Transparency of the Regulatory System
The legislation of Kazakhstan has set up basic principles for fostering competition on a non-discriminatory basis. Kazakhstan has steadily improved its business environment since independence. It has streamlined bureaucratic practices, provided accelerated business start-up procedures, reduced minimum capital requirements for businesses, and simplified the procedures for registering property and obtaining construction permits. As a result, the World Bank in 2017 moved Kazakhstan up 6 places to 35 out of 190 countries in its “Doing Business” report.
Kazakhstan is a unitary state, and national legislation accepted by Parliament and President are equally effective for all regions of the country. The Government, ministries and local executive administrations in the regions (“Akimats”) have the ability to issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the Eurasian Economic Union and decrees of the Eurasian Economic Commission are mandatory for the country and have preemptive force over national legislation. Publicly listed companies adhere to international financial reporting standards.
The Government consults on some draft legislation with experts and the business community, however, the legal and regulatory process remains largely opaque.
Implementation and interpretation of business-related legislation sometimes creates widespread confusion. In summer 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some provisions of which (including a Kazakh language requirement) created significant problems for foreign investors. After an active intervention by the international investment community through the prime minister’s Council for Improving the Investment Climate, the most onerous clauses of these new rules were cancelled.
The non-transparent application of laws remains a major problem in Kazakhstan and an obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many positive and progressive laws, local authorities may interpret rules in arbitrary way for the sake of their own interests.
Draft bills are available for public comments, however, the process occurs without broad notifications and some bills are excluded from public commentary altogether. All laws, decrees of the President and the Government are available in Kazakh and Russian at the web-site of the Ministry of Justice of the Republic of Kazakhstan: http://adilet.zan.kz/rus
In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. The reforms include the creation of modern government apparatus, strengthening of rule of law, industrialization and economic growth, and a transparent accountable state. The latter anticipates the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an “open government system” with better access to information held by state bodies. Initial implementation of this plan has already helped to improve the government’s accountability. For example, in addition to the Audit Committee that monitors government agencies’ performance, ministers and regional governors now report to the public annually.
The “100 Steps” plan emphasizes the importance of foreign investment for the country and has objectives to attract transnational corporations in the local processing industry, transport and road infrastructure, agriculture, energy saving and tourism.
International Regulatory Considerations
As reported above, Kazakhstan is the part of the Eurasian Economic Union and decisions of the Union supersede the national regulatory system.
Kazakhstan became a member of the WTO on November 30, 2015. The government notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations.
Legal System and Judicial Independence
Kazakhstan’s Civil Code establishes general commercial law principles. The 2015 Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes can be settled by negotiation, litigation, or international arbitration. The judicial system is independent of the executive branch according to the country’s Constitution. Aggrieved investors can seek dispute settlement in Kazakhstan’s courts or international arbitration. Although some analysts believe the government prefers litigation to arbitration, courts will enforce arbitration clauses in contracts. Any court of original jurisdiction can consider investment disputes and bankruptcy cases. Monetary judgments are normally made in the domestic currency.
The Supreme Court of Kazakhstan established a special Investment Court in Astana in 2016. The Government intends to develop the Astana International Financial Center in 2018. According to the Government, the Center will have its own courts that will be based on principles of British business laws.
Laws and Regulations on Foreign Direct Investment
The following legislation affects foreign investment in Kazakhstan: 1) the 2015 Entrepreneurial Code; 2) the Civil Code; 3) the Tax Code; 4) the 2003 Customs Code and the Customs Code of the Customs Union (in force since July 2010); 5) the Law on Currency Regulation and Currency Control; and 6) the Law on Government Procurement. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. Inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, create significant obstacles to business in Kazakhstan.
A new Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and relations of entrepreneurs with the government. The Code reinstates a single investment regime for domestic and foreign investors, and thus, in principal, codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in Part 5.2 (Performance Requirements and Investment Incentives). This law also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the law’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.
