Keeping Kazakhstan Investor-Friendly While Protecting Local Labour Market
Dana Kadyrzhanova, lawyer, Almaty office of Salans Hertzfeld & Heilbronn*
(* Salans Hertzfeld & Heilbronn is an international law firm with offices in Paris, New York, London, Moscow, St. Petersburg, Kiev, Warsaw, Almaty and Baku. Dana Kadyrzhanova is an Associate of the Firm based in the Almaty office.)
This August for the first time the Government of the Republic of Kazakhstan established a quota on the import of foreign labor. The introduction of the quota affected the interests of many foreign and Kazakhstan companies and, thereby, drew broad attention not only to the problem of creating quotas but also to other issues connected to the use of foreign labor in the territory of Kazakhstan. Unfortunately the procedure for obtaining permission for the import of foreign workers, the liability for violating the established procedures and several other issues are still not sufficiently clearly regulated by our legislation. The present article is devoted to a discussion of the problems attendant in bringing in foreign labor.
The Law “On Employment,” dated 14 December 1990, provided the beginning of legislative regulation of the process of importing foreign labor into the Republic of Kazakhstan.1 (1 Law of the Kazakh SSR dated 15 December 1990. It ceased to be in effect by Law dated 30 December 1998, No. 342.) Article 18 of the law stated that enterprises, institutions and organizations could bring in foreign labor only with a license of the Ministry of Labor of the Kazakh SSR if not otherwise provided in legislation. In the ten years since the law was adopted, the procedure for bringing in foreign citizens to work in the territory of the Republic of Kazakhstan has changed four times.2 (2 The first Regulation on the Procedure of Licensing the Bringing in of Foreign Labor was adopted 15 October 1991. Changes were introduced 11 January 1994 and 4 June 1997. At the present time Rules on Issues of Licensing the Bringing In of Foreign Labor and the Export Abroad from Kazakhstan, affirmed by Resolution of the Government of the Republic of Kazakhstan dated 25 June 1999, No. 862.)
It should be noted that each new Regulation, governing the hiring of foreign workers increasingly clearly defined the procedure and terms necessary for bringing in foreign labor. With every change the requirements of the Government became greater and more complicated. This tendency is related both to the high level of unemployment in Kazakhstan and measures of the Government to lower it, as well as to the increase in the level of education and training of Kazakhstan’s own skilled workers. Besides this, the changing investment climate of the republic indubitably played an important role. In the beginning of the 1990s, when Kazakhstan was in need of vigorous infusion of foreign capital, the procedure for receiving a license was extremely simple. At the present time, however, the Government, in striving to create new job openings for the country’s own workers and to defend the country’s economy, establishes more and more obstacles to hiring foreign citizens and individuals without Kazakhstan citizenship.
The practice of establishing various mechanisms to constrain the influx of foreign labor is used in many countries, including highly developed nations. Every government is interested in the welfare and prosperity of its citizens and, therefore, strives to defend their interests. Thus, the introduction in Kazakhstan of such a mechanism is a rather positive practice, inasmuch as it reflects the gradual maturing of the Kazakhstan economy and its regulatory mechanisms.
At present, the Law “On Employment of the Population,” dated 30 December 1998 (henceforth “Law on Employment”), is the basic legislative act setting forth the procedure for hiring foreign labor. Article 16 of the Law on Employment regulates activity regarding the import of foreign labor as well as the export abroad of Kazakhstan’s labor force. In the Law on Employment there is a distinction made between permission to an employer who brings in foreign labor and licenses with regard to activity connected with importing foreign labor.
The previously existing system required all companies to receive a license in order to bring in foreign labor. As a consequence, a violation of the licensing procedure entails liability under the Law “On Licensing,” dated 17 April 1995,3 which provides that the income received through the unlicensed activity that was subject to licensing, may be confiscated to the appropriate budget. (3 Article 24(2) of the Edict of the President of the Republic of Kazakhstan having the Force of Law “On Licensing” dated 17 April 1995, No. 2200.) Such liability for companies that employ several foreign workers, but whose basic form of activity is in no way connected with the import of foreign labor, was, in our view, extremely exaggerated. Therefore, limiting the liability incurred by this law is completely just. A company, the activity of which includes the import of foreign labor for other companies, should bear the liability to the extent of profit received, as per the Law on Licensing. Companies that are employers of foreign labor should bear the corresponding administrative liability.
During the summer 2000 campaign of the Almaty Municipal Prosecutor’s office to bring to light the issues of the import of foreign labor into the territory of the Republic of Kazakhstan, officials of the Prosecutor’s Office and Tax Inspectorate noted that the presently established administrative liability for violation of the procedures for bringing in foreign labor was too insignificant. Based on this a return to the old regulatory procedure was suggested, i.e., to reestablish licensing for all companies.
