Aliya Vaisova, Manager of MinTax LLP Tax Department, reviewed certain issues related to taxation of income of non-residents earned from sources located in the RoK.
Currently, many Kazakhstan’s entities use services of foreign companies to ensure effective running of their business. Services which are most frequently provided by foreign companies include consultancy and research services. At the same time, given the existence of international treaties on avoidance of double taxation entered into by the RoK, questions arise as to levying taxes on income of foreign companies derived from the provision of these services. Let us consider one of them using a particular example.
Question: A Kazakhstan’s company (hereinafter – the JSC) plans to sign with a foreign company – a resident of PRC[2] (the Non-resident) a contract for the provision of consultancy and research services related to technical studies for increasing the efficiency of oil extraction. In this case, these services will be provided by the Non-resident’s experts both in the RoK and in the territory of a foreign state, during 1 calendar year, with the experts staying periodically in the territory of Kazakhstan.
On signing this contract, the JSC will face the need to pay corporate income tax withheld at the source of payment (CIT at source) from the Non-resident’s income, as well as value-added tax to be paid for the Non-resident (VAT for non-resident).
Answer: If the Non-resident provides consultancy and research services, the JSC will be obliged to assess, withhold and transfer CIT at source from the Non-resident’s income at the rate of 20%, because, on the basis of sub-paragraph 2) of paragraph 1 of Article 192 of the RoK Tax code, income of non-residents from performing work, providing services in the RoK shall be recognized as the non-residents’ income from sources located in the RoK.
Given that the Non-resident is a resident of the PRC with which the RoK has concluded the Treaty on avoidance of double taxation and prevention of evasion from taxes on income ratified in accordance with the RoK Law No.421-II dated 2 July 2003 (the Tax Treaty), the Non-resident will be entitled to apply the provisions of this Tax Treaty in respect of tax exemption of the Non-resident’s income, unless he has created a permanent establishment in the territory of the RoK.
Pursuant to sub-paragraph c) of paragraph 3 of Article 5 of the Tax Treaty, provision of services, including consultancy services, by an entity through its employees or other personnel engaged by the entity for such purpose, but only where activities of that nature continue (for the same or related project) within Kazakhstan in total for more than 12 months, leads to creation of a permanent establishment in the RoK.
Provisions of the Tax treaty are applied by the JSC following the procedure established by Article 212 of the RoK Tax code, on the basis of a document presented by the Non-resident which confirms his residency, or its notarized copy meeting the requirements of paragraphs 4 and 5 of Article 219 of the Tax code.
Such a document must be presented by the Non-resident not later than one of the earlier dates as stipulated by paragraph 3 of Article 212 of the Tax code, in particular, not later than:
1) 31 March of the year following the tax period determined in accordance with Article 148 of the Tax code, in which income was paid to the Non-resident or unpaid income of the Non-resident was recognized as deductions;
2) starting date of a scheduled tax audit of the quarter in which income was paid to the Non-resident, ending in the calendar year when such a tax audit is performed in respect of fulfilment of a tax liability on CIT withheld at the source of payment;
3) five business days before the completion of an off-schedule tax audit of the quarter in which income was paid to the Non-resident, ending in the calendar year when such a tax audit is performed in respect of fulfilment of a tax liability on CIT withheld at the source of payment. The completion date of an off-schedule tax audit is determined in accordance with an instruction.
Special attention should be paid to the format of a document confirming the residency of the Non-resident. The document should confirm that the Non-resident is a resident of the PRC during the period of time specified in the document or within the calendar year in which it was issued. Since the PRC is not a party to the Treaty abolishing the requirement of consular or diplomatic legalization by affixing an apostille (the Hague, October 5, 1961), except for the territories of Hong Kong and Macau provinces, the document confirming residency of the Non-resident is subject to a consular legalization in the manner prescribed by the RoK legislation.
Considering that consultancy and investigatory services will partially be provided by the Non-resident’s specialists in the territory of Kazakhstan, if they are provided within the period not leading to the formation of the Non-resident’s permanent establishment in the RoK, in addition to a residency certificate, the Non-resident will also need to submit notarized copies of constituent documents or extract from the trade register (stockholder register or other similar document under the laws of the PRC, indicating the founders (participants) and majority shareholders of the Non-resident).
Thus, in order that the Non-resident’s income could be exempted from tax and to avoid any risk of creating a permanent establishment of the Non-resident in Kazakhstan, pursuant to the norms of the Tax Treaty, the period of providing consultancy and research services under the contract should not exceed 12 months.
In accordance with sub-paragraph 4) of paragraph 2 of Article 236 of the Tax code, the location of sale of consultancy and research/engineering services shall be recognized to be a place where the buyer of the work, services is engaged in business or any other activity, that is Republic of Kazakhstan.
In this regard, when income is paid to the Non-resident for the provided consultancy and research/engineering services, for which the RoK is the location of sale, the JSC will be obliged to assess and pay VAT for non-residents at the rate of 12%. However, pursuant to paragraph 5 of Article 241 of the Tax Code, in the presence of a payment document or a document issued by the tax authority according to the form established by the authorized body, confirming payment of VAT for the non-resident, the JSC shall be entitled to set off the amount of tax paid in accordance with Article 256 of the Tax Code.
