This chapter examines tax competitiveness issues in Kazakhstan. It considers companies, SMEs and the self-employed. Recommendations to strengthen the design of the corporate income tax and SME taxation regimes are provided in the table overleaf.
OECD Tax Policy Reviews: Kazakhstan 2020
OECD Tax Policy Reviews
5. Competitiveness chapter
Abstract
Box 5.1. Recommendations to strengthen the design of the CIT and the SMEs taxation regimes
Simplify CIT design
Maintain the statutory 20% CIT rate, which remains internationally competitive, or consider reducing it modestly along with base broadening reforms to increase competitiveness.
Conduct regular and systematic tax expenditure reports to monitor the use and effectiveness of corporate tax incentives. Collect tax revenue and other data related to corporate tax incentives and SEZ privileges and evaluate their direct and indirect costs and benefits empirically on an ongoing basis to ensure that they provide value for money and are aligned with longer-term national objectives.
Consider broadening the CIT base by scaling-back or removing some of the costly corporate tax incentives and Special Economic Zones (SEZ) privileges.
Abolish the newly proposed tax reform that will shift SME CIT revenue from central to local government.
Retain cost base incentives but remove profit based tax incentives such as tax holidays and exemptions.
Reduce discretion and uncertainty in the application of tax incentives to enhance transparency and accountability. For example, eligibility for priority investment projects is based on areas of investment that are updated annually. However, the uncertain and discretionary aspects of such a policy reduce the effectiveness of incentives and raise costs for investors.
Enhance design aspects of the special tax regimes for SMEs
Given the high levels of self-employment in Kazakhstan and significant participation in the special tax regimes, the design of each regime should be reviewed both independently and with respect to all other regimes.
Consideration could be given to reducing the overall number of existing special tax regimes for SMEs, in particular by abolishing the Fixed Deduction regime.
Continue to implement the Single Aggregate Payment (SAP) regime, which is a promising regime to reduce informality and promoting fairness by bringing more people under the protection of social insurance.
Review empirically the extent of participant bunching activity below the maximum thresholds for the different special tax regimes including the extent to which participants choose to remain in the SAP regime rather than graduating to the Patent regime, and for businesses in the Patent regime that try not to grow into the Simplified Declaration regime.
Strengthen monitoring across the special tax regimes to mitigate against potential avoidance and evasion strategies.
Review the requirement to have no employees in the Single Aggregate Payment (SAP) and Patent special regimes, which could undermine formal employment and induce entrepreneurs to hire informal workers instead.
Reconsider the requirement of SAP workers to offer services only to individuals and not to corporations.
Lower the annual turnover eligibility ceilings of various special regimes including the SAP regime, Patent regime and Simplified Declaration regime. This reform is a necessary condition in order to lift the limitations on the SAP and Patent regime.
5.1. The economy is dominated by relatively few firms
Kazakhstan has a “dual” business sector. The business economy can be characterised as having a dual economic structure, split into large firms and small firms (Table 5.1). On the one hand, less than 500 large companies produce half of all firm income and employ almost half of all employees in Kazakhstan. On the other hand, there is widespread small-scale self-employment and SMEs with very low incomes. The data shows that about one-third of SMEs are incorporated and these SMEs have far higher incomes and produce more employment. In terms of the CIT contributions by firm size, most CIT is paid by a small number of large companies (see Table 5.2 later in the section). SMEs currently represent about 10% of total CIT revenues.
Table 5.1. The business economy has a dual economic structure
Firm numbers, income and employment in Kazakhstan, 2017
1.Company SMEs refers to legal entities.
Note: Partnerships are considered legal entities in Kazakhstan. The European Commission (EC) definition is used. The EC classification defines micro, small and medium-sized enterprises based on their number of employees and either turnover or balance sheet total. According to this classification, SMEs are enterprises that employ fewer than 250 persons and have an annual turnover below EUR 50 million (and/or an annual balance sheet total below EUR 43 million). For the purposes of the analysis in this section, the income definition is used for the number and income of firms and the employment definition is used for employment.
Source: State Revenue Committee data.
The share of employment in larger firms is high by international standards. Large firms, defined as those with more than 250 employees, employed almost half of employees (46%) in 2017 (Figure 5.1). This is high compared to the EU-28, where the proportion was one-third (33%). Furthermore, one-third of all employment (34%) is in companies with 50 to 250 employees, which is also considerably above the corresponding share in the EU (at 17%). On the other hand, only 20% of employees is employed by micro or small firms in Kazakhstan, which is significantly below the share in the EU-28.
Firm income concentration is high. A small number of large firms hold a large share of all firm income. For example, in 2017, half (53%) of all income is earned by less than 0.1% of all firms in Kazakhstan. Part of the economy is dominated by large State-Owned Enterprises (SOEs), which may partly explain the high levels of firm income concentration. Most SOEs tend to be in the economic sectors of telecommunication, mining and transportation sectors.
Figure 5.1. Larger firms provide a high share of employment by international standards
Share of employment, by firm size, 2017
Note: SMEs categorised based on European Commission definition of number of employees: micro (0 – 9 employees), small (10 – 49 employees), medium (50 – 250 employees) and large (>250 employees).
Source: Statistics Committee of Kazakhstan; European Commission 2017.
Figure 5.2. Firm income concentration is high
Income distribution of firms in Kazakhstan, by firm income size, 2017
Source: State Revenue Committee data.
5.1.1. Tax revenues from companies are relatively high
Tax revenues from companies are high when compared internationally. CIT revenues are high in Kazakhstan, representing one-quarter of total tax revenues (27%) in 2017, based on OECD Revenue Statistics data. CIT revenues as a share of GDP are also high at 4.5%, compared to the OECD average of 3%. CIT is the only tax in Kazakhstan that collects more revenues as a share of GDP compared to the OECD average. About 35% of CIT is paid by oil-companies which, in addition, pay other taxes whose revenues are paid to the National Fund as well as non-tax revenues. It should be noted that the definition of what constitutes tax and non-tax revenues in the extractive sector differ in Kazakhstan and the OECD Interpretative Guide.1
Figure 5.3. Tax revenues from companies are high
Taxes on companies as a % of total tax revenues, selected countries including from OECD and CIS, 2017
Note: Taxes on companies refers to taxes on income, profits and capital gains of companies (OECD tax reference code 1200) and does not include total revenues from companies to the National Fund including taxes on exports (5124) and other taxes (5128). Commonwealth of Independent States (CIS) data other than Kazakhstan relate to 2015. CIS average based on countries shown in chart only. Data for Australia, Canada, OECD relate to 2016. Africa relate to 2015. For non CIS countries, CIT refers to 1100 Taxes on income, profits and capital gains of individuals.
Source: OECD revenue statistics; data on CIS countries from State Revenue Committee of Kazakhstan.
