Draft of the Republic of Kazakhstan Code On Taxes and Other Obligatory Payments to the Budget
Section 9. Taxation of Subsoil Users
Chapter 45. General Provisions
Article 292. Taxation Models for Subsoil Use Contracts
1. Based on the major types of contracts, the taxation of subsoil users is characterised by two models:
1) the first model provides for the payment of all taxes and other obligatory payments under this Code by the investor;
2) the second model provides for the payment (transfer) by the investor of the share due to the Republic of Kazakhstan under production sharing terms, as well as the payment of all taxes and other obligatory payments under this Code, except:
• excise on crude oil and other minerals;
• excess profit tax;
• land tax;
• property tax.
2. The first taxation model is applied to all contracts except for production sharing contracts (agreements), to which the second model is applied.
3. The share due to the Republic of Kazakhstan under production sharing agreements is a source for the national and local budgets, and is transferred as revenue to the relevant budgets in amounts defined by the Law On the National Budget for the corresponding year.
4. The scope of tax obligations assumed by a subsoil user under a contract (agreement) regulated by the second model should not be less than under agreements regulated by the first model.
Chapter 49. Production Sharing Contract (Agreement)
Article 321. The basic terms and conditions of a production sharing contract (agreement)
1. A production sharing contract (agreement) is an agreement under which, on a chargeable basis, the Republic of Kazakhstan provides a subsoil user with the right to produce minerals on a contract territory and carry out related operations at its own expense; the production sharing contract (agreement) shall contain the following terms and conditions:
1) the total production volume to be shared;
2) the definition of the role of the Republic of Kazakhstan and the profitable production of the subsoil user;
3) the form of sharing (in kind or in money) of the profitable production (production to be shared after compensatory production is deducted);
4) the determination of a portion of the production extracted to be transferred to the ownership of the subsoil user in order to reimburse the expenses of operations under the contract (agreement) (compensatory production);
5) fixing the price and determining production costs when receiving the production in monetary form.
2. The accounting period for payment to the Republic of Kazakhstan of the share due to it under the production sharing conditions shall be one calendar month.
3. The subsoil user shall produce calculations of the share due to the Republic of Kazakhstan under the production sharing conditions to the territorial tax authority at its place of registration by the 10th day of the month following the accounting month.
4. The share due to the Republic of Kazakhstan under the production sharing conditions shall be paid not later than the 15th day of the month following the accounting month.
Article 322. The list of reimbursable costs under a production sharing contract (agreement)
1. Reimbursable costs mean reasonable expenses actually incurred by the subsoil user during implementation of the programme of work. The limit of the share which the subsoil user may spend for recovering reimbursable costs shall be established individually for each production sharing contract (agreement), taking into account the commercial value of the field under development, but the share shall not exceed 80% of the overall quantity of minerals produced by the subsoil user during the tax accounting period. Reimbursable expenses shall be established in the manner established in the contract (agreement).
2. Reimbursable expenses shall include:
1) expenses actually incurred by the subsoil user before the effective date of the contract (agreement):
• expenses involved in preparing for and carrying out the feasibility study for the project at the stage preceding the signing of the contract (agreement);
• expenses involved in prospecting, appraisal and exploratory operations related to the project and carried out before the effective date of the contract (agreement);
2) expenses actually incurred by the subsoil user beginning from the effective date of the contract (agreement) and during its entire period of validity, except for expenses defined in para. 3 of this Article.
3) expenses that will not be reimbursed from compensatory production:
• expenses relating to the tendering fee for the right to use of the subsoil;
• expenses relating to obtaining geological information;
• expenses relating to items for which the contract (agreement) establishes limits, including administrative expenses, if these limits are exceeded;
• expenses connected with sale of the compensatory production owned by the subsoil user and the share of the profitable production owned by the subsoil user, including expenses involved in delivering the production from the point of delivery (sharing) to the point of sale, losses during transportation, insurance expenses during transportation of production to the destination, commission and other expenses;
• expenses connected with business and financial auditing carried out at the request of shareholders (founders);
• expenses arising from the non-fulfilment or improper fulfilment of obligations under the agreement by the subsoil user;
• expenses relating to payments for tickets for visits and travel;
• expenses incurred due to arbitration;
• penalties and fines imposed by any state authority on the subsoil user;
• other expenses not relating to the activity under the agreement.
3. Reimbursable expenses of the subsoil user will be reduced by:
• the amount of operating income relating to the receipt of rents for leased property created or acquired under the contract (agreement), less any expenses relating to the receipt of such rents;
• the amount of other income (penalties, fines, etc.) received from the activity within the framework of the contract (agreement).
Article 323. Procedures for the calculation and payment of royalties and the share of the Republic of Kazakhstan under production sharing conditions in kind
1. In the case of an additional agreement (to the contract) on the payment of royalties in kind, legal and tax assessment of the agreement shall be carried out before it is signed.
2. Royalties and the share due to the Republic of Kazakhstan under the production sharing conditions that are payable in kind shall be equivalent in money terms to those fixed in the contract.
3. When calculating royalties and the share due to the Republic of Kazakhstan under the production sharing conditions that are payable in kind, the agreement shall provide information on:
1) the recipient on behalf of the Republic of Kazakhstan (hereinafter «the Recipient») of the share of production to be paid as royalties and the share due to it;
2) the point and terms of delivery.
4. The terms fixed in agreements for the transfer of production paid on account of royalties and the share due to the Republic of Kazakhstan by the subsoil user shall correspond in money terms to the terms of such payments fixed in the subsoil use contract.
The subsoil user shall transfer the production to the recipient not later than the date of payment fixed in the contract (agreement) for subsoil use.
5. Within the period of payment in money terms fixed in the contract (agreement) for subsoil use, the recipient shall transfer to the national budget the royalties and the share due to the Republic of Kazakhstan in money terms calculated by the subsoil user in accordance with the contractual terms and conditions, and shall ensure the timeliness and completeness of the corresponding production volume transferred by the subsoil user to the recipient.
6. The subsoil user and the recipient shall provide reports to the tax authority on the amount and terms of payment (transfer) of royalty and the share due to the Republic of Kazakhstan under production sharing contracts paid in kind within the period fixed in the contract. Reports shall be in a form established by the competent state authority.
7. The recipient shall be responsible for any violation of the terms and the completeness of funds transferred to the budget for the production received in accordance with the laws of the Republic of Kazakhstan, including penalties set forth by the laws of the Republic of Kazakhstan.
Source: The Kazakhstanskaya Pravda newspaper, 2nd November 2000
Table of contents
The Foreign Investors Council is a model of co-operation between young democracy and transnational companies Askar Yelemessov
Kazakhstan Investment Policy: Time to Change Priorities Dulat Kuanyshev
The Association of Investors of Kazakhstan: Our might is in unity, and the path to success lies in our solidarity! Serik Tulbasov
Fundamentals of the Legal Regulation of Production Sharing Agreements in the Russian Federation Sergei Gudkov
Production Sharing Agreements: The Legal Aspects Aigoul Kenjebayeva
