Tax Reforms to Boost Economy

Kazakhstan Unveils Ambitious Tax Reforms to Boost Economy

In his recent State of the Nation Address titled "Economic Course of a Just Kazakhstan," President Kassym-Jomart Tokayev outlined a series of crucial reforms aimed at enhancing the country's economic landscape. Central to his address was the imperative need for comprehensive tax reform, emphasizing fairness, simplification, and efficiency in the tax system.

One of the pivotal points addressed by President Tokayev was the differentiation of tax rates across various sectors of the economy. This measure aims to distribute the tax burden in proportion to the complexity of production, reflecting a commitment to fairness and equity in fiscal policy.

President Tokayev's Vision for Fair and Efficient Taxation

Acknowledging the concerns of entrepreneurs, President Tokayev highlighted the cumbersome VAT refund procedure as a significant obstacle to improving the investment climate in Kazakhstan. He called upon the Government to swiftly address this longstanding issue to foster a more favorable environment for business and investment.

President Tokayev stressed the urgency of accelerating the introduction of progressive taxation as part of a comprehensive reset of tax policy. He called upon both the Government and Parliament to demonstrate bold leadership in enacting these reforms, underscoring the importance of rigorous planning and implementation to achieve sustainable economic growth and social development in Kazakhstan.

Furthermore, President Tokayev underscored the importance of simplifying tax incentives to strategically drive economic growth. He emphasized that uncollected taxes directly impact essential public services such as hospitals, roads, and schools, making streamlined tax policies imperative for sustainable development.

As part of his reform agenda, President Tokayev proposed a substantial reduction of tax benefits by at least 20%. He stressed the necessity for remaining incentives to be granted based on transparent criteria, devoid of individual projects or personal affiliations, ensuring accountability and effectiveness in tax administration.

In a bid to modernize tax administration, President Tokayev advocated for transitioning to a service-oriented model in interactions between fiscal authorities and taxpayers. This approach aims not to punish but to prevent non-compliance, thereby promoting a cooperative and supportive environment for businesses.

Digitalization emerged as another cornerstone of the proposed reforms, with President Tokayev calling for complete digitalization of tax control processes. He proposed a significant reduction—by 30%—in the number of tax reporting forms, streamlining bureaucratic processes to enhance efficiency and reduce compliance burdens on taxpayers.

Moreover, President Tokayev urged for a reduction of at least 20% in the total number of taxes and mandatory payments to the budget. He suggested eliminating redundant taxes where their fiscal impact is negligible, consolidating the remaining types to simplify the tax system and enhance its effectiveness.

Building on successful initiatives like the retail tax, President Tokayev announced plans to expand its scope as part of broader efforts to enhance revenue collection and ensure fairness in taxation.

President Kassym-Jomart Tokayev's State of the Nation Address outlined a clear roadmap for revitalizing Kazakhstan's economy through comprehensive tax reforms. By prioritizing fairness, simplicity, and efficiency, these reforms aim to create a more conducive environment for business, foster economic resilience, and ensure sustainable development for all citizens.

Simplifying VAT Refunds to Improve Investment Climate

President Kassym-Jomart Tokayev's call to overhaul Kazakhstan's Tax Code has prompted significant reforms aimed at achieving a delicate balance between strengthening budget revenues and fostering robust economic growth. Deputy Prime Minister and Minister of National Economy Nurlan Baibazarov recently outlined key amendments planned for the Tax Code, emphasizing their dual purpose of supporting public sector functions while stimulating business activity and investment.

Central to the proposed reforms is the principle of balance. The Tax Code revisions aim to ensure sufficient budgetary income to sustain social programs and fulfill state obligations, while concurrently incentivizing entrepreneurship, boosting investment, and driving industrial output.

"One of the primary focuses will be on enhancing tax administration through a service-oriented model," stated Vice Premier Baibazarov. This model shifts emphasis from punitive measures to proactive support and guidance for businesses, promoting compliance and easing administrative burdens through comprehensive digitization of tax processes.

A cornerstone of the reform agenda is the reduction of tax benefits by more than 1.3 trillion tenge, aligned with President Tokayev's mandate to cut such benefits by at least 20%. These measures are designed to streamline the tax system, ensuring that remaining incentives are transparent and conducive to sustainable economic development.