The statutory CIT rate is high relative to CIS countries and similar to the OECD average. A first point of reference for a company to consider investing in a country is the statutory CIT rate. The statutory CIT rate is 20% in Kazakhstan, which falls between the rate of the OECD average (22%) and the CIS average (16%), as displayed in Figure 5.4. Kazakhstan currently has a similar rate to Azerbaijan, Russia, Armenia, Estonia, Latvia, Finland and Iceland.
Figure 5.4. The statutory CIT rate is close to the OECD average and above the CIS above
Statutory CIT rates in Kazakhstan, the OECD and CIS countries, 2019
Note: Various countries provide for reduced CIT rates under certain conditions which are not included for the purposes of this analysis.
Source: OECD tax database.
Although the gap in the statutory CIT rate between Kazakhstan and the OECD has been narrowing in recent years, the statutory CIT rate in Kazakhstan remains below the average rate in the OECD. Kazakhstan reduced its CIT rate from 30% in 2008 to 20% in 2009 and it has remained at that rate since. The OECD average statutory CIT rate declined rapidly in the 2000s. This decrease slowed temporarily with the crisis, but accelerated again in recent years. Overall, the OECD average combined (central and sub-central) CIT rate declined from 32.2% in 2000 to 23.5% in 2019. In 2019, there were only two countries with CIT rates above 30%, against 22 in 2000. Meanwhile, the number of countries with CIT rates below 20% increased from two in 2000 to 11 in 2019. Unlike CIT revenue trends which have been mixed across countries, the decline in CIT rates has been widespread (OECD, 2019[1]).
Figure 5.5. There has been a steady and widespread decline in CIT rates globally
The evolution of combined statutory CIT rates in different groups of countries, 2000 - 2019
Note: The non-OECD average refers to the average of the three non-OECD countries covered in this publication: Argentina, Indonesia and South Africa.
Source: OECD Tax Policy Reforms Report 2019; OECD revenue statistics in Asian Countries 2017; Trading Economics.
There are a range of taxes on companies that operate in the extractive sectors beyond CIT. Tax and non-tax revenue from the oil sector could represent as much as 5.5% of GDP, of which 3.7% goes the National Fund and 1.7% goes the budget, based on data from OECD revenue statistics (as discussed previously in Chapter 3). Using a different data source (EITI, 2018[2]), Figure 5.6 confirms that a large share of many taxes from oil companies go to the National Fund. These include the Mineral Extraction Tax (71% goes to the National Fund), Excess Profit Tax (89%), Export Rental Tax (98%) and the Kazakhstan share of production sharing under contracts (99%).
Figure 5.6. There are many taxes on companies in the extractive sectors
The National Fund and budget shares of direct taxes from oil companies, KZT thousands, 2017
Source: The Extractive Industries Transparency Initiative (EITI) Based on data from the Extractive Industries Transparency Initiative, the 13th National Report, Report on Republic of Kazakhstan in 2018.; Statistics Bulletin of the Ministry of Finance 2018.
Box 5.2. The taxation of oil and gas in Kazakhstan
In Kazakhstan, the taxation of oil and gas companies operating in the extractive sector is provided for under the ‘Taxation of Subsoil Users’ in the Tax Code. The associated tax revenues, which are substantial (Figure 5.6), are derived from a range of different taxes. These include CIT, mineral extraction tax (MET), signature bonus, rent tax on exports, excess profit tax (EPT) and crude oil export duty. While a detailed investigation of oil taxation in Kazakhstan goes beyond the scope of this report, an overview of the different taxes, including their tax bases and tax rates, are discussed below.
Corporate income tax (CIT) is applied to all companies at a tax rate of 20% on taxable income. Taxable income is aggregate annual income after adjustments and less deductions. Deductions include all expenses incurred by the taxpayer in carrying out business activities. Deductions include interest expenses, expenditures on exploration operations for the extraction of mineral resource and expenditure on R&D.
Mineral extraction tax (MET) is a progressive volume-based tax that applies to crude oil, gas, metals and minerals. The rates increase for higher volumes. The MET ranges from 5% for smaller volumes up to 10% (for over 10 000 000 tons). Rates also differ depending on whether it is for export or the domestic market.
The signature bonus is a one-time lump-sum payment paid by subsurface users for the right to use the subsurface.
Export rental tax is paid by companies and individuals that export crude oil. The tax base is calculated as the export volume of crude oil products multiplied by the world price (of crude oil). The tax is volume-based, with a progressive tax rate ranging from 0% for smaller volumes up to 32% for larger volumes.
Excess profit tax (EPT) is paid annually at progressive rates on income that remain after the deduction of CIT. The taxable object is the portion of net income (if any) that exceeds 25% of deductions (where deductions are expenditures deductible for CIT purposes). The net income is calculated as annual income less deductions less CIT and branch profit tax (if any). The tax rate ranges from 0% to 60%.
Crude oil export duty is paid at a progressive rate, depending on the monthly average market price for crude oil.
Rental tax payments for the use of land plots for mining companies operating under subsoil use licenses.
Note: An alternative subsurface use tax (ASUT) may be applied by some types of oil producers as a substitute to MET, EPT and payment for compensation of historical costs.
Source: EY global oil and gas tax guide 2018; ETI; Tax Code 2019.
5.1.2. The CIT is concentrated among a small number of large companies
Turnover and taxes paid by companies are concentrated among a small handful of companies. Table 5.2 shows the share of turnover and taxes paid by turnover decile, based on data for about 440 000 companies in Kazakhstan in 2018. Total taxes relate only to those paid by companies. Overall, the total turnover of all companies is over KZT 80 trillion in 2018, which is 1.4 times GDP and total CIT revenues from companies is KZT 3.1 trillion in the same year. According to the analysis, the top 10% of companies (about 44 000 companies), produced 90% of all turnover. The top 100 companies earned over one-third of all turnover (38%). The concentration of CIT revenues paid is even higher. The top 10% of companies paid virtually all CIT (99%) and the top 100 companies paid more than three-quarters of CIT (77%). VAT paid by companies is also highly concentrated, albeit less so than CIT. The top 10% of companies pay 89% of VAT and the top 100 companies pay about one-third of all VAT (35%). Similarly for PIT and property tax, the top 10% of companies pay 93.1% and 99.5% respectively.
The concentration of tax is higher than the concentration of turnover. Most income and employment is concentrated in large and medium-sized incorporated firms (Figure 5.2) while small and micro unincorporated SMEs tend to have very small incomes and little employment. The concentration of turnover is further confirmed in Table 5.2. Despite this high level of turnover concentration, tax concentration is even higher, which suggests that many small and micro SMEs may contribute little in terms of tax revenues. For example, the bottom 9 deciles represent 9.9% of turnover but only contribute 1.4% of CIT and 1.0% of property taxes. The bottom 9 deciles contribution relatively more to employee PIT at 7.4% but this still remains below their share of turnover.
