Comments on the Terms of Reference for the New Tax Code: Calculations and Principles

1. Quote: "It is noteworthy that, amid minimal GDP growth and declining business activity in the first 10 months of 2016, state budget tax revenues rose by KZT 1.1 trillion, or 31%."

• Real GDP growth cannot be compared with nominal growth in tax revenue. Nominal GDP growth in the first nine months of 2016 was only 13.5 percent, and the full-year figure may be even higher. Tax revenue growth in 2016 was therefore only about 17 percent. It is this figure that should be used to analyze the causes of growth: how much came from a higher tax burden, and how much from better tax collection and bringing business out of the shadows.

2. Quote: "Today, Kazakhstan has 36 types of taxes and other mandatory payments, including 7 types of extrabudgetary contributions." I would like to see these taxes listed. There can be any number of tax types. What matters is how many taxes fall on a single taxpayer. For large businesses it is 10 taxes at most, for small and medium-sized enterprises (SMEs) 3–4 taxes, and for individuals 2–3 taxes. In other words, the number of taxes does not mean that a taxpayer pays all of them. It reflects the diversity of the tax system and its differentiation across types of activity, which is in principle normal practice.

3. Quote: "In the coming years, the increase in the burden on the payroll will become critical. In addition to personal income tax (PIT, 10%), pension contributions (10%), social tax (11%) and social contributions (5%), additional employer pension contributions of 5% and contributions to the Social Health Insurance Fund of 2%, rising in stages to 7%, will be introduced.

As a result, the tax burden on the payroll will rise to 48% by 2020."

I think it would be useful first to work through the Tax Code and the taxation procedure.

The figure of 48 percent will never be reached by 2020, and it will not be reached by 2030, because:

• The amount of social contributions is deducted from the social tax, so the maximum social tax payable is 11 percent.
• Pension contributions are deducted from taxable income for PIT purposes, so the maximum combined rate of PIT and pension contributions is currently 19 percent. With the additional contributions, it will be 23.5 percent.

Mandatory social insurance also amounts to 2–5 percent.

The maximum burden on the payroll will be 11 + 23.5 + 5 = 39.5 percent, not 48 percent. The difference is considerable. Moreover, there is the concept of the tax shield: since these are deductible expenses, the rate must be multiplied by (1 − 0.2) = 0.8, so 0.8*39.5% = 31.6 percent. I therefore think there is too much emotion here and too little actual calculation.

4. Quote: "According to the Ministry of National Economy (MNE), 'of the total "possible VAT," an estimated 19% is paid, i.e., 81% of possible VAT revenue is not paid.' This is obviously the main argument in favor of abolishing VAT and moving to a sales tax." I think this is calculated very simply: (value added − net exports − non-taxable services, such as financial services and government services) * 12% is the potentially possible VAT.

VAT revenue / potentially possible VAT = collection ratio.

From last year's value added of KZT 38.7 trillion, we subtract:

• accommodation and food services – 0.42
• agriculture – 1.9
• financial and insurance activities – 1.43
• real estate operations – 3.69
• professional and scientific activities – 1.86
• public administration and defense – 0.8
• administrative and support services – 0.8
• education – 1.2
• health care – 0.73
• arts, entertainment and recreation – 0.33
• households – 0.03

= KZT 25.5 billion.

Net exports in 2015 were about KZT 3 trillion.

That leaves value added subject to VAT of KZT 22.5 trillion.

VAT revenue in 2015 was about KZT 1 trillion.

The maximum possible VAT revenue is KZT 2.7 trillion.

1/2.7 = 37 percent, not 19 percent.

In general, this is a very, very rough calculation. A detailed one is needed, and it is easy to do given proper data.

5. Quote: "A key prerequisite for developing the new Tax Code will be the possibility of reducing the tax burden on SMEs by ensuring a sustainable and balanced budget: optimizing and improving the efficiency of budget expenditures." SMEs in our country pay practically no taxes. It would also be more logical to clarify what is meant by SMEs, and it would be more correct to distinguish between small and medium-sized businesses. In principle, all businesses in Kazakhstan are medium-sized, with the exception of large commodity companies.

6. The tax principles listed in the proposals do not correspond to international practice. The key principle of a tax system is fairness of taxation, not simplicity. Simple taxes can be designed only for small businesses and nothing more. There are three basic principles: fairness, certainty, and efficiency. Any other principles will always have the opposite effect. For example, a turnover tax is the simplest tax, but it is also the least fair and cannot be considered an advanced tax.

7. As a guideline, the proposal essentially amounts to revising the existing tax burden on enterprises to reflect their specific circumstances. This is the wrong approach in principle, because tax policy differentiates taxation not only by industry and business size but also between legal entities and individuals. In all developed countries, the largest budget revenues come from taxing individuals, not legal entities. The claim that the payroll burden should be reduced is rather debatable and requires deeper study. Clearly, the stimulating function of taxes should work not only by stimulating supply but also by stimulating demand. That requires a radical change in the taxation of individuals, with progressive taxation and large deductions in the calculation of taxes. This becomes especially relevant with the introduction of universal income declaration.

8. The legal aspects and tax audits are not addressed at all. Yet it is well known that the legal protection of taxpayers is the guarantee of a successful investment climate and of encouraging businesses to come out of the shadows. For example, when the state refunds accumulated VAT not as a matter of right but at the government's discretion, it makes Kazakhstani exports uncompetitive.

The proposed terms of reference therefore need substantial revision. Clearly, the entire Tax Code cannot be built around small business. Everything is very simple for small business, and it is not the main source of tax revenue. The main emphasis should be placed on the mining sector, VAT, corporate income tax (CIT), PIT, and tax administration in Kazakhstan. The principles of tax distribution and the types of taxes also need to change, with a division into local and national taxes.

Regions should be given more room for maneuver on local taxes.

Excise policy needs to change, along with many other things. Unfortunately, I do not have much time to write on this subject. But I would like to understand the position of the National Chamber of Entrepreneurs, to hear its version of the terms of reference, and to learn how it intends to work and coordinate all the actions involved.