Daulet YERGOZHIN:
"NO FUNDAMENTAL CHANGES TO TAX LAWS IN 2011"
In 2010 Kazakhstan slowed down the recession, turned its gaze toward highly developed industrial countries and jumpstarted the work of the Customs Union along with keeping up the economic cooperation with other international partners. The chairman of the Tax Committee of the Ministry of Finance of Kazakhstan Daulet Yergozhin told Interfax-Kazakhstan how the Tax Committee secured continuous inflow of tax revenues during the past year, while the country was coming out of the crisis, and clarified if the new year brings heavier tax burden.
- What the passing year brought to the tax authorities of Kazakhstan?
- The past year was difficult, one can say - hard. It was the year of overcoming the crisis, and we faced difficult choices in respect of the businesses bordering on insolvency and had tax debts. We teamed up with the companies' shareholders and found mutually acceptable solutions including tax deferrals with penalties.
Besides, the Customs Union started operating from July 1, which gave us an additional workload -- collecting indirect export-import taxes, which earlier was a responsibility of the customs authorities. We had been given more tasks to handle, but not more officers to deal with them. Due to the efforts of our small-sized staff, we formed a special department on the Customs Union, designed software for electronic transactions with taxpayers in two months and established electronic communications with our colleagues in Russia and Belarus. Starting from September 9 this year, the information exchange with the CU tax authorities have been handled via the means of electronic communications. As a result, from July 1, 2010 to November 30, 2010 value added tax (VAT) revenues from Russian and Belarus imports rose by 40% from the same period of last year.
Note:
According to the Ministry of Finance, last year the total VAT import revenue from Russian for the period from July 1 to November 30 totaled 62.209 billion tenge. Over the same period in 2010, the total VAT revenues from Russian imports amounted to 87.463 billion tenge, an increase of 24.146 billion tenge. Revenues from VAT on Belarus imports for the period from July 1 to November 30, amounted to 3.715 billion tenge, an increase of 1.070 billion tenge from last year.
The Tax Committee will continue keeping up the good work. We had no major cases of tax evasion, but still we have some questions to those taxpayers who understated declared value of imported goods or failed to submit declarations. However, we tracked them all down and in January next year we expect to bring to the budget 1.3 billion tenge in surcharged taxes. It mainly applies to pre-owned car imports by individual entrepreneurs from Russia, as well as food products and building materials. We started this work in September. Today 24 taxpayers provided their declarations and paid 650 million tenge in taxes out of the said 1.3 billion tenge.
- Earlier you expressed an opinion that Kazakhstan would see an inflow of companies from Russia due to the more favorable taxation in Kazakhstan within the Customs Union.
- We haven't seen a major "inflow" of new companies. However, for the period of CU operation, the number of nonresident companies increased by 87 and the companies with non-resident founders rose by 425, which is 90% more than the number of new companies registered last year. If the dynamics persist, we will have a more expanded segment of taxpayers and boost tax revenues.
- Kazakhstan's Minister of Finance Bolat Zhamishev expects the 2010 tax revenues to be 7% above the forecast. What mechanisms will ensure that?
- The expected rise in tax revenue projections will come from bigger tax revenues from VAT on domestic products, tax on mineral extraction, rental tax, VAT on goods imported from Customs Union members, which alone will go up 40%.
Higher tax payments from mineral developing companies will be ensured by a several factors: first, tax on natural resources production depends on the oil price, which has risen recently; second, everyone pays taxes now, no favors made; third, tax probes into finical standing of the resource companies did the trick as well. During the audits we scrutinized not only special mineral taxes, but made an emphasis on the transfer pricing as well.
In general, tax revenues are brought up by an improved tax payment discipline, better tax administration and favorable economic situation.
- This year the Tax Committee was in talks with the tax authorities of the other CIS states concerning information exchange. Will you please comment on the outcomes of the negotiations?
- We are going to conclude agreements with all the countries, with which we already signed the agreements on avoidance of double taxation. We have sent the draft agreements to Korea, Bulgaria, Poland, Czech Republic, Pakistan, Latvia, China, India, Austria, the U.S., Switzerland, Singapore, China, Finland and Germany. We expect the agreements to be signed in the first half of the next year.
To date we have signed the agreements with all CIS states. These agreements are not only for cooperation and information exchange but consolidation of efforts to fight tax evasion. For instance, we have a well-coordinated information exchange over KPO (Karachaganak Petroleum Operating) audit with Russia. We also share with our Russian colleagues the information on the goods and services provided by our mining companies.
As for the non-CIS counties, we have signed an agreement on exchange of information with Italy. We have sent our first request as part of the KPO tax audit and expect to receive a response in January.
Kazakhstan is conducting the KPO audit, while our Russian and Italian colleagues provide us with the information we need. The inquiry relates to the tax reports of KPO service providers and contractors. The audit of the members of the consortium poses no such problem, as all of them are registered in Kazakhstan.
Note:
The government formed a special commission to verify if Karachaganak Petroleum Operating was duly paying all taxes and other mandatory payments to the republic's budget in 2005-2009. Currently, the dispute between the Kazakh authorities and KPO about 187 billion tenge (147.4/$1) worth of economic damage the company allegedly caused to the republic is in the international arbitration court. On April 29, 2010 the State Agency for Combating Economic and Corruption Crimes (the Financial Police) lodged a claim against KPO management over alleged 187 billion tenge fraud through overstating the production costs during the period from 2002-2007 and receiving sales revenues for that amount. Kazakhstan is keen to acquire a stake in KPO. National Company KazMunayGas has proposed to buy a 10% holding in KPO. KPO, which is owned by BG-Group (32.5%), ENI (32.5%), Chevron (20%) and Lukoil (15%), is operating the Karachaganak oil and gas condensate field under the 40-year Production Sharing Agreement, signed in 1997. The reserves of the Karachaganak field are estimated at 1.2 billion tons of oil and 1.35 trillion cubic meters of gas.
- This year the Tax Committee expressed doubts about the legality of some production sharing agreements and sent some recommendations to the Ministry of Oil and Gas. What kind of recommendations were they?
- First, we said we needed to review the PSA's in the context of the legislation that was in force at the time such PSA's were concluded and in the context of today's laws. In accordance with the exiting Tax Code the tax stability approach will only apply to the contracts, which were concluded in the form of production sharing agreements. Second, all such contracts were to be reviewed and approved by the tax experts. We have identified a number of contracts that were not reviewed and, consequently, such contracts will not enjoy the tax stability regime. Of all the existing PSA's there are about five, for which we have not found any documents to prove that they were reviewed for tax compliance. We sent notifications to these companies and the Ministry of Oil and Gas saying that these contracts have to be brought into compliance with the existing tax legislation of the Republic of Kazakhstan. I cannot name these companies now because we sent them the notifications only a while ago. Their failure to reply to our notifications within 30 days after they received them means that the companies admit they were wrong, and the Tax Committee will send them notifications of additional taxes to be paid - it will be billions of tenge.
However, there are a few legal ways to resolve the situation: the company may prove that its contract was reviewed by the tax experts (it will have to provide the supporting documents) or they may switch to the existing tax requirements and pay all the taxes in accordance with today's law. There is a third option, which is to get the PSA ratified by the parliament and, thus, divulge all the terms and conditions of their contracts. Of course, the Kazakh government would like to resolve this issue with the mineral resource companies through negotiation. However, the law allows for termination of the contract if the parties fail to reach consensus, which is the measure of last resort.
- In October you said that the Tax Committee of the Kazakh Finance Ministry had some questions to KPO concerning the tax payments for the whole period of 2009. Could you specify the costs of fines and surcharges?
- As I said, the Tax Committee of the Ministry of Finance of Kazakhstan requested the Italian authorities to provide tax-related information on contractors of the Karachaganak Petroleum Operating (KPO). Until we receive the response, we are unable to close the audit and therefore it's impossible to estimate the claim amount now.
The audit is close to completion. We are waiting for the two final pieces to fall into place. First, KMG's confirmation of KPO's reimbursement of expenses and, second, a response from the Italian colleagues. I think the audit report may be released in January next year.
- This spring the Tax Committee started a probe into the financial operations of Kazakhaltyn. Is it close to completion?
- The audit is underway. We have sent a request to Russia to confirm delivery of goods and also conduct internal counter-checks of the suppliers. The audit covers the period over the last 5 years. It is a comprehensive audit, everything is under scrutiny from taxes to travel expenses. I think in January we will be done with it.
- Does the Tax Committee plan to offer tax benefits to certain sectors of the economy or some companies in the future? Recently, Vice Premier Yerbol Orynbayev said that by the end of the year the government would adopt a resolution to lower the Mineral Extraction Tax (MET) for the low-profit fields. When will the resolution come into effect and to what companies will it be applied?
- Up to now, the government has adopted a resolution on solid minerals extraction. We have received 12 requests from the companies and are looking into them now. That is true, there are fields that have little reserves and that need a lot of investments to continue operation. Furthermore, the companies operating such fields offer jobs to local residents, for example one of them employs 1200 people, or nearly a whole village. If we close this company, the whole village will be left without earnings to live on. All such factors will be taken into consideration and in the near future we will make certain decisions concerning each of the requests. I cannot say that our decisions will be positive for all the companies but we keep working on them.
As far as MET concessions are concerned, the draft resolution of the government, to the best of my knowledge, has been approved by the Finance Ministry and is now being reviewed by the government. Its goal will remain the same, which is to ensure a minimum profitability level for the companies in order to keep the people employed. However, these companies will not be able to earn exorbitant profits.
- Thank you for the interview!
December, 2010
й 2009 Interfax-Kazakhstan news agency
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December, 2010
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