Table 5.2. Company turnover and taxes are concentrated among the most profitable companies
CIT, VAT, PIT and property taxes, paid by companies, by turnover deciles, 2018
Note: Turnover refers to total annual income, including all types of income from all sources before deductions for a resident legal entity of Kazakhstan. The bottom decile is excluded from the analysis since large VAT repayments to companies in this decile produce a negative figure, perhaps due to losses and repayments. The analysis relates only to the taxes that are paid by companies.
Source: State Revenue Committee data.
Figure 5.7. CIT as a share of turnover is concentrated among the top firms
CIT as a share of company turnover, by turnover decile, 2018
Note: The first decile is excluded since proportions are negative, perhaps due to losses.
Source: State Revenue Committee data.
Company taxes are concentrated in a few sectors. The taxes paid by companies are relatively concentrated in a few industry sectors. Taking CIT, VAT and property taxes together, 75% of all three taxes is paid in four sectors – mining, wholesale and retail trade, manufacturing and construction (Figure 5.8). The data show that the single sector of mining comprises more than one-third (37%) of all three taxes combined and 58% when the wholesale and retail sector is also included.
Figure 5.8. Company CIT, VAT and property taxes are concentrated in a few sectors
Company CIT, VAT and property taxes by sector, 2018
Source: State Revenue Committee data.
CIT as a share of turnover is low. CIT as a share of company turnover is 3.8% for all sectors. Notably, CIT as a share of turnover is the highest in the mining sector at 14%, perhaps because other company taxes are included related to the oil and gas sector. If the mining sector is excluded from the overall effective rate, the tax as share of turnover would fall to 1.9%.
Figure 5.9. CIT as a share of company turnover is low
CIT as a share of turnover, by sector in 2018
Note: Effective CIT is the total CIT revenues paid divided by total annual company income.
Source: State Revenue Committee data.
5.1.3. A wide range of generous corporate tax incentives
Corporate tax incentives reduce tax revenues and may create distortions and complexities. Kazakhstan offers various tax incentives to companies (Box 5.3). For example, companies that implement a priority investment project under one of the priority areas (as defined by government) that invest in a new production facility (with an investment of at least 2 million MCI) are exempt from CIT and land tax for up to 10 years and from property tax for up to 8 years. When production facilities are expanded and/or updated (with an investment of at least 5 million MCI), the company can be exempt from CIT for up to 3 years. Such incentives reduce tax revenues for a longer time period. In addition, these incentives may provide windfall profits to some firms, for example those who may have invested on the basis of resources in the country rather than the incentives in place. Revenue losses from tax incentives and concessions as a share of CIT revenues have been estimated at 32%, 51% and 36% in 2014, 2015 and 2016 respectively (World Bank, 2016[3]). The aforementioned study also finds that the sectors that benefit most from tax incentives are finance, insurance, education, healthcare and the professional and scientific sector.
Special Economic Zones (SEZ) have been established in Kazakhstan to support the development of economic sectors other than natural resources. There are 11 SEZs, each of which are from different regions and which support a wide range of investment priorities. Companies in SEZs may reduce CIT, land tax and property tax up to 100%. In addition, sales of certain qualifying goods within SEZs are subject to VAT at a rate of zero percent. They are however still required to file tax returns, which is a positive feature that may help to monitor and report revenue forgone. To register for the preferential SEZ tax treatment, companies must meet several eligibility requirements. For example, the company must undertake government-approved priority activities consistent with the SEZ where the business is located, the business cannot be a subsurface user and it must derive 90% of their sales from self-manufactured goods or services (see Box 5.3). The tax exemption in the SEZ starts applying from the moment the right has been granted for a period of 10 years, which differs from the operation of SEZ in some countries, where the exemption only applies when profits are made. While a time limit is in principle a design feature, 10 years is an extensive period of time.
Companies in Special Economic Zones hardly pay any tax. Table 5.3 shows the contribution of SEZ companies to total CIT and VAT revenues. The CIT paid in SEZs as a share of total CIT revenues was 0.4% and 0.3% in 2017 and 2018 respectively. Similarly, VAT paid in SEZs as a share of total VAT was 0.3% in 2017 and 2018. Overall, taxes paid by companies in SEZ appear to be negligible.
Table 5.3. Taxes paid by companies in special economic zones are negligible
CIT and VAT paid in special economic zones, USD, 2017 and 2018
Source: State Revenue Committee data.
5.2. Strengthening the design of the CIT
The tax system in Kazakhstan seems overused to stimulate corporate investment. There is a wide range of tax incentives to stimulate investment in Kazakhstan. Moreover, the tax incentives are generous in terms of both the amount of taxes that are waived and the length of the tax holiday. For this reason, a cost-benefit-analysis (CBA) should be conducted to evaluate whether 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 the objectives to stimulate “additional” investment in Kazakhstan. Indeed, there is a risk that tax incentives provide a windfall gain to capital owners and investment that would have taken place anyway. A detailed discussion of each tax incentive goes beyond the scope of this review.
The annual revision of the list for priority investment projects increases uncertainty and discretion which may undermine the effectiveness of tax incentives and increase costs for investors. Priority sectors and investments are decided by the authorities. A potential risk to this approach is the extent to which government has sufficient information to correctly select priority areas of future investment. Furthermore, some of these tax incentives lack transparency and the requirements that need to be fulfilled to qualify for them are not always clear, which runs the risk that the rules are not applied in a consistent manner across all businesses and sectors. Moreover, the annual revision of the investment areas which determine eligibility for priority investment projects increases uncertainty and discretion, which reduces the effectiveness of tax incentives and increase costs for investors. This may raise the risk of arbitrary variation in the application of tax rules and create opportunities for rent seeking and corruption.
Box 5.3.Tax incentives for investment projects
There are a number of preferential tax regimes for different types of investment projects. Tax incentives are granted under a contract between the Government and companies for investment projects that focus on priority sectors of the economy. Between 2017 to 2019, 122 investment contracts were concluded with investments in fixed assets, of which 16 contracts were granted tax investment preferences (Investment Committee, Ministry of Foreign Affairs). Priority sectors are set by the Government. The current priority list includes industrial infrastructure, processing industries, housing construction, the social sphere, tourism and production of nuclear materials. In accordance with Article 284 of the Entrepreneurial Code of the Republic of Kazakhstan, there are three types of investment projects each of which offer different preferential tax treatment and require different criteria as follows:
1. General investment projects relate to investments in the creation of new, expanded or updated facilities. These projects receive preferential tax treatment in that they are exempt from customs duties on imported technology equipment (and other components and raw materials) for a maximum of 5 years and are exempt from VAT on imports of certain raw materials. To be eligible for general investment projects, companies must import technological equipment.
