This chapter presents a summary overview of the main findings from the Country Tax Policy Review. Firstly, the chapter considers the importance of raising tax revenues to support Kazakhstan’s medium-term goals and longer-term sustainability. Secondly, it examines equity issues - how to share the tax burden more fairly across society. Recommendations include moving towards a broader and more progressive PIT system, raising SSCs to support the underperforming health and welfare systems and enhancing the design of the VAT. Finally, it considers competitiveness issues. Among the recommendations are to maintain CIT rates and broaden the CIT base and simplify the design of special tax regimes for SMEs.
OECD Tax Policy Reviews: Kazakhstan 2020
OECD Tax Policy Reviews
1. Main Findings
Abstract
1.1. Setting the scene for tax reform in Kazakhstan (see Chapter 2)
The country tax policy analysis presented in this report was prepared before the outbreak of the Covid-19 pandemic and the economic crisis that resulted from it. While the health, economic and budgetary impact of the crisis remains unclear at this stage of the crisis, it seems very likely that the crisis will be very costly for countries around the world, including for Kazakhstan. The lack of diversification of the Kazakh economy, the low level of non-oil tax revenues and the concentrated design of the tax system contribute to the lack of resilience of the country to deal with major challenges and call for an ambitious tax reform. Broadly aligned with international practice, Kazakhstan has implemented a wide range of measures in response to the Covid-19 pandemic and the corresponding economic crisis. This report does not review these measures. Instead, the report focuses on the fundamental tax reform that the country may wish to implement as part of the fiscal consolidation phase once the health crisis is under control and the economy is recovering.
Prior to the covid-19 pandemic, the economy of Kazakhstan was showing some signs of recovery. However, the economy remains over-dependent on natural resources, multiple inflationary pressures continue to pose risks and seemingly positive labour market outcomes may mask deeper challenges. While the authorities are focused on reducing the non-oil budget deficit, the current targets may be ambitious and discretionary targeted transfers to the budget from the National Oil Fund remain significant.
1.2. Tax revenue analysis (see Chapter 3)
Despite increases in tax revenues over the past decade, taxes as a share of GDP in Kazakhstan have decreased and remain low compared to the average for OECD countries. (As pointed out, this analysis does not take into account the drop in tax revenues linked to the Covid-19 crisis as that data was not yet available when this report was prepared).The tax mix is concentrated on tax revenues from value-added tax (VAT) and corporate income tax (CIT), with a lower share from personal income tax (PIT), social security contributions (SSCs) and property taxes. CIT and VAT revenues are generated by a relatively small group of large firms and in a small set of sectors. An undiversified tax base, even when compared with some other resource-rich countries, has made Kazakhstan vulnerable to tax revenue declines in the past. Important sources of tax revenue such as CIT and export duty taxes rely on the extractive sectors of the economy such as mining and the fossil fuel sector. Furthermore, the taxes are relatively volatile. CIT revenues are sensitive to the international oil price and VAT revenue volatility has increased in recent years following the rising share of the VAT levied on imports. For more details on tax revenue analysis, see Chapter 4.
Kazakhstan aspires to become one of the top 30 global economies by 2050. However, tax revenues are too low support these ambitions set by government, including to meet tax revenue and expenditure targets and to reduce the non-oil deficit. Kazakhstan should aim at raising more tax revenues to support its medium-term goals and longer-term sustainability. Financing needs could be met by gradually increasing some taxes that have the potential for generating more revenues and are less dependent on natural resources. For example, additional tax revenues could be raised from PIT, SSCs and property tax with modest increase in taxes on goods and services. Opportunities exist to increase tax revenues across most of the major taxes by broadening the tax base and enhancing tax design. In 2019, the State of the Nation address set out a number of tax reforms including on PIT, SSCs, VAT and CIT (see Box 4.1). A set of best practice guiding principles need to be followed for these tax reforms to succeed including that they are sufficiently comprehensive across taxes, consistent, and complementary with the existing capabilities of the tax administration (see Box 4.2).