To invigorate economic activity and attract both domestic and foreign investments, the revised Tax Code preserves essential investment incentives while introducing new measures. Notably, support for geological exploration aims to uncover untapped potential in the mining sector, laying groundwork for future growth.

Recognizing the importance of small and medium-sized enterprises in driving economic dynamism, the reforms propose simplifying special tax regimes for the self-employed, small businesses, and farmers. Additionally, a differentiated approach to corporate income tax is envisaged to optimize budget revenues while encouraging high-value investments in manufacturing.

"Increase in the adjustment of customs value rate for high-margin financial operations and gaming business is proposed, while maintaining current rates for the real sector," Vice Premier Baibazarov clarified. Furthermore, incentives such as reducing Corporate Income Tax (CIT) for investments in advanced manufacturing processing underscore the government's commitment to promoting industrial modernization.

In addressing procedural bottlenecks, plans include automating the VAT refund process to expedite liquidity for businesses. Moreover, a proposal to eliminate personal income tax on pension income at a 10% rate aims to alleviate tax burdens on retirees, pending legislative approval.

Baibazarov emphasized that final decisions on these proposals rest with the Parliament and the Head of State. However, these initiatives collectively aim to cultivate a more favorable tax environment conducive to sustained economic growth and business expansion in Kazakhstan.

A Tool for Fairness and Revenue

As Kazakhstan charts its course towards economic resilience and prosperity, the planned reforms to the Tax Code reflect a strategic alignment of fiscal policy with national development priorities. By prioritizing efficiency, fairness, and investment promotion, these reforms are poised to bolster Kazakhstan's competitiveness and attractiveness as a destination for both domestic and international investors.

Azamat Amrin, Vice-Minister of National Economy, recently unveiled significant reforms poised to reshape Kazakhstan's tax landscape under the new Tax Code. At a press conference held at the Central Communications Service Square, Amrin detailed several key adjustments aimed at reducing complexity, promoting economic efficiency, and aligning with international tax practices.

A pivotal highlight of the proposed reforms is a substantial reduction in the number of taxes and mandatory payments to the budget by at least 20%. "As outlined by the head of state, taxes with minimal fiscal impact will be eliminated, and some will be consolidated," Amrin explained. Currently, Kazakhstan imposes a total of 12 taxes, a structure largely in line with global norms. Notably, the proposal includes merging the unified land tax into the personal income tax, while maintaining a favorable regime for peasants and farmers.

Moreover, Amrin addressed the consolidation and reduction of mandatory payments, emphasizing efficiency gains. "We plan to merge payments related to the use of water resources, forests, and wildlife into a single payment for natural resource use," he stated. Overall, the reforms aim to streamline payment processes by reducing 77 types of rates and 6 types of fees, simplifying administrative burdens on taxpayers.

In another significant move, the reforms include the removal of 5 types of state duties and the reduction of rates across 51 others, fulfilling the commitment to reduce the overall number of taxes and payments by 20%.

During the presentation of the new Tax Code, Amrin also introduced mechanisms to implement luxury taxes. "Higher property tax rates will apply to real estate exceeding a total value of 450 million tenge," he disclosed. Additionally, an additional excise duty will be imposed on passenger cars valued above 75 million tenge, along with increased taxes on luxury items such as high-end alcohol, tobacco products, sea ships, and aircraft.

These reforms underscore Kazakhstan's commitment to enhancing fiscal efficiency, fostering economic growth, and aligning with international tax standards. By simplifying the tax structure, reducing bureaucratic hurdles, and introducing targeted taxes on luxury items, the government aims to create a more transparent and business-friendly environment while ensuring sustainable revenue generation for public services and development initiatives. As these reforms move forward, stakeholders will closely monitor their impact on the economy and business climate, anticipating positive outcomes for Kazakhstan's economic future.

Examples of Progressive Taxation in Action: Britain and Beyond

Progressive taxation, a cornerstone of fiscal policy in many developed countries like Great Britain, represents a system where tax rates increase as income rises. This approach not only aims to distribute the tax burden fairly but also plays a crucial role in funding public services and reducing income inequality.

In Great Britain, for instance, the progressive tax system divides incomes into several brackets. Those earning below £12,500 annually pay no income tax, while individuals earning between £12,501 and £50,000 are taxed at 20%. Higher income brackets face steeper rates, with earnings between £50,001 and £150,000 taxed at 40%, and income exceeding £150,000 taxed at 45%.

