and administrative costs for taxpayers and tax administrations.

Taxpayer compliance costs. Tax incentives impose significant compliance costs on taxpayers in understanding and complying with the tax rules and regulations. Time and money spent by businesses to qualify for and receive tax incentives, as well as to lobby the government for incentives, represent significant indirect costs.

Economic efficiency costs. Providing incentives for certain types of investments is likely to have efficiency costs and distort resource allocation. There is a risk that there will be inefficiently high investment in incentivised activities and inefficiently low investment in others. Incentivised firms are likely to enjoy an artificial competitive advantage, which may also lead to distortions in other markets such as the labour market, where incentivised firms are likely to be able to attract workers from non-incentivised firms by offering higher wages. These distortions are likely to lead to a less efficient allocation of resources.

Administrative costs. The indirect costs of tax incentives, including the administrative costs of running them, could be quite substantial; technical personnel need to be hired or (re)trained to ensure compliance with the rules, additional data and information management systems need to be introduced or adjusted. There is also an additional cost of staff and materials required to administer requests for information and auditing of tax accounts to determine if investors are compliant with tax incentives definitions.

Benefits of a tax incentives programme include:

Direct impact and revenue. By reducing the tax burden, tax incentives increase the after-tax return of an investment. That, arguably, encourages additional investment, which may translate into more jobs, higher returns to capital owners and potentially more investment. Greater investment and economic growth results in additional direct tax revenue.

Indirect and induced impact. Through employment and linkages effects, the incentivised investment also generates other income opportunities and corresponding indirect revenue gains. Indirect effects arise from inter-industry transactions, while induced effects are due to changes in income, from spending on local goods and services.

Positive spillover effects, international integration. FDI attracted to the country could generate positive externalities – “spillovers” – for the host economy. Investment can act as a trigger for technology and know-how transfers, but also bring in the “entire package”, i.e. needed management experience, entrepreneurial abilities, marketing and sales experience, which can be transferred to the host country by training programmes and learning-by-doing.

Social/environmental benefits. It is often argued that tax incentives can correct for market imperfections. Where the social rate of return on the investment is higher than the private rate of return (e.g. investments into R&D, green technologies or renewable energy), tax incentives could be justified as an instrument to improve the return on the private investment and correct the instances of market imperfections. The benefits of the incentivised investment to the larger society need to be counted in.

Fiscal incentives granted in the framework of SEZs are a case in point. Despite the effective business facilitation and support measures that can be found in the SEZs in Kazakhstan as assessed in the next chapter of the present Review, tax incentives remain a key element of the strategy to attract investors. International experience has shown that while successful zones provide quality infrastructure and a good environment for doing business, they do not always require highly generous fiscal incentives. According to a survey of zone investors in ten countries in 2009, levels of corporate taxation ranked fifth among their concerns, behind cost/quality of utilities, access to transport infrastructure, regulatory environment for business and trade facilitation (Farole, 2011). For example, Charitar and Narrainen (2009) point to the success of the Shenzhen High-Tech Industrial Park, which attracted some 2 000 firms while offering only very limited fiscal benefits.

The lower oil prices combined with the slower growth in China and the economic contraction in Russia have affected Kazakhstan’s export revenues, mounting fiscal pressures and weakening macro-economic fundamentals of the country. Elimination of some tax incentives, designed and introduced at the times of upward-sloping oil prices, could provide a relief to fiscal pressures. However the revenue generation priority of the government needs to be considered alongside its investment attraction strategy, in a “whole-of-government” manner, to ensure consistency between the country’s tax policy and its broader national and sub-national development objectives. Only a thorough analysis of tax-related policies can reveal the effectiveness of the policy measures that the government is implementing to stimulate investment. It is therefore important for the Ministry of Finance to build its human and institutional capacity to conduct cost-benefit analyses, performance diagnostics of tax policies, and tax policy simulation analyses, in order to support informed government decision-making.

Effective tax rates

With non-uniform treatment of business profits, the Kazakh tax policy-makers need to fully understand the likely effect of the diversity of tax regimes on the capital investment decisions of the investors.

