Gaps in the Tax Code: Rent Tax, Dividends and VAT on Loans

Gaps in tax legislation

I wrote some time ago about the flaws in the taxation of uranium deposits, under which mines with a low uranium content pay more tax than mines with a high content. As a result, uranium companies find it more profitable to mine deposits with a high uranium content than those with a low one. Nobody paid any attention to this: not the National Chamber of Entrepreneurs (NCE), nor Kazatomprom, nor the government. Well, never mind.

Now I am looking at how oil exports are taxed, and here is what I found: at a price of $50 per barrel the rate is 11%, while at $49 it is 7%. The tax is calculated as the volume of exported oil multiplied by the world price and by the tax rate. Here is what that means if, for example, I export 10 million barrels of oil:

Option 1: the price is $50 per barrel

Revenue: $500,000,000 (50 × 10,000,000)

Rent tax on exports: 11% × 500,000,000 = $55,000,000

The subsoil user keeps $445,000,000.

Option 2: the price is $49 per barrel

Revenue: $490,000,000

Rent tax on exports: 7% × 490,000,000 = $34,300,000

The subsoil user keeps $455,700,000.

The difference is $10,700,000.

So a subsoil user is better off with a price of $49 than $50, while the state is better off with the opposite.

Simple arithmetic shows that any price up to $47.85 per barrel is more profitable for subsoil users than $50 (anyone who needs it can ask me for the calculation separately in a private message).

And the same situation arises at every threshold: $40, $50, $60, $70 and so on.

Only here could this happen.

It would be more logical for the progressive scale to be cumulative, so that the higher rate is applied not to the entire base but only to the increment. The rate on the increment should also follow a geometric rather than an arithmetic progression, since it is the price increase that is taxed at the higher rate. This is not the kind of tax that should put simplicity of calculation first; it is not, after all, a tax for SMEs.

There is another interesting provision that simply baffles me, and I cannot make sense of it. It must have been written by people who do not quite understand the economics of enterprises. I quote the Tax Code verbatim. If there are any tax specialists reading, please explain it to me, as someone who knows little about taxes.

Article 12 of the Tax Code of Kazakhstan states that dividends are income "...from the distribution of property upon the liquidation of a legal entity or upon a reduction of charter capital by a proportional reduction in the contributions of founders or participants, or by full or partial redemption of the shares of founders or participants, as well as upon the return to a founder or participant of an ownership interest in a legal entity or part of it."

Read literally, a reduction of charter capital counts as income for the founder. In other words, suppose I put KZT 10 million into a company, then decide to wind up the business and take back my KZT 10 million. It turns out that I will get back not KZT 10 million but KZT 9 million, and pay dividend tax on the remaining KZT 1 million. I think this is simply a typo, but I am sure our tax officials will read the provision literally.

And one more point about the Tax Code. Interest on loans is subject to VAT, and if VAT is not charged, the borrower is deemed to have received income. So contributing to charter capital will be taxed, and extending a loan means paying VAT. Yet there are many projects that begin to return the invested funds only after several years, while on loans they have to accrue interest and pay VAT. At a time of limited liquidity at the banks, I think the NCE needs to address the issue of VAT on loans.

What is the position of the National Chamber of Entrepreneurs of the Republic of Kazakhstan?

I think the NCE should take up a review of the legislation and the elimination of such gaps, in order to make life easier for entrepreneurs. If it did, I think many people would support the NCE.