2. Priority investments projects relate to company investments (above certain investment amounts) in the creation of new, expanded or updated production facilities. The priority investment list is revised annually and excludes gambling, subsoil use activates and the production of most excisable goods. The company must invest in the creation of new production of at least 2 million MCI or the expansion of existing production of at least 5 million MCI. Priority investments are exempt from CIT for 10 years for the creation of new production facilities and for 3 years for the expansion of existing production. They are also exempt from land tax for 10 years and property tax for 8 years for the investment project.
3. Special investment projects relate to Kazakhstan companies that are either registered in a SEZ, own a free warehouse, have concluded an agreement on the industrial assembly of motor vehicles or have carried out activities in the list of priorities approved by the government. Companies operating a special investment project are tax exempt on import customs duties for up to 15 years.
Accelerated depreciation for capital expenditure is available to subsurface users at double depreciation rates. This must be applied in the first tax period after putting the fixed assets into operation in Kazakhstan and must be directly used in subsurface operations for at least three consecutive tax periods.
Source: Investment Committee of the Ministry of Foreign Affairs of the Republic of Kazakhstan; IBFD.
Significant scope exists to broaden the tax base and collect more tax revenues from businesses across the economy. Currently, CIT revenues as a share of company turnover is 3.8% overall, but both CIT and turnover vary considerably across sectors. Hypothetically, if CIT as a share of company turnover were constant at 3% across sectors, CIT revenues would increase by one-quarter (24%) (the natural source sector is left outside of these calculations) (Figure 5.10). Based on this simple back-of-the envelope calculation, it is observed that CIT as a share of turnover is currently low in sectors such as wholesale and retail trade, finance and construction. While such a simple analysis does not allow to make in depth recommendations, it does flag that more in depth analysis is necessary to ensure that all sectors pay their fair share of CIT. More rigorous estimates could be simulated by developing a microsimulation modelling of all companies using tax records and survey data.
Figure 5.10. CIT as a share of turnover varies across sectors
CIT as a share of turnover compared to CIT as a share of turnover at a uniform 3% rate across sectors
Note: Mining sector not included.
Source: State Revenue Committee data.
Kazakhstan should review whether incentives are the right tool to attract investment and, if and where they are, profit-based tax incentives should be replaced by cost-based tax incentives. As discussed in Box 5.3, Kazakhstan has a mixture of both profit-based (tax holidays, preferential rates) and cost-based (tax allowances for investment expenses and accelerated depreciation) tax incentives. A number of cost-based incentives come under Article 274 of the Tax Code on investment tax preferences. Profit-based tax incentives generally reduce the tax rate applicable to taxable income and include tax holidays, preferential tax rates or income exemptions (IMF/OECD/UN/WB, 2015[4]). Profit-based incentives lower the tax rate for any amount of profit earned so the value of this incentive is a direct function of the company’s profits. Therefore, the incentive favours companies with high profits, which least need government support. This can lead to high redundancy of expenditure on incentives since an investor anticipating high profits would have proceeded anyway. The loss in tax revenue may also be significant. The risk for profit shifting is also high since companies may attempt to artificially allocate profits within the company with the preferential rate (UNCTAD, 2015[5]). Cost-based incentives, such as tax allowances for investment expenses, special tax deductions, accelerated tax depreciation regimes and credits offer superior design features. Unlike profit-based incentives, cost-based incentives lower the cost of inputs. In this case, the magnitude of the benefit is independent of its profit level and instead depends on the size of the investment that is undertaken. In general, there are therefore strong arguments to avoid profit-based tax incentives but rather use incentives that lower the cost of investment.
Larger companies face a tax-induced incentive to register as a SME and operate under one of the simplified tax regimes in Kazakhstan. To be eligible for the simplified and fixed deduction special tax regimes, companies must have a maximum annual income of approximately USD 226 000 and USD 1 392 000 respectively in 2019. These relatively high maximum income thresholds mean that, for example, a company earning USD 1 million could opt for the fixed deduction regime and benefit from making a fixed 30% deduction without the need to provide documentation.
A new tax reform will shift CIT revenues paid by SMEs from central to local government. Following announcements in the State of the Nation Address 2019, Kazakhstan is transferring CIT revenues paid by SMEs to local government starting from December 2019 (and as cited in the Action Plan for Kazakhstan 2019). CIT revenues paid by SMEs currently represent about 10% of total CIT revenues. The rationale for this reform is to equalise the level of fiscal capacity in the regions and ensure equal fiscal opportunities in addition to increasing the level of responsibility of local executive bodies when using budget funds. In addition, local government will be entitled to spend the CIT revenues collected from SMEs. This reform shifts the most challenging tax to administer to under-resourced local tax administrations. 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 of the good government intentions, this reform is not a step in the right direction.
Kazakhstan aims at incentivising local communities to develop their economies through the tax system. In order to achieve this objective, and to provide more funding to local communities, Kazakhstan plans to assign the CIT revenues paid by SMEs to the region where the SME is located. When SMEs grow and pay more taxes, local communities will collect more tax revenues, and they will therefore be incentivised to further develop their local economies. While this strategy might work in the short run, it comes also at a cost. First, local communities might not want their businesses to grow from SMEs to large businesses, as this would reduce local tax revenues. Moreover, it might lead to unwanted competition amongst local communities to attract SMEs (for example, in the form of infrastructure spending).
OECD research shows that the corporate income tax is the least efficient form of taxation for sub-central governments. Empirical research conducted by the OECD has shown that taxes on immovable property are generally the least distortive tax instrument in terms of per-capita GDP growth, followed by consumption taxes, personal income taxes and corporate income taxes (Johansson et al., 2008[6]). Further OECD research related to sub-central governments (SCGs) has explored the question of what are the most appropriate taxes (Blöchligeri and Petzold, 2009[7]). This research finds that the conditions for a sub-central tax to be growth-enhancing are generally the same as those for a national tax (but some additional constraints apply to make a “good” SCG tax). As a principle, SCGs should rely on benefit taxation, that is, there should be a link between taxes paid and public services received. To achieve this, the criteria for efficient SCG taxation should include that the tax is non-mobile, non-redistributive (to avoid erosion), non-cyclical and should not be exported to other jurisdictions (to avoid distortions in the tax burden) and should be evenly distributed across jurisdictions (to avoid disparities). Based on these criteria, a property tax represents an efficient form of tax whereas corporate income tax is the least efficient as it is highly mobile, highly cyclical, geographically concentrated and tends to shift the tax burden to non-residents (Blöchligeri and Petzold, 2009[7]).
