Article: Tax Code of 2018

Tax Code of 2018

Alzhan Stamkulov, partner

Last year, amendments to the Tax Code of the Republic of Kazakhstan were adopted. Most of the amendments begin to operate from January 1, 2018, and as a result, affect small and medium-sized businesses, as well as the interests of wealthy citizens. We will try to describe some tax novelties in 2018.

SHIF

Last year, employers were required to make transfers to the Social Health Insurance Fund (SHIF) of 1.5% of the employee's income. In 2018, there is no change in respect of employees. Employers will also retain this 1.5% for their employees and transfer it to the SHIF in 2018.

The changes relate to non-regular employees or freelancers working under contracts of a civil-law nature. If in 2017 all legal entities, as well as private entrepreneurs and owner-operated farms, were obliged to withhold and transfer contributions in the amount of 5% from the income of a freelancer, from 2018, freelancers are exempt from these contributions to the SHIF. This also applies to the individual entrepreneur himself, who does not pay contributions to the SHIF for himself personally. Accordingly, customers (employers) are not entitled to make deductions and transfers from incomes of freelancers to the SHIF from January 1, 2018.
We believe that freelancers are a good opportunity to increase the motivation and rewards of SME stakeholders, since the value of money "now" is several times higher than "future" money in an uncontrolled pension fund, not to mention the simplification of personnel records.

STR on the simplified declaration

The conditions for the application of the special tax regime (hereinafter - STR) under the simplified declaration have changed, for application of the regime there should be no more than 30 employees and the income should not exceed 2,044 minimal wages or 57 million tenge per year.

STR of a fixed deduction

In 2018 a new STR emerged, which allows the taxpayer to take some expenses for deductions. STR for a fixed deduction resembles a cut-down version of the generally established tax regime.

The conditions for the application of the STR of a fixed deduction are (1) the marginal revenue is not more than 12,260 minimum or 346 million tenge and the number of employees is not more than 50 people. If these limits are exceeded, the taxpayer must switch from the STR to the generally established tax regime.

The reporting year for the STR of a fixed deduction is a calendar year. The rates of income tax for this tax regime are 10% for private entrepreneurs and 20% for legal entities from total annual income (SRS), from which some expenses are deducted.

The list of expenses attributable to deductions is very narrow, if compared with the generally established tax regime. In particular, expenses related to deductions can only be the cost of purchasing goods, salary costs, travel expenses and VAT deductions. Unfortunately, the costs for the services of lawyers and business consultants are not specified, as the effectiveness, competitiveness and sustainability of the business depend on receiving these services, because most SMEs do not have stellar executives and brilliant businessmen and managers to operate without outside professional assistance.

The Tax Code lists what is recognized as income and what is not recognized as income for the STR of a fixed deduction. The list is almost the same as under the generally established tax regime.

In general, the STR of a fixed deduction allows to refer to deductions twice, that is, the above mentioned deductions and also to make an additional fixed deduction obtained by adjusting the annual average income. If the taxpayer has made an adjustment to the annual average income, the additional fixed deduction should not exceed 30% of this annual average income, and the total amount of all deductions (including an additional fixed deduction) should not exceed 70% of the adjusted annual average income. The adjustment of the annual average income is possible in case of goods return, transaction changes, discounts, price changes due to indexation, debt forgiveness during the reporting period. In practice, of course, it turns out that there is no double deduction; there is only one deduction, even with adjustments. Therefore, the calculations will occur so that the amount of deductions will not exceed 70% of the annual average income.

If we compare the STR of a fixed deduction to the generally established tax regime, then the generally established tax regime has more advantages for legal entities at the same rate of 20%, in particular, a more extensive list of deductions and loss transfers for 10 years. But, if you look from the standpoint of an individual – private entrepreneur, which has a 10% tax, the private entrepreneur can apply some deductions, which lawyers and notaries are now dreaming of. That is, for a private entrepreneur, an effective tax rate can be 1%, and if it faces losses, it does not pay anything to the budget.

If we compare the fixed deduction STR with the STR on the simplified declaration, then the fixed deduction STR will be beneficial to the taxpayer who is forced to buy goods, and risks losing. And with the STR on a simplified declaration, a tax of 3% is paid on all sales, without taking into account all costs and damages. Therefore, if you are renting a property, where there are no operating costs and risks are minimal, then it is better for you to use the STR on a patent or STR on a simplified declaration. If you are engaged in construction and installation or other contract work and are forced to buy various construction materials, hire personnel and have the risk of "going in the red," then it will be beneficial to use a fixed deduction or fixed tax regime in order to pay a decent salary to your staff and keep people on following works.

The complexity of accounting and tax accounting should not deter entrepreneurs. Your task is to find the most optimal tax regime for your business.

VAT

There were allegations that in 2018 VAT turnover would be lowered so that many entrepreneurs registered VAT. But no, in 2018 the turnover for mandatory VAT registration remained the same - more than 30,000 MCIs or slightly more than 68 million tenge. If your turnover grows, of course, you can open a second company and transfer some of the non-duplicating transactions and revenues.

Advocacy

Moderators-consultants and specialists of tax services certainly provided advice and facilitated the activities of private entrepreneur and SMEs. The tax code now officially obliges the tax authorities to assist taxpayers in clarifying tax legislation, providing software for submission of tax reports, or other reports established by this Code, in electronic form, with the formation of an electronic payment document for payment of taxes and payments to the budget.

Fee

Penalty for untimely paid taxes and payments to the budget is halved, and now is 1.25 of refinancing rates of the National Bank of the Republic of Kazakhstan. The penalty for using money has taken the form of a tax loan.

CFC

Back in 2016, the tax authorities announced the intention to tax the income and property of all individuals, including those that own offshore companies or property issued by offshore companies. As a rule, such offshore companies are registered in countries with preferential taxation.

The Tax Code of the Republic Kazakhstan since 2018 has introduced a mechanism for taxing the income of Kazakhstan individuals and legal entities that own or control foreign companies. Controlled foreign companies (including non-legal entities) (hereinafter referred to as CFC) generally meet the following criteria: (1) CFCs are registered outside of Kazakhstan in a country with an effective tax rate of less than 10%, (2) CFCs are controlled by Kazakhstan physical or legal entities at the expense of owning more than 25% of voting shares or in general more than 50% of the shares, or (3) or CFC exist in the form of a simple partnership (partnership) without the formation of a legal entity, where one of the partners is required to keep records of income and expenses or to manage the assets simple partnership (partnership).

The total profit of controlled foreign companies or permanent establishments of controlled by foreign companies (CFC in general) is included in the taxable income of a resident legal entity or the annual income of a resident individual and is subject to corporate or individual income tax in the Republic of Kazakhstan. Thus, when profits are repatriated by "schemes", for example, Kazakhstan-Luxembourg-off-shores, ultimate beneficiaries – Kazakhstan citizens – must pay the revenues received from these CFCs at the consolidated level. Tax evasion in Kazakhstan provides for criminal punishment with serving time in prison. Accordingly, the final beneficiaries and nominal holders need to review the "old schemes" for future additional charges this year already, taking into account this innovation. It is necessary to review the tax accounting of CFC trading operations, purchases of CFC services, passive income and ownership of real estate abroad through CFC.
 

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