Comments on the Amendments to the Law of the Republic of Kazakhstan “On Transfer Pricing”

Comments on the Amendments to the Law of the Republic of Kazakhstan “On Transfer Pricing”

Hereby we would like to provide brief comments to amendments to the Law ‘On Transfer Pricing’, as well as the description of difficulties that may be faced in the course of applying the amendments.

What transactions that are subject to the control over transfer pricing?

One of the transactions that are subject to control over transfer pricing is an international business operations. At the same time, international business transactions include exports and (or) import transactions for the sale-and-purchase of goods, transactions on work performance, services rendering where one of the parties is a non-resident operating in the Republic of Kazakhstan without a permanent establishment; transactions between residents of the Republic of Kazakhstan performed outside the Republic of Kazakhstan on the sale-and-purchase of goods, works and services.

Now, since 1 January 2010 the Law has been amended in terms of the provisions that controls applies to international business transactions and these transactions include exports and imports of goods.

So, we have that under Article 3 of the Law, control applies to international business transactions and they include only import and export of goods, while Article 2 of the Law control applies to all transactions.

What is a quotation period?

The Law was added with the concept of quotation period, i.e. a period of pricing, which amounts to not more than thirty calendar consecutive days, for which the price quotations were published on the stock exchange, established in the contract for sale of goods (works, services) during which, under terms of the transaction, the transaction parties determine an arithmetic mean value of the average daily price quotations for the relevant exchange goods (works, services), as well as for non-exchange goods, which prices are linked to quotation for exchange goods.

What goods are subject to the preferential quotation period?

Please note that if goods to be sold by you are exchange, then you are granted the quotation period of 30 calendar days. The quotation period is calculated as an arithmetic mean value of the average daily price quotations.

If you are selling non-exchange goods and these goods are not linked to exchange goods, then the period for market price determination will be, as before, one day, i.e. here is a nonsense.

Thus, these amendments decide only the issues of exchange goods and, of course, the goods that can be processed and subsequently sold on the stock exchange.

So what about goods that are not quoted? There is no information on market prices for such goods, no similar suppliers, and at the same time only one day is given for the market price determination. - That means the amendments are favourable not for all exporters or importers.

In addition, how should we deal with services and works? As you know, the stock exchanges do not publish either forwarding services or construction works, and if you sign a contract for the purchase on 1 January, and the service will be available on 25 January, the date of the market price determination remains the same, that is 25 January.

The duration of quotation period

For Oil – not more than five calendar days prior to the transfer of ownership to a buyer of goods (works, services) and not more than five calendar days after the transfer of ownership to a buyer of goods (works, services);

If you sell oil on Friday, then according to the world standards, the quotation period would be 5 quotation days, i.e. Friday, Monday, Tuesday, Wednesday, and Thursday.

Pursuant to the amendments introduced to the Law, the quotation period is 5 calendar days, i.e. Friday, Saturday, Sunday, and Monday, Tuesday.

Therefore, when determining the quotation period many companies will again face some clashes in quotation period, i.e. according to the world practice, week-ends and holidays are not considered as quotation period, while tax authorities in accordance with the amendments to the Law consider these days as a quotation period.

For instance

5 August            - 80                             Quotation period (80+85+70+75+74)/5 = 76,8

6 August            - 85                                         according to the world practice

7 August            - weekend                 

8 August            - weekend                  Quotation period (80+85+70)/3 = 78,3

9 August            - 70                                         according to the tax authorities

10 August          - 75

11 August          - 74

Moreover, there are many other unclear issues with respect to other goods.

As you are aware, under Article 2 of the Law, the quotation period is 30 calendar days, while Article 13 of the Law says that:

for exchange goods, except for oil - not more than thirty calendar days prior to the transfer of ownership, and not more than thirty calendar days after the transfer of ownership, i.e. 60-days period may be applied;

for non-exchange goods, which prices are linked to quotes on exchange goods - no more than thirty calendar days prior to the transfer of ownership, and not more than sixty calendar days after the transfer of ownership, i.e. 90-days period may be applied.

In this case, if you apply 35-days quotation period, then such quotation period is applied in violation of Article 2 of the Law, but without violating Article 13 of the Law, which implies that the tax authorities in their sole discretion will determine whether a given quotation period is transfer or not, since one article allows it, while the other does not.

How to calculate the arithmetic mean value of the average daily price quotations and how to apply it

The arithmetic mean value of the average daily price quotations is also unclear, that is Article 13 of the Law states that if the contract for sale of goods (works, services) provides for the use of the quotation period, the price of exchange goods, as well as non-exchange goods linked to quotation for exchange goods, shall be defined as the arithmetic mean value.