Countries around the world differ in their approach to fund local communities and other sub-central governments but country best practices can be identified. Almost in all countries, local communities are funded with revenues from the recurrent taxes levied on the immovable property located in their community. However, this requires a fiscal cadastre and property valuation system (discussed in section 4.6.2). Such a system could be complemented with a system of grants or tax sharing agreements that takes into account the capacity of local communities to collect property taxes (i.e. a fiscal equalisation mechanism across municipalities) as well as the efforts taken by local communities to develop their local communities. In general, grant systems take into account a wide range of factors beyond the tax system, such as spending needs that may vary with the characteristics of the local population and the spending powers of the local governments. Guidance on the specific design of such a sub-central financing mechanism (including the balance between own taxing powers, grants and tax sharing agreements) is left for future work.
5.2.1. Selected international tax issues
A comprehensive approach to protecting Kazakhstan’s corporate tax base is necessary. Base erosion and profit shifting (BEPS) arises when businesses can exploit gaps and mismatches between different countries’ tax systems. BEPS negatively affects tax revenues as well as the efficiency and the ability of tax systems to create a level playing field for all firms. A comprehensive approach to addressing simultaneously different BEPS behaviours is needed.
Undertaken at the request of the G20 Leaders, the OECD/G20 BEPS Project provided 15 Actions to equip governments with the domestic and international instruments needed to tackle tax avoidance and ensure that profits are taxed where economic activities are performed and where value is created. The 15 Actions in the BEPS Project include four minimum standards as well as common approaches, best practices and new guidance in a number of areas. Working together in the OECD/G20 Inclusive Framework on BEPS, over 130 countries are implementing these 15 Actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
As a member of the Inclusive Framework on BEPS, Kazakhstan has agreed to implement the four minimum standards. These imply removing any harmful tax practices from its domestic tax regime (Action 5), amending its tax treaty rules to prevent treaty abuse (Action 6), implementing country-by-country reporting rules and exchanging the reports it receives from MNEs with other countries (Action 13), and working with other BEPS IF members to improve cross-border tax dispute resolution mechanisms (Action 14). Each of the four minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard a level playing field.
Corporate tax reforms in special economic zones should be conducted with regard to international tax reforms in other countries particularly the United States. The 2017 US tax reform contains a provision, the "Global Intangible Low Taxed Income" (GILTI), which constitutes a minimum tax on profits of foreign subsidiaries controlled by US parent companies (Controlled Foreign Corporations). Thus, under certain conditions, part of the income of a Kazak company controlled by a US company must be included in the income of the US company and declared to the US tax authorities and taxed at the rate of 10.5% by the United States (13.125% after 2025). Consequently, if the taxation of profits is too low (less than 10.5% currently), for example in the export sector where many foreign companies are located, Kazakhstan may risk losing tax revenue from companies in Kazakhstan controlled by US parent companies.
Regarding transfer pricing, Actions 8-10 seek to align transfer pricing outcomes with the value creation of the MNE group. Transfer pricing rules, which are used for tax purposes, are concerned with determining the conditions, including the price, for transactions within an MNE group resulting in the allocation of profits to companies within the group in different countries. The standard approach is to treat each enterprise within the MNE group as a separate entity. To do so, individual group members must be taxed on the basis that they act at arm’s length in their transactions with each other. Actions 8-10 clarify and strengthen the existing Transfer Pricing Guidelines, including the guidance on the application of the arm’s length principle, the application of the profit split method, intangibles, and an approach for appropriate pricing of hard-to-value-intangibles within the arm’s length principle to ensure that what dictates results is the economic reality. These changes reduce the incentive for MNEs to shift income to shell companies with few if any employees and little or no economic activity, which seek to take advantage of low or no-tax jurisdictions. Kazakhstan is considering implementing Actions 8 – 10 and plans to hold an international round table with the participation of OECD experts on the implementation (Specialised Division, State Revenue Committee).
Box 5.4. The OECD/G20 BEPS project and the Inclusive Framework on BEPS
The OECD/G20 BEPS project produced a 15-point Action Plan including minimum standards, common approaches, best practices and new guidance in the main policy areas.
Minimum standards were agreed upon in the areas of fighting harmful tax practices (Action 5), preventing treaty abuse (Action 6), Country-by-Country Reporting (Action 13) and improving dispute resolution (Action 14). Each of the four minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level playing field.
A common approach, that facilitates the convergence of national practices by interested countries, was outlined to limit base erosion through interest expenses (Action 4) and to neutralise hybrid mismatches (Action 2). Best practices for countries which seek to strengthen their domestic legislation were provided on the building blocks for effective controlled foreign company (CFC) rules (Action 3) and mandatory disclosure by taxpayers of aggressive or abusive transactions, arrangements or structures (Action 12).
The permanent establishment (PE) definition in the OECD Model Tax Convention was modified to restrict inappropriate avoidance of tax nexus through commissionaire arrangements or exploitation of specific exceptions (Action 7). In terms of transfer pricing, important clarifications have been made with regard to delineating the actual transaction, and the treatment of risk and intangibles. More guidance has been provided on several other issues to ensure that transfer pricing outcomes are aligned with value creation (Actions 8-10).
The changes to the PE definition, the clarifications on transfer pricing, and the guidance on CFC rules are expected to substantially address the BEPS risks exacerbated by the digital economy. Value Added Taxes (VAT) will now be levied effectively in the market country facilitating VAT collection (Action 1).
The multilateral instrument (MLI) modifies the application of bilateral tax treaties to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.
The tax challenges of the digitalisation of the economy were identified as one of the main areas of focus of the Base Erosion and Profit Shifting (BEPS) Action Plan, leading to the 2015 BEPS Action 1 Report (OECD, 2015[8]). Concrete proposals by IF members to re-design the international tax system were classified into two Pillars. Pillar One focuses on the re-allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules. Pillar Two (also referred to as the “GloBE” proposal) seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax.
5.3. The taxation of SMEs and the self-employed
There is scope to reduce the number and enhance the design of Kazakhstan’s special tax regimes. Kazakhstan is committed to support the SME sector of the (State of the Nation, 2019[9]). The country 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. Overall, having many special tax regimes creates complexity for government and businesses. A further general risk across the regimes is the possibility of taxpayer bunching activity arising from higher tax burdens as taxpayers graduate up regimes.
5.3.1. There is widespread low-income self-employment
Self-employment has fallen but remains high. Currently, there about 2 million self-employed workers in 2018 in Kazakhstan, representing about one-quarter (24%) of employment. The remaining three-quarters are employees. Of the self-employed, 94% are own-account workers and 5% are employers.2 The proportions of self-employed workers remains high despite falling over the past two decades. Since 2000, self-employed workers as a share of total employment has declined steadily from 44% in 2000 to 34% in 2009 to 24% in 2018. According to the analysis, the number of self-employed workers was stable at 2.6 million between 2006 and 2013. Since then, the numbers have declined, reaching 2.1 million in 2018. Despite this, the proportion remains high compared to OECD and other countries. Only Greece, Turkey, Mexico, Chile and Korea had higher proportions in 2018 based on the countries shown in Figure 5.11.
