If amendments to the Kazakhstani tax legislation will be adopted, foreign internet companies will be required to pay value added tax starting from the beginning of 2021. It’s supposed that the new tax will not affect online trade in goods, but will cover, for example, the purchasing of online games and books, as well as advertising and the use of domain names.
The initiator of the digital tax is the Ministry of National Economy of the Republic of Kazakhstan.
Kazakhstan Introduces New Tax
Digital tax is not a special type of tax. In Kazakhstan, this concept means the extension of the 12% value-added tax (VAT) to foreign digital companies that are not tax residents of the country (for example, Google, Yandex and Netflix), but earn money from the local audience.
On June 24, the bill was approved by the Mazhilis (The Lower Chamber of the Kazakhstani Parliament) in the first reading. The second consideration was planned for autumn after the end of the parliamentary holidays.
If the draft law remains unchanged, particularly relating to the digital tax, all non-resident entities that provide online services to individuals in Kazakhstan will have to pay VAT starting from January 1, 2021. These entities might also be obliged to register themselves as a taxpayer in Kazakhstan.
The list of online services that might be covered by the digital tax is quite wide. Among the most popular are software, computer games, and databases. In other words, when a Kazakhstani user purchases the Windows operating system or a game via Steam,this deal might be subject to taxing.
Moreover, the online purchase of e-books and other electronic publications, images, viewing and listening to musical and audiovisual works would also be covered by the new tax. Therefore, such services as Yandex.Music, Spotify and e-book seller Litres may also be obliged to pay VAT.
However, the main goal of the new legislation is the covering of online marketing and advertising. This refers to all online advertising, including the provision of domain names and hosting services, as well as maintaining statistics on websites.
What are the benefits for the country’s treasury?
According to the Ministry of National Economy officials, the new tax on foreign internet companies may boost the coffers by only about two billion tenge ($4.7 million) per year. This is a really small volume if compared to the 11.7 trillion tenge ($27.9 billion) of all treasury revenues, where 2 billion is just about 0.017%.
Foreign internet companies do not mind paying VAT for their paid services, the Ministry of National Economy says. Kursiv edition has asked Microsoft, Bookmate and Spotify for comment on that claim with the only response coming from online music service Spotify. “In every country where we do provide our service, we do it in accordance with the requirements of local legislation," the company said.
According to the amendments, the registration of foreign companies as taxpayers must be voluntary. However, as Aydana Abdalieva, director of the tax and legal department at Deloitte Kazakhstan noted, this may be a reason for problems with the tax administration due to the physical absence of many companies in Kazakhstan. This means that it would not be so easy to register foreign companies as taxpayers and to push them to pay VAT in Kazakhstan.
Who is a beneficiary?
The new digital tax will help to make equal the competitive conditions for Kazakhstani and foreign companies, said Nikolay Babeshkin, head of Kolesa Group and chairman of the board of the Digital Kazakhstan Association.
“The tax we are talking about is already paid by Kazakhstani companies. Perhaps, if the game rules were fair, the costs for products for Kazakhstani and foreign companies would be the same. If we want to develop the country, we need to develop our own IT products,” Babeshkin stated.
So far, Kazakhstan does not have too many of its own IT products, similar to those that fall under the digital tax. Actually, there are no prominent Kazakhstani social networks or music services. However, the situation is changing step by step. For example, BTS Digital is developing the Aitu platform, which includes messenger, community pages and channels with content. This service was launched in 2019 and already has about half a million monthly active users.
More than a dozen trading platforms are currently operating on the Kazakhstani market. They are developed both by individual companies, for example, Kolesa Group which operates Kolesa, Krysha and Market websites, as well as financial institutions, such as Kaspi Bank and ForteBank with their own online stores. In 2019 the site Kolesa was visited by 5.3 million unique users per month on average, and about three million unique users were on Krysha. These are pretty high rates for a country with a population of about 18 million people.
“For Kazakhstan, the right strategy would be to support its own IT sector and stimulate its development through the provision of certain tax preferences, such as the already created special economic zone, as well as introducing the digital tax for foreign competitors at the same time. And of course, the tax burden should be paid by digital companies, not by the end consumer, as it can happen now, which is very important,” says Inna Alkhimova, partner and head of the tax and legal consulting department of KPMG in Kazakhstan and Central Asia. Perhaps, when foreign service will identify the location of the client as Kazakhstan, it may increase its charge by 12%, including the Kazakhstani VAT, she added.
Maxim Baryshev, founder of Uchet.kz, does not believe that digital tax is an effective tool to protect the internal market. “Taxes never were an effective tool to protect the domestic market. Let’s say customs duties, they do not protect the domestic market but make prices higher. People are just forced to pay all these customs duties and taxes when purchasing something,” he said.
According to Baryshev, once the digital tax is adopted, the costs of services of foreign internet companies in Kazakhstan will increase and this will affect all domestic businesses. “When we talk about such companies as Facebook, Amazon, Apple, Netflix and Google, we mean the advertising tools for business needs. Thus, if the digital tax will be introduced, it will affect the cost of ads for thousands of entrepreneurs here,” Baryshev explained.
Who did the same before?
Several countries that were unhappy with profits large tech companies are accumulating in jurisdictions with low taxes, and not where users are located and services are provided, already have some experience with digital tax.
For example, in 2019, France introduced a digital tax of 3% on the gross income received from online services (for example, Facebook or Amazon) consumed by residents of this country. However, when France introduced that digital tax, the United States called this approach discriminatory and even threatened Paris with retaliatory duties on French goods in the amount of $2.4 billion. After talks between the leaders of both countries in January 2020, France declined to introduce its digital tax until the end of this year.
Another approach is used by Hungary, where taxes cover online advertising. The main criterion for tax binding is the location of the advertisement and the targeted audience. If advertising is displayed in Hungarian it also is considered as an object for Hungary jurisdiction, regardless of the location of the advertising platform and the advertiser. The advertising tax rate in Hungary is progressive and changes from 5.3% to 7.5%.
Hungary also suspended the collection of this tax, but the only reason for that is the low collection rate. From July 2019 until the end of 2022, the advertising tax in this country has been zeroed.
In Belarus, since the beginning of 2018, foreign companies that provide online services to individuals are required to register for VAT and submit tax returns. VAT is paid by companies on their own or through an intermediary who makes payments for the services provided.
In Russia, on January 1, 2019, amendments to the tax code on the payment of VAT for online services also came into force. The tax mainly applies to online advertising services, marketplace services and services for providing users' data.
The Russian experience is interesting because of the competition between foreign and local players. For example, Yandex is competing with Google, and VKontakte does the same against Facebook.
In neighboring Uzbekistan, the digital tax was introduced since the beginning of 2020. All foreign online companies should register as taxpayers on a voluntary basis. In April, the State Tax Committee of Uzbekistan announced that the first VAT payment was made by Google Commerce Limited. Based on the results of work for the first quarter of 2020, the company paid out €85,000.