Tax rates are competitive. The tax code that Kazakhstan adopted in 2009 lowered corporate income and value-added taxes (VAT), replaced royalty payments with a mineral extraction tax, and introduced excess profit and rent taxes on the export of crude oil and natural gas. Accordingly, the corporate income tax rate has dropped from 30% to 20%. The VAT rate is 12%. Kazakhstan applies a flat 11% social tax to employers based on employees’ earnings, and a personal income tax rate of 10%. The tax rate for non-residents varies between 5% and 20% depending on the type of income. Subsurface users may be subject to additional taxes, such as signing bonuses, commercial discovery bonuses, and historical cost reimbursements.
It is common for Kazakhstan’s tax authorities to invoke national Tax Code provisions over International Financial Reporting Standards (IFRS). At times this can lead to double taxation, especially when employing IFRS standards for deducting expenses between a company’s home office and its branch office in Kazakhstan.
In 2001, Kazakhstan adopted transfer pricing legislation which gives tax and customs officials the authority to monitor export-import transactions, and which since 2009 have codified the “arm’s length principle” embraced by the OECD. Amendments to the law made in 2010 further clarified the rights and liabilities of government agencies by providing private parties contracting with the government the right to justify applied prices to state agencies and to appeal tax inspection results. According to the law, the Ministry of Finance has the right to monitor companies’ transactions by surveying the prices of transactions and analyzing companies’ reports. Foreign investors have noted the new law is more closely aligned with international standards, but remain concerned that the law will be applied not only to transactions with related parties, but all international transactions.
Competition and Anti-Trust Laws
The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. The Committee for Regulating Natural Monopolies and Protection of Competition under the Ministry of National Economy of the Republic of Kazakhstan is responsible for reviewing transactions for competition–related concerns.
Expropriation and Compensation
The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases, but fails to provide clear criteria for expropriation or require prompt and adequate compensation at fair market value.
ICSID Convention and New York Convention
Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the UN Commission on International Trade Law Arbitration rules, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan.
Investor-State Dispute Settlement
A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.
In an effort to encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by refereeing inter-governmental disagreements hampering investors’ activities. According to the Ministry of Investment and Development, from 2015-2016 the Investment Ombudsman successfully addressed 60 investors’ requests.
Kazakhstani law provides for government compensation for violations of contracts that were properly entered into and guaranteed by the government. However, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts (for example, concerning the issuance of a license, granting of a land plot, or mining allotment, etc.) necessary to facilitate the investment activity in question. In such a case, litigation or commercial arbitration may be needed to remedy the alleged violation.
International Commercial Arbitration and Foreign Courts
Even when investment disputes are eventually resolved in accordance with contractual conditions, the process of reaching a resolution can be very slow and require a considerable investment of time and resources. Many investors therefore elect to handle investment disputes privately, rather than make their cases public. The U.S. Embassy advocates on behalf of U.S. firms with investment disputes.
Additionally, the U.S. Ambassador participates in every meeting of the Prime Minister’s Council to Improve the Investment Climate. The Council was created with the goal of paying special attention to questions related to foreign investors, including protection of their rights and interests. The Council has proved to be an efficient forum for foreign companies to raise concerns about doing business in Kazakhstan to the country’s ministers and decision makers. In 2012-2017, the Council discussed various issues, including tax administration problems, decriminalization of administrative violations, the rule of law, judicial independence, and the arbitrary application of environmental fines.
A 2014 bankruptcy law improves the insolvency processes by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, and introduces a time limit for adopting a rehabilitation or reorganization plans, and adds court supervision requirements. In part due to these changes, the World Bank ranked Kazakhstan 37 (up from 47) for ease of resolving insolvency in its latest “Doing Business” report. As the World Bank’s report indicates, the country made resolving insolvency easier by changing voting procedures for reorganization plans and providing protection to creditors who vote against such plans. Creditors have also received a greater access to the information about debtor during insolvency proceedings and may challenge decisions affecting their rights.