19
#87/2020
ARTICLES
by Assiya Atekeyeva
Senior Manager, Tax & Legal, KPMG Kazakhstan
Aliya Zhylkybayeva
Senior Consultant, Tax & Legal, KPMG Kazakhstan
At present, more than 130 countries including Kazakhstan
have participated in the OECD’s G20 Base Erosion and
Pro t Shifting Project (BEPS Project). By taking part,
member countries collaborate to implement and develop
their BEPS actions on an equal footing and in parallel with
OECD and G20 members.
The result is a paradigm shift towards transparency,
information exchange, and clear and fair taxation. National
economies today are integrating to deal with tax avoidance
and tax abuse and, given the magnitude of changes,
Kazakhstani companies and foreign investors cannot carry
on with ‘business as usual’. Firms and investors must adopt
tax approaches in line with global trends.
Since 2017 – when Kazakhstan joined the BEPS Project
– Kazakhstan’s tax legislation has evolved to re ect these
global changes in international taxation. The article below
focuses on issues that have been widely discussed in the
global tax community and are progressively becoming part
of Kazakhstan’s tax routine.
Controlled Foreign Companies
In 2018, Kazakh tax legislation introduced new controlled
foreign company (CFC) regulations. Accordingly, a Kazakh
tax resident owning a CFC that meets certain criteria was
required to include the nancial pro ts of that CFC in his/
her taxable income. A year later, these CFC rules were
amended to exclude foreign companies registered in
countries with which Kazakhstan has a tax treaty. However,
these amendments were in force only from 1 January 2018
to 1 January 2020.
Although the CFC rules followed OECD guidelines,
taxpayers faced di culties in their application because
they lacked clarity on some issues and required further
development. Therefore, Kazakhstan’s Parliament is
currently reviewing a draft legislative act that will introduce
changes to tax law, including the CFC rules. The changes
propose to clarify taxation of CFC pro ts and to retain the
provision that CFCs registered in countries with which
Kazakhstan has a tax treaty are excluded from CFC taxation
if the o cial corporate income tax rate in that treaty-partner
exceeds 75% of Kazakhstan’s corporate income tax rate
(i.e. more than 15%).
RECENT TRENDS IN INTERNATIONAL TAXATION
Country-by-Country Reporting
In Kazakhstan, three-tiered reporting has been legally
binding since 1 January 2018, including noti cation of
membership in multinational enterprises (Noti cation),
a Country-by-Country report (CbC Report), Local and
Master les. The law made signi cant changes to local
transfer pricing reporting procedures for multinational
enterprises (MNEs) operating in Kazakhstan by introducing
requirements for MNEs to le CbC Reports, Noti cation,
and Local and Master les.
One of the documents, a CbC report, should be submitted
if group revenue exceeds 750 mln Euros. A CbC report can
be submitted by an ultimate parent company of a group in
Kazakhstan, or by a MNE member rm authorized by an
ultimate parent to le the report. The rst reporting year for
CbC reporting is 2016, and for Local File and Master les,
2019.
There was a common approach that unjusti ed application
of treaty bene ts primarily refers to bene ts on passive
income (dividends, interest, royalties). As such, a number
of tax treaties requires that an entity claiming tax treaty
bene ts should be the bene cial owner of any income
(dividends, interest, royalties). Kazakhstani tax law also
stipulates that non-resident recipients of passive income
from Kazakhstan sources are obliged to provide a rationale
for why they are the bene cial owner of this income.
Since 1 January 2018 this requirement has been extended
to other types of income, including business pro ts and
leasing payments. However, it is expected that, starting
from this year (2020), the bene cial owner requirement will
apply only to transactions with related parties in accordance
with the proposed changes to tax legislation.
Nonetheless, current tax law does not specify the
documentation that the bene cial owner should provide
to its Kazakh counterpart in order to support its status, or
any con rmation procedures required to prove bene cial
ownership status. Since the burden of proof of bene cial
owner status is on Kazakhstani tax agents, they should
be ready to provide necessary documentation if the
Kazakhstan tax authorities challenge bene cial owner
status. This creates additional complexity for Kazakhstani
tax agents working with nonresidents.
