Amendments to the Tax Code signed by President of RK

On December 21, 2022 the President of the Republic of Kazakhstan ("RK") signed the Law №165-VII "On Amendments and Additions to the Code of the RK "On Taxes and Other Mandatory Payments to the Budget" and the Law "On Enactment of the Code of the Republic of Kazakhstan "On Taxes and Other Mandatory Payments to the Budget". A considerable number of the amendments concern taxation of subsurface users.

Some key changes, to which we would like to draw your attention, are outlined below. Unless otherwise specified, the changes are effective from January 1, 2023.

Taxation of subsurface users

1. Special aspects of performance of tax obligations under contracts for exploration and production or production of hydrocarbons for complex projects

As of January 1, 2023, certain provisions of the Tax Code of the RK ("TC") have entered into force regulating the specific aspects of performance of tax obligations under contracts for exploration and production or production of hydrocarbons for complex projects (Article 722-1 of the TC). According to the amendments to the Code of the RK dated December 27, 2017 "On Subsurface and Subsurface Use" (Article 36), the complex projects, among others, include:

1. marine projects providing for exploration and (or) production of any hydrocarbons in the subsurface area(s) located in whole or in part within the Kazakhstani sector of the Caspian or Aral Sea;
2. onshore projects involving exploration and production of hydrocarbons in any subsurface area with certain parameters;
3. onshore gas projects involving exploration and (or) production of hydrocarbons in the subsurface area(s) containing a gas or gas condensate reservoir or field with a volume of the oil-saturated portion of 25% or less of the total volume of hydrocarbons in the reservoir or field.

• Deductions of expenses for geological research, exploration and preparatory works for the extraction of mineral resources and other deductions of a subsurface user

A separate tax depreciation rate has been established for expenses for geological research, exploration and preparatory works for extraction of mineral resources and other deductions of a subsurface user for complex projects.

Specifically, expenses incurred by a subsurface user prior to the commencement of production after commercial discovery for geological research, exploration, preparatory work for production and other deductions of subsurface user shall be deducted from the total annual income as of the commencement of production after commercial discovery in the form of depreciation deductions by applying a depreciation rate determined at the discretion of a subsurface user, but not higher than (paragraph 2 of Article 258 of the TC):

1. 37,5% - under a contract for exploration and production or production of hydrocarbons under complex offshore projects for the period provided for in paragraph 4 of Article 722-1 of the TC;
2. 25% - under other subsurface use contracts, including a contract for exploration and production or production of hydrocarbons under complex offshore projects after the expiration of the period referred to in subparagraph 1).

• Maximum depreciation rates applied by subsurface users for complex projects

New maximum tax depreciation rates applied by a subsurface user under a contract for exploration and production or production of hydrocarbons for complex projects are introduced, which are set out in Table No. 1 in the Appendix below (subparagraph 7-1 of Article 271 of the TC). At the same time, the application of double depreciation rates for subsurface users under a contract for exploration and production or production of hydrocarbons for complex projects is abolished (part four of paragraph 7 of Article 271 of the TC).

• Alternative subsurface use tax

Subsurface users under complex projects have been added to the list of payers of the alternative subsurface use tax (paragraph 4 of Article 766 of the TC). An alternative subsurface use tax is levied in lieu of historical costs, mineral extraction tax (“MET”) and excess profits tax.

The alternative subsurface use tax is calculated at updated rates based on the world oil price (see Table No. 2 in the Appendix), except for complex marine projects (Article 768 of the TC). Subsurface users in complex marine projects calculate the alternative subsurface use tax according to the rates listed in Table No. 3 in the Appendix.

At the same time, subsurface users who pay alternative subsurface use tax based on a notification sent before December 31, 2022 inclusive, shall calculate and pay alternative subsurface use tax until December 31, 2023 inclusive at the rates effective on the date such notification is sent.

• Property tax exemption

As of January 1, 2023, subsurface users under contracts for exploration and production or production of hydrocarbons for complex projects (except for onshore gas projects) within the framework of contractual activities are not property tax payers (subparagraph 5 of Article 517.3 of the TC).

2. Changes in the definition of "production"

As of January 1, 2024, primary processing will be excluded from the definition of "production" (subparagraph 49 of Article 1.1 of the TC):

"Production – the entire complex of works (operations) directly related to the extraction of mineral raw materials or solid minerals from the subsurface to the surface and (or) the separation of minerals from their places of occurrence, including from technological mineral formations, as well as related to the intake of groundwater."

3. Modification of the mechanism for calculating MET on mineral raw materials

As of January 1, 2024, the mechanism for calculating MET on mineral raw materials will be changed. In particular, reserves will be accounted for in accordance with the Kazakhstan Code for Public Reporting of the Results of Geological Exploration, Mineral Resources and Mineral Reserves (KAZRC Code) (Article 744 of the TC).

