On the New Tax Code

The Address announced an initiative to draft a new Tax Code. The previous Tax Code was adopted on 25 December 2017 and took effect on 1 January 2018. Drafting a new code will realistically take at least a year, which means it will most likely enter into force on 1 January 2024. In effect, the old code will have lasted just six years. In that time it has been amended many times, and there are already 37 versions of the Tax Code.

The 2017 Tax Code was practically no different from its predecessor. Then, too, the main focus was on administration, while the substance of the taxes themselves did not change. Why the code was introduced at all remains a mystery to me. Tax stability is one of the important factors for investors; at the same time, the Tax Code is itself one of the most important instruments for managing a country's economy. So far, the Address makes clear that differentiated rates will be introduced for various sectors of the economy, along with a tax on luxury goods and an exemption for investment in innovative sectors. I am not the biggest supporter of complex tax codes, and I am not at all sure that differentiating by sector will have a positive effect; if anything, the opposite. It increases the complexity of administration, and the complexity of accounting for companies that run several types of activity. In this respect, as everywhere in the world, only the agricultural sector and small business can be singled out for special treatment, which is, in principle, already the case today. Tax exemptions for innovative companies, I think, should apply only to venture companies at the initial stage. Everything innovative eventually becomes obsolete, especially in a rapidly changing world. Today innovation is in IT, tomorrow it will be in biotechnology, and the day after tomorrow in physical materials, while IT, with "no code" tools, will become an everyday instrument for everyone, like Excel today. That is why a proper criterion for defining innovativeness is needed.

It would be logical to include universal tax declaration in the Tax Code of Kazakhstan, which should become one of the key instruments for building a progressive tax system with increased deductions for consumption. The economy is stimulated through consumption precisely by means of deductions, including those for housing construction. I have written a great deal about this, so I will not go into detail here.

The Tax Code must pay particular attention to the taxation of subsoil users, who are the main source of budget revenue. At present it is a very complicated system, with complex calculations and administration, and it involves not only the State Revenue Committee but also the Geology Committee, which is wrong. We should in effect move to taxation on a royalty basis, where the tax base equals the volume of raw materials sold or passed to the next processing stage. This greatly simplifies administration and makes taxation fairer, since tax is paid on revenue rather than on extraction. All the problems with accounting, residual "tails" and the like disappear. Many segments of the mining and metals sector have very different tax burdens, and it is important to set high rates on the first processing stages and lower rates on the second and third. That would encourage our subsoil users to build downstream processing facilities within the country rather than export raw materials to neighboring countries.

Corporate income tax in Kazakhstan suffers from enormous distortions in tax exemptions. All of them should be abolished, and exemptions for specific projects should be converted into investment subsidies. This includes removing the exemptions on bonds and notes, on the various special economic zones, and so on.

In my opinion, it would be better to write the Tax Code with the help of outside consultants or experts, so as to bring a fresh outside view free of bias and of pressure from third parties on such an important document.

To sum up: from the standpoint of investment stability, frequent changes are not good, but on the other hand the current code does not meet the principles of taxation and clearly requires a complete overhaul.