Transfer Pricing in Kazakhstan
TP in Kazakhstan has not undergone many notable changes in 2015 and 2016; only a small number of legislative changes, TP reforms and enforcement actions have been implemented. However, there was a noteworthy change with regard to the structure in the governmental system through the implementation of a reform which combined the tax and customs authorities into a single State Revenue Committee. In the course of 2016, discussions have been taken place between the authorities and different taxpayer associations, as well as industry specific bodies concerning future reforms in TP. They focus for instance on i.e.:
- The cancellation of the mandatory requirement for the submission of the annual monitoring report by large taxpayers (in lieu thereof the monitoring report would be submitted to the authorities upon explicit request);
- The introduction of stricter requirements relating to transfers/receipts of funds for transactions via offshore bank accounts.
Even though Kazakhstan does not belong to the list of OECD member states, its contemporary TP law has some common features with the OECD Transfer Pricing Guidelines (OECD Guidelines). On January 22, 2015, Kazakhstan signed a two-year memorandum of understanding with the OECD, which covers various matters, including taxation. Thus, there is the possibility of future convergence between the Kazakh tax legislation and OECD programs, frameworks and principles. However, one of the key differences from the OECD Guidelines is the fact that the Kazakh TP legislation applies to all international business transactions without distinguishing between related and unrelated parties. Please note: Even though an approach in tax matters between Kazakhstan and the OECD took place, the TP law in Kazakhstan in certain aspects significantly differs from the key principles laid down in the OECD Guidelines as it contains a number of unusual concepts. The arm’s length principle introduced by the Kazakh tax law focuses mainly on the transaction price rather than on the financial results of the transaction in general. This results in a restriction of the application of this principle with regard to profit-based transaction methods, which are included in the law. Furthermore, although the profit split method and transaction net margin method is recognized by TP Law, there is no any clear guidance on the approach or application of these two methods, so in practice these methods are rarely applied in Kazakhstan. Kazakhstan’s TP legislations are considered one of the most detailed within the Commonwealth of Independent States. The relevant laws on TP in Kazakhstan are laid down in the Law of the Republic of Kazakhstan № 67-IV (dated 5 July 2008) on “Transfer Pricing”, which entered into force on January 1, 2009 as well as in the Code of the Republic of Kazakhstan “On taxes and other obligatory payments to the budget” (the Tax Code).
Kazakhstani Transfer Pricing regulations, rulings and guidelines
- Law of the Republic of Kazakhstan № 67-IV (dated July 5, 2008) on “Transfer Pricing”.
- Law of the Republic of Kazakhstan № 377-IV (dated January 6, 2011) “On State Control and Supervision in the Republic of Kazakhstan”.
- Order of the Minister of Finance № 129 (dated March 26, 2009) “On approval of the regulation on the procedure of interaction of the authorized bodies during transfer pricing control”.
- Order of the Minister of Finance № 194 (dated March 19, 2015) “On approval of the list of goods (works, services) international transactions that are subject to monitoring”.
- Resolution of the Government № 292 (dated March 12, 2009) “On approval of the list of officially recognized sources of information on market prices”.
- Resolution of the Government № 74 (dated February 3, 2011) “Concerning the approval of Regulations (methodology) on pricing of natural uranium concentrate”.
- Resolution of the Government № 741 (dated June 30, 2011) “Concerning the approval of Regulations (methodology) on pricing of sponge titanium, titanium ingots and elementary magnesium ingots”.
- Resolution of the Government № 1197 (dated October 24, 2011) “On approval of the rules for concluding an agreement on application of transfer prices”.
- Resolution of the Government № 1324 (dated November 11, 2011) “On approval of the reporting forms for monitoring of transactions and rules for conducting monitoring of transactions”.
- Resolution of the Government № 848 (dated June 26, 2012) “On approval of rules for identifying of market price of goods under production sharing agreements, including transactions with parties registered in tax havens”.
- Rules for correction of cost for imported goods from members of Customs Union № 1249 dated November 28, 2010.
- List of exchange goods adopted by government regulation, № 638 (dated May 6, 2009).
