Aliya Vaisova, Senior Manager of MinTax LLP, in her article tells about applying a deduction in the amount of one minimum wage (hereinafter – MW) to the income of employees who are citizens of foreign countries, when assessing the liabilities for PIT[1] withheld at the source of payment in the RoK[2].
In connection with frequently asked questions regarding the lawfulness of a taxpayer’s applying a deduction at the rate of one MW to the income of employees who are citizens of foreign states when assessing liabilities for PIT at the source of payment in the RoK, we will consider the relevant norms of the Tax Code[3] and the provisions of the Treaty concluded between the Government of the RoK and the Government of the Russian Federation in Moscow on 18 October 1996 “On the elimination of double taxation and prevention of evasion from taxes on income and capital” (hereinafter – the Tax treaty with the RF).
According to paragraph 1 of Article 317 of the Tax Code, in respect of income taxable at the source of payment of RoK citizens, foreigners or stateless persons who are residents of the RoK (hereinafter – a resident individual), the assessment, withholding and transfer of PIT, as well as the presentation of tax reports, shall be carried out by the tax agent (employer) in the manner and within deadlines which are established by Chapter 35 of the Tax Code, paragraph 1 of Chapter 36, Chapter 38 and Article 657 of the Tax Code, at the rates stipulated by Article 320 of the Tax Code.
According to paragraph 1 of Article 351 of the Tax Code, the assessment of PIT on income taxable at the source of payment shall be carried out by the tax agent when calculating income subject to taxation. The amount of PIT shall be calculated by applying the rates established by Article 320 of the Tax Code equal to 10% to the amount of income taxable at the source of payment determined in accordance with Section 38 of the Tax Code.
At the same time, paragraph 1 of Article 353 of the Tax Code states that the amount of taxable income is determined as follows: the amount of employee’s income taxable at the source of payment accrued for the tax period, minus the amount of income adjustment for the tax period provided for by paragraph 1 of Article 341 of the Tax Code, minus the amount of tax deductions in the manner specified in Article 342 of the Tax Code.
Sub-paragraph 3) of paragraph 1 of Article 342 of the Tax Code establishes the right for an individual to apply standard tax deductions, among which, according to sub-paragraph 1) of paragraph 1 of Article 346 of the Tax Code, is one MW established by the law on the republican budget and effective as of January 1 of the corresponding financial year. The standard deduction is applied for each calendar month. The total amount of the standard deduction for a calendar year should not exceed 12 times the MW established by the law on the republican budget and effective as of January 1 of the corresponding financial year.
Thus, when assessing PIT liabilities on income received by RoK citizens, foreigners or stateless persons who are residents of the RoK, a taxpayer – a tax agent should apply a standard tax deduction equal to one MW established by the law on the republican budget and effective as of January 1 of the corresponding financial year.
At that, in accordance with sub-paragraph 1) of paragraph 1 of Article 217 of the Tax Code, for the purposes of the Tax Code, a resident of the RoK is an individual:
– permanently residing in the RoK;
– residing in the RoK not permanently, but whose center of vital interests is in the RoK.
According to paragraph 2 of Article 217 of the Tax Code, an individual shall be recognized to stay permanently in the RoK for the current tax period, if such person is staying in the RoK for not less than one hundred and eighty-three calendar days in any consecutive twelve-month period, ending in the current tax period.
At the same time, sub-paragraph 2) of Article 219 of the Tax Code states that, for the Tax Code purposes, despite the provisions of Article 217 of the Tax Code, a non-resident shall mean a foreigner or stateless person who is recognized as a non-resident in accordance with the provisions of the international treaty governing the avoidance of double taxation and the prevention of tax evasion.
Thus, for example, according to paragraph 1 of Article 4 of the Tax treaty with the RF, the term “resident of a Contracting State” means any person who, under the legislation of this State, is subject to taxation in it on the basis of his domicile, permanent residence, place of management, registration or creation, or any another criterion of a similar nature.
However, this term does not apply to any person who is liable to tax in that State only in respect of income from sources in that State or in respect of capital situated therein.
Paragraph 2 of Article 4 of the Tax treaty with the RF states that, in cases when, according to paragraph 1 of Article 4 of the Tax treaty, an individual is a resident of both Contracting States, then his status is determined as follows:
- a) he shall be deemed a resident of the state in which he has a permanent home available to him; if he has a permanent home available in both Contracting States, he shall be deemed a resident of the State in which he has closer personal and economic relations (center of vital interests);
- b) if the State in which he has his center of vital interests can not be determined, or if he has a permanent home available to him in none of the Contracting States, he shall be deemed a resident of the State in which he normally resides;
- c) if he normally resides in both States or in none of them, he shall be considered a resident of the State of which he is a citizen.
- d) if he is a citizen of both States or neither of them, the competent authorities of the Contracting States shall resolve the issue by mutual agreement.
It should be noted that the above provisions of Article 4 of the Tax treaty with the RF are similar to the provisions of the most part of Tax treaties concluded by the RoK with the governments of foreign states.
Therefore, when determining the residency of foreign employees who stay in the RoK for more than 183 calendar days and who are citizens of a foreign state with which the RoK has concluded the Tax treaty, one must be guided by the provisions of such a Tax treaty, in particular, paragraph 2 of Article 4 of the Tax treaty.
Accordingly, when assessing PIT liabilities on income received by such foreign citizens who are non-residents of the RoK in accordance with the Tax treaties, the tax agent’s applying a standard tax deduction equal to one MW established by the law on the republican budget and effective as of January 1 of the relevant financial year is considered to be unlawful.
In case when the status of a “resident of the RoK” is confirmed by such citizens of a foreign state on the basis of a Kazakhstan residency certificate issued by the tax authority of the RoK in the manner prescribed by Article 218 of the Tax Code, the tax agent, when assessing PIT liabilities, has the right to apply a standard tax deduction equal to one MW established by the law on the republican budget and effective as of January 1 of the corresponding financial year.
[1] Personal Income Tax.
[2] Republic of Kazakhstan.
[3] Code of the Republic of Kazakhstan No 120-VI dated 25 December 2017 “On Taxes and Other Obligatory Payments to the Budget (Tax Code)”