1.2.1. Increasing tax revenues to support the country’s medium-term goals and ensure longer-term sustainability and welfare
Higher tax revenues are needed to meet Kazakhstan’s expenditure goals and to reduce the non-oil deficit (the methodology underpinning the analysis in this section is detailed in section 3.3.2). Raising more tax revenues would allow the country to meet its revenue targets and expenditure goals and to reduce the non-oil deficit (NOD). The authorities have set an ambitious goal to increase tax collection from 18 to 25 percent of GDP by 2025 (IMF, 2020[1]). The authorities also have a wide range of ambitious expenditure goals including supporting low-income households, promoting SMEs and enhancing the quality of healthcare. In addition, Kazakhstan presently runs a budget deficit and a non-oil budget deficit (NOD). In general terms, the idea of NOD is to strip out oil revenues from the budget to provide a more realistic measure of the budget deficit in the absence of oil revenues. The authorities define the NOD as the difference between budget revenues (with the exception of loan receipts, transfers from the National Fund and export customs on crude oil) and expenditures (with the exception of repayment of loans). Reducing the NOD has been identified by government as a reform priority. To reduce the NOD, this report recommends a series of structured reforms to PIT, SSCs, VAT and CIT over the short, medium and longer-term. While financing needs have been identified based on the NOD assessment in this report, further follow-up work could consider a fiscal-tax analysis and structural tax gap assessment which takes into account the structure of the economy and projected revenues at different tax rates.
Kazakhstan needs to strike a balance between consuming resource-revenue today versus investing and consuming the revenues in the future. Resource-rich countries such as Kazakhstan face the opportunities and challenges of managing oil, gas, and mineral revenues that are volatile, finite and uncertain (Botta, 2020[2]). As the world gradually decarbonises over the long-term, Kazakhstan can decide how much resource-revenue to consume and invest now through the budget and how much to save for the future through the National Fund. The analysis in Infographic 1.1 provides an indicative snapshot in 2017 of the flows of oil and non-oil tax and non-tax revenues in the Kazakhstan fiscal system (more details are provided in section 3.3.2).
Resource revenues currently fuel the National Fund and the budget. Notwithstanding the illustrative nature of the analysis in Infographic 1.1, it highlights a number of points. The tax and non-tax revenues generated by the oil sector in 2017 are significant (5.5% of GDP). Most tax and non-tax oil revenues flow to the National Fund (3.7% of GDP) but some go directly to the budget (1.7% of GDP). Non-oil tax revenues go directly to the budget (11.4% of GDP) along with non-oil non-tax revenues (1.1% of GDP). Kazakhstan’s oil wealth is managed through its National Fund. The assets of the National Fund are significant at 33% of GDP in 2017. The assets are accumulated in a number of ways. They include taxes from oil sector businesses including CIT, alternative subsoil use tax, mineral extraction tax, bonuses, export rental tax and excess profit tax. They also includes other revenues from operations carried by organisations of the oil sector, including for example violations of the terms of oil contracts in addition to other proceeds (EITI, 2018[3]). Assets also includes investment income from the management of the fund (2.7% of GDP). The National Fund annually allocates transfers to the budget (8.3% of GDP in 2017) but these do not necessarily correspond to the revenues flowing into the National Fund. Some of these transfers can be made in accordance with the decision of the President (referred to as targeted transfers). Budget revenues are estimated at 22.5% of GDP, comprised of oil tax revenues including export custom duty (1.7%), non-oil tax revenues (11.4%), non-oil non-tax revenues (1.1%) and transfers from the National Fund (8.3%) (for the year 2017, when transfers were relatively high compared to previous years).
Infographic 1.1. The flow of oil and non-oil revenues to the National Fund and the Budget of Kazakhstan
Note: More methodological details are described in the same infographic in the tax revenue analysis section of the report.
Source: OECD revenue statistics; OECD global revenue statistics database; (EITI, 2018[3]); Ministry of National Economy; National Statistics Committee of Kazakhstan; OECD multi-dimensional review of Kazakhstan 2016.
