Owing to its heavy dependence on exports of natural resources, the issue of transfer pricing is an important political and legal issue in Kazakhstan. On November 10, the lower chamber of the central Asian nation's parliament passed, and sent to the upper chamber, a draft law On State Control Over Transfer Pricing. The law aims to give the country's tax and customs authorities great power to monitor and adjust the taxation of all transactions where prices deviate from market prices.
The announced aim of the Kazakhstani government is to stabilize the domestic petroleum products market, and to monitor more closely exports of crude oil, thereby preventing losses which the country is allegedly experiencing owing to exports of petroleum products at less than world prices. The government claims that $500 million in tax revenues were lost last year as exporters sold their commodities abroad at below-market prices. Not surprisingly, many exporters dispute that claim. They point out that, because of Kazakhstan's remoteness from world markets, its landlocked setting and other unique factors, the country's products often cannot be competitive at prices prevailing elsewhere.
The draft law defines the term "transfer pricing" very broadly, and it includes prices used in the following types of transactions:
- transactions between mutually dependent parties (related
parties who have a direct or indirect effect on the economic
results of transactions between them);
- barter transactions;
- transactions involving offsets of counter
- transactions where a counter-party is registered (residing)
or has bank accounts in foreign countries, the legislation of
which does not provide for disclosure and submission of
- transactions where a counter-party is registered in a
country with a preferential taxation regime;
- transactions with legal entities that enjoy tax exemptions,
or have a rate which differs from the one established by the
- transactions with legal entities which have losses in
accordance with their tax declarations for the last two tax
- any other international transactions where the price deviates from the market price by more than 10 %.
The broad scope of this term suggests that, while the ultimate test is compliance with world prices, the draft law would allow the state authorities to challenge not only those transactions between mutually dependent parties, but virtually all transactions involving Kazakhstan (both domestic and international).
The draft law sets out in detail a formula for defining "related parties". That term includes, among others, all legal entities and individuals that are affiliated or controlled by each other, whether through ownership or management of shares, or assets. A different minimum ownership interest test is applied for non-resident parties (10%) than for Kazakhstani parties (25%).
The draft law provides for three different methods to be used when determining the market price:
- comparable uncontrolled price;
- costs plus price; and
- price of the subsequent sale.
The most frequently used method is likely to be the first. The other two methods will apply when there are no identical or similar transactions against which a comparison may be made.
The comparable uncontrolled price method establishes the market price, based on prices for identical (or similar) goods, works and services sold under comparable conditions, to a buyer unrelated to the seller. When determining the amount of deviation of a transaction price under this formula, the draft law directs the tax and customs agencies to consider the specific terms of each transaction (eg the volume of goods supplied, the contract's term, the payment mechanism, seasonal changes of demand, etc).
Where the state authorities determine that there has been a deviation from the market price, they are authorized to adjust the taxation relating to that transaction, including recalculation of corporate income tax, VAT, excise duty, royalties for subsurface users, and customs duty. Fines and penalties also may apply.
If the draft law is approved by the upper Chamber of Parliament, it is expected to become effective on January 1 2000.
Curtis Masters and Azamat Kuatbekov