Analytics of the Russian "Oil-and-gas vertical" magazine - on tax reform in Turkmenistan
Turkmenistan updated its tax law in the autumn of last year. The changes don't look revolutionary. The point is rather about adjustment, systematization and specification of the tax law. They are evidence of the country's aspiration to become more transparent and friendly towards strategic investors from near and far abroad as it plans to draw large-scale capital investments in oil and gas projects.
The tax system of Turkmenistan is simple: five basic taxes, plus municipal levies. Investors operating on a PSA basis pay even less than that - two taxes and bonuses. Remarkably, the changes in the tax law have not affected interests of contractors and subcontractors of oil contracts. It is the important sign of stability.
Perhaps, the only thing that breaks idyll is a norm in the Tax code that compels tax officials to earn their daily bread by fining tax payers. Diligent tax payers should probably commit some tax sins to avoid running into more serious troubles.
The Tax code of Turkmenistan took effect on November 1 2004 . For the first time it regulates the general principles of taxation and relationships between tax bodies and tax payers. Besides, the code systematizes and concretizes the rules of calculation and payment of taxes.
A conference entitled "Opportunities of partnership between Turkmenistan and Russia in the oil and gas sector" held in Ashgabat in the middle of last November confirmed that our countries have good prospects for bilateral cooperation. As Turkmen president Saparmurat Niyazov noted, "large Russian companies have recently taken a clear interest in participation in projects on transportation, exploration and extraction of hydrocarbons in Turkmenistan, which is proved by the establishment of ZARIT consortium to develop Caspian shelf deposits. In this context, the changes in the tax law of Turkmenistan are of practical interest to the Russian companies.
The tax code establishes a system of taxes levied to the state budget of Turkmenistan, general principles of taxation, the reasons for occurrence and rules of fulfillment of duties on payment of taxes, rights and obligations of tax payers, bodies of tax service, the forms and methods of tax control, responsibility for violation of the tax law of Turkmenistan, appealing decisions of bodies of the tax service and actions of their officials.
The tax code has an absolute priority in the sphere of tax regulation. Other laws of Turkmenistan cannot have provisions relating to taxation, if not stipulated otherwise by the Tax code. Such an exception was made, for example, as regards the basic law for oil and gas companies, "On the hydrocarbon resources". The provisions of the code on contractors and subcontractors of oil and gas projects are applied taking into account exceptions established by the law (see "a special status of the contractor").
According to the Tax code, companies operating in Turkmenistan pay the value-added tax, excise tax (paid by manufacturers and sellers of gasoline and diesel fuel), tax on the use of subsoil reserves (extracting companies), tax on property, profit tax and also a target levy for improvement of territories of cities, townships and villages. Besides, there is a levy on the sale of cars.
It should be noted that in some cases there applies a special rule of taxation on participants of the oil and gas projects.
Apart from the sale of goods, carrying out of works and rendering of services, the VAT in Turkmenistan is levied on construction-assembly works for own needs, on the sums of insurance compensation and compensation for the damage caused by theft or damage of goods. The VAT is also levied on goods, works and services for own consumption if relevant expenses are not deducted under the profit tax.
At the same time, the assignment of property rights is viewed as the sale of goods or rendering of services. Shortage of goods in excess of the norms of the natural loss is also viewed as the sale of goods if there is no official confirmation of the fact that these goods were stolen or spoiled.
There is a 15% rate of the VAT on taxable operations (13,04% if goods are sold at the state-set prices). The VAT is levied at full rate in exports operations of natural and associated gas, oil, hydrocarbon products. At the same time, a zero rate of the VAT is levied on transportation of export goods as well as on services for transit of foreign cargoes through the territory of Turkmenistan. Contractors and subcontractors under the law "On the hydrocarbon resources" do not pay the VAT (covering only oil contracts).
Besides, the tax base decreases by the amount of money transferred to the Currency reserve of the government of Turkmenistan. The negative difference under the VAT is subject to return or transfer to other budget payments.