The NOD could range from 4 – 7% by 2025. A number of methodological steps are taken to estimate a new definition of the NOD to 2025 for the purposes of this report (methodological details are available in section 3.3.2). According to the baseline analysis, the NOD is 5.4% of GDP in 2018, 6.2% of GDP in 2020 and could be 3.5% by 20251. However, the forecast growth in expenditures (based on IMF data) are low between 2018 and 2025, averaging 0.2% over the period, and resulting in a gradual decrease over time of expenditure as a percentage of GDP. Figure 1.1 shows the NOD if expenditure growth were 2 and 3 percentage points higher annually than the baseline growth rates. On this basis, the NOD could range from 4 – 7% of GDP by 2025.
The government NOD forecast sits in between this range, albeit the definition of NOD is different.2 The authorities forecast the NOD at 7.4% of GDP in 2018, 7.0% in 2020, 6.5% in 2022 and 6.0% in 2025.3 This NOD estimate is in the range of previous international estimates ranging from 5% to 8% for 2025 based on various fiscal adjustment strategies (World Bank, 2017[4]). However, these forecasts may depend on relatively optimistic forecasts of non-oil revenue, expenditures and GDP (higher GDP forecasts reduce the NOD).
Figure 1.1. The forecasts of the non-oil deficit are significant
NOD as a % of GDP, under different expenditure scenarios, 2010 - 2025
Note: The non-oil deficit and baseline scenario growth for non-oil revenue and expenditure are described in the tax revenue analysis section.
Source: OECD revenue statistics; the OECD multi-dimensional review of Kazakhstan 2016; publicly available data from the State Revenue Committee of Kazakhstan; (IMF, 2020[1]).
1.2.2. Financing the NOD by raising more tax revenues
Reducing the NOD would require raising significantly more tax revenues. The tax-to-GDP ratio is 16.4% in 2017; the figure includes the SSCs that are paid to separate social funds. On the basis of the previous simulation analysis, to eliminate fully its NOD, Kazakhstan will have to raise its tax-to-GDP ratio by 4 - 7 percentage points. This financing need for the NOD is the starting basis for the analysis below, which examines which taxes it might be raised from. Research conducted by the Economic Research Institute in Kazakhstan reach a similar result showing that the tax-to-GDP ratio could be increased by 4 – 5 percentage points within 10 years (from the level of 2018) with limited negative effects on economic growth and tax collection (Alpysbayeva, Kenzhebulat and Karashulakov, 2019[5]).
Financing needs could be met by gradually moving some taxes that have the potential for generating more revenues and are less dependent on revenues from the resource-sector. Kazakhstan’s tax base is concentrated in taxes on goods and services (8.4% of GDP) and taxes on companies (4.5%) and to a lesser extent taxes on individuals (1.4%), SSCs (0.5%) and property taxes (0.5%). To support its financing needs and simultaneously increase the diversity of the tax base, Kazakhstan could support the financing of the NOD by raising tax revenues from taxes that have the potential to generate more revenue, and which are less exposed to the resource-sector and less harmful to economic growth.
There are several ways in which taxes could be raised to finance the NOD. Tax revenue increases could come from a combination of PIT, SSCs and property taxes along with a modest increase in taxes on goods and services. The analysis, detailed in Chapter 3, provides a framework for considering which taxes, and how much revenue from each tax, might need to be raised. There may be additional scope for raising tax revenues from PIT including tax on personal capital income, SSCs, property taxes and VAT. For example, one option could be increases in taxes on individuals, SSCs and property taxes while modestly increasing taxes on goods and services) and maintaining current company tax levels. The scheduled increase in SSCs may contribute to lowering the NOD.4 If the scheduled increase in employee and employer SSCs will finance additional social spending, the reform will leave the current NOD intact, which then will have to be financed through other tax increases. Maintaining revenues of company taxes constant over time would, in an environment of decreasing oil prices because of decarbonisation of the world economy, imply a gradual increase in company taxes paid by the non-oil sector.