When considering capital investment options, investors can be expected to analyse the entire tax landscape of the country. Their first point of reference is the statutory tax rates that serve as an important signal function. The assessment does not end there though. Analysis of the country’s effective tax rates allows capturing into a single measure the complex tax landscape of Kazakhstan, including the statutory tax rate, the impact of tax holidays, depreciation allowances and other tax incentives. Effective tax rates further combine investment-related factors, such as the expected rate of business profitability, or the type of assets invested in. The measures express the tax liability as a share of the present value of all financial profits expected from a capital investment. Effective tax rate analysis sheds light on the implications of tax parameters – including targeted tax incentives – on investment returns and helps understanding the implications of implemented (or proposed) tax policy measures on expected investment outcomes.

Two forward-looking effective tax rate indicators are commonly used. The average effective tax rate (AETR) measures the difference in the before- and after-tax net present value of a profitable real investment project. The AETR is relevant in a context where a firm needs to decide among a set of mutually exclusive projects. This is the typical decision faced by a multinational choosing to locate investment in one of the OECD countries. In other words, the AETR affects inbound FDI. The marginal effective tax rate (METR) is the tax component of the user cost of capital and identifies the percentage rise in the cost of capital for an investment project due to taxation. Conditional on locating in that particular country, it affects the scale of investment: a higher cost of capital is associated with lower investment. Like the AETR, the METR depends on both the statutory tax rate and the definition of the tax base, however, the tax base will generally play a relatively more significant role in the determination of the METR and this largely accounts for the difference in the two measures.

To analyse the divergence of tax burden on capital in Kazakhstan, analysis of effective tax rates of various business segments were conducted. Six representative tax regimes were analysed, as follows:

Regime 1: A project is granted a tax holiday for 10 years; a standard corporate tax rate of 20% is applied thereafter. This regime applies to investment into special economic zones and/or one of the 14 priority sectors.
Regime 2: A project is granted a reduced tax rate of 6% for the life of the project. This regime is applicable to producers of agricultural products, aquacultural (fishery) products, and for rural consumer co-operatives who enjoy a 70% reduction of the standard corporate tax rate.
Regime 3: A standard corporate tax rate of 20% for the life of the project.
Regime 4: A standard corporate tax rate of 20% for the life of the project, as well as full deduction for the capital asset, taken at once within one tax period.
Regime 5: A standard corporate tax rate of 20%. In addition, a branch profit tax, reduced to 5% under a tax treaty, applicable to after-tax profit of a foreign company with a permanent establishment in Kazakhstan, resulting in a tax rate of 24%.
Regime 6: A standard corporate tax rate of 20%. In addition, a branch profit tax of 15%, applicable to after-tax profit of a foreign company with a permanent establishment in Kazakhstan, resulting in a tax rate of 32%.

Annex 4.A1 discusses in details the modelling process, as well as underlying data. The table below only presents the results. Table 4.3 shows AETR and METR calculated for investment under each of the six tax regimes discussed above to allow for cross-comparison. Two classes of assets are considered: 1) machinery and equipment or 2) industrial buildings. The assumptions, discussed in detail in Annex 4.A1, are used uniformly across all scenarios to ensure that the differences in effective tax rates are attributable only to the changes in tax variables.

Table 4.3. Effective tax rates on hypothetical capital investment projects Investment financed by Retained Earnings Profit rate – 20%
In per cent
Corporate income tax regime	Machinery and Equipment		Buildings
Corporate income tax regime	AETR	METR	AETR	METR
Regime 1	5.02	9.46	9.53	11.33
Regime 2	5.50	4.08	5.53	4.22
Regime 3	18.33	14.28	18.45	14.71
Regime 4	15.00	0.00	15.00	0.00
Regime 5	22.00	17.39	22.14	17.89
Regime 6	29.33	23.88	29.52	24.51
Source: Author’s calculations.

A quick glance at the effective tax rates calculated under various tax scenarios (Table 4.3 above) reveals considerable variation of the tax burden on capital investment across the segments of business investors in Kazakhstan. The results are easier to observe when shown against the statutory tax rate, as seen in graphics 4.2 and 4.3, where the size of dotted lines represents the difference between the statutory and effective tax rates for each tax regime under consideration. The difference between the highest and lowest AETR is as high as 24.31 percentage points for the investment in machinery and equipment financed by retained earnings. The same difference in METRs is 23.88 percentage points. These differences are substantial.