Self-employment is concentrated among younger workers in agriculture and trade sectors in rural areas. Self-employment is concentrated in certain sectors. For example, two-third of self-employed workers are employed in one of two sectors - agriculture, forestry and fishing (38%) or wholesale and retail trade (31%). Self-employed workers are also concentrated in rural areas. For example, only 5% of all self-employed work occurs in the major cities of Astana and Almaty. Self-employed workers also tend to be young - 72% of self-employed are aged between 25 and 54; only 2% are older than 65. Furthermore, the self-employed are working longer hours than before. After 2008, the proportion of self-employed reporting working more than 36 hours per week rose from 45% to over 80% in 2018. During the same period, the proportion reporting working 25 hours or less fell from 42% to 14%.
Figure 5.11. The proportion of self-employed workers has fallen but remains high
Source: OECD statistics and Statistics Committee of Kazakhstan.
SMEs play a key economic role in the economy and account for the vast majority of firms. SMEs contribute significantly to income and employment in Kazakhstan. There are about 885,000 SMEs, which employ 2.4 million people and have annual income of over EUR 100 billion in 2017. SMEs account for 99.9% of the total number firms in Kazakhstan in 2017 (see also Table 6.1), similar to the EU-28 average of 99.8% (European Commission, 2017[10]). SMEs employ half of all employees (54%), which is low compared to the EU-28 where the same figure is two-thirds (67%). Micro-businesses, those with less than 10 employees, employ about 6% of workers in Kazakhstan, compared to 30% for the EU-28. There is also a strong sector weighting of businesses towards the wholesale and retail trade and much more limited numbers of SMEs in manufacturing (OECD, 2018[11]).
Most SMEs consist of self-employed workers that earn low income. SMEs earned about half (46%) of all income in 2017, with the remainder attributable to larger firms (53%). However, the majority of SMEs are micro SMEs earning relatively small incomes – 9 in 10 earn considerably less than EUR 100 000 annually. Among companies, four in every five (79%) earned substantially less than EUR 100,000 annually. Among individuals, the proportion earning less than EUR 100 000 per year is even higher at 96% in the same year.
Figure 5.12. Most firms are SMEs with relatively small annual incomes
Distribution of firms in Kazakhstan, by size of annual income, 2017
Source: State Revenue Committee data.
5.3.2. There is a tiered system of special tax regimes
Government has announced ambitious reforms to stimulate the SME sector. As part of the State of the Nation address in 2019, the President of Kazakhstan highlighted the importance of SMEs in the economy. Several reforms of the SME sector were announced to support this ambition. In addition to financial support measures, government has announced a number of unconventional tax measures, including a PIT exemption for SME for up to three years as well as a ban on inspections of SMEs for up to three years. These tax holidays are generous and while they might stimulate entrepreneurship, they run the risk of being abused (for instance businesses that disappear before the end of the third year and then restart again) and they create an unlevelled playing field with SMEs that correctly comply with the tax code.
In practice, many individuals and SMEs choose one of the special tax regimes. Kazakhstan has a tiered system of special tax regimes that are available to self-employed individuals and companies. A brief description of some of the special tax regimes is summarised in Table 5.4 and discussed in Box 5.5. The objective of the regimes are broadly to simplify and reduce the tax burden on the self-employed by offering reduced tax rates and reporting requirements while also encouraging self-employed workers to enter the formal economy. The main special tax regimes are the patent regime, the simplified regime and the fixed deduction regime. The Single Aggregate Payment (SAP) regime (defined by articles 774 and 775 of the Tax Code) is not considered a special tax regime in Kazakhstan, although it functions as one from an economic perspective.
Table 5.4. There is a tiered system of special tax regimes
The SAP is not defined as a special tax regime in Kazakhstan. 1. 0.5 MCI in rural areas. (2) 20% for companies. Based on minimum salary (MS) of KZT 42 500 and MCI of KZT 2 525 in 2019. The income thresholds for the patent, simplified and fixed deduction regimes are less than or equal to 300, 2 044 and 12 259 values of the cost of living respectively. Income eligibility rounded to nearest thousand. Converted to US dollars based on an exchange rate of KZT 1 to USD 0.0026 exchange rate. Employee eligibility refers to the average number of employees for the tax period.
Source: OECD analysis.
Box 5.5. The current special tax regimes
A number of special tax regimes exist for individuals and SMEs
The Single Aggregate Payment (SAP): The SAP regime was introduced in 2019 to encourage self-employed workers to enter the formal economy while simultaneously including more workers in social and pension supports. The regime has a simplified registration whereby individuals register automatically by paying a fixed monthly amount of 1 MCI in urban areas (or 0.5 MCI in rural areas). As the name suggests, a single aggregate payment covers four types of payment – PIT, social tax, mandatory pension and medical insurance. Consequently, participants of the regime can avail of various social benefits (including related to health, disability, job loss and childcare). The regime is targeted at individuals engaged in entrepreneurial activity who are not officially registered as individual entrepreneurs (IEs). To be eligible for the regime, individuals must have no employees, perform services for other individuals and have annual incomes not exceeding MCI 1 175 in 2019 (KZT 2.97 million), inter alia.3 Currently there is an estimated 500 000 – 600 000 individuals who are working informally who may be eligible for the regime.4
The patent regime. A patent regime is in place for individual entrepreneurs (IEs). The PIT rate is currently 1% of annual gross income without applying deductions for expenses (having been reduced from 2% previously). To qualify for the scheme, IEs must have no employees and income of less than 300 ‘values of the cost of living’ in 2019. In the trade sector, a new law was introduced in 2020 where individual entrepreneurs in the trade sector must switch to the simplified regime. Only a simplified set of accounting and financial records need to be kept.
The simplified declaration regime: A simplified declaration regime is in place for IEs and legal entities (LEs)5 with a PIT rate of 3% on annual gross income without applying any deductions for expenses. To qualify for the regime, IEs and LEs must have a maximum of 30 employees and annual income of KZT 86.9 million. Similar to the patent scheme, it is only necessary to maintain a simplified set of accounting and financial records.
The fixed deduction regime: IE and LEs can alternatively choose to enter a fixed deduction regime where, as the name suggests, they make a fixed deduction from total annual income of 30% without the need to provide documentation.6 PIT is 10% for IEs and 20% for LEs. To qualify for the regime, SMEs can have a maximum of 50 employees and 12,259 ‘values of the cost of living’ in income in 2019. Tax reporting is once annually.
Note: There are however other smaller special regimes, which are not discussed here. For example, a special tax regime applies to individual farmers, where there is a single land tax levied at a rate of 0.15% of the land value. Under this scheme, taxpayers are not subject PIT on income from farm and other related activities (Tax Code 517.3).