The VAT on the capital assets, unfinished construction and non-material assets is charged from the moment of their purchase (production by own means). Thus, the tax is charged under three algorithms established by the code. A lump sum is paid as regards objects worth up to Manat 50 million. Equal installations are made on a monthly basis within seven years as regards objects of capital construction (buildings, facilities, roads and transfer mechanisms), ships and airplanes, railway transportation means. Equal installations are made on a monthly basis within two years for the rest of objects.
Gasoline and diesel fuel are subject to levying the excise tax in Turkmenistan. In both cases the excise tax is levied at a rate of 40% of the cost of goods. The excise tax is levied from the sale and use for own needs of excised goods produced in the country as well as when rendering services on production (production and bottling) of excised goods from raw material provided by the customer. When importing excised goods to Turkmenistan the excise tax is paid by the importer.
However, the state organizations, contractors and subcontractors under the law "On the hydrocarbon resources" are exempted from paying the excise tax. In the latter case, this exemption is applied only to operations under oil contracts and excise goods imported to Turkmenistan for oil works. Besides, services on production of gasoline and diesel fuel made of raw material rendered by foreign legal entities under the condition of subsequent export of this production from Turkmenistan are exempted from the excise tax.
Tax on subsoil
Legal persons and individual businessmen that extract minerals are the payers of the tax on subsoil, except for contractors and subcontractors under the law "On the hydrocarbon resources."
As regards hydrocarbon resource, their cost is viewed as the tax base. The cost is determined based on the price for hydrocarbon resources that a tax payer receives or has the right to receive from any other person, excluding the VAT. As for other minerals, profits from their sale make up the tax base.
The tax base for minerals sold in the country at a reduced price is determined taking into account such exemptions. It applies to free-of-charge use by the population of goods according to the legislation of Turkmenistan.
As for taxable operations with natural and associated gas, the tax for using subsoil is 22%. For oil operations the rate is 10%. The rate on taxable operations with other minerals depends on profitability.
The tax on operations with hydrocarbon resources is levied in the form of advance payments (one third of the subsoil tax calculated for the previous tax period - a quarter).
Tax on property
Legal persons who have private property, property on the basis of full economic management or operative (trusteeship) management are the payers of the tax on property in Turkmenistan. During exploitation of an object which was not put into operation or was not recorded as the capital asset the tax on property is paid by the principal. Organizations recognized as contractors and subcontractors under the law "On the hydrocarbon resources" are exempted from paying the tax as regards property used during oil operations.
Legal persons-residents of Turkmenistan pay the tax on property which is located both in the territory of Turkmenistan and outside Turkmenistan. At the same time, the tax on property paid outside Turkmenistan according to the tax laws of other states are taken into account when they pay the tax on property in Turkmenistan.
Soil is not the object of taxation. The tax on property does not apply to gas pipelines (except for mains), railway access roads, public highways, communication lines and electricity transmissions, bypassing and water facilities, bridges, engineering and other constructions intended for their use.
The average annual residual cost of property makes up the tax basis for the capital assets and their annual cost is considered the tax basis for the floating assets. The tax is levied at a rate of 1% of the tax base of the tax period.
Payers of the tax on profit (income) are both legal persons-residents of Turkmenistan and legal persons-non-residents of Turkmenistan that operate in the territory of the country through permanent mission or receive profits from sources in Turkmenistan.
The profit of legal persons is established as the gross revenue of a tax payer, minus deductions stipulated by the Tax code. Residents of Turkmenistan are levied the tax on profit (income) received both in the territory of Turkmenistan and outside Turkmenistan.
The taxable base excludes accrued sums of the VAT, excise tax, tax on property and tax on using subsoil, incomes from quota sharing in other legal entities that were earlier levied at the initial source of payment in Turkmenistan and also expenses connected to the production and sale of goods (works, services). The last category includes material expenses, salaries, transfers for state social insurance, accrued amortization, miscellaneous costs and losses, charges (losses) that are not related to the sale of goods.
Deductions do not include expenses of capital nature, loans, dividends, expenses covered by funds and reserves established by tax payers, losses from the maintenance of objects of social purpose, refund of charges to workers exceeding the fixed limits.
