When it comes to taxes it is obvious that there are always opposing opinions. Those that pay often see any tax as an unfair or excessive burden, or a legal way to extort money that will often be ill-spent, without benefiting either the tax payer or the community. From the other side those in charge of collecting taxes need to constantly review and expand the tax base in order to apply an equitable system and avoid overcharging this or that group. In between there are those that think that taxes are applied only to them and that there are many groups that are exempted or enjoy unjustified benefits.
The proposed property tax to be introduced in Kyrgyzstan has not yet been implemented. The law was passed in April 2003 and signed by the President in September 2003. The delay in implementation is due to the need for the Jogorku Kenesh (Parliament) to adopt the valuation procedure and the list of tax exemptions.
In the meantime, there are groups of people advocating this or that exemption, or at least the increase of the exemption platform for residential properties. Meanwhile, no one seems interested in giving proper consideration to the tax to be levied on commercial and industrial properties, which in the end are those that bring real benefits to the country.
Further discrimination may emerge towards properties hold by foreigners and local entities. There is already a differentiation between property titles for foreign and local companies that makes local properties less attractive to foreigners. On the other hand everyone keeps repeating the need to create a more favorable investment climate that should apply to local and foreign companies on an equal basis. In actual fact, when it comes to practical considerations everything is done to differentiate the position of foreigners from that of the locals. This is often achieved through undisclosed procedures that are unfair and inequitable. They not only make Kyrgyzstan less competitive than other Central Asian countries, but they also create a real stagnation of investment with the result that the economy suffers, employment remains at a low level, and the tax base remains small.
It is necessary to restructure the present tax system in Kyrgyzstan, simply by reducing the number of existing taxes and streamlining their application. What the country needs is not a new tax but a reduction of the existing ones, and their application should be made more transparent and more equitable.
If the property tax is introduced, the least that the tax-payer should ask is the elimination of other local taxes. Foreigners are more attracted by a fair system than by a so-called "liberal attitude" that often ends up in private negotiations, bargaining, and bribes. Foreign investors are aware of and willing to pay a fair amount of taxes but they are strongly opposed to surprises and retroactive systems. Especially when it comes to un-estimated hidden burdens that increase cost of operation, it is quite natural that they oppose new taxes and request a fair treatment and the respect of those taxes that were in force at the time when they decided to invest.
This brings us to another important point under dispute, that of the valuation of property. It is important that a transparent valuation system should be applied equally to all properties.
The International Business Council (IBC), that groups together most of the foreign investors in the Kyrgyz Republic, strongly objects to any valuation system that is not transparent and that provides favorable treatment to certain groups. The IBC is also convinced that the property tax should concentrate on residential properties and exempt all commercial and industrial properties in order to facilitate additional investment in the country. If an exemption is granted, it should be at the minimum level, and be applied to everyone.
Even the rate to be used for calculating the tax is the subject of much debate. Many think that existing taxes already exceed a tolerable burden and that, in addition to eliminating old taxes, the new property tax should be set at a rate that is comparable with international standards and does not exceed 0.25% of the assessed value.
The new property tax will certainly broaden the tax base and this is a welcome move. But it should not penalize additional investments or increase the tax burden, therefore is it is important that certain local taxes should be phased out as soon as the property tax is implemented. On the other hand, if a system of decentralization to certain local government entities is a way of creating a better administrative system, it should be made clear that the matter of transparency must be kept in maximum consideration and that the variation between rates should be minimum and based on preset criteria.
The government should avoid by all means the possibility of creating an additional vehicle for bribes and corruption and avoid any system that may encourage the shadow economy to remain on the fringes of legality.
More transparency, more equitable taxes, a broader taxable base will certainly mean more private investment and an undisputed economic growth with more employment, less poverty and a better future for everyone.
By Giorgio Fiacconi, TCA publisher,
The Times of Central Asia, December 12, 2003