However, the old procedure from the outset violated the rights of those companies that only hired one or two foreign workers, as their income that was received as the result of activity regulated by the licensing procedure should be confiscated. Take the following example. A company is engaged in drilling of oil wells. In order to execute such activity three foreign workers were brought in without receiving the appropriate license.
Apart from the three foreign workers there are ten Kazakhstan employees. How in the given instance does one calculate the income received by the company through the use of the foreign workers? In practice, the tax authorities divide the net income of the firm received during the period of the violation by the total number of employees (in our example 13). The sum thus received is multiplied by the number of foreign workers (i.e., multiplied by three in our example) and this amount is subject to confiscation. We think that such a measure of liability is not justifiable as the income received by the company is income from the development of the oil wells and may not be considered as income from the act of bringing in a foreign worker. The activity of drilling oil wells is subject to licensing and not the hiring of foreign workers.
As to administrative liability, the Code on Administrative Offences4 (4 Code of the Kazakh SSR On Administrative Offenses, dated 22 March 1984, No. 4279 as amended.) (henceforth “Administrative Code”) contains only one article concerning rules on the presence of foreign citizens in the Republic of Kazakhstan. Article 201(2) establishes the liability of the responsible party of the enterprise, institution or organization, which has given employment in the Republic of Kazakhstan to foreign citizens or parties without citizenship for: the violation of the conditions of staing in Kazakhstan and of transit through the territory of Kazakhstan by foreign citizens and parties without citizenship; violation of the established procedure for their registration as a non-resident, registering or unregistering a residency; violation through incorrectly completing documents required for the right to reside, travel and change of place of residence in the Republic of Kazakhstan. Liability ranges from a warning to a fine of seven to ten times the minimum salary amount. However, for these purposes it would seem more logical to apply Article 41 of the Administrative Code, which establishes liability for the violation of legislative and other normative acts pertaining to labor, since the absence of permission from the competent agencies for engaging foreign employees touches foremost on the area of labor and not the financial and economic areas of activity of an enterprise.
Thus the absence of a concrete norm establishing liability should not serve as a reason for demanding a return to old procedures but, rather, should serve as an incentive to introduce corresponding amendments into the Administrative Code with the goal of concretizing the given legal violations. Often, having adopted laws that take a step forward in one area, we forget to adopt corresponding measures in another area and thus nullify whatever progress was achieved in the first law.
One may consider as another example of the deficiency of the adopted measures the fact that in adopting the procedure that softens the liability for companies hiring foreign workers, there is no mention of the issue of the application of liability adopted earlier for procedural violations. At first glance, such a provision need not be included inasmuch as the Constitution of the Republic of Kazakhstan establishes as one of its basic principles that in the case of a lessening of liability for violations of law, the law providing the lesser penalty should apply. However, in practice, in an audit, the tax authorities and the public prosecutor’s office apply to the legal entities that have hired foreign personnel the harsher law for violations that have occurred in the past, both confiscating income as well as levying an administrative fine. Thus, cases not accounted for in the legislation and vague regulations of the procedure and terms for engaging foreign workers become a reason for violating the rights of Kazakhstan and foreign companies.
Some amendments should be included in the Rules on the Procedure for Bringing in Foreign Workers. In part, the procedures should be made easier for receiving permission to bring in foreign workers for companies that are engaged in activity in Kazakhstan on the basis of contracts with the Government or other state agencies, if such contracts have a Government guarantee providing for unimpeded import of foreign labor employed by the company. A simplified procedure should also be established for citizens of foreign countries who have a right to live and work in the territory of Kazakhstan according to international conventions (For example, the Agreement on Partnership and Cooperation between the Republic of Kazakhstan and the European Union, ratified by Law of the Republic of Kazakhstan dated 26 May 1997, No. 113-1).
Besides this, in many nations those holding permission to work have the right to extend the period of their permission for a supplemental period upon demonstrating behavior during their initial permission period that complies with the law and shows respect for the domestic legislation of the country in which they reside.
The next very important problem connected with the import of foreign labor is setting the import quota. Article 16 of the Law “On Employment of the Population” dated 30 December 1998 provided that the Government of the Republic of Kazakhstan establish quotas for bringing in foreign citizens hired by employers outside the Republic of Kazakhstan for work in the territory of the republic in the aggregate and grouped by professions.