While the effect of significantly lower effective tax rates on targeted investment in Kazakhstan is yet to be studied, the differences in effective rates between various tax regimes open up opportunities to shift activities across entities with different tax treatments either domestically or internationally. This adds further pressure on tax revenues, representing a substantial point of concern for Kazakhstan’s authorities.

To show the effect of tax holidays on effective tax rates, the evolution of effective tax rates over the course of tax holidays is studied. graphic 4.4 shows the development of effective tax rates for investment into machinery and buildings, financed by retained earnings. The effect of tax holidays is easily observable; a large one-off investment will benefit the most from the tax holiday regime. However, an additional or repeated investment that could be necessary, for example, for capital replacement, will benefit less as tax holidays become exhausted and the effective rates increase over time. The analysis confirms a well-known argument – tax holidays are most attractive for footloose industries. Short-term investments are likely to benefit from tax holidays compared to longer-term investments. Since tax holidays benefit the industries that start making profits during the holiday period a favourable tax bias exists for short-term projects and short-term assets.

graphic 4.5 offers an interesting insight into the importance of macroeconomic fundamentals. Marginal and average effective tax rates are studied under different inflation rate assumptions. Effective rates under inflation rates of 3.5 (solid lines) are 8.5 (dotted lines) are analysed. A higher inflation rate, more realistic in Kazakhstan’s setting, clearly offers a discouraging investment environment, as both marginal and average tax rates are higher under the inflation rate of 8.5. This highlights, once again, the critical importance of macroeconomic factors in business attractiveness of the country.

Making the tax system more efficient

For the purpose of enhancing the efficiency of the country’s tax system, the government decided at the end of 2015 to scale back or remove some exemptions as part of its plan aimed at consolidating the Tax Code and the Customs Code into one single code. With the same view of making the system more efficient, it also planned to simplify the multi-layered tax regime. Accordingly, a number of amendments are expected to be introduced to the tax part of the new Code, which would become effective in late 2017. In addition to the abolition of tax incentives seen as ineffective or contradicting WTO rules, notably the following tax changes have been announced:4

The current tax regime would be replaced by a three-layer tax regime as follows: A general tax regime; a special tax regime for individual entrepreneurs based on a patent; and a special tax regime for small and medium-sized enterprises and agricultural enterprises;
Progressive individual income tax rates would be introduced;
Measures aimed at simplifying and improving the subsurface-use taxation, the real estate taxation for individuals and the social tax procedure.

In addition, the plan includes amendments to optimize tax and customs duties collection, including improving the tax monitoring of large taxpayers and introducing a common procedure for the enforced collection of unpaid taxes and customs duties.

Policy recommendations

Kazakhstan’s tax regime is one of the key policy instruments that can either encourage or discourage investment. Like all countries, Kazakhstan faces a trade-off: reducing the tax burden to encourage investment deprives the country of much-needed revenue, in Kazakhstan’s case, putting further pressure on its already weakened fiscal position. Despite the growing recognition by Kazakh authorities of the challenges associated with tax incentives, there is inadequate analysis of their costs and benefits in a national context to support the government’s decision making. Limited data is collected either on the direct and indirect benefits to the economy, or on the cost of these tax incentives, including forgone revenue. With non-uniform treatment of investors and targeted tax relief no assessment is made in favour of and against such treatment, to ensure that the different treatment can be properly justified. Businesses complain about costly compliance, inconsistent application of rulings in practice, the lack of predictability, and excessive discretion in tax-related decision-making.