- List of countries with concessional tax regime adopted by government regulation, № 595 (dated December 29, 2014)
Main Provisions and Definitions of the Transfer Pricing Law
Applicability of TP rules
TP control applies in Kazakhstan regardless of whether the parties to a particular transaction are related. Hence, local TP rules apply to related and unrelated parties regarding international business transactions as well as to certain domestic transactions related thereto. According to TP law “related parties” are individuals or entities whose special common relations may influence the economic results. The term “international business transactions” is defined as incorporating:
- Export and / or import transactions for the purchase and sale of goods;
- Transactions for the execution of works and rendering of services, when one of the parties is a nonresident carrying out activities in Kazakhstan without a permanent establishment;
- Transactions undertaken by residents of Kazakhstan that are executed outside Kazakhstan for the purchase and sale of goods, the execution of works, and delivery of services.
The scope of TP law is extremely broad due to the fact that TP control includes certain transactions which affect unrelated parties. Revenue authorities are authorized to control transfer prices applied for the following types of international business transactions:
- Between related parties;
- Barter / exchange transactions;
- Involving counter-claims and reducing claims;
- With parties registered in tax havens;
- With legal entities that have taxation privileges;
- With legal entities that have reported losses in their tax returns for two tax years previous to the transaction
Control by the state authorities can further be carried out with regard to domestic intercompany transactions within the territory of the Republic of Kazakhstan if they are directly related with international business transactions:
- When minerals are sold by a subsoil user,
- If one of the parties benefits from tax exemptions,
- If one of the parties has losses for the two last years preceding the year of the intercompany transaction.
Transfer Pricing Methods and Information Sources
In order to determine the market prices, one of the following five methods has to be applied:
- Comparable uncontrolled price method (CUP)
- Cost plus method
- Resale price method
- Profit split method
- Transactional net margin method
Please refer for the more detailed description of the methods here. The above methods should be applied in hierarchal order. The primary method is the CUP method, which must be used in first instance. Any next method can be applied only if taxpayer can prove that the preceding method is not applicable. Please note: In the course of 2015 – 2016, discussions about potential future reforms are taking place between the authorities and different taxpayer associations as well as industry specific bodies. The discussions concern, among others, the change in the order of the pricing methods to be applied. In case the CUP method is not applicable, taxpayers would be allowed to apply any of the other four methods that is most appropriate for a particular case. However, these discussions are not successful so far. Resolution of the Government № 292 (dated March 12, 2009) “On approval of the list of officially recognized sources of information on market prices” introduced a list of international bulletins, magazines and other sources of information which are officially recognized sources of information on market prices. This list takes precedence over other sources. Other sources of information may be used in the following hierarchal order:
- Officially recognized sources of information;
- Information on stock exchange quotations;
- Information of governmental bodies, authorized bodies of other states and organizations;
- Information provided by special TP software, information submitted by the parties to the transaction and other sources of information.
Like with the TP methods, taxpayer can refer to a particular source of information only if it proves that the preceding source is not applicable.
Advance Pricing Agreements
Advance pricing agreements (APA) are possible. APA is signed between the tax authority and its duration is limited to three years. By law the process takes approximately 90 days, but in practice is process is much longer. In practice, only a handful of companies have succeeded in arranging an APA because of an extensive list of documentation requested by authorities and their overall reluctance to enter into APAs.
Transfer Pricing Documentation
Taxpayers are required to maintain documentation justifying the prices used in international business transactions. In Kazakhstan, documentation requirements are established for two categories of transactions:
(1) Transactions with goods / work / services which are subject to monitoring: The Rules for Performance of Monitoring Transactions were introduced in Kazakhstan in February 2009. In compliance with these rules, particular taxpayers, who are involved in intercompany transactions, are supposed to submit a special pricing monitoring declaration by May 15, following the financial year after the controlled transactions occurred. Additional supporting documents for monitoring purposed may be requested and have to be submitted within 30 calendar days after receiving the request. In order to fall under the abovementioned requirement the following two conditions have to be met:
- The taxpayer is on the list of the 300 largest taxpayers, which is approved and issued by the Ministry of Finance on annual basis.
