What is the bookkeeping and fiscal accounting method used in Kazakhstan?

Kazakhstan bookkeeping and tax legislation uses accrual method of bookkeeping (Article 5 of the Law On accounting and financial reporting) and fiscal accounting (Article 192 of the Tax code enacted on 1st of January 2018).

What reporting standards are applicable in Kazakhstan?

Small enterprise companies may use (a) Kazakhstan national financial reporting standards, or (b) IFRS for small and medium enterprises, or (c) IFRS.

Medium enterprises may use (a) IFRS for small and medium enterprises or (b) IFRS.

Public companies and large business enterprises should only use IFRS.

Which Model Tax Convention is used in Kazakhstan? 

Most of double tax treaties, according to the Ministry of Finance of the Republic of Kazakhstan, are based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital (OECD MTC) and some of the double tax treaties are based on the UN Model Double Taxation Convention (UN MTC). The double tax treaty with the US is based on the US Model Income Tax Convention, nonetheless, the text of the Kazakhstan-US double tax treaty contains number of deviations towards the UN MTC.

Does the thin capitalisation rule apply in Kazakhstan?

Yes, the thin capitalisation rule is articulated by the Article 246 of the Tax code (enacted on 1st of January 2018) and deductible threshold is calculated according to the following formula:

(A+E) + (AE/AL) * (k) * (B+C+D), where

A – sum of interest, excluding the sums of B, C, D, E;

B – sum of interest which is due to related party, excluding the sum of E;

C – sum of interest which due to parties located in the low tax jurisdiction, excluding the sum of B;

D – sum of interest which is due to unrelated lender under the loans secured or guaranteed by the related party in cases where such security or guarantee is executed, excluding the sum of C;

E – sum of interest which is due for the loans provided by the Kazakhstan credit partnerships;

k – maximum coefficient (7 for financial organisations and 4 for other entities);

AE (average annual equity) – average annual sum of equity (is equal to average arithmetical sum of equity on the end of each month of the tax period);

AL (average annual liabilities) – average sum of liabilities (equal toaverage arithmetical maximal sum of liabilities on the end of each month of the tax period. Excluding the following liabilities: taxes, employee revenues,unearned revenues,except related party unearned revenues,interests and fees,dividends).

Does Kazakhstan have transfer pricing regulations?

 Yes, on 5th of July 2008 Kazakhstan has enacted the Law “On transfer pricing” applicable to cross-border transaction and some internal transactions.

What is the PE regime used in Kazakhstan?

The following items trigger constitution of a permanent establishment According to the Article 220 (Permanent establishment of a non-resident) of the Kazakh Tax Code (enacted on 1st of January 2018):

  • any place of manufacturing, processing, kitting, packaging and (or) supply of goods;
  • any place of management;
  • any place of geological research, exploration, developments for extraction of minerals and (or) extraction of minerals and (or) execution of works, rendering of services related to control and supervision of minerals’ exportation and (or) extraction process;
  • any place of management (including control and supervision) related to pipelines;
  • any place of activities related to installation, setup and operation of slot-machines (including detachable devices), computer networks and network channels, and also related to transportation or other infrastructure;
  • a place of sale of goods on the territory of the Republic of Kazakhstan;
  • any place of construction and (or) construction and installation works, and also services related to supervision of such works;
  • a branch or representative office;
  • a location of a person that provides intermediate services according to the Law ‘On insurance activities;
  • a location of a resident that is a party to a joint venture agreement concluded with a non-resident in accordance to the laws of other state or the Republic of Kazakhstan if activities under joint venture are executed on the territory of the Republic of Kazakhstan.
  • Should a non-resident provide services or execute works in Kazakhstan that are not covered by the above list through its personnel, such non-resident is considered to constitute a permanent establishment if the services or works are executed during 183 days within 12 months.

Non-resident is also considered to set up a permanent establishment during sale of goods on fairs and exhibitions should such sale take place for 10 days.

If a non-resident conducts business in Kazakhstan through its dependent agent (legal entity or individual) such non-resident is deemed to have a permanent establishment in Kazakhstan. For this purpose, a subsidiary company can also be considered as a dependent agent.

 Does Kazakhstan apply force of attraction in relation to active income?

Force of attraction is a situation where a source state taxes all income of an enterprise that has a PE in such source state regardless of nature of income that was not routed through such PE (earned directly by the enterprise or by other parts of such enterprise located in other states). The situation where a source state taxes some income of an enterprise that was not routed through its PE is called a limited force of attraction.

Kazakhstan domestic tax legislation employs a limited force of attraction rule under the Article 651 (2) (4) of the Tax code (enacted on 1st of January 2018), that is if a non-resident enterprise (including parts of such enterprise located outside of Kazakhstan) receives income from activities carried out in Kazakhstan that are similar to those activities that are carried out by its Kazakh permanent establishment, then such income (from activities not routed through its Kazakh PE) is taxable in Kazakhstan.

Do the tax treaties signed by Kazakhstan contain tax sparing provisions?

Many of the developing courtiers try to provide tax incentives for investor from developed counties in form of tax exemption. Tax sparing provision in a double tax treaty allows a taxpayer to claim for a tax credit in the state of its residence for the taxes that are ‘deemed’ to be paid rather than actually paid in the source state.

So long as the OECD 1998 “Tax Sparing: a Reconsideration” report discourage use of a tax sparing provisions, such provision is not stipulated in the Kazakh double tax treaties.

Which method of tax relief is used in Kazakhstan?

Kazakhstan taxes worldwide income of a tax resident without exemption. Instead it provides a unilateral tax credit against foreign taxes paid by a resident.

Does a permanent establishment derive profit or incur losses due to currency fluctuation?

No. The Tax code (enacted on 1st of January 2018) disregards the profits of a PE derived from, as well as losses incurred in connection to, currency fluctuation. This is a novelty of the latest Tax code as before it was unclear whether a PE should book losses or profits due to fluctuation of exchange rates between the local currency (KZT) and the functional currency of a PE and of an enterprise of which such PE is a part.