Before touching on the efficacy of introducing quotas with regard to foreign labor, one should note that the formulation of the article itself is not sufficiently well thought through and raises a number of questions. For instance the use of the term “quota for bringing in foreign citizens” immediately raises the question what of individuals without citizenship? It is well known that through the Law “On the Status of Foreign Citizens” individuals without citizenship are oiven the same rights and obligations as those of foreign citizens.5 (5 Article 29 of the Law “On the Status of Foreign Citizens” dated 19 June 1995.) That is, probably one may assume that individuals without citizenship are included in the established quota. The Rules on implementation of labor and professional activity of foreign persons and individuals without citizenship on the territory of the Republic of Kazakhstan6 (6 See fn. 2.) create unnecessary confusion as well in that their term “foreign citizens” includes both foreign citizens and individuals without citizenship. Moreover, it is not comprehensible why the Law mentions a quota only with regard to foreign citizens hired outside of Kazakhstan. Such a formulation may be interpreted as excluding foreign workers hired in the territory of the Republic of Kazakhstan, which, as we understand it, was not the intent of the legislator.
Undoubtedly, the Government should ensure the employment of Kazakhstan citizens and attempt to lower the level of unemployment, which, unfortunately, presently remains rather high. But it should be noted that there various methods allowing these goals to achieved. The analysis below shows that the introduction of a quota has both positive and negative effects.
The actual mechanism of setting a quota consists in limiting the quantity of foreign personnel hired for work in the territory of the Republic of Kazakhstan and a corresponding decrease in unemployment among Kazakhstan citizens. That is, the permits for bringing in foreign labor are issued until the established quota limit is reached. Then the access to work in Kazakhstan for all foreign citizens and parties without citizenship is cut off. Thus, positions that would have earlier been occupied by foreign workers should now be transferred to Kazakhstan citizens.
In our opinion the first negative result of quotas, is that in fact the number of jobs does not increase, but only the nationality of the person who occupies a given job changes. The introduction of quotas does not play a significant role in the situation with chronically unemployed (unemployed for over a year); persons over 50; those who are ending their period of service in the armed forces of the Republic of Kazakhstan; veterans of wars and other undefended parts of the population. It would be more efficient to establish incentives for the investors to hire such people who would not otherwise be hired.
The quota mechanically limits the access to foreign labor in Kazakhstan without categorizing for highly qualified specialists or for laborers. It is possible that it would be more effective to establish a list of jobs for which one may not engage foreign personnel. Into this category would go positions requiring low qualifications that do not demand special training and for which there is a corresponding Kazakhstan labor force. Moreover, it is possible to establish tax incentives for companies that provide training for the local work force and continuing education for Kazakhstan citizens. All these possibilities remained unexploited in Kazakhstan.
In assessing quotas the method of determining the quota’s size is significant. The quota for 2000 was set at 7,000 divided into professional groups by a Decree of the Government dated 8 August 2000.7 (7 The Decree of the Government dated 8 August 2000 “On the Establishment of a Quota for Bringing in Foreign Citizens Hired by Employers Beyond the Boundaries of the Republic of Kazakhstan for the Year 2000 According to Professional Groups,” No. 1219.) Unfortunately, the Decree did not indicate on what basis its parameters were based. However, at the time of the adoption of the Decree, the number of issued permits had already exceeded the established quota. As a result, as of 1 September 2000, it was necessary to cease issuing permits. Related to this, the work of many companies was paralyzed. Such measures are sharply reflected in the investment situation. Many representatives of foreign companies hurried to abandon the country when their permits ran out.
Fortunately, the mistake was promptly fixed and on November 14.2000 the Decree of August 8 2000, have been cancelled. In the new Regulation of the Government the size of quota of foreign workers for the year 2000 have been established in the amount of 0.15% of the total amount of economically active population.8 (8 The Regulation of the Government of the Republic of the Kazakhstan, dated November 14, 2000 ? 1709 "On Some Question Related to the Regulation of Entry of Foreign Citizens for Work on the Territory of the Republic of Kazakhstan".) In our opinion, the size of the quota should have been determined at least six months before the beginning of the year to which it applies. So that, companies interested in attracting employees could have planned their activities and defined their priorities with consideration to the possibilities of hiring Kazakhstani employees instead of foreigners. Setting quota in the end of the year makes its effectiveness equal to zero. No new positions for Kazakhstani citizens can be created when one month is left till the end of the year. Thus, the aim behind establishing quota could not be reached.
In addition, not only the Regulation does not eliminate existing defects of the system of attraction of foreign employees, it also creates new ones. In particular, the new not clear term «economically active population» is introduced. Most likely, it means a total amount of employed on the territory of the republic, however, what categories of citizens are included into «economically active population» and how they are defined is not