For the purpose of determining the object of taxation, the extracted mineral raw materials and (or) solid minerals are determined within the framework of the state balance sheet effective as of the day preceding the day of transition to inventory accounting in accordance with the KAZRC Code, as well as taking into account mineral raw materials extracted from written-off reserves (loss recovery) in the deposit.

General tax issues

4. New restrictions regarding the application of tax treaties in relation to passive income

Additional conditions are introduced for applying a reduced tax rate to the income of a non–resident - an affiliate party in the form of dividends, interest and royalties received from sources in the RK in accordance with the provisions of the Double Tax Treaties, to which the Multilateral Convention ("MLI") applies (paragraph 1 of Article 667 of the TC):

• such income should be subject to inclusion in the taxable income of a non-resident in a foreign state, in which the non-resident is a resident, and is subject to taxation without the right to exclude such income from taxable income and (or) to reduce (adjust) the taxable income by the amount of such income in the reporting period, and (or) to refund  the tax paid on this taxable income in the reporting and (or) subsequent periods;
• the nominal tax rate applied to the taxation of such income in a foreign country in which the non-resident is a resident, during the reporting period, is at least 15%.

This change may have a significant impact on current ownership structures as most tax regimes in other jurisdictions do not tax certain types of passive income by exempting or adjusting taxable income.

5. Taxation of non-resident entities’ income on advances received

As of January 1, 2023, non-resident’s income in the form of advance payment (prepayment) is included in the list of non-resident’s income from sources in the RK if the following conditions are met simultaneously (subparagraph 5-1 of paragraph 1 of Article 644 of the TC):

• an international agreement for the avoidance of double taxation has not been signed with the non-resident’s state;
• the term of the agreement (contract) is more than two years.

6. Determination of taxable import in the Eurasian Economic Union (taxation of temporarily imported goods in the RK)

Starting from January 1, 2023, import of temporarily imported goods shall be recognized as taxable and shall be subject to VAT on imported goods from the date of accounting for such goods if temporarily imported goods are in the territory of the RK for more than two years from the date of import  (paragraph 5 of Article 440 of the TC).

7. Accounting and primary documents signed with an electronic digital signature (EDS) on the Electronic Invoices (EI) portal are recognized as accounting documents

Statutory accounting documentats or primary accounting documents issued through the EI portal using EDS are recognized as accounting documentats (paragraph 2 of Article 190 of the TC). Consequently, taxpayers (tax agents) are not required to submit copies of VAT invoices, accounting documents and primary accounting documents registered on the EI portal upon request of tax officials during a tax audit.

These amendments are introduced retrospectively from April 1, 2018.

8. Desk control

• The requirements for the provision ofrovide information and documents in response to a notification on results of desk control have been established

As of January 1, 2023, in case of disagreement of a taxpayer with violations specified in a notification, the following should be submitted to the tax authority (paragraph 2 of Article 96 of the TC):

• for violations with a medium degree of risk - explanations about the absence of violations attaching extracts from registers (tax and/or accounting registers) and/or documents related to these violations, confirming the reliability of tax reporting data;
• for violations with a high degree of risk - explanations with attached copies of documents confirming the fact of the operations (transactions) specified in the violations.
• Restriction of electronic VAT invoicing

As of January 1, 2023, the issuance of electronic invoices will be restricted if, according to the results of a desk control, violations with a high degree of risk are detected and these violations are not resolved within the prescribed period or are recognized as unfulfilled.

The deadline for the taxpayer to execute a desk control notification is 30 business days from the date of its delivery.

The decision on restriction of issuance of electronic VAT invoices is made within one business day from the day on which a notification was not fulfilled or recognized as not fulfilled. The decision to lift the restriction on the issuance of electronic VAT invoices shall be made within one business day after the day on which the notification was fulfilled. The taxpayer's appeal against the decision on restriction of issuing electronic invoices does not cancel its effect (Article 120-1 of the TC).

9. Changes in the taxation of insurance and reinsurance organizations

As of January 1, 2023, the tax accounting of insurance and reinsurance organizations is based on the reporting data established by the National Bank of the RK (Article 190 of the TC). Previously, the tax accounting of such organizations was based on the International Financial Reporting Standards (IFRS) and the requirements of the legislation of the RK on accounting and financial reporting.

10. Exemption from VAT on the sale of household electrical appliances

A new VAT exemption for the sale of household appliances and (or) consumer electronics appliances has been introduced, subject to certain conditions (Article 394 of the TC).

We will be happy to discuss the impact of these amendments on your company and provide the necessary support in adapting to changes / revision of the business model in the Republic of Kazakhstan.

Authors:

• Roman Yurtayev
• Yekaterina Zhgutova
• Rafael Khaidarov