Ten Facts For Investor
Two years ago, the process of transformation of the management system and improving the investment climate started in the mining industry. This article contains an overview of what the investors shall know on subsoil use in our country, kindly provided by the legal firm Colibri Kazakhstan.
№1 LEGAL FRAMEWORK
The main governing law in the sector is the “Law on Subsoil and Subsoil Use” (No.291-IV) dated 24 June 2010 (the "Subsoil Law").
The Subsoil Law defines the basic legal framework governing the exploration and development of natural resources, including both solid minerals and hydrocarbons. The Subsoil Law contemplates government control over the provision, implementation and transfer or termination of the subsoil use right, and regulates other general questions.
It should be noted that an important block of the legislation in the sphere of subsoil use also include many regulations, in particular resolutions of the Government of Kazakhstan adopted in the light of the Subsoil Law.
Relations connected with the exploration and production of natural resources, as well as other market relations governed by the provisions of civil, environmental, land and other industry-specific legislation.
Among the most important international agreements related to subsoil use, ratified by Kazakhstan, is the Energy Charter Treaty, as well as bilateral agreements on protection of investments concluded by Kazakhstan with almost all developed countries and some CIS countries.
According to many scientists and representatives of public authorities, the Subsoil Law does not meet the conditions of the modern economy. This law, fully completing the historic mission for accelerated development of discovered deposits entrusted to it, needs a new replacement, more progressive and thorough piece of legislation. In this regard, at present the industry-specific ministry is working on the drafting of the Subsoil Code of the Republic of Kazakhstan. This Subsoil Code is designed to consolidate the basic principles and institutions in the sphere of subsoil use, and create the legal foundation for the formation of a rational system of public-private interaction in the field of research, development and the use of mineral resources of Kazakhstan. It is expected that the Code will be adopted soon.
№2 GRANTING OF SUBSOIL USE RIGHTS. TRANSFER OF SUBSOIL USE RIGHTS AND/OR OBJECTS RELATED TO SUBSOIL USE RIGHTS
Under the Constitution of Kazakhstan, the subsoil and minerals are State property. Notwithstanding who owns the land plot, the subsoil remains in State ownership. Subsoil use rights are granted by executing a contract with the Government of Kazakhstan through its relevant competent authority. The competent authority for the oil and gas sector is the Ministry of Energy of the Republic of Kazakhstan, whereas the Ministry for Investment and Development of the Republic of Kazakhstan is the competent authority for the solid minerals sector.
In Kazakhstan, the State has a pre-emptive right to acquire transferred subsoil use rights and/or objects related to subsoil use rights (or a part thereof) in respect to subsoil use areas, fields, which have strategic significance. The Subsoil Law provides for certain cases when the transfer of subsoil use rights and/or objects related subsoil use rights (or a part thereof) does not require the obtaining the State’s waiver of its pre-emptive rights.
Additionally, the transfer of subsoil use rights and/or objects related to subsoil use rights is subject to the prior consent of the relevant competent authority, and the term of validity of such a consent is six months. The procedure and timing for applying for and obtaining the State’s waiver of its pre-emptive rights and the consent of the relevant competent authority are detailed in the Subsoil Law.
№3 FORMS OF SUBSOIL USE PROJECTS
Kazakhstan law allows any individual or legal entity whether of Kazakhstan origin or foreign to become a subsoil user. Legal entities may be established in any form as allowed under Kazakhstan legislation; a joint stock company or various types of partnerships. The most popular legal form used in Kazakhstan is a limited liability partnership.
№4 FORMALIZATION OF SUBSOIL USE RIGHTS
A contract to carry out operations on subsoil use, as a rule, enters based on the results of the conducted competition. In addition, the legislation provides cases, when the subsoil use right may be granted without a tender, but based upon auction and direct negotiations (for instance, national companies or the person who has wrought to commercial discovery under the contract for exploration). In some cases, the subsoil use right is granted based upon written consent of the authorized body or the contract (for instance, in respect to common minerals used in construction of roads).
Pursuant to the Subsoil Law, the following types of contracts may be executed with a subsoil user: (1) for exploration; (2) for production; or (3) for combined exploration and production. The term of a contract as well as its prolongation depends on the type of contract. Exploration contracts may be executed for up to 6 years with a possible prolongation for 2 years during the implementation of sea exploration. Extraction contracts are concluded for a period of 25 years, whereas for deposits with large and unique reserves of mineral deposits - up to 45 years, with a possible prolongation. Combined exploration and production contracts may be entered into upon a decision of the Government of Kazakhstan only with respect to ﬁelds of strategic importance and/or complex geological structure.
