: / Analytics / The Tax System of the Kyrgyz Republic (2003)

Kyrgyzstan Review, 10 years ago


Analysis of the tax regime would not be complete, if the attitude of businessmen of Kyrgyzstan to this regime has not been taken into account. That is why a survey of sample of enterprises in various spheres and of different scopes of activity was performed during implementation of this project. Among the chosen enterprises were large enterprises, such as Kyrgyzshampany LLC, Bishkeksut JSC, Kyrgyztelecom JSC, Zum JSC as well as representatives of small and medium-sized businesses. The surveyed enterprises were 10 in number, covering the following spheres of business activity: manufacturing including production of excisable goods, construction, services including financial services (commercial banks being taken as an example), and trade. The chosen enterprises include those engaged in exports of goods (services); enterprises importing goods (services) from abroad; enterprises performing re-exportation.
The method of interviewing was applied in the course of the survey. 10 meetings were held with financial authorities (heads, chief accountants, heads of financial departments, auditors) of the chosen enterprises. Interviewing was held in a free form, but within the framework of one scheme. The respondents were offered to answer the following questions:
¨ of the main types of activity, a variety of taxes paid to the budget and the structure of taxes;
¨ of the possible reasons for distortions in carrying on business and keeping of reporting for the purposes of tax evasion;
¨ of the problems connected with taxation at a certain enterprise;
¨ of wishes and recommendations of the given economic subjects in regard of the tax legislation improvement.
The detailed reports on each interview are presented in Appendix 3.
The share of taxes of the surveyed enterprises in regard to gross income is 30-50% as an average. The bigger tax burden is incurred by the enterprises in the services sphere. In the structure of the paid taxes and fees VAT payments used to account for the major share. The next in amount are payments to the Social Fund and profits tax, then deductions to the LESF and road tax. The smallest share in the structure of taxes belongs to local taxes.
The majority of respondents believe that there are two main reasons for distortions in carrying on business and keeping reporting. First, too high rates of value added tax and deductions to the Social Fund. Second, some of respondents called attention to keeping of double reporting and evasion from taxation have to a great extent been caused by the existing system of the tax bodies. On the one hand, the tax bodies (represented by tax inspectors) frequently exert pressure upon businessmen, and the latter have to hold the so-called black cash for unofficial payments (bribes). Such pressure is connected in particular with the fact, that the level of salaries in the tax bodies is insufficient to keep the available qualified personnel, let alone attracting the new one. Insufficient professionalism and low salaries of the tax inspectorate employees directly involved in inspections of correctness of accounting and assessment of taxes inevitably raise their demand for unofficial payments. On the other hand, an enterprise considers it to be more advantageous to make an unofficial payment to a tax inspector, than to show all incomes and pay taxes according to the Tax Law, because an average amount of an unofficial payment is 10-20% of the amount of the tax violation revealed by the tax inspector. Nevertheless, the interviewed persons are of the opinion that sustainable and long-term development of business in such conditions is difficult as businessmen are too vulnerable in the current situation. In this context one may note that a greater number of businessmen used to hire highly qualified, well paid accountants and spend additional resources for their training and professional improvement, thus insuring the level of accounting, which will hamper revealing violations, if any, as the existing Tax Law makes it possible for them to find legal ways of understating income received from their business activity.
As interviews were held with representatives of various enterprises, many problems revealed are of a specific character; however, one can determine several principal problems and disputable issues of taxation, which actually all enterprises used to come across. Given below is the list of similar tax problems faced by the surveyed enterprises.
Value added tax is the main revenue-forming item of our budget; in 2001 only this tax accounted for almost 50% of all tax revenues to the budget. However, it is VAT that is mostly problematic for enterprises both from the point of view of payment mechanisms and from the point of view of the rate size.
All respondents are of the opinion that significant difficulties arise in regard of getting VAT credit. This particularly relates to import supplies. Mostly suffer from this enterprises engaged in re-exportation. The main obstacle is the Order of the Ministry of Finance 355p (registered with the Ministry of Justice), which allows refund of VAT paid in excess, provided re-export supplies (taxed at the zero-rate) constitute more than a half of the turnover and were repeatedly made during recent 6 months. Even if this fact has actually taken place, lots of bureaucratic procedures hamper getting credit for the subsequent import supplies. Collection of all documents confirming payment of VAT in excess by the importer takes him about a month and a half. So, the importer may either wait for a month and a half or make another payment of tax, having actually paid in excess. The situation is aggravated by the procedures of VAT pledge and duties, which have not been properly developed by the customs bodies. A deposit account, to which a firm must transfer the pledge, is missing. The problem cannot be solved by the joint account it is actually impossible to take money back from this account. Besides, the government official require a customs declaration and documents confirming payment of taxes in the country of destination and lots of various certifying documents and documents issued by the Kyrgyz Customs to certify transportation of cargo outside the territory of the Kyrgyz Republic.
Enterprises working in the domestic market only also face problems connected with VAT credit. However, these problems are of a different character. The tax inspectorate will not allow VAT credit on supplies, where a taxpayer with the number indicated in the invoice does not exist, or he fails to perform his liabilities to the budget. Thus, a tax inspectorate used to solve its administration problem, shifting liabilities off the taxpayers, who do not abide by the Law, and placing them on law-abiding taxpayers.