1.3. Equity – how to share the burden fairly across society (see Chapter 4)
1.3.1. Towards a broader and more progressive PIT system
Kazakhstan should aim at introducing a progressive PIT system over the medium-term to raise revenues and support equity but not before certain risks and limitations are addressed. Despite positive labour market outcomes on participation and unemployment, employee incomes are low in Kazakhstan, particularly in rural areas. PIT revenues as a share of GDP are low by international standards, having fallen slowly in recent decades. The introduction of the flat PIT rate system in 2007 does not appear to have had much impact on PIT revenues in the years immediately following its introduction (see Figure 4.2). A new reform introduced in 2020 will exclude 90% of taxable income from PIT for low-income taxpayers; this reform could possibly lead to large distortions as it might induce workers to under-report incomes and to hold multiple jobs simultaneously (as different revenue streams are not added up to determine tax liability) in order to benefit from the tax exemption. Despite the equity objectives underlying the reform, the exemption undermines the role of the PIT in the tax system and comes at a large tax revenue cost. In order to strengthen the role of the PIT in the tax system, government should consider introducing a progressive PIT system that would raise additional PIT revenues, particularly among higher-income employees, that would be less distortive and more fair than the current design of the PIT. Such a reform would go hand in hand with the introduction of an end-of-the-year tax declaration and measures that strengthen the tax administration. The introduction a progressive PIT system has some limitations relative to a flat-system including increased administrative burden (on employers) and the potential for higher PIT rates (or perceived higher rates) to induce under-reporting of entrepreneurial income by the self-employed, and possibly informal activity. Recent research on the possible transition to a progressive PIT system highlights the potential risks including a reduction in local budget revenues with low wages and tax evasion (Institute of Economic Research in Kazakhstan, 2020) (Alpysbaeva et al., 2020[6]). Therefore, a reform of the PIT needs to be accompanied by measures that strengthen tax administration.
Government has been planning to introduce an end-of-year PIT declaration (the ‘universal declaration’) but the introduction has been repeatedly delayed. The universal declaration is currently set to be introduced in 2025. Introducing such a tax declaration, which is common in most OECD countries, would be a step in the right direction and would allow government to introduce a progressive PIT rate schedule, which is one of the key recommendations in this report. The introduction of an end-of-year tax declaration would also require investments in the capacity and resources of the tax administration.
The basic tax allowance could be turned into a basic tax credit once a progressive PIT rate schedule is introduced. The value of tax allowances are increasing in the taxpayer’s marginal tax rate while the value of a tax credit is the same for both low and higher-income taxpayers. The basic allowance in the PIT has been a widely used tax policy instrument in Kazakhstan. In recent years, increases in the basic allowance have removed millions of low-income taxpayers from the PIT net while simultaneously eroding PIT revenues. Therefore, to support equity in the short-term, the use of the basic tax allowance could be maintained at its 2019 level, although the exemption of 90% of income up to a ceiling could be repealed, as its current design is distortive. Further research is available on converting the PIT basic allowance in to a PIT credit (OECD, 2006[7]) (OECD, 2004[8]).
Personal capital income, such as dividends and capital gains, are mostly exempt from tax in Kazakhstan. Where tax does apply, the rates are low. Some of the exemptions on personal capital income could be removed and a single low rate or a progressive rate applied across all forms of personal capital income. This reform will be particularly important if a progressive PIT system is introduced to prevent high-income employees shifting their income from more highly taxed labour income to more lightly taxed capital income. A progressive rate schedule on personal capital income would complement a progressive PIT rate schedule. To raise PIT revenues in the short-run, a modest increase in the flat PIT rate could be considered. However, any PIT rate change should not be considered in isolation but rather as part of the broader tax wedge, which is set to increase due to the proposed increases in SSC rates over the coming years.