The origins of progressive taxation trace back to the Roman Empire, but it was the English who revived and refined this concept in the modern era. In 1798, Prime Minister William Pitt introduced progressive taxes to address budget shortfalls, setting a precedent that eventually became entrenched in British fiscal policy.

To illustrate how progressive taxation works in practice, let's consider the current British Prime Minister, Rishi Sunak. His annual salary, including additional allowances, totals £157,372. Applying the progressive tax brackets, Sunak would first deduct the tax-free threshold (£12,500). The remaining £144,872 falls into the 20% tax bracket up to £50,000, resulting in a tax payment of £10,000. The remainder (£134,872) then enters the 40% bracket, with a tax liability of £42,948.80. Therefore, Sunak's total tax payment would be approximately £52,949.

While this example simplifies the calculation, in reality, additional taxes and deductions would affect the final amount paid to the treasury. The complexity underscores the importance of skilled accountants and a robust tax administration to ensure accurate compliance and revenue collection.

The United States employs a progressive tax system, where tax rates increase as income rises. This system is designed to ensure that individuals with higher incomes pay a larger percentage of their earnings in taxes compared to those with lower incomes. Canada has a federal progressive tax system with rates ranging from 15% to 33%, combined with provincial taxes, leading to a total range of approximately 15% to 54% depending on the province. Germany has a progressive tax system with rates ranging from 0% to 45%. The rates increase with income, and there is an additional solidarity surcharge for higher incomes.

President Kassym-Jomart Tokayev's proposal to adopt a progressive tax system in Kazakhstan holds similar promise. Such a system could enhance fairness, bolster the effectiveness of tax collection, boost revenue streams for public services, and expand the national budget. Although implementing progressive taxation requires careful planning and adjustment, its potential benefits in fostering economic equity and stability are substantial.

As Kazakhstan considers embracing progressive taxation, it signals a commitment to modernizing its fiscal framework in alignment with global practices. By redistributing the tax burden equitably across income levels, the country aims to foster economic growth while ensuring that its citizens benefit from enhanced public services and infrastructure development.

Learning from Global Progressive Taxation Practices

In developed countries, the progressive tax system places significant responsibility on the wealthy. As mentioned earlier, we highlighted world-renowned footballers Lionel Messi and Cristiano Ronaldo at the outset. Let's delve further into their cases. Both the strikers were fined and received suspended prison sentences for tax evasion.

The Spanish prosecutor's office revealed that Lionel Messi concealed 4.1 million euros of income from various endorsements between 2007 and 2009. The court in Spain found the Ballon d'Or winner guilty, imposing a 2 million euro fine and sentencing him to 21 months of suspended imprisonment.

Similarly, Cristiano Ronaldo minimized his taxes while playing for Real Madrid, resulting in 14.5 million euros less paid to the treasury. The Spanish court upheld the prosecutor's accusations, fining Ronaldo 19 million euros and sentencing him to 23 months of suspended imprisonment.

It's important to note that these football icons, who dominate on the field and strike fear into defenders, typically don't handle tax matters directly but employ specialized lawyers. Nevertheless, given Spain's 45% tax rate on annual incomes exceeding 60,000 euros, these lawyers are known to navigate legal loopholes to minimize tax burdens.

France employs a comparable tax approach. In 2013, then-President François Hollande introduced an additional tax for high-income earners, specifically targeting those exceeding 1 million euros in income. This measure entailed taxing 75% of their earnings beyond this threshold.

Hollande's initiative faced significant criticism. Notably, actor Gérard Depardieu renounced his French citizenship and moved to Russia in protest. Subsequently, in 2017, this tax policy was abolished.

To conclude, President Kassym-Jomart Tokayev's proposal for a progressive tax system is currently a topic of extensive public debate and refinement. It's imperative to consider the methods utilized by foreign jurisdictions in combating tax evasion by high earners. In developed nations worldwide, stringent legal measures are applied against tax evaders, including those working internationally. Professionals such as footballers, hockey players, and consultants earning substantial incomes are closely monitored, with penalties ranging from fines to imprisonment. It is hoped that these international practices will inform the discussions surrounding the implementation of a progressive tax system in our country.

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