Another important problem of VAT taxation relates to import and export supplies of services. While providing a clear definition of goods, the Tax Code lacks that of imports and exports of services. This appeared to be a grave problem for communication services. First, Kyrgyzstan is a member of the International Communication Union. According to the membership rules of the Union, all taxes are to be paid at the place, where services are provided. However, despite the priority of international agreements over the local legislation, all calls from abroad are VAT-taxed by the tax bodies. Second, even if this agreement has not been taken into account, calls from abroad refer to exports of services (not imports, as considered by the tax bodies), as Kyrgyz operators provide their services to foreign ones, this being the ground for zero-rate VAT taxation.
Enterprises engaged in processing of agricultural produce have to solve the problem of unequal competition conditions. For example, a number of large producers of milk simultaneously produce dairy products and according to the existing legislation are exempt from VAT. Thus, the products of enterprises, which have no ancillary agricultural production, rise in price by about 20 per cent (the amount of VAT decreased by the allowed VAT deductions). Competitiveness of such enterprises still more decreased after reduction of the deductions on acquired agricultural products to 3% (first its rate was decreased from 10% to 5%, then from 5% to 3%). The Tax Code stipulates calculation of VAT on supplies on the basis of the full price of these supplies, whereas according to the instruction the amount of VAT must be calculated on the basis of the price minus VAT. Such tax policy of the government with regard to the persons engaged in processing of agricultural produce deteriorates competitiveness of their situation in the external market. Both Kazakhstan and Russia pursue the tax policy aimed at protection and stimulation in this respect. In Russia VAT rate in dairy branch is 10%, and producers of agricultural products are not exempt from VAT. In Kazakhstan importation of raw materials is taxed at the 10% VAT rate at the border, whereas importation of finished goods is taxed at the rate of 20%. One should mention in this connection that branches processing agricultural produce in Kyrgyzstan are considered to be the branches of priority and principal importance for the economy of Kyrgyzstan.
Enterprises engaged in production of excisable goods have difficulties in getting credit on acquired excisable raw materials and having it treated as credit. If an enterprise acquires raw materials for a long period, the tax inspectorate will allow credit of excise tax as far as products produced from these raw materials are sold.
Many respondents noted that offset of the excess payments accumulated on some taxes against other tax arrears is a sore subject, though, according to the Tax Code, this must be done in a usual way without assessment of penalties and fines. The above mentioned credit still can be obtained on tax payments, though with certain difficulty, but repayment of debt to the Social Fund in this way is impossible, even in the presence of significant excess tax payments.
The major part of the interviewed indicated the difficulties connected with transition to the new accounting standards and the method of calculation. Where there are significant delays in payment for the goods supplied or services provided, application of this method will inevitably lead to distraction of the working capital and channeling it to the budget as payments of the tax due.
For representatives of financial sphere the above mentioned problems are less urgent, as all commercial banks have already been transferred to the international accounting standards in a compulsory manner several years ago, and do not have special difficulties in this aspect. Commercial banks rather come across methodological problems of taxation. First and foremost, this is lack of co-ordination between normative and legal acts related to taxation and published by the tax bodies and the Ministry of Finance and the acts of the National Bank. The most disputable situations arise during formation of the reserve fund, which, according to the Tax Code, is attributed to expenditures of the bank, even in the case of sale of the pledged property, as expenditures connected with its keeping and sale are not recognized by the Tax Code.
Besides, both banks and some enterprises come across certain problems when calculating income received from the difference in exchange rates. In the case of banks, the total result is calculated on the basis of accounting, though actual incomes are received and losses incurred by a bank only during sale of currency. As for enterprises, they can find themselves in a strange situation, when a positive difference in exchange rates calculated on the basis of the principal amount of credit in foreign currency, is recognized as income.
And finally, all respondents acknowledged that lack of the unified body capable of interpreting disputable issues of taxation is a serious problem, as interpretations of the Ministry of Finance and the Tax Inspectorate often contradict each other.
In the course of the interview a number of wishes were expressed and recommendations made by the respondents regarding improvement of the tax system functioning. According to the authors of this report, the following should be taken into account during revision of the Tax Law:
¨ to bring all instructions, interpretations and other normative and legal acts related to taxation to conformity with the Tax Code in order to exclude difference in interpretation of certain Articles of the Tax Code;
¨ to make a certain body responsible for interpretation of disputable issues of taxation;
¨ to develop a detailed instruction on taxation of banks;
¨ to provide co-ordination between normative and legal acts on taxation issued by the Tax Inspectorate, the Ministry of Finance and the National Bank;
¨ to improve the procedures of VAT and customs duties refund and credit;
¨ to revise the rates of VAT subject to credit for the agricultural produce manufacturers;
¨ to begin assessing interest on the debt amounts payable by the budget;
¨ to improve the procedure of getting excise tax credit;
¨ to solve the issue of crediting arrears of enterprises not only connected with taxes, but with their indebtedness to the Social Fund as well, if there is indebtedness of the Government due to an enterprise;
¨ to bring the amounts of contributions to the Social Fund to conformity with the amounts of paid sick-leave allowances and pensions;
¨ to provide a clear interpretation of exports and imports of services in the Tax Code, to pay a special attention to communication services;
¨ to bring into action implementation of interstate agreements on avoidance of double taxation.