1.3.2. Raise SSCs to support the underperforming health and welfare systems
Kazakhstan should continue to implement its current reform of the SSC system to support the underperforming health and welfare systems while also considering broadening the SSC base. Kazakhstan is in the process of reforming its SSC system, including by introducing new SSCs and increasing current SSC rates (OECD, 2017[9]).5 The reform will go some way to increasing SSC funding more closely towards the OECD average, which will provide much needed financial resources to support the underperforming health and welfare system. The reform occurs in the context of the country’s significant demographic advantages including a large and expanding working-age population. However, the SSC base remains narrow by design with many generous but expensive policies in place. Notable examples where revisions could be considered to broaden the SSC base include the deductibility of pension contributions from the SSC base and the inheritability of pension entitlements. There have been frequent SSC proposed policy changes, some of which have been delayed, producing planning challenges for individuals and businesses. Notwithstanding the political challenges to SSC increases, Kazakhstan would benefit from less frequent but more consistent SSC policymaking.
The implementation timing of the tax policy recommendations might have to be adjusted in light of the Covid-19 crisis. As pointed out before, this report was prepared before the outbreak of the Covid-19 pandemic. While the crisis has strengthened the call for a fundamental tax reform in Kazakhstan, the implementation timing of the PIT and SSC measures presented in Table 1.1 might have to be adjusted in response to depth of the crisis. As at the time of publication of the report, no new data was available to the authors about the impact of the crisis on tax revenues and the economy in Kazakhstan, this analysis is left for future work.
1.3.3. The design and functioning of the VAT can be enhanced
The VAT in Kazakhstan is based upon the core features of a well-designed VAT, but there is scope to improve its design and administration and to, over time, modestly raise the VAT rate (see section 4.5). VAT as a share of tax revenues are similar to the OECD average. However, the revenue performance of the VAT, measured by the ‘VAT productivity’ indicator, is not high compared to some countries in the region, which may point at weak tax enforcement and administration as well as a narrow VAT base. There is scope to increase the standard VAT rate, which is currently low internationally. Any increase in the VAT rate should be considered in the context of inflation levels in the country. There is scope to broaden the VAT base as many goods and services continue to be VAT exempt, for example by bringing newly constructed residential buildings that are brought on the market for the first time within the scope of VAT. Important steps have been taken by the authorities to address the challenges of the VAT system. However, the special VAT treatment for Special Economic Zones (SEZ) is a major flaw in the design of the VAT system and recently announced measures will not address the main design weaknesses. Instead, the authorities should fully restore the VAT chain by applying the standard VAT on all transactions to and within the SEZs while simultaneously providing more timely VAT refunds. Kazakhstan is in the process of adapting its VAT rules to increasing digitalisation and online sales, and the implementation of these measures has now been set at 1 January 2021. This reform will broaden the VAT base by ensuring the taxation of inbound digital supplies, in line with the OECD International VAT/GST Guidelines. The VAT registration threshold in Kazakhstan remains high internationally (see section 4.5.8). The tax administration should strengthen its operation so that, over time, the VAT registration threshold can be lowered accompanied by VAT simplification measures.
Table 1.1. PIT and SSC policy recommendations by implementation timing
PIT policy recommendations for consideration, by phase of possible implementation
Source: OECD analysis.
Property taxes on recurrent immovable property could be increased and health-related excises taxes could be used to support the financing of healthcare. Excise duties are low compared to OECD countries and arguments exist to partly finance public contributions to healthcare from excise duties on alcohol and tobacco. Property taxes play a minor role in Kazakhstan and there may be scope to increase taxes on recurrent immovable property taxes, which is an efficient form of taxation that falls mostly on companies rather than individuals.