Broaden the tax base. Reversing the recent decline in the government receipts is a priority. This can be achieved by streamlining the tax system and eliminating wasteful tax incentives identified through a credible cost-benefit analysis.
Introduce more systematic tax expenditure analysis and reporting. Regular and consistent tax expenditure analysis is an essential element of good governance. The revenue forgone through tax incentives should be reported regularly, ideally as part of an annual tax expenditure report covering all main tax incentives.
Collect better tax revenue data, as a follow-up to, and in the framework of the OECD Revenue Statistics Project.5 The analysis of tax incentives required for public statements, budgeting, periodic reviews, tracking of behavioural responses by business, etc. is data intensive. Revenue authorities need to periodically collect and analyse taxpayer data. This may require them to introduce institutional mechanisms to do so.
Strengthen policy analysis capacity. To support coherent and comprehensive government decision-making, the Ministry of Finance needs the capacity to analyse and explain tax reforms’ impacts to decision makers and the public. Both, the human and institutional capacity need to be strengthened.
Eliminate ambiguity in interpretation of legal provisions. Statutory guidance needs to be made available to allow for an unambiguous interpretation of domestic and international tax laws. The inconsistency in application of tax provisions, including between various tax authorities and regions, has to be addressed. This will not only improve predictability and clarity of the business framework but also support stable and consistent tax compliance in the country.
Strengthen tax administration, including the administration of VAT, to enhance tax compliance and to increase the effectiveness and the efficiency of the combat against tax fraud and non-compliance. The government should notably implement administrative reform to tackle VAT refund-related fraud, which appears to be significant, as part of the implementation of broader tax compliance strategy based on risk management principles. Such reform should aim at minimising the revenue losses from fraud and non-compliance without creating undue costs and complexity for compliant businesses.

References

Ali Abbas, S.M. and A. Klemm with Sukhmani Bedi and Junhyung Park (2012), “A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies”, IMF Working Paper No. 12/28.

Botman, D., A. Klemm and R. Baqir (2008), “Investment Incentives and Effective Tax Rates in the Philippines: A Comparison with Neighbouring Countries”, IMF Working Paper No. 08/207.

Deloitte (2013), Doing business in Kazakhstan 2013, Reach, relevance and reliability, Deloitte Touche Tohmatsu Limited, 2013.

Devereux, M.P. and R. Griffith (1998), “The Taxation of Discrete Investment Choices”, Institute for Fiscal Studies Working Paper Series, No. W98/16.

Devereux, M.P. and R. Griffith (2003), “Evaluating Tax Policy for Location Decisions”, International Tax and Pubic Finance, Vol. 10, pp. 107-126, 2003.

Klemm, A. (2008), “Effective Average Tax Rates For Permanent Investment”, IMF Working Paper No. 08/56.

OECD (2003), Checklist for Foreign Direct Investment Incentive Policies, Paris, www.oecd.org/investment/investment-policy/2506900.pdf.

OECD (2013), Principles to Enhance the Transparency and Governance of Tax Incentives for Investment in Developing Countries, www.oecd.org/ctp/tax-global/transparency-and-governance-principles.pdf.

OECD, IMF, WBG and UN (2015), Options for Low Income Countries’ effective and Efficient Use of Tax Incentives, www.oecd.org/tax/tax-global/options-for-low-income-countries-effective-and-efficient-use-of-tax-incentives-for-investment-call-for-input.pdf.

WBG (2015), World Bank Group, Doing Business 2015, Going Beyond Efficiency, Economy Profile 2015, Kazakhstan.

WBG (2017), World Bank Group, Doing Business 2017, Equal Opportunity for All, Economy Profile 2017, Kazakhstan.

Witt, A.D. and C.E. McLure Jr. (2001), Tax Reform: Creating the Modern System http://enforcement.trade.gov/download/kazakhstan-nme-status/itic/itic-comments-kaz.pdf.

Annex 4.A1.

The analysis of effective tax rates is using the Devereux and Griffith model (Devereux and Griffith, 2003), extended by Klemm to permanent establishments (Klemm, 2008). The theoretical discussion of the model, as well as its practical application for policy analysis, have been widely documented,6 and are not repeated here. The discussion below presents only the formulas used in the analysis (without showing the derivation of the formulas) to allow for replication of the results by an interested reader. Economic and tax law data used in the analysis as well as all assumptions made in the course of modelling are presented below.

The calculations are made under the following basic assumptions:

The hypothetical capital investment is made by profit-making value-maximizing business;
The business acts in an open economy that takes the world rate of return as given;
Personal taxes do not affect investment decisions (i.e. analysis is done on the company-level and not on a shareholder-level).

Economic parameters are summarized in Table 4.A1.1 below.

