Expanded Scope of International Business Transactions and Related Operations (Controlled Transactions)
International business transactions now include not only the import and export of goods, the execution of works, and the provision of services between Kazakhstan residents and non-residents [1], as per the previous version of the Transfer Pricing Law, but also any transactions between Kazakhstan residents and non-residents, such as loans, the transfer of property rights, and others.
Operations related to international business transactions, under the new version of the Law, include transactions on the territory of Kazakhstan with the subjects of international business transactions (both preceding and subsequent). According to the previous version of the Law, only preceding transactions were included.
The list of prerequisites for controlling operations related to international business transactions has been expanded with the following factor: the parties to the transaction have different corporate income tax (CIT) rates.
Thus, according to the current version of the Law, transactions on the territory of Kazakhstan between Kazakhstan residents with the subjects of international business transactions are controlled if the parties have different CIT rates, or there are tax losses for the previous 2 years or benefits, or if one of the parties sells the minerals it has extracted.
New Additional Criteria for Interconnection of Parties Introduced
The new version of the Transfer Pricing Law introduces additional facts demonstrating economic dependence of the parties, indicating special interconnections:
- Payment to a person of more than 50% of the initial cost (cost price) of the produced products for the use of an intangible asset and/or intellectual property rights;
- Supply by a person (and its related party) of more than 50% of the total cost of raw materials, materials, or initial products used for the production of finished products;
- More than 50% of revenue for the reporting calendar year from international business transactions formed from sales to a person (and its related party);
- A person provided guarantees for debts amounting to more than 50% of its own capital or for at least 10% of the total debt amount;
- A person is granted the right to act as an agent, distributor, or dealer of a company in the purchase or sale of goods (works, services) under a written agreement.
These additional criteria do not apply to participants in transactions who are non-residents, whose financial statements are published (or listed on the stock exchanges of OECD countries), confirmed by an auditor, presented on request to the authorized body within 60 days, and who are participants in an international group whose financial statements are published (or listed on the stock exchanges of OECD countries).
Option to Choose the Method for Determining Market Price Introduced
The comparable uncontrolled price method remains the priority.
However, if it is not possible to apply the comparable uncontrolled price method, one of the four other methods provided in the Transfer Pricing Law, which is the most appropriate, may be used.
Before the amendments, the Law prescribed the sequential application of methods in the order listed in the Law: first the comparable uncontrolled price method, if it was impossible to apply, the cost-plus method, if it was impossible to apply the cost-plus method, then the resale price method, and so on.
Additionally, the choice of method must be justified and take into account:
- The nature of the transaction, which is determined by analyzing the functions performed by the participants in the transaction, considering the assets used and the assumed risks;
- The availability of reliable information necessary for the application of the method;
- The degree of comparability of controlled and uncontrolled operations, including the possibilities for ensuring the reliability of adjustments.
Range of Profitability for the Cost-Plus Method Specified, List of Information Sources Refined
Before the amendments, the Law prescribed that the markup to costs when applying the cost-plus method should ensure the “average range of profitability rates.”
In the current version of the Law, it is specified that the markup should be determined to ensure the range of profitability rates typical for the relevant field of activity.
Previously, the sources of information prescribed included data from state statistical bodies of Kazakhstan, state revenue bodies, and other information sources.
According to the current version of the Law, the general list of information sources specified in Article 18 of the Transfer Pricing Law is used when applying the cost-plus method, which includes, in addition to officially recognized information sources (as listed), exchange quotes, and data from state bodies, data from organizations on prices, data from information programs used for transfer pricing purposes, information provided by transaction participants, and other information sources.
Procedure for Applying the Net Profit Method Specified (Aligned with Global Practice)
The net profit method, according to the new version of the Law, is applied by comparing the profitability of the transaction participant with the profitability range using operating profitability indicators of costs, sales, or assets.
Previously, the method was based on determining net income, which was calculated using indicators of the residual value of fixed assets, sales volume, or costs.