Source: OECD analysis.
5.3.3. Strengthen the design of the special tax regimes targeted at SMEs
Kazakhstan has four main special regimes, which is more than in most other countries. Contrary to the stated goal of simplification that comes with introducing new special tax regimes, having too many special tax regimes can increase the enforcement costs and compliance burden for tax administrations and taxpayers while simultaneously undermining fairness and incentives. At the same time, having many regimes may increase opportunities for tax evasion including for example incentives to report income below the maximum income thresholds to avoid moving to the next regime. Therefore, Kazakhstan could consider reducing the number of special tax regimes and, instead, introduce other types of tax simplification measures.
Individuals typically graduate to higher statutory PIT rate regimes as turnover rise. The special tax regimes place businesses on a graduated path to expansion towards the regular system. With the exception of the SAP regime, where a fixed payment implies that the PIT rate falls for higher income levels within that regime, individuals graduate to higher statutory PIT rates as incomes (i.e. business turnover) increase and they transition from one regime to the next. Figure 5.13 illustrates the progression in the statutory PIT rates as taxpayers transition up regimes. For example, for individuals moving from the patent to simplified declaration to fixed deduction and then to a standard business, the PIT rate would rise from 1% (above USD 7,700) to 3% (above USD 33,000) to 7%7 (above USD 300,500) and finally to 10% (above USD 1.4 million). Under the regular regime, however, the 10% tax rate would be levied on taxable income (i.e. turnover net of deductible tax expenses) rather than turnover under the simplified regimes.
Figure 5.13. Gradually higher statutory PIT rate regimes under simplified regimes as turnover rises
Effective PIT rates and max income thresholds, selected special tax regimes in Kazakhstan
Note: The maximum annual income caps for the Single Cumulative Payment (SCP), patent and simplified regimes are ~KZT 3.0 million (1,175 x MCI), ~KZT 12.8 million (300 x MS) and ~KZT 115.6 million respectively. There are also criteria for the number of employees which are not included for the purposes of this analysis. Analysis relates to individuals and individual entrepreneurs and not legal entities. 7% PIT rate is calculated for the fixed regime on the basis of the fixed 30% deduction.
Source: OECD analysis.
The SAP regime is expected to be successful in bringing workers into the formal economy. The SAP regime brings many benefits to participants, which suggests that it is likely to drive a high take-up in the coming years. There are a number of reasons for this. Firstly, payments are small, simple and fixed. The payment of 1 MCI (about USD 6.60) or 0.5 MCI (about USD 3.30) per month is likely to be sufficiently low to induce informal workers to enter the formal economy. A special regime with some similarities is applied in Mexico where ‘Individual Micro Entrepreneurs’ pay a fixed monthly lump-sum tax (although it varies by sector). Second, it provides an opportunity for previously informal workers to have an official status in the system while also reducing the concern of tax inspections by the tax administration. It might bring broader advantages such as facilitating the access to banking credit. Third, it provides additional financial and health security through the provision of pension and social support benefits. Nevertheless, the insurance cover may remain limited compared to the public services for standard employees who pay higher SSCs. Fourth, the registration process is simple and automatically includes workers in the regime. Since the SAP regime was recently introduced in 2019, it will take some time to determine its success. However, the early evidence is positive. According to data from the Ministry of Economy, approximately 100 000 workers have already registered in early 2019.
Entrepreneurs are not allowed to hire workers under both the SAP and Patent regime. While this requirement seems logical for the SAP regime, which is mainly targeted at bringing individual entrepreneurs within the formal economy, it is far from straightforward for the Patent regime as it prevents businesses in the regime for creating new jobs. Taking the number of individuals in the two regimes together, this could restrict at least as many as 200 000 taxpayers from creating additional employment in the economy (129,300 in the patent scheme plus an estimated 100 000 and rising in the SAP regime). This presents an employment risk considering that almost half of employment in Kazakhstan is generated by small and medium-sized business.
On the other hand, the Patent regime is generous as it levies only a 1% tax rate. By imposing this hiring restriction, government induces businesses that want to grow by hiring more workers to enter the Simplified Declaration regime, which levies a higher 3% tax rate (on turnover). Indeed, under the current design, the non-hiring condition of the Patent regime operates as an incentive for entrepreneurs to move from the Patent to the Simplified Declaration regime. However, in reality it might rather induce entrepreneurs in the Patent regime to hire workers from the informal sector. In that sense, the incentives created by the Patent regime contradict the efforts of government to bring informal workers into the regular economy through the introduction of the SAP regime. In order to strengthen policy coherence, the hiring restriction under the Patent regime could be abolished.
The Patent and Simplified Declaration regime have high eligibility ceilings. The annual turnover ceiling to qualify for the Patent regime of about USD 33 000 is high. Entrepreneurs with turnover up to that ceiling are likely in a position to employ workers, but they are refrained from doing so as the tax consequences are significant. (As pointed out, they might be inclined to hire workers from the informal economy instead). While a low 1% PIT rate on turnover might be warranted to induce workers to move from the generous SAP regime into the Patent regime, government could consider lowering the turnover ceiling of the Patent regime to below USD 33 000. It would turn the Patent regime as a stepping-stone from the SAP regime towards the Simplified Declaration regime, which levies a tax rate of 3% that is more aligned with international practice.
When reduced rates are based on turnover, they tend to penalise low profit-margin business, which end up being taxed at a higher rate than businesses with a lower turnover but higher profits. The impact of a flat turnover tax rate will therefore vary across firms and sectors. For firms that have a low profit margin (i.e. have high costs as a share of turnover), even a low tax rate levied on total turnover represents a high effective tax when the tax is expressed as a share of their profits. The opposite is true for firms that earn high margins. As profit margins typically vary across industries, some countries therefore levy a tax on turnover in their simplified regimes that differs across sectors (i.e. higher for profitable sectors and lower for sectors where the average firm has a low profit margin).
However, differentiated turnover taxes across sectors increases complexity and government therefore might want to maintain the 3% a turnover tax rate in the Simplified Declaration regime. As is the case in the Patent regime, the Simplified Declaration regime also has an eligibility ceiling that has been set at a too high turnover level. Government should consider lowering the ceiling considerable in order to induce more businesses to enter the regular tax regime.
Overall, the size-based regime ceilings in Kazakhstan have been set too high and likely constrain growth and result in tax avoidance behaviour. Limiting tax regimes to companies under a certain revenue or employee size can create barriers to the growth of SMEs. Such regimes may give businesses incentives to remain below the threshold so as to continue benefiting from such targeted regimes, both in terms of reduced compliance costs as well as tax payable. Furthermore, growing SMEs may be incentivised to split up into different companies to benefit from the preferential tax treatment or to engage in deflating revenues and inflating costs.