So, the result is the following: if Article 13 of the Law is applied, i.e. an arithmetic mean value, and during the quotation period the price for goods amounted to 20 US Dollars and 30 US Dollars, then the market price will be 25 US Dollars (20+30)/2, and the tax authorities will consider deviations from 25 US Dollars.

So, what about Article 10 of the Law, which says that in respect of exchange goods the taxation objects and (or) tax-related objects shall be adjusted subject to a range of prices and differentials?

Range of prices - series of values of market prices limited by the minimum and maximum values, i.e. a seller shall sell the goods within 20 US Dollars and 30 US Dollars, that means 20 US Dollars is not a transfer price.

Thus, if a seller sold the exchange goods at 20 US Dollars, then such price has been applied in breach of Article 13 of the Law, but without violating Article 10 of the Law, which implies that the regulatory authorities in their sole discretion will determine whether a given price is transfer or not, since according to Article 13, the seller must sell at 25 US Dollars, while according to Article 10 of the Law 20 US Dollars are sufficient to ensure that competent authorities do not adjust income.

The option to change a quotation period in the contracts

One more important thing is the concept of quotation period set forth in the contract for the sale of goods (works, services) that cannot be changed during twelve-month period after it has been set forth.

As you know, when the Law of the Republic of Kazakhstan ‘On Transfer Pricing’ was enacted, in particular on 1 January 2009, the quotation period for everything was 1 day, i.e. on the date of transfer of ownership.

Similar deals were also concluded by many companies since 1 January 2010, i.e. quotation period was defined as 1 day.

On 30 June 2010 the Law was amended in terms of the quotation period, and these amendments made a retroactive effect, i.e. they apply from 1 January 2010.

Many companies would like to change the quotation period in their contracts, but they cannot do so now as Article 13 of the Law states that quotation period established in a contract for the sale of goods (works, services) cannot be changed during the period of twelve months from the date of its establishment.

If a company wants to change the quotation period, it can only do so from 1 January 2010, as the Law does not allow to change quotation period earlier than this date, in this case date of introduction of this amendment into the Law, which is 1 January 2010, is unclear.

Reporting on monitoring of transactions

Nuances are also in Article 7 of the Law, i.e. reporting and documentation on monitoring of transactions. This article stipulates that transaction parties must submit to the competent authorities information on the margin, commission (agent) fee for a trading broker, trader or an agent, or, compensation for the performance of trade and intermediary functions. In this case, a transaction party shall provide information disclosing the components of the margin, if such information is available to the transaction parties; and if the margin includes commission (agency) fee to a trading broker, trader or an agent, or compensation for performing trade and intermediary functions, the authorised bodies do not consider these components when performing control.

It would be hard to state whether a margin includes trading broker fee (trader, agent) or compensation for the performance of trade and intermediary functions as these items are reflected by a buyer in the differential as one digit.

The question on how the competent authorities will distribute margin expenses items among several items remains open.

Monitoring of Transactions

In accordance with Article 6 of the Law, monitoring of transactions shall be performed by observing by the authorised bodies of the prices applied by transactions parties.

What transactions on goods (works, services) shall be reported to Tax authorities?

Monitoring of transactions shall cover international business transactions on goods (works, services), approved by the Resolution of the Republic of Kazakhstan No. 293, and dated 12 March 2009.

Who shall submit reporting in monitoring of transactions?

Pursuant to paragraph 2 of the Regulations to Monitoring of Transactions, approved by the Order of the Minister of Finance of the Republic of Kazakhstan No. 62, dated 12 February 2009, monitoring of transactions shall be performed by observing by the authorised bodies of the prices applied by transactions parties and collecting from taxpayers, which are subject to monitoring under the Code of the Republic of Kazakhstan ‘On Taxes and Other Obligatory Payments to the Budget’ (Tax Code), information on international business transactions, subject to the list of goods (works, services) in accordance with paragraph 2 of Article 6 of the Law.

In accordance with Article 623 of the Tax Code and the Resolution of the Government of the Republic of Kazakhstan No. 1344, dated 31 December 2008, the list of large taxpayers to be monitored was approved.

The clarifications on reporting for monitoring of transactions are also given in the letter from the Tax Committee of the Ministry of Finance of the Republic of Kazakhstan No. NK-05-22/8102, dated 25 August 2009.

The companies not included in this list of taxpayers, which are subject to monitoring, as well as the companies engaged in transactions with goods, which are not subject to monitoring, shall not submit reporting to the tax authorities.

In this case, pursuant to Article 7.2 of the Law, these companies shall be liable to keep records confirming the prices applied, and upon request from the authorised bodies shall submit the said records to the authorised bodies.

Best Regards,

Transfer Pricing Department

Tel.: +7 (727) 2445-777
Fax: +7 (727) 2445-776
info@gratanet.com
amendybayev@gratanet.com