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Kioge-2022

Kazakhstan Transfer Pricing News

Transfer pricing control for tax purposes gain more importance for Kazakhstan taxpayers from year to year. This is due to the increased frequency and thoroughness of tax audits on transfer pricing issues and tightening of control by tax authorities. This is a global trend which is largely based on recommendations developed by the Organization for Economic Co-operation and Development. Kazakhstan actively cooperates with this organization on various areas, including transfer pricing.

It is important to note that in 2022, the transfer pricing reporting was modified, and work on developing amendments to the Transfer Pricing Law of the Republic of Kazakhstan is under way. In general, these changes can be considered as an expansion and improvement of the transfer pricing control in Kazakhstan.

Changes in transfer pricing reporting

The new rules for the preparation and submission of three-tier transfer pricing documentation in Kazakhstan were published in May 2022 and enacted from June 2022.¹ The new rules apply to the reports that taxpayers prepare for the period from 2021 onwards, unless a taxpayer submitted reports for 2021 to the tax authorities before the changes took effect.²

The most significant changes relate to the local file and include the following:

• The coverage of counterparties to be included in a local file has been extended. Earlier these were deals with companies of a multinational group, which together with a Kazakhstan taxpayers fell into general consolidation of financial statements. This usually happens where more than 50% of the interest in a company is owned by the group of a parent company. Now the updated version states that transactions with "related parties" should be included in a local file. This coverage is wider and implies a related party’s participating interest or a share of voting shares of the company owned by a parent company group to be 10% or more. In addition, the related party definition covers affiliates, trust management, control and other conditions.

• A materiality threshold has been introduced for categories of controlled transactions included into a local file which is 250 thousand MCI for the total amount of income (expenses) and/or liabilities. Previously, taxpayers specified a materiality threshold in accounting policies; now there is no need for this. It should be also noted that a principal loan amount should now be recognized to determine materiality. In the absence of materiality categories of controlled transactions in a reporting financial year, no local file is submitted.

• The basis for grouping transactions into a single category for applying the materiality threshold has been expanded: transactions with identical or similar goods (works, services) are subject to grouping regardless economic conditions in which transactions were made.

• The "Local entity" section should additionally include a description of parties to whom local management reports, including the countries where such parties have their main offices.

• It is necessary to additionally indicate in the "Local entity responsibility" section details of a person involved in preparation of a local file, namely: a full name, a phone number and a signature.

Other changes (in addition to the local file section) in the updated rules:

• Adding the official web address of the resource where the forms and rules for completion of transfer pricing reports are available (https://kgd.gov.kz/ru/content/transfertnoe-cenoobrazovanie-1-1).

• The deadline for submission of a master file has been adjusted to be no later than 12 months from the date when a multinational group participant receives a tax authorities’ request to provide a master file. Previously, the 12-month deadline for submission of a master file was from the end date of a reporting financial year.

• The forms and rules for country-by-country reporting have been removed from the order containing the forms and rules for notification on participation in a multinational group. This eliminates duplication.

• The wording indicating when a notification on participation in a multinational group has been amended: the notification must be submitted by a participant of a multinational group no later than 1 September of the year following a reporting financial year. Thus, it is now clear that taxpayers who are not subject to the local file requirement but are members of a multinational group disclosed in country-by-country reporting are required to submit the notification.

• Preference is given to the electronic form of notification on participation in a multinational group. In the absence of software or detection of technical errors in the software of the tax authorities, the notification can be submitted in person.

Working on the Transfer Pricing Law reform

Currently, the official working group discusses significant changes to the Kazakhstan Transfer Pricing Law proposed by the tax authorities. If this work is completed in the coming months and the draft law is considered and approved by the Parliament of Kazakhstan, then after signing of the legislative act by the President of Kazakhstan, the revised version of the Law may enter into force from 1 January 2023. The key changes discussed include:

• Expanding transfer pricing control by changing the definition of "international business operations". This definition is currently based on a transaction’s nature: in particular, export and import of goods, performance of works or provision of services.... The amended definition is based on who are parties to a transaction without specifying what the transaction’s nature or subject is – transactions of Kazakhstan tax residents with non-residents not registered in Kazakhstan. The new definition would cover transactions to which applicability of the control was ambiguous. For example, transactions with shares, securities, currency exchange transactions, various financial transactions, etc.

• Expanding the definition of related parties: introducing additional definitions of so–called "economic relationship", in particular - via sales, where a seller receives more than 50% of its revenue from one customer, via purchases, debt, licensing, exclusive rights, etc.

• Clarifying transfer pricing methods: the comparable uncontrolled price method retains priority, while the hierarchy of the other methods is eliminated.
  The amendments would also introduce more specific definitions of profit level indicators for application of the profitability testing methods.

• Clarifying calculation of a market range, including the introduction of the so-called inter-quartile range - the range between the 25th percentile and the 75th percentile excluding extreme values of prices and profitability from a market range.

• Introducing the basis for tax adjustments based on a deviation of a tested party’s profitability from a market range of profitability, i.e., not only a deviation of transaction prices from a market price range.

Since the discussed amendments to the Transfer Pricing Law under may come into force from 1 January 2023, we recommend companies to review the proposed changes in advance, assess a potential impact of the changes on business and determine necessary steps for compliance with the amended legislation.

Authors: Anuar Mukanov is a Partner, Transfer Pricing Services Group; Alena Baravaya is a Manager, Transfer Pricing Services Group; and Alisher Khojayev is a Senior Consultant, Transfer Pricing Services Group at Ernst & Young Kazakhstan LLP, Kazakhstan. If you have any questions, please contact us by email: Anuar.Mukanov@kz.ey.com; Alena.Baravaya@kz.ey.com; Alisher.Khojayev@kz.ey.com