Higher income SAP registered workers may have an incentive not to graduate to the Patent regime. The income of most employees falls within the range to participate in the scheme since the SAP maximum monthly income threshold in 2019 is about KZT 250 000 (1 175 MCI annually), which is three-times higher the monthly median employee income (KZT 82 977). This confirms that the eligibility ceiling for the SAP regime has been set at a high level. However, the incentive not to graduate to the Patent regime will only apply to higher income entrepreneurs, who for example earn between the mean wage and the SAP maximum, since the tax burden is small on low-income workers (as analysed in Figure 5.4). Data from the State Revenue Committee indicate that 96% of all self-employed in Kazakhstan (about 580 000) have an annual income of less than or approximately USD 7 800, which is close to the SAP regime maximum threshold.
There is a general risk of bunching activity across regimes, which could undermine tax revenues. Additional empirical analysis would allow assessing and improving the design of the simplified regimes. An individual entrepreneur who transitions from the SAP to the Patent regime becomes subject to additional SSC payments, which were previously covered by the 1 MCI payment. This increase in the effective tax burden may produce an additional incentive for individuals to conceal some of their income by declaring taxable income below the maximum threshold of about USD 7 700. Additional income earned beyond this point could be earned in the informal economy perhaps through cash payments, leading to reduced tax revenues. Similarly moving from the Patent regime to the Simplified Declaration regime leads to a relatively high PIT rate increase from 1% to 3% (in particularly for sectors that have a low profit margin). The extent of this so-called ‘bunching’ effect could be detected empirically by examining the taxable income declarations of taxpayers just above and below the respective thresholds over the period 2018 and 2020, once data becomes available on participation in the SAP regime next year.
Within the SAP regime, the fixed payment means that the effective PIT rate decreases for higher incomes. Under the SAP regime, individual entrepreneurs pay a fixed monthly amount of 1 MCI per month or 12 MCI per year (Figure 5.13). This lump-sum tax translates into a 3% tax rate for entrepreneurs that earn an annual income of KZT 1 million (USD 2,800) (i.e. 12 MCI per year, equivalent to KZT 30 300, divided by KZT 1 000 000) compared to only 1% for individuals earning more than twice that amount (of KZT 2.9 million; i.e. about USD 7 700). This declining effective PIT rate, however, does not result in a tax-induced disincentive to growth within the SAP regime because the tax is a lump-sum tax. However, it does mean that if the tax would have been set too high for small informal workers, it might have prevented them from entering the SAP regime. However, the fixed payment is set at a low amount, so these disincentives have been avoided through the specific design of the SAP regime in Kazakhstan.
In the absence of effective tax monitoring, firms may have an incentive to contract SAP regime workers instead of hiring regular employees to reduce their tax burden. SAP regime workers are obliged to provide their labour services only to other individuals and cannot be hired by a company. However, these limitations may be challenging for a tax administration with limited resources to effectively monitor and enforce. In order to reduce tax liabilities, companies might be tempted to employ regular workers to work with company customers but to hire individual SAP workers to work with individual customers. Such an arrangement, while clearly being illegal, would reduce the tax burden on both the company and the informal individuals at the expense of tax revenues. While the requirement for SAP workers to offer services only to other individuals has a strong policy rationale, it in practice may be difficult to enforce and, at least, has further increased the burden on the tax administration.
Lowering the annual turnover eligibility ceilings would allow reforming other distortive and administrative costly 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.
The tax burden on regular employees versus self-employed workers differs considerably. Firms face different incentives in the tax system when deciding to hire different employment types. In some OECD countries, firms that contract labour from self-employed workers instead of hiring standard employees generally tend to face lower tax burdens on per-worker basis (Milanez and Bratta, 2019[12]). Figure 5.14 illustrates the incentives facing a Kazakh firm deciding between hiring an employee or a self-employed worker in the SAP regime. To consider the employment form that is preferable to the firm, take-home pay is equalised across the employment types (KZT 136 825) and the workers is assumed to earn the mean wage (KZT 163 673). Individual social contributions include pension SSCs; employer social contributions include pension SSCs, health SSCs and insurance SSCs. Employees have a tax wedge of 23.9%, a take-home pay of 76.1 per cent and a total employment cost of KZT 179 877 (employment cost is gross mean wage plus social tax and employer SSCs). SAP workers face a tax wedge of 1.8 per cent, a take-home pay of 98.2% and a total employment of KZT 139 350. Therefore, compared to the total employment cost of a standard employee, all else being equal, a firm would rather offer an employment contract to a SAP regime worker, thereby saving KZT 40 527 per employee in this case. Similar, although less outspoken, results would be found for workers in the Patent regime.
As part of future research, Kazakhstan could empirically investigate the tax incentives facing firms across all employment types including the Patent and Simplified Declaration regimes. Our analysis indicates that 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.
Figure 5.14. Firms that contract labour from self-employed workers instead of employees could face lower tax burdens on a per-worker basis
Decomposition of total employment cost, employees and self-employed in the SAP regime, 2019
Source: Milanez and Bratta, 2019.
Finally, the tax policy rationale for the Fixed Deduction regime seem weak. Under this regime, the rate that is levied is either the flat PIT rate or the statutory CIT rate. However, instead of deducting actual expenses, businesses can deduct a fixed amount of 30% of turnover. Businesses within the regime can realise turnover up to USD 1 392 000 per year, which is high. Businesses of that size should be in a position to declare an actual tax return rather than declaring turnover in the simplified regime. This would increase transparency for government and strengthen tax compliance. In fact, the regime is likely only attractive for a narrow selection of profitable firms, as most firms that employ workers face costs (including salaries) that are higher than 30%. Moreover, it would be difficult to maintain such a regime with a progressive PIT rate schedule. Overall, consideration should be given to abolish the regime. Instead, Kazakhstan could introduce and maintain other types of tax simplification measures (such as less frequent tax payments and simplified bookkeeping requirements)
References
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Notes
← 1. The share of the Republic of Kazakhstan under production sharing contracts of oil companies, the bonuses of oil and non-oil sector companies, the levy for the use of the radio-frequency spectrum, the payment to compensate for historic costs as well as certain other items are classified as non-tax revenues according to the OECD Interpretative Guide, but are considered as tax revenues in Kazakhstan.
← 2. Statistics Committee of Kazakhstan.
← 3. Certain activities are excluded from the regime including those engaged in commercial real estate, providing property for rent and those registered as individual entrepreneurs.
← 4. Ministry of Labour and Social Protection. Further details can be found on the following website: https://egov.kz/cms/en/articles/taxation/edinyiplatezh.
← 5. Both are treated the same.
← 6. Beyond this 30% proportion, documentation is required and the maximum allowable deduction is 70%.
← 7. Assuming a fixed deduction of 30%.