№5 ACCESS TO GEOLOGICAL DATA
Generally, access to geological data is regulated by the Subsoil Law and the Rules.
Preliminary geological data is provided to a potential investor by the Geological and Subsoil Use Committee of the Republic of Kazakhstan after signing of a conﬁdentiality agreement. The cost of the State-owned geological data is determined as part of the amount of the historical costs. A subsoil user may not disclose the geological data provided to any third party excepting its subcontractors operating under a subsoil use contract. In this case a trilateral agreement is executed among the subsoil user, the subcontractors and the competent authority.
According to the Subsoil Law, the geological data obtained at the expense of a subsoil user belongs to such a user. However, during the term of a subsoil use contract and upon its termination, all geological data and documents and physical storage objects of geological data must be provided by the subsoil user to the competent authority free of charge.
№6 PROGRESSION FROM EXPLORATION TO MINING
As provided for by the Subsoil Law, if a subsoil user under an exploration contract has discovered and appraised a deposit, then it has an exclusive right for the execution of a production contract on the basis of direct negotiations. If the competent authority refuses to enter into a production contract as a result of direct negotiations, then the relevant subsoil area will be put up for tender.
№7 TAXES, ROYALTIES AND DUTIES
The Tax Code of Kazakhstan establishes several special taxes as speciﬁed below payable to the State budget by subsoil users, in addition to taxes applicable to all legal entities (such as corporate income tax (20%), VAT (12%), social tax (11%), excise and other mandatory duties).
Signature Bonus is a one-time fixed payment paid by a subsoil user for the right to use the subsoil. The amount of a Signature Bonus varies depending on the type of contract concluded, type of minerals, etc. So, the Signature Bonus for oil exploration contracts – 2,800 monthly calculated index (“MCI”) ; for oil production contracts with non-approved reserves – 3,000 MCI; and with approved reserves – as per the formula set forth, but not less than 3,000 MCI. Commercial Discovery Bonus (0.1%) is a one-time payment paid by a subsoil user when a commercial discovery is made on the contract territory. The tax base for the calculation of the Commercial Discovery Bonus is the value of proven extractable reserves of minerals, which is generally determined using the market price established at international exchanges.
Payment of Compensation of Historical Costs is a ﬁxed payment to compensate the State for the total costs incurred for geological surveys of the contract territory and the exploration of the ﬁelds before the subsoil use contract is executed.
Excess Proﬁts Tax (0% - 60%). The taxable object is the portion of the net income of a subsoil user for a reporting tax period that exceeds an amount equal to 25% of tax deductible costs. Excess Proﬁts Tax is calculated annually and is based on a progressive sliding scale.
Mineral Extraction Tax (0.5% - 18%) is paid separately on each type of mineral raw materials, oil, underground waters and therapeutic mud. Mineral Extraction Tax applies to crude oil, gas condensate and natural gas; depending on what is produced and whether it is sold domestically or exported, diﬀerent rates and tax bases apply.
Rent Tax on Exports and export customs duties are applicable if a subsoil user exports crude oil, gas condensate and oil products.
Under the Subsoil Law, subsoil users are only stabilized against legislative amendments adversely aﬀecting the results of the commercial activities of a subsoil user. The Subsoil Law does not contain any provisions assuring inter alia tax stability.
№9 SAFETY AND ENVIRONMENTAL PROTECTION
The main legislation in the area of environmental protection is the Environmental Code, which establishes the authority of the Ministry of Energy of the Republic of Kazakhstan (monitoring in the sphere of protection and supervision over the rational use of natural resources, the treatment of municipal solid waste) and other central and local executive bodies, sets out procedures for obtaining environmental permits, provides for State monitoring and expertise of the environment and natural resources, and protects the environmental rights of individuals and legal entities. Additionally, it provides for the requirements for the use of radioactive materials, atomic energy and dangerous chemical substances. The Environmental Code also provides for the basic requirements to ensure the safety of activities associated with subsoil use. In addition to compliance with the general environmental requirements contained in, or incorporated into subsoil use contracts, subsoil users must obtain speciﬁc environmental permits before carrying out subsoil operations. There are two types of environmental permits: permits for the discharge of pollutants into the environment, when a separate permit is issued for each sort of discharge; and combined ecological permits.
№10 SALE OF THE MINERALS PRODUCED
The Subsoil Law does not contain the requirement that some or all minerals produced must be processed or sold domestically. However, the relevant competent authorities are entitled to require inclusion into subsoil use contracts of the obligation to deliver a certain amount of crude oil and minerals to domestic plants for processing.