About a year ago, a new edition of the Tax Code was adopted in Kyrgyzstan. The preparation of the document caused much controversy. The International Business Council has repeatedly criticized certain positions which, in our opinion, could worsen the conduct of business in the republic.
Then work began on amendments to the Tax Code. After long discussions, we still managed to find a compromise with the developers regarding the proposed changes to the legislation.
In early April 2023, the President of Kyrgyzstan signed the Law on Amendments to Certain Legislative Acts in the Field of Taxation. The amendments not only significantly improved tax legislation, but also made it easier for businesses to work in the country.
On some points I would like to dwell separately. First, for single taxpayers, the upper income threshold of 30 million som per year has been excluded. It’s a great advantage. If you remember, there was a special tax regime for small and medium-sized enterprises (SMEs) – instead of three types of taxes, they paid one.
However, if the annual turnover of an SME exceeded 30 million soms, it automatically became liable for sales tax, income tax and VAT. In order to avoid this, entrepreneurs were forced to resort to certain tricks. There were cases when some tried not to show all the profits, others simply “crushed” their business. Now the need for that is gone.
Secondly, among the changes to the Tax Code, our recommendations regarding the work of commercial banks were included. Due to the peculiarities of their activities, financial and credit institutions are no longer tax agents with regard to the payment of the so-called “reverse” VAT – a compulsory payment paid by the buyer for goods and/or services purchased abroad with a foreign company that is not registered with the tax authorities of Kyrgyzstan. This, for example, may be a Microsoft computer program. The company is not registered in the Kyrgyz Republic, but if the supplier imports his products into the territory of the republic, he will be obliged to pay VAT – 12%.
There have been many disputes over bank secrecy. Consequently, it has been decided that a request for information from the tax authorities on transactions on company accounts will only be made within the framework of tax audits and on the basis of a reasoned decision by the tax department.
I would like to dwell on another positive moment. If you remember, when drafting amendments to tax legislation, a norm was proposed that stipulated a mechanism for restricting foreign Internet resources that were not registered in Kyrgyzstan. We have expressed our concerns that such a mechanism could lead to the blocking of well-known foreign online platforms and thousands of paid or partially paid services.
The current procedure for registering foreign Internet companies as liable for VAT is sufficient. In our opinion, it is not necessary to apply punitive measures and restrict citizens’ access to useful computer resources. We are pleased that the authors of the bill have taken note of these recommendations.
The issue of importing electric cars and spare parts into the republic was also hotly debated. At one point we were approached by companies supplying these vehicles to the country. They asked to provide benefits for the payment of VAT for the entire turnover cycle. That is to say not only for the supply of the machines themselves, but also for their components.
A norm has been introduced into the Tax Code, according to which the import of vehicles with a year of production up to five years, driven only by an electric motor, as well as their components, is a supply exempt from VAT. This helps to stimulate imports and the use of “green” cars not only by individuals, which should accelerate the transition to electric cars.
Now let’s talk a little about the recommendations that were not taken into account in the adopted package of changes, but which, in our opinion, are very important.
First of all, this concerns the period of application of the zero rate of sales tax for cashless payments. Unfortunately, the developers of the law did not give the green light to exclude double liability in case of non-use of invoices by the supplier and the buyer.
We were unable to convince the authors of the law of the inappropriateness of the proposed high tax rates on income from the extraction of certain metals, of the application of a zero VAT rate (instead of exemption) on exports of ores containing metals, concentrates, alloys and refined metals to EAEU countries.
Some recommendations in the field of e-commerce were also not included in the law on amendments – a gradual transition of the taxpayer to an electronic type of supply, an exemption from VAT for legal advisory services provided by organizations not-for-profit organizations, including professional associations. In the meantime, such an exemption could contribute to increasing the legal knowledge of the population.
In addition, as early as 2021, when considering a new version of the Tax Code, the CIB recommended eliminating a number of standards that reinforce the punitive nature of the functioning of the tax service – the investigative function, direct dependence on tax collection, a large amount of fines, a significant increase in the amount of tax penalties, a ban on appealing certain acts of the department. These recommendations are not accepted in the current amendments.
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