Table 4.A1.1. Economic parameters assumed in the analysis
Economic variables	Symbol	Value
True economic depreciation	δ
Machinery and equipment Industrial Buildings		12.25% 3.25%
Inflation	π	3.5%
Real interest rate	r	5%
Pre-tax profit rate	p	20%

Essential elements of the Kazakh tax system used in the analysis are presented in Table 4.A1.2 below. Corporate tax rates are shown for a single corporate tax regime, applicable, for example, to investment into special economic zones and/or one of the priority sectors. The formulas presented in this Annex are the ones used in modelling of this tax regime.

Table 4.A1.2. Domestic tax variables used in the analysis
Tax variables	Symbol	Rate/Notes
Depreciation allowance	θ	Declining-balance depreciation for both, capital investment into machinery and equipment, and buildings.
Machinery and equipment		25%
Industrial Buildings		10%
Corporate tax rate. A single corporate tax regime is detailed below, as an example. Under this regime, the corporate tax rate changes twice over the life of the project.
Tax holiday for 10 years	rate τ1 for Y1	0%
20% for the rest of the project	rate τ2	20%

It is assumed that the investment is financed by retained earnings.

In the model, the AETR is calculated as present discounted value of taxes over the present discounted value of the profit of a project in the absence of taxation. Adopted by Klemm (Klemm, 2008) to permanent investment, rather than one-period perturbation, AETR is defined as:

where R* is discounted value of the economic rent earned in the absence of taxation, R is the same in the presence of taxation, p is the pre-tax profit (net of depreciation), r is the real interest rate, and δ is true economic depreciation.

R* – the economic rent in the absence of taxation – is determined as:

As discussed in Table 4.A1.2 above, we consider an investment project with 2 changes in corporate tax rate over the life of the project. In this case, R is determined as:

where:

is a factor that measures the difference in treatment of new equity and distributions; m^d is a personal tax on dividends and z the tax on capital gains. Since our analysis is conducted on the company-level and not on a shareholder-level, γ is equal to 1.

is the investor’s discount rate; mⁱ is the personal tax rate on interest and i the nominal interest rate, determined as . In the absence of personal taxes .

π is the inflation rate

τ 1 and τ 2 are the corporate tax rates applicable to the investment project under consideration, over the life of the project

Y1 is the duration of validity of corporate tax rate τ 1

A is the present discounted value of depreciation allowances. The calculation of A depends on the depreciation rules (see, for example, Abbas and Klemm (2012), or Botman, Klemm, and Baqir (2008) for relevant formulas). We are only reproducing the formula for depreciation allowances under declining balance method applicable to the investment project under discussion.

F captures the effect of the investment being financed by alternative sources of finance: retained earnings, new equity or debt. Our analysis was limited to the investment financed by retained earnings; F = 0 when the investment is financed by retained earnings.

To calculate METR, R is set to zero and solved for a pre-tax net profit (see, for example, Abbas and Klemm (2012), or Botman, Klemm, and Baqir (2008)).

Marginal effective tax rate is calculated as:

Notes

← 1. This information is provided as a matter of general analysis and should not be relied on with regard to individual treaties. Recourse should be had to the precise treaty text in each case. The dates do not take into consideration the possibility of an agreement by the treaty partners to amend and/or terminate the treaty. The reference date for the calculation is 20 October 2016. The calculation is also approximate due to the different length of months and years.

← 2. Effective 1 January 2009.

← 3. The Tax Code of 2008 abolished the stability of the tax regime for subsurface use contracts other than production sharing agreements (PSA) signed with the government prior to January 2009, contracts which passed the obligatory tax inspection, and contracts signed by the President. All other subsurface users, including those with contracts concluded before 2009, but not stabilized with respect to taxation, are subject to taxation in accordance with the tax law that is in effect at the time when a particular tax liability arises.

← 4. See Table 4.2. for the list of approved “priority activities”.

← 5. “Kazakhstan: Ministry of Justice approves plans to consolidate Tax Code and Customs Code”, EY Tax Insights, 5 May 2016.

← 6. See, for example, Abbas and Klemm (2012), or Botman, Klemm, and Baqir (2008).