1.4. Competitiveness – a dual tax policy approach for a dual business economy (see Chapter 5)
1.4.1. Maintain CIT rates but broaden the CIT base
Tax revenues are concentrated in small number of companies and sectors and there are many corporate tax incentives. Significant scope exists to broaden while maintaining the statutory CIT rate at its current level. Kazakhstan has a dual business sector. A relatively small group of 500 large companies dominate the economy, producing half of all company turnover and employment. At the same time, there is widespread small-scale self-employment and SMEs with low incomes. CIT revenues are high compared to the OECD average as a share of total tax revenues (see Figure 5.3), partly because more than one-third of CIT comes from oil companies. Beyond CIT, a range of additional taxes apply to companies operating in the extractive sectors (including Mineral Extraction Tax and Excess Profit Tax and others), which go to the National Fund. In addition to oil tax revenues, there are also oil non-tax revenues (such as the share of production under concluded contracts). The statutory CIT rate in Kazakhstan remains competitive and below the average rate in the OECD, although the gap in the CIT rate between Kazakhstan and the OECD has narrowed in recent years. The statutory CIT rate could be maintained at the current rate. Tax revenues are concentrated in a small number of companies. While the top 10% of companies produced 90% of turnover in 2018, the concentration of CIT paid by companies is even higher – the top 10% of companies paid 99% of all CIT. While comparisons of concentration are challenging due to a lack of available data, these concentration levels provide suggestive evidence that many SMEs contribute little to tax revenues overall.
As Kazakhstan offers a wide range of generous tax incentives to companies, accountability and transparency could be enhanced by regular tax expenditure reporting and cost-benefit analysis. Whether these tax incentives create significant ‘additional’ investment, i.e. investment that would not have taken place without the tax incentives, is not entirely clear. For example, companies that implement a priority investment project under one of the priority areas (as defined by the authorities) that invest in a new production facility could be exempt from CIT and land tax for up to 10 years and property tax for up to 8 years. Furthermore, in SEZs, which were established in Kazakhstan to support the development of economic sectors other than natural resources, companies can reduce CIT, property tax and land tax by up to 100%. The contribution of companies in SEZs to total CIT and VAT revenues was less than half of one-percent in 2017 and 2018. Overall, there is evidence to suggest that the tax system may be overused to stimulate corporate investment in Kazakhstan. To support greater accountability and transparency, regular tax expenditure reports which systematically summarise the type of preferential treatment and the amount of tax revenue forgone could be established to support the monitoring, use and effectiveness of tax incentives (OECD, 2010[10]). A further step could be conducting cost-benefit-analysis (CBA) to evaluate whether specific tax incentives are fit for purpose and, if not, whether they should be abolished completely or replaced by incentives that are more closely aligned with longer-term objectives. Furthermore, there is scope to reduce the discretionary and uncertain application of some tax incentives to enhance transparency and accountability including the annually updated list of investment areas which determine company eligibility for priority investment projects. A detailed discussion and evaluation of each tax incentive is recommended as part of future work, but goes beyond the scope of this review.
A new tax reform to shift CIT revenues paid by SMEs from central to local government would transfer the administration of the CIT, which is the most challenging tax to administer, to under-resourced local tax administration which lack capacities. This reform would come with a wide range of difficulties, including the fact that it could create domestic transfer pricing problems. Even if the administration of the CIT would continue to be carried out at the central government level, OECD best practice shows that local governments should be funded through taxes whose revenues are not volatile (such as recurrent taxes on immovable property). However, CIT revenues are very volatile in most countries and in particular in Kazakhstan. The CIT is therefore the least preferred tax to finance local governments directly. Despite the good government intentions of this reform, it is not a step in the right direction and should be re-evaluated.
1.4.2. Simplify and enhance the design of the special tax regimes targeted at SMEs
There is scope to reduce the number of Kazakhstan’s special tax regimes targeted at SMEs and to enhance the design of regimes that are retained. The 2019 State of the Nation address reaffirmed Kazakhstan’s commitment to support the SME sector of the economy. Currently, SMEs account for the vast majority of firms and self-employment remains widespread but incomes remain low. Kazakhstan has a tiered system of special tax regimes for self-employed individuals and companies. The regimes are intended to simplify and reduce the tax burden on the self-employed while also placing them on a graduated path to expansion towards the regular system. While strong policy rationales exist for simplified regimes targeted at SMEs, special tax regimes also come at a cost in that they create complexity for businesses and enforcement and administration costs for the authorities. Therefore, Kazakhstan could consider reducing the number of special tax regimes and, instead, introduce and maintain other types of tax simplification measures (such as less frequent tax payments and simplified bookkeeping requirements).