- The bargain item is on the officially approved list, i.e. only transactions with certain goods and/or works and services should be reported.
(2) All other transactions with goods / work / services which are subject to TP control: Formal TP documentation requirements apply to international business transactions and domestic transactions related thereto and oblige taxpayers to keep and maintain documentation verifying the applied transfer prices. Reporting includes:
- Financial Statements;
- Documentation confirming the justification of prices used;
- The TP method used to determine the market price and the source of information;
- A description of the goods/work/services, terms of the contract and business strategy and information on the trade broker’s margin; and
- Other documents and information which provide the accordance of used prices with market prices.
Upon request of the relevant tax authority, taxpayers have to submit the necessary documentation within 90 days of the date of the competent authority’s request. The tax authority also has the right to request information from banks, financial institutions, insurers, auditors, stock traders. Please note: The law stipulates an extensive list of information that has to be included into the TP documentation. It is of high importance to comply with the relevant rules and requirements. Acceptable languages for documentation are Russian and Kazakh. However, the reporting for TP monitoring is supposed to be in Russian. TP control is carried out by the relevant authority using the following means
- Monitoring of certain transactions;
- Carrying out of TP audits;
- Enquiries of the parties of the transaction and any third parties directly or indirectly involved in the transaction as well as the competent authorities of the other jurisdictions involved.
Please note: The TP law does not allow for any deviation of a transaction price from a comparable arm’s length price except for agricultural products where deviation of up to 10 percent is tolerable. Furthermore the TP law stipulates the rules that specify pricing of uranium, titanium and magnesium products. The recent updates to the law refer to the implementation of the rules on pricing of oil and gas products being sold under production-sharing agreements.
The failure to provide documents or monitoring reports by the specified deadline is subject to an administrative fine of up to 350 MCI. MCI is the monthly calculation index determined for a relevant year by the Law “On the Budget of the Republic of Kazakhstan.” The MCI in 2017 is KZT 2,269.00 (approximately EUR 7 at current exchange rates). If as a result of a TP audit the tax authorities detect price deviations resulting in additional taxes, an administrative fine of up to 50% of the amount of underreported taxes applies. This fine is not levied if taxpayer voluntarily reports additional tax liabilities arising from non-arm’s length transaction before TP audit commences. Interest charge on underpaid tax of 2,5 times the refinancing rate established by the National Bank for each day the tax obligation remains overdue still applies in either case.
What does it mean for you?
We consider that with the enforcement of the (new) TP regulations in Russia, Ukraine, Poland, Kazakhstan and Belarus, the matter of TP in the different countries will attract the increased attention of the relevant tax authorities. Therefore, the management of the company’s pricing policy and documentation of transactions will require additional consideration by taxpayers. The following steps should be undertaken in order to be prepared for a TP audit:
1. Examine intercompany transactions in order to prepare a list of transactions which are subject to TP control and verify whether or not you are above the relevant thresholds and need to prepare TP notifications and TP documentation.
2. Select the appropriate TP method under the local law.
3. Analyze the performed functions, involved risks and used assets in order to prepare a functional analysis.
4. Carry-out a benchmark analysis.
5. Prepare the TP notification / report and TP documentation.
It should be taken into consideration that the preparation of the TP documentation is a time-consuming procedure. Therefore, it is important to calculate what additional personnel should be hired or to outsource the process to external consultants. However, preparation for the TP policies implementation should start as soon as possible in order to meet legislative requirements. Please note: Due to country-specific differences in TP law, the TP methods used in the abovementioned countries might differ significantly.
How we can help you
SCHNEIDER GROUP has a team of accountants and tax experts with extensive experience in accounting and taxation in our offices in Russia, Ukraine, Poland, Kazakhstan and Belarus, who will be pleased to provide you with:
- An analysis of your transactions which may be subject to TP control;
- A benchmark study to check if your intercompany prices comply with the “arm’s length” principle
- Preparation of the TP documentation for your controlled transactions;
- Preparation of the notifications/reports to the tax authorities about controlled transactions;
- Support to your in-house team in preparing TP documentation and notifications.