Kazakhstan’s tax authorities might undertake to refer
to OECD recommendations and the experience of
neighboring countries. Speci cally, they might refer to
Russian tax authorities, who have issued clari cation letters
with guidance on de ning the bene cial owner of income,
including reference to documents and other supporting
information to justify nonresidents’ bene cial owner status
( nancial statements, tax returns, lists of employees, etc.).
20
#87/2020
ARTICLES
Multilateral Instrument
As for treaty abuse practices, the network of current tax
treaties appeared to be ineective. New challenges
required changes and as such, the OECD developed a
multifunctional “tool” to introduce these changes into existing
bilateral tax treaties. The Multilateral Instrument (MLI) is a
set of provisions – mandatory (“minimum standard”) and
optional – that amend tax treaties in a synchronized and
ecient manner. For a tax treaty to be modied by the
MLI, both contracting states must be signatories to the MLI
and must indicate that their tax treaty is a ‘Covered Tax
Agreement’ (CTA).
The MLI ‘minimum standard’ is obligatory for every state
that agrees to implement the MLI. The objective of the
minimum standard is to prevent treaty abuse and improve
dispute resolution procedures. The MLI stipulates two
tests to determine whether an entity is eligible to claim tax
treaty benets: the Principle Purpose Test (PPT) and the
Simplied Limitation on Benets Test (SLOB).
While the PPT focuses on the essence of the arrangement/
transaction, SLOB provides a specic list of criteria for an
entity applying for benets under a CTA. To pass the PPT,
the claiming party must provide a rationale showing that the
primary purpose for using the CTA in the transaction is not
to acquire CTA benets. The SLOB test, when compared
with the PPT, has considerably stricter criteria and the
potential to hinder many cross-border arrangements.
The PPT is mandatory for all MLI signatories, while the
SLOB is optional. The good news is that SLOB will apply
to a tax treaty if both jurisdictions choose to apply it. As
of today, there are 14 countries that have opted for the
SLOB, including Kazakhstan, Armenia and Russia. The
overwhelming majority of European countries have chosen
PPT alone (minimum standards), limiting their exposure to
the MLI.
There are also optional provisions to prevent treaty-shopping
arrangements with respect to dierent categories of income,
including dividends and capital gains. Additionally, the MLI
provides a bundle of changes for creating and operating
permanent establishments.
Kazakhstan has published its ocial reservations and MLI
notications, and in so doing conrmed its intention to
implement not only the minimum standard, but a number
of optional provisions. As of today, the MLI legislative act
to be ratied in Kazakhstan is under review in the Senate.
It is reasonable to assume that the MLI will be ratied in
Kazakhstan in 2020 and will enter into eect in 2021.
Tax Treaty with Cyprus – New Opportunities
The position of Cyprus for tax purposes in Kazakhstan has
taken a 180-degree turn in recent years. Although Cyprus
was once regarded as a tax haven jurisdiction, it has now
been removed from the “black list” and has become a tax
treaty partner with Kazakhstan.
Kazakhstan ratied a tax treaty with Cyprus on 30 December
2019, and on 17 January 2020 the treaty came into force.
For residents of Kazakhstan and Cyprus, the treaty benets
will be available for taxes on derived income beginning 1
January 2021.
Cyprus is known as a country providing a wide range of tax
benets for foreign investors. In comparison to countries
in Western Europe, which also have business-friendly tax
regimes, Cyprus has many comparative advantages - low
setup and operational costs, as well as simple administrative
procedures. In addition to these benets, investors from
Kazakhstan can now claim lower tax rates on dividends,
interest and royalties payable from Kazakhstan to Cyprus
as stipulated in the tax treaty, as well as exemption for
active income (income from provision of services).
Conclusion
The modication of Kazakhstan’s tax legislation may have
an impact on the tax strategies of Kazakhstani companies
and foreign companies investing in Kazakhstan, and
therefore the above changes should be carefully considered
when structuring inbound or outbound investments.
