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Kazakhstan: Astana Proposes Tax Changes that Would Hit Energy Producers, Mineral Extractors

Seeking to diversify Kazakhstan's economy, government officials are considering changes to the county's tax code that would aim to stimulate economic activity among small- and medium-sized businesses. While entrepreneurs would reap the most benefit from the proposed changes, the new code would significantly increase the tax burden on large energy companies.

The Mejlis, Kazakhstan's parliament, opened debate on September 8 on a comprehensive tax reform prepared by Prime Minister Karim Massimov's government. The legislature is expected to vote on the plan by early October. The basic premise of the reform initiative would be to expand the energy export tax and introduce a mineral extraction tax, and use the additional revenue to fund development of non-extractive economic sectors.

Under the existing tax code, oil export tax ranges between 1 percent and 33 percent. The proposed changes would set the progressive tax rates at between 7 percent and 32 percent. The tax would kick in as long as the oil price remains $60 per barrel, with the exact taxation rate for exports being linked to the global market price for oil. Producers would also be responsible for paying an extraction tax of up to 18 percent of the market price.

The government also is planning a mineral extraction tax with rates varying depending on the mineral being mined. For example, the tax rate for copper is envisioned at 8.7 percent in 2009 and 9.8 percent in 2010. For iron ore, the rates would be 2.5 percent next year and 2.8 percent in 2010.

The extraction tax would help the government offset a reduction in corporate income tax. Currently the corporate income tax is fixed at 30 percent. The new tax code proposes cutting it down to 20 percent in 2009, 17.5 percent in 2010 and 15 percent in 2011.

Bakyt Sultanov, Kazakh Minister of Economy, told journalists on September 8, that under the proposed new tax code, the overall tax burden of the oil sector will increase from the current 49 percent to 62 percent. Sultanov added that the proposed energy taxes would apply to roughly 60 percent of the nation's crude oil output next year. Kazakhstani officials emphasized that major energy companies operating under production-sharing agreements -- including Chevron, Shell, and ExxonMobil -- would not be affected by the tax changes.

The plan is prompting resistance from the energy sector. Timur Kulibayev -- President Nursultan Nazarbayev's son-in-law and the chairman of KazEnergy, a powerful association of Kazakhstani and foreign oil producers -- is on record as being staunchly opposed to increasing the tax burden on energy companies. Doing so, Kulibayev has argued, could lead to an overall decrease in revenue coming into government coffers.

The opposition of Kulibayev, who has a net worth estimated at $2.7 billion according to Forbes Magazine, indicates that the tax issue could open a rift within the Kazakhstani elite. For now, it appears that Massimov's technocrat-dominated government retains the support of Nazarbayev.

Kulibayev tends to prefer keeping a low public profile. Going public with his grievances would seem to suggest a breakdown in informal mechanisms used to forge consensus among members of Kazakhstan's political and economic elite. Kulibayev, along with other powerful energy-sector leaders, is believed to be waging a determined behind-the-scenes campaign to frustrate the Massimov government's plans. The stakes involved would appear to be big enough that Kulibayev seems willing to risk incurring the wrath of Nazarbayev, something that could cost him his fortune, if not his liberty [For background see the Eurasia Insight archive].

The roots of the jockeying over tax reform stretch back to early 2007, when President Nazarbayev appointed Massimov as prime minister. Since his appointment, Massimov has moved to increase the state's influence over key economic sectors, energy in particular. [For background see the Eurasia Insight archive]. In addition, he has attempted to streamline and professionalize Kazakhstan's bureaucracy, placing younger officials in position of authority and weakening the influence of interest groups over Kazakhstan's oil-and-gas sector.

According to some local observers, the struggle for influence is not just over taxes, but also extends to the operations of KazMunaiGaz (KMG), the major state-run energy company. In late August, KMG experienced an unexpected leadership change, when Serik Burkitbayev was forced out as chief executive officer after less than three months on the job. He was replaced by Kairegeldy Kabyldin. Some analysts suggest that back-room political maneuvering played a role in Burkitbayev's sudden downfall.

A September 9 report appearing in the Kazakhstani newspaper Vremya, suggested that Burkitbayev's enemies precipitated his ouster by presenting President Nazarbayev with evidence that the then-KMG chief had engaged in unsavory behavior. According to ZonaKZ.net, a Kazakh information website, Burkitbayev, in his previous capacity as the chairman of KazakhTelecom, allegedly provided Rakhat Aliyev with eavesdropping equipment and assisted him in bugging the offices of key government officials. Aliyev is a former son-in-law of Nazarbayev who fell from grace in 2007 and is now living in exile. [For background see the Eurasia Insight archive].

Some local political analysts question whether Massimov's government has sufficient clout to push the tax changes through the legislature in the face of strong opposition from the energy sector. The measure has drawn criticism from several corners of the legislature. Some MPs question whether the move would cause too much disruption, while others have wondered why some of the biggest energy operators in the country would enjoy tax-exempt status.

Some small-scale entrepreneurs are also leery of the changes because it hikes real estate tax. Serik Turzhanov, head of the Almaty Association of Goods Manufacturers, described the changes as "extremely unsatisfactory" in a discussion with journalists on September 4.

Alisher Khamidov is a PhD Candidate at the School of Advanced International Studies (SAIS) of Johns Hopkins University in Washington D.C.

Kazakhstan: Astana Proposes Tax Changes that Would Hit Energy Producers, Mineral Extractors

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