Tax Policy of Kazakhstan

Whatever the various theories in favor of low rates may claim, their influence in Kazakhstan is very limited. The tax base in the non-oil sector is not growing, and none of the programs for developing the non-resource sector has delivered the desired results. As a result, transfers from the National Fund are now the largest single item of budget revenue, and the non-oil budget deficit has reached colossal proportions. To achieve an acceptable deficit and still accumulate savings in the National Fund, we need not only to raise taxes but also to change the tax policy itself, so that it encourages growth of the tax base.

The current proposals to change tax policy are rather controversial. They are not backed by up-to-date, accurate calculations or by examples from international practice.

The drafting of the Tax Code should be built on a few principles, but they are ones without which no Tax Code can be built. The main principles of any tax system are:

• the principle of equality and fairness,
• the principle of efficiency,
• the principle of reasonableness (economy).

The most contentious principle, and also the most important, is fairness in taxation. For example, transport tax is paid for owning a car, although it would be fairer to pay according to how much the car is used. That is possible, for instance, by including the transport tax in the excise duty on fuel: the more fuel you burn, the more you pay.

Progressive taxation is also a fairer system, although many will dispute this outright.

Fairness is also highly relevant to the taxation of subsoil users. The subsoil belongs to the people, so taxation of this sector is the most sensitive. Here the rate of return matters, depending on the exploration stage and the type of extraction. The system of taxing subsoil users is currently badly unbalanced, even though this sector should be our main source of budget revenue. It is therefore essential to develop a balanced and transparent system of subsoil user taxation, based on international experience.

The efficiency of a tax system is determined by its ability to stimulate economic development, and low rates do not always work here. For example, progressive taxation is one of the main methods of stimulus. If individuals are allowed to deduct from their income expenses that stimulate domestic demand (housing purchases, education, healthcare, tourism), this encourages domestic consumption, and the person pays no tax on those amounts. Because he is consuming a domestic product, the tax is paid by the person from whom he bought it, in the form of CIT and taxes on wages. A progressive scale will give him an incentive to do so. The same works for corporate income, through accelerated depreciation of fixed assets and intangible assets, the taxation of dividends, and so on.

Returning to subsoil users, we should also encourage them to carry out more processing stages inside the country. To do so, the tax rate for subsoil users should fall as the degree of processing rises, thereby encouraging the creation of production facilities. But this should be done not through differentiated CIT rates, as the government now proposes, but through differentiated MET and royalty rates (if royalties are planned to replace MET).

It seems to me that differentiating CIT rates is not the best way to stimulate domestic production, for a number of reasons:

The complexity of production is very hard to define, and it is not the key sign of development. The key sign of development is the production of unique products that command a high price because of their uniqueness. For example, the creative economy produces unique films that are in good demand abroad. Would such an industry receive CIT preferences? Or take computer manufacturing (essentially assembly): the output may seem to be a high-processing-stage product, but in substance it is simply the assembly of parts imported from China, and the value added amounts to the labor of low-skilled assemblers plus the seller's margin. Some criteria for measuring economic complexity probably exist, but I think all of this will be subjective.

Any degree of subjectivity erodes trust in the decision-maker and constantly invites arbitrage, which increases bureaucracy and dependence on officials. All of this worsens the investment climate and raises the risks of corruption and cronyism. Processes must be transparent and simple.

Administering complex taxes raises the cost of collecting them. Any differentiation of taxes creates a permanent incentive for entrepreneurs to optimize. Large diversified holdings will start shifting costs to companies subject to higher rates, which will increase the cost of audits and add subjectivity to tax inspections. That in turn will damage the investment climate and feed corruption and cronyism.

Any arbitrage within a single tax always brings many problems that are very hard to resolve, and selective support for particular enterprises always creates imbalances. The key criterion for production should be its competitiveness. Even simple products, given high productivity and quality, lead to high value added and growth in output, just as complex production offers no guarantee of competitiveness. Therefore, industrial production should on no account be stimulated by granting separate preferences to separate categories of enterprises. Uniform principles should be introduced for all enterprises. The world has long since thought of everything for us, so here is what could be done within the Tax Code to stimulate industrial production:

• Accelerated depreciation for all equipment, as well as for industrial buildings and structures. This allows companies to recover their investment faster and reinvest it in other production.
• VAT exemption on equipment acquired through finance leasing. This will keep companies from tying up funds in VAT and reduce initial investment, and will also encourage the development of leasing in the country.
• VAT exemption on imports of process equipment. This provision existed before; it can be modernized, simplified and automated.
• Synchronization of tax and accounting records for companies, to cut the cost of bookkeeping. At present many expenses are not deductible, and some are calculated by different methods, provisions for example.
• An enhanced deduction coefficient for R&D expenses. This would require such organizations to be registered as research entities, to avoid fraud and understatement of the CIT base.
• A reduction in the MET rate for each successive processing stage, with the rate set to zero at the fourth or fifth stage.
• Permission to write off expenses on intangible assets in full in the period of acquisition.