Expenses related to the development of natural resources (including those that did not bear positive results) are subject to inclusion in the structure of miscellaneous costs if a source of their financing does not come from the state budget of Turkmenistan or state funds. At the same time, expenses of tax payers for geological surveys, exploration of subsoil reserves, minerals, carrying out preparation works are regarded as expenditures on natural resources development.
Charges on scientific researches, project developments and test designing works (including those that did not bear positive results) also are subject to deduction from the gross revenue. But this norm does not apply to expenses of capital nature.
For legal persons-residents of Turkmenistan with private ownership the rate of the profit tax is 8%, for other legal persons - 20%. The rate of the tax on revenues as dividends or other means from quota sharing in other legal entities is 15%.
For legal persons-residents of Turkmenistan that receive revenues from the sale of natural or associated gas, oil, oil products and electricity the Cabinet of Ministers of Turkmenistan may establish a special order of calculation of the tax on profit (income), submitting the tax declaration and payment of the tax.
Calculation of the profit tax, submitting of the tax declaration and payment of the tax by the legal persons who operate under the law "On the hydrocarbon resources" are made according to the provisions of this law. The foreign legal persons operating under this law can pay the profit tax (income) in hard currency.
The profit tax paid by a legal person-resident of Turkmenistan outside Turkmenistan according to the tax laws of other states is taken into account when paying the profit tax in Turkmenistan. The income tax is levied on physical persons at a rate of 10%.
One can see that Turkmenistan has a simple tax system. And the tax rates are not high.
At the same time, the updated tax law stimulates tax officials to carefully search for tax sins - even where they can't exist. This particularly relates to operators of large projects who ensure the major part of budget incomes. It may make a sense to agree with tax officials beforehand on the size of the future penalties and fines to avoid running into more serious troubles.
The thing is that according to Article 71 of the Tax code of Turkmenistan the material prosperity of local tax officials is directly linked to their ability to reveal tax sins. And the point here is not about rewards but rather about earning their basic salary. The state budget of Turkmenistan covers just 50 % of expenditures for salaries of tax service officers. The other part of their salaries depends on the amount of additional penalties and fines transferred to the budget: up to one half of such budget incomes goes for these purposes.
Fines are charged at a rate of 0,03% of the unpaid in due time tax for each calendar day of delay, including the day of payment. And the fines for delayed payment of the additionally accrued sum of the tax are calculated for the entire period of non-payment of the tax. Understatement of the tax sum results in financial sanctions on a tax payer at a rate of 40% of the unpaid tax.
Special status of the contractor
The law of Turkmenistan "On the hydrocarbon resources" was developed under the leadership of the president of Turkmenistan, Saparmurat Niyazov, in December 1996. The law regulates relations in the process of oil works in the territory under the jurisdiction of Turkmenistan, including at sea and internal reservoirs, licensing, conclusions and executions of contracts on carrying out of such works. The law regulates the authorities, rights and obligations of the state bodies as well as companies, enterprises and organizations that carry out such works.
This law has an absolute priority in regulation of oil operations: if other laws, including the Tax code, establish other rules then the norms of the law "On the hydrocarbon resources" are applied.
Two kinds of contracts are used to carry out oil works in Turkmenistan: on product sharing and joint work. In both cases a concern or a competent body act as the partner of the investor. Users of subsoil who concluded such contract are called contractors.
Under oil contracts, the contractor pays only the profit tax (at a regular rate, but the order of determining the taxable profit is set in the contract) and the royalty which is also set in the contract. A contract may envisage payment of a bonus of signing or lump sums upon achieving certain result.
Payment of taxes and other payments stipulated by the contract do not exempt the contractor from payment of other taxes and payments connected to activity not related to oil works. The subcontractor pays the same taxes as the contractor.
All materials and equipment used to carry out oil works are exempted from customs duties and registration at the state commodity and raw material exchange. The contractor is not exempted from payment of the customs duties and other payments when carrying out works that are not related to oil works.
Analytical service "Oil-and-gas Vertical"
"OIL-AND-GAS VERTICAL" Magazine (Moscow), № 3, 2005