Kazakh President Nazarbayev Tells Oil Companies To Pay More Tax

Tatiana Smolenska, Tax-news.com, Moscow

14 August 2000

President Nursultan Nazarbayev of Kazakhstan last week attacked major exporting companies which use transfer pricing mechanisms to reduce their profits in Kazakhstan, thus reducing or avoiding profits taxes. He singled out a number of major companies, warning them to mend their ways. According to Kazakhstan officials, the two biggest Western invoicing destinations for Kazakh exports are Bermuda and the British Virgin Islands, each of them responsible for $900m worth of trade with a country whose GDP equals only $15bn.

Despite the losses of tax through transfer pricing, the country fulfilled its revenue budget last year, but still ran a massive deficit which is causing concern domestically and among international lenders. In a televised speech reported by the BBC, the President congratulated State Revenues Minister Zeynulla Kakimzhanov but then called for improved tax performance:

'I am upset by oil companies such as Chevron, Mangistaumunaygaz [Mangistau oil and gas], enterprises working at the Karachaganak deposit and the companies of the Eurasian Bank Group, which are undergoing a strict inspection of their transfer prices. Once again I want to say that they themselves should shift to an honest and open work and transparency so that all money flows are published and they themselves should report to the State Revenues Ministry and remove all issues concerning tax payment without waiting for other approaches to be taken. We know how oil and other companies are working in the world, we know in line with what laws taxes are paid and we will not let these companies and investors working on the reserves of Kazakhstan evade paying taxes using various methods. Now, I simply address all of you. They are friends of ours and we support them. They are working in our major companies which form the basis of Kazakhstan and we want to create conditions for them and help them and we will support their work if their activities conform to the laws of Kazakhstan. Let them accept this as the president's warning.'

The President's attack is directed not only or even perhaps mainly at Western companies, although he named some of them, but more at Kazakhstan's version of Russia's oligarchs, who are famous for exporting their profits and assets to the West via offshore companies. He was supported by National Bank Chairman, Grigory Marchenko, who said that the President's goals were 'entirely just, objective, and necessary to develop just economic relations for Kazakh taxpayers'.

'Everybody knows', he said, 'how much Kazakh oil is currently being exported to Bermuda and the Virgin Islands. This is quite unacceptable. Kazakhstan should either admit that it is a banana republic which is in fact allowing itself to be used, or the country's government should establish civilized relations with both major Kazakh and foreign companies which are operating in Kazakhstan using the mechanism of transfer prices'.

Marchenko pointed to 'an obvious excess of tax indulgences for oligarchs which allows them to make use of the transfer prices mechanism to evade tax payments on big sums.' He said he believed that 70 per cent of the capital flight abroad is through the mechanism of transfer prices. "This imbalance should be eliminated right now" he went on, echoing the President in saying that there should however be no campaign against the companies concerned. The reality of course is that the country cannot do without the major Western investors who have supported the development of its natural resources, and are now needed more than ever in the exploitation of massive oil and gas resources being discovered in the Caspian Sea.

Later in the week, Prime Minister Kasymzhomart Tokayev emphasized the dire state of the country's budget, saying that there is 'an alarming economic situation'. He thinks the government cannot but take tough steps to cut the budget.

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