Tax Policy as a Driver of Investments and New Technologies
By Inna Alkhimova, Partner, Head of Tax & Legal, KPMG Caucasus and Central Asia
Fiscal policy is the main tool of the government to stimulate business and increase investment in the economy. Since Kazakhstan’s independence, the country’s tax legislation has undergone significant positive changes. However, in terms of tax administration, there are problems that reduce Kazakhstan’s attractiveness to investors, creating barriers to investment and the introduction of new technologies into Kazakhstan.
There are three major problems in the field of international taxation that need to be resolved in order to stimulate foreign investment for Kazakhstan.
The first problem is ignoring tax treaties with respect to double taxation. These treaties give the right to tax income to the government on whose territory the business activity is conducted and the corresponding income is received. In recent years, Kazakhstan tax authorities have taxed income earned by non-residents exclusively outside Kazakhstan in foreign countries based only on the presence of these non-residents in Kazakhstan. This contradicts the norms of tax treaties and international practice, negatively affecting Kazakhstan’’s investment image. However, this problem can be resolved through appropriate amendments to tax legislation.
Second, tax treaties governing taxation of royalties are ignored in Kazakhstan. The reason is the incorrect interpretation of the concept of "royalty" by the tax authorities when applied in practice, which contradicts the norms of tax treaties. This significantly reduces the usage of sophisticated technologies in Kazakhstan. Apart from contravening international best practices, in most CIS countries, non-resident incomes are not taxed in the importing country for new technologies, sophisticated equipment, and software products. It should be noted that Kazakhstan strives to develop its own sophisticated technologies but there is still a need to acquire these technologies abroad. It is therefore recommended to resolve the problem of royalty taxation by bringing Tax Code norms into conformity with the provisions of the relevant tax treaties in order to interpret and apply these norms without ambiguity.
Third, new problems are emerging for international companies due to recent changes in tax legislation. Thus, restrictions were introduced to reduce taxable profit on expenses related to the acquisition of various specialized services (management, consulting, engineering) and intellectual property rights from interrelated parties within the group. This new restriction greatly disturbed the foreign business community and may reduce international business in Kazakhstan. This in turn will negatively affect jobs and tax revenues to the country’s national budget. Instead of these restrictions, we propose to more effectively implement the existing methods of control over intra-group international transactions in the transfer pricing legislation.
In our opinion, all of the above steps on the part of the tax authorities to increase tax revenues for Kazakhstan produce only a short-term effect.
We should note that international taxation policy is becoming even more important in light of the current relocation of international business to Kazakhstan. According to statistics, relocating business to Kazakhstan to a certain extent compensates for the volume of medium-sized businesses in the country's economy that has decreased in recent years. This relocation of foreign business to Kazakhstan may have a long-term positive effect.
KPMG tax experts previously submitted tax reform recommendations to the government, among which the following recommendations may be of particular interest for reform of the Tax Code:
- Integration of tax policy with Kazakhstan’s investment policy
- Creating a new perception of Kazakhstan’s tax system as fair and transparent, thus creating trust between businesses and the government
- Increasing the transparency of tax legislation and decision-making through digitalization
- Tightening control over the local tax authorities and increasing responsibility for illegal actions
- Hiring international experts to analyze and implement best international practices in the field of tax policy and administration