The Single Aggregate Payment (SAP) regime introduced in 2019 is a generous regime that replaces most taxes by a low, simple and fixed lump-sum tax, and because of it generosity, the regime is expected to succeed. However, the annual turnover eligibility ceiling has been set too high. While the regime will support fairness by bringing more people under the protection of social insurance, the SAP might become a victim of its own success as individuals who would otherwise have moved to the patent regime may have a tax-induced incentive to remain in the lower-tax SAP regime. Indeed, a further general risk across the simplified taxation regimes is the possibility of taxpayer bunching activity arising from higher tax burdens as taxpayers graduate up regimes. Such ‘bunching’ activity across regimes should be tested for empirically. The SAP tax administration should be strengthened to monitor employees entering special tax regimes.
To encourage employment, the requirement to have no employees in the SAP and patent regimes should be removed. While the no-hiring condition has been installed to induce entrepreneurs from growing out of the Patent regime and into the Simplified Declaration regime, the condition also provides an incentive for entrepreneurs in the Patent regime to hire workers from the informal economy, thereby counteracting the efforts of government to strengthen the formal economy through the introduction of the SAP regime.
The annual turnover eligibility ceiling of the SAP, Patent and Simplified Declaration regime are set at a high level and consideration should be given to lower the ceilings significantly. Such a reform would allow reforming other design characteristics of the simplified SME taxation regimes, such as the non-hiring requirement under the Patent regime and the requirement that SAP workers can only work for individual clients and not for corporations. Indeed, these additional requirements have been introduced to prevent the regimes from becoming too generous. However, these requirements have also resulted in additional tax evasion opportunities and in an increased tax burden on the tax administration to enforce these regimes. Lowering the turnover eligibility ceilings would allow further simplifying the tax system. Finally, the tax policy rationales for the Fixed Deduction regime seem weak and the regime could be abolished.
Businesses face a strong tax-induced incentive to hire self-employed workers who operate under one of the simplified taxation regimes rather than employing regular employees. This may result in ‘false’ self-employment where workers only work for one employer but work under a self-employment contract.
Table 1.2 provides a high-level summary assessment of the tax system in Kazakhstan along with selected recommendations for consideration. The assessment highlights some of the key message from the report across the major taxes.
Table 1.2. Tax policy assessment and tax policy recommendations in Kazakhstan at a glance
High-level context, assessment and selected recommendations for consideration in the Kazakhstan tax system
Note: (1) Tax base may be further narrowed if high-income employees draw income from capital and other sources rather than from salary. (2) One example is the deductibility of pension contributions. (3) The rationale for no further increase is so as not to further increase employment costs (4) While VAT to GDP ratios are low to mid-range, VAT to total revenues are average due in part to the overall low tax to GDP ratios in Kazakhstan (5) Tax to GDP ratios not available in OECD revenue statistics (6) In some cases, rates are high as 20% for example such as capital gains on disposal of business assets by legal entities (7) Relates to capital investment projects, based on (OECD, 2017[11]) (8) Relates to the year 2019; based on simulation modelling in this report. (9) ‘VAT productivity’ averaged 0.36 between 2011 and 2018, which is low compared to other countries in the region. (10) But high on total goods and services, due to specific taxes on natural resource sector (11) Tax revenue volatility is based on the standard deviation of the tax-to-GDP between 1998 and 2017 using OECD revenue statistics.
Source: OECD analysis; OECD revenue statistics.
References
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Notes
← 1. The decrease in the NOD in 2018 is largely due to the reduction in current expenditures in that year.
← 2. The NOD is defined by the authorities in Kazakhstan as the difference between budget revenues (with the exception of loan receipts, transfers from the National Oil Fund and export customs on crude oil) and expenditures (with the exception of repayment of loans). These forecasts are according to the Presidential degree in 2016.
← 3. This is based on a forecast provided by the Department of Macroeconomic Analysis and Forecasting. Ministry of National Economy (2019).
← 4. This is the case only to the extent to which the higher SSCs will finance social spending that already takes place.
← 5. The definition of social security contributions (SSCs) used is that described in the OECD Interpretative Guide. SSCs do not include the social tax.