New Procedure for Determining Price Ranges, Margin and Profitability Ranges Introduced, Global Practice Profitability Indicators Applied, and Calculation Procedure Enshrined in Law
The Law has been supplemented with Articles 17-1 “Procedure for Determining Price Range and Profitability Range (Margins)” and 17-2 “Procedure for Determining Profitability.”
Previously, before the amendments to the Law, the price/profitability range was limited to the minimum and maximum values found in the information source for market prices/profitability.
Now, the market price/profitability range is determined in a manner similar to the one established in the Tax Code of the Russian Federation [2]: the minimum value of the range is the value below which 25% of the first values found in the information source of market prices/profitability are located, and the maximum is the value above which 25% of the last values of market prices/profitability are located.
For example: Data on the following market price values were obtained:
№ | Value |
1 | 900 |
2 | 950 |
3 | 1200 |
4 | 1400 |
5 | 1500 |
6 | 1550 |
7 | 1800 |
Thus, the price range: from 950 (value number 2, above the 25th percentile) to 1500 (value number 5, below the 75th percentile). The median is 1400 (value number 4).
For constructing the market price range, data on prices obtained from one source should be used.
For constructing the profitability range, financial data for the 3 years preceding the year for which the analysis is performed should be used.
Additionally, the Transfer Pricing Law introduces the concepts of “median value,” “profitability,” “market profitability,” and enshrines the procedure for calculating profitability indicators: gross and operating profitability of sales and costs, as well as operating profitability of assets, similar to the procedure established in the OECD Guidelines [3] (instead of the “profitability rate” indicator that was in the previous version of the Transfer Pricing Law).
Expanded Scope of Companies Providing Local Reporting
Transfer pricing reporting consists of local, main, and country-by-country reporting and is provided to the authorized body generally by a member of an international group.
According to the amendments, the obligation to prepare and provide local reporting also arises for a transaction participant who is not a member of an international group but has conducted transactions subject to control with related parties [4], provided that the revenue of such a transaction participant for the year preceding the reporting year exceeded 5 million MRP (17,250 million tenge).
Main reporting is provided by a member of an international group upon request from the authorized body within 30 calendar days from the date of receiving the request (previously within 12 months from the date of receiving the request). However, the main reporting can be requested no earlier than 12 months from the end of the relevant reporting financial year.
Changes in the Procedure for Adjusting Taxable Objects by the Authorized Body
Adjustment of the taxable object for transactions with offshore companies, companies with tax losses for the previous 2 years, or those applying benefits, as well as in barter transactions and in the termination of mutual obligations by offset, is carried out based on the median value of the price range (before the amendments, based on the average value of the range).
Adjustment of the taxable object for transactions with related parties is carried out based on the results of a tax audit, using the median value of the price range (previously, the specificities of adjusting the taxable object for transactions with related parties were not specified in the Law).
Self-adjustment of the taxable object by the taxpayer is carried out using the price range and/or profitability range (margin).
When adjusting the tax base for transactions with offshore companies using methods based on comparative profitability analysis, the profitability of the offshore transaction participant is not taken into account.
Document: Law of the Republic of Kazakhstan “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Transfer Pricing” dated 25.03.2024 No. 68-VIII ZRK.
The changes come into effect on 27.05.2024.
[1] Unregistered in the territory of the Republic of Kazakhstan.
[2] If more than 3 values of market prices/market profitability are obtained from information sources.
If only one value of market price/market profitability is available, the range is taken as this value.
If only three or fewer values of market price/market profitability are available, the minimum and maximum values of the range are taken as the minimum and maximum values found in the information sources, as before the amendments.
[3] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
[4] Except for persons recognized as interconnected in accordance with paragraphs 16-20 of Article 11 of the Transfer Pricing Law (based on the above-mentioned signs of economic dependence).
Author
Natalya Kerentseva
- Senior Tax Consultant, Auditor
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