The Tax Code should be simple, without complicated accounting and subjectivity. Rates should be fair and economically justified. Investors care more about transparency in tax administration than about reduced rates: once profit has been earned, companies always already account for CIT, whereas nobody ever plans for penalties and additional assessments. What matters to an investor is predictability, not preferences.

Kazakhstan's first Tax Code was adopted in 2001. After seven years it was replaced by a new one, which came into force in 2009. The 2009 Code lasted nine years, and in 2018 the third Tax Code was adopted, which remains in force today. It is now 2024, and this year the drafting of a new Tax Code is planned, to take effect from 2025. In other words, the third Tax Code will most likely have lasted seven years. The most interesting thing is that, in principle, the tax system has not changed at all since 2002, and each successive Code has been an improved copy of the previous one. Most likely, the old code will again be taken as the basis, with cosmetic amendments and no change to the country's tax policy itself. Frankly, I see little point in constantly rewriting the Code, since such changes can simply be made by amending the current Code. If the Code is to be rewritten, it is better to write it from scratch, with outside consultants and without reference to the existing Code. Admittedly, such a process would take at least two years if we want a working document that meets its stated goals.

There is a widespread view that our whole problem lies in the shadow economy, and that if we sort out tax administration we will solve the revenue problem. This is a rather questionable understanding, for a number of reasons:

We have no scientifically proven estimate of the shadow economy and of its effect on budget revenue, so the picture is far from clear. Any unrecorded and untaxed income is subsequently converted into spending that is subject to taxes. Accordingly, shrinking the shadow sector will indirectly also reduce the revenues of some enterprises, which will reduce their tax payments. This is not a simple thing to calculate: it requires a lot of data and a large analytical team. Making decisions on how tax administration will affect future revenue on the basis of impressions and subjective opinion is extremely dangerous, and may produce zero effect, because the problem lies not in administration but in the tax system.

We have no criteria for what counts as the shadow economy. For example, prostitution and drugs can certainly be called the shadow economy, but it is hard to call the splitting of a business into sole proprietorships and LLPs, which the state itself legally allows us to do, the shadow economy, even though neither the former nor the latter pays taxes.

Taxes should be simple, but not simplified. That means the more preferences we give to certain taxpayers, the harder such systems are to administer, because legal preferences that involve subjective judgment will always give rise to various tax optimization schemes, which is what is happening across the country now. To avoid this, preferential regimes must be extremely simple and specific, while classic taxes must have no preferences or exemptions. Our system has all of this, and without a radical change to the tax system, resolving the administration problem will be very difficult and expensive.

Listing every possible principle would take a great deal of space, so I will give some systemic measures that could be introduced and could help solve collection problems, but which many entrepreneurs will not like:

• VAT should be calculated on a cash basis with a separate account, which would make it fully transparent. Incidentally, our digital tenge could well serve this role, and its use here would be invaluable.
• Simplified regimes for small and micro businesses should be available only for the B2C segment, which completely closes the loophole of tax optimization through sole proprietors' services, now extremely popular.
• Zero rates for particular types of activity should disappear. If there is a strong wish to help, it should be done through subsidies, which allow the size of the support to be controlled.
• The payroll taxation systems should be merged into a single tax; I believe the state is perfectly capable of splitting the proceeds between the funds itself.
• The cumbersome, hard-to-calculate and poorly administered taxes on subsoil users should be converted into ordinary royalties, paid on sales rather than on extraction.
• Income taxes should be progressive, which will encourage spending and investment.
• Property taxes should be tied to market valuations of the assets, which will make them fairer.
• Professional workers, such as lawyers and realtors, should have a separate type of tax. Such workers should be accredited and belong to a professional association.
• Taxes that can be merged with others should be: for example, the transport tax can clearly be included in the excise duty on fuels and lubricants. Lower administration costs and fuel prices in line with those of our neighbors would solve two problems at once.

The list could go on, but the idea is that the simpler and clearer the taxes, the easier they are to administer. When there is one preference piled on another, and those preferences make it possible to reduce the tax burden, administration becomes more complicated and, most importantly, depends on the subjective judgment of tax officials, and subjectivity is always a breeding ground for corruption.