In January 2022, Kazakhstan introduces the obligation on the VAT payment by foreign companies that are engaged in e-commerce with goods or provide e-services to individuals. The Law, dated 10 December 2020, No. 382-VI supplemented the Code of the Republic of Kazakhstan ‘On Taxes and Other Obligatory Payments to the Budget’ (hereinafter - the ‘Tax Code’)’ with a new ‘Section 25.  Features of Taxation of Foreign Companies When Engaging in E-Commerce with Goods, Providing E-Services to Individuals’.

Before discussing the new Section 25 of the Tax Code, we consider the recommendations of the Organisation for Economic Cooperation and Development (OECD), which are given by it in the Addressing The Tax Challenges of The Digital Economy, Action 1 - 2015 Final Report (hereinafter - the Report). In addition to the challenges related to a uniform approach and application of international tax legislation to VAT and income tax of digital companies that do business in several countries, the OECD Report highlights the following:

  • Digital foreign companies earn income from their activities in countries, where they do not have a physical (actual) presence. The Report notes that a non-resident “leverages digital technology to participate in the economic life of a country” and to derive income in a regular and sustained manner, whereupon the OECD introduced the concept of “significant economic presence” ;
  • Many countries faced a decrease in budget revenues from income tax and VAT resulted from the transformation of the goods and services supply into a digital format;
  • There is a negative impact on the domestic economies of countries importing goods and services in digital format, in particular, there is an imbalance in sales of similar goods and services by local suppliers towards sales by foreign companies, which goods and services are cheaper due to no VAT. Such imbalance is forcing local suppliers to move their business from the local market to offshore, which also causes an increase in unemployment in the domestic market.

According to general taxation rules, VAT payment is based on a destination/consumption principle. Given that cross-border supplies become very popular among the population of countries importing goods and services, many jurisdictions, however, considered it inappropriate to introduce obligations for the individuals to pay VAT on cross-border supplies of goods and services. In addition to the fact that the costs of administering VAT collection from the citizens may be higher than budget receipts from such supplies, the question also arises on the lawfulness of access to personal data of individuals and their protection.

In 2017, the OECD issued the International VAT/GST Guidelines (hereinafter - the ‘VAT Guidelines’), defining internationally agreed guidelines for VAT collection (or goods and services tax - GST) on cross-border transactions with services and intangibles. Certain provisions of the VAT Guidelines cover transactions between a commercial entity (enterprise) and a consumer (B2C), as well as the taxation of non-resident providers of services and intangible goods.

The OECD and the G20 recommended in the VAT Guidelines for B2C Cross-Border Transactions that suppliers should register for taxes and pay VAT in the country of consumption (or use), and jurisdictions should establish a simplified regime for such registration and for compliance with legal requirements in order to facilitate VAT collection from non-resident suppliers. In many countries, this approach has proven to be more effective, and non-resident suppliers follow these recommendations, because it is primarily a matter of business reputation for them. The jurisdictions, however, shall limit compliance obligations to ‘what is strictly necessary’.  Simplified registration and minimum compliance requirements are especially important for companies that face tax liabilities in multiple jurisdictions. At the same time, the states are important to keep in mind that the simplified registration for VAT is an individual issue separate from the traditional registration regime and compliance with VAT obligations.

Read more: https://gratanet.com/publications/kazakh-approach-to-the-taxation-of-foreign-companies-engaged-in-e-commerce-and-e-services