Kazakhstan is undergoing a pivotal transformation in its transfer pricing framework, marked by the Majilis’ approval of substantial amendments to the existing legislation. The aim is to curb revenue losses, prevent capital outflow, and align with global standards.

Overview

 Transfer Pricing Methods

• Previous Framework: The earlier legislation had a rigid hierarchy of five methods for determining transfer pricing, requiring taxpayers to justify the non-application of preceding methods before opting for a less preferred one.
• Amendment Details: The amendments propose a more flexible approach, allowing taxpayers to choose a method that aligns with the nature of the international transaction. This could reduce administrative burdens for both taxpayers and auditors.
• Expected Impact: This amendment simplifies the process, potentially lowering compliance costs for businesses and making tax assessments more reflective of market realities.

Profitability Range Determination

• Previous Framework: The original law determined the range based on minimum to maximum market values, which could lead to significant discrepancies from actual market conditions.
• Amendment Details: The amendment introduces a more nuanced way of calculating the profitability range by considering a broader set of market data and excluding extreme outliers, which aligns more closely with international practices.
• Expected Impact: This change is designed to provide a more accurate, market-aligned basis for determining transfer prices, leading to fairer tax assessments and reducing the chances of arbitrary adjustments.

Expanded Definition of Related Parties

• Previous Framework: The definition of related parties was more limited, potentially allowing some related-party transactions to escape scrutiny. Some large taxpayers used artificial intermediary structures not recognized as related parties, allowing capital outflow.
• Amendment Details: The expansion of the criteria aims to encompass a broader array of corporate relationships and structures.
• Expected Impact: This broader definition is expected to close loopholes that allowed for profit shifting and tax avoidance, ensuring a more comprehensive application of transfer pricing rules. A Kazakhstani oil producer selling its entire production to an ‘exclusive’ trader at reduced prices, where both entities aren’t legally related, will now fall under scrutiny, preventing potential revenue loss for Kazakhstan.

Control over Commodity Exchange Transactions

• Previous Framework: Transfer pricing control was primarily focused on traditional transactions involving goods, works, and services. Control wasn’t applied to transactions on commodity exchanges, often executed at below-market prices.
• Amendment Details: The scope now includes these transactions under transfer pricing regulations.
• Expected Impact: The broadened scope addresses the evolving nature of global trade. This expansion is crucial for capturing more transactions under transfer pricing rules, ensuring a comprehensive tax base.

Local File Requirements

• Previous Framework: The requirement to file the Local file was limited to participants of multinational enterprises, leaving out a significant segment of taxpayers.
• Amendment Details: The new amendments expand this requirement to taxpayers conducting transactions with related non-resident entities, enhancing transparency.
• Expected Impact: This increase in reporting requirements aims to enhance transparency and accountability, particularly for transactions that might have previously been underreported. A Kazakhstani company engaged in significant transactions with a related foreign entity will now need to file detailed local reports, providing a clear picture of the transaction for tax purposes.

Rationale and expectations

These legislative changes are driven by several factors. Aligning with OECD standards, particularly the BEPS initiative, is a key motivator. These reforms aim to position Kazakhstan in line with global tax practices.

The amendments are also a response to the significant revenue losses experienced due to previous inadequacies in the transfer pricing system. They seek to safeguard and potentially increase state revenues.

Compared to the previous transfer pricing framework, these amendments represent a significant shift towards a more flexible, market-oriented approach. The changes reflect a deeper understanding of contemporary business practices and a commitment to aligning with international standards. By addressing the limitations and gaps in the old framework, these amendments are expected to bring about more accurate and effective transfer pricing practices in Kazakhstan.