March 3, 2021
OECD releases Kazakhstan Stage 1 peer review report on implementation of Action 14 minimum standard
On 16 February 2021, the Organisation for Economic Co-operation and Development (OECD) released the 10th batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms.1 Kazakhstan was among the assessed jurisdictions in the 10th batch.2
Overall the report concludes that Kazakhstan meets most of the elements of the Action 14 minimum standard. In the next stage of the peer review process, Kazakhstan’s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored.
In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective.3 The Terms of Reference translated the Action 14 minimum standard into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring in two stages. In Stage 1, a review is conducted of how a member of the Inclusive Framework (IF) on BEPS implements the minimum standard based on its legal framework for Mutual Agreement Procedure (MAP) and how it applies the framework in practice. In Stage 2, a review is conducted of the measures the member of the IF on BEPS takes to address any shortcomings identified in Stage 1 of the peer review.
Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration’s (FTA) MAP Forum.4 In summary, Stage 1 consist of three steps or phases:
Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs’ to adopt the report for publication.
Minimum standard peer review reports
The report is divided into four parts, namely:
Each part addresses a different component of the minimum standard.
The report includes 18 recommendations relating to the minimum standard. In general, the performance of Kazakhstan with regard to MAP has proven to be satisfactory in their respective reports. Overall, Kazakhstan meets most of the elements of the Action 14 minimum standard.
Kazakhstan does not meet the Action 14 minimum standard concerning the prevention of disputes. It has in place a bilateral Advance Pricing Agreement (APA) program, but this program does not allow roll-back of bilateral APAs.
To be more precise, most of Kazakhstani tax treaties contain a provision which states that all jurisdictions should ensure that their tax treaties contain a provision which requires the competent authority of their jurisdiction to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of their tax treaties that is equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention (OECD, 2017).
In order to meet the Action 14 minimum standard concerning the prevention of disputes, the provision of roll-back of bilateral APA in appropriate cases is required in all jurisdictions with APA programs as the “roll-back” of an APA to these previous filed years may be helpful to prevent or resolve potential transfer pricing disputes. However, at the current time, Kazakhstan does not allow roll-back of bilateral APAs.
Within the framework of improvement, mismatches equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention (OECD, 2017) in tax treaties will be modified via the Multilateral Instrument (MLI) or future bilateral negotiations. With respect to roll-back of bilateral APAs, Kazakhstan reported that it intends to amend it domestic legislation soon to allow roll-backs.
Availability and access to MAP
In general, Kazakhstan meets some of the requirements regarding the availability and access to MAP under the Action 14 minimum standard. It provides access to MAP in almost all eligible cases, although it has since 1 January 2016 not received any MAP request concerning transfer pricing cases or cases where anti-abuse provisions are applied or cases where there has been an audit settlement. However, for treaties that do not include a filing period for a MAP request, domestic legislation provides time limits for a filing period of less than three years as from the first notification of the action resulting in taxation not in accordance with the provisions of a tax treaty. Furthermore, Kazakhstan has in place a bilateral consultation or notification process for those situations in which its competent authority considers the objection raised by taxpayers in a MAP request as not justified, but this process is not documented. Kazakhstan also has no guidance on the availability of MAP and how it applies this procedure in practice.
The number of cases Kazakhstan closed in the period 2016 to 2019 is less than the number of all new cases started in those years. In addition, several peers experienced difficulties in effectively scheduling face-to-face meetings, obtaining positions papers in due time, receiving responses to position papers issued by peers and receiving timely responses to communications on pending MAP cases. This indicates that resources are not made available for the competent authority function in a way that allows an adequate use of such resources for the resolution of MAP cases in a timely, efficient and effective manner.
In order to improve availability and access to MAP under the Action 14 minimum standard, Kazakhstan reported that it intends to modify tax treaties which do not include a time limit for submission of a MAP request via the MLI or future bilateral negotiations. Moreover, it is indicated that Kazakhstan is planning to publish rules, guidelines and procedures on access to and the use of MAP in Kazakhstan, including the specific information and documentation that should be submitted in a MAP request.
Resolution of MAP cases
In accordance with the resolution of MAP cases, Kazakhstan meets certain requirements under the Action 14 minimum standard.
Generally, the organization of MAP cases is adequate and performance indicators used are appropriate to perform the MAP function, but there are several issues related to tax administration personnel directly involved in the adjustment at issue which influence the resolution of MAP cases. Moreover, major part of peers provided feedback that Kazakhstan’s competent authority does not have the authority to resolve MAP cases under the terms of the applicable tax treaty.
By the way of improvement, Kazakhstan should ensure that adequate resources – including personnel, funding, training and other program needs – are provided to the MAP function, in order to enable competent authorities to carry out their mandate to resolve cases of taxation not in accordance with the provisions of the Convention in a timely and effective manner.
Furthermore, Kazakhstan should ensure that tax administration personnel directly involved in the adjustment at issue do not have any influence in the decision-making process of MAP cases.
Implementation of MAP agreements
As there was no MAP agreement reached during the Review Period that needed to be implemented in Kazakhstan, it was not yet possible to assess whether Kazakhstan would have implemented all MAP agreements on a timely basis thus far. Accordingly, it was not yet possible to assess whether Kazakhstan meets the Action 14 minimum standard with respect to the implementation of MAP agreements.
Kazakhstan is already working to address deficiencies identified in its peer review and will now move on to Stage 2 of the process, where Kazakhstan’s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, Kazakhstan shall submit an update report to the FTA’s MAP Forum within one year of the OECD Committee on Fiscal Affairs’ adoption of the Stage 1 peer review report.
In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Kazakhstan’s peer review report represents the continued recognition and importance of the need to achieve tax certainty related to cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process.
Furthermore, the peer review for Kazakhstan provides insights to taxpayers on the availability and efficacy of MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis.
With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for Kazakhstan and any other jurisdictions, and to perhaps comment on whether the next iteration of the OECD’s assessment of tax administration’s MAP performance warrants greater feedback from taxpayers as the primary source. Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current favorable result.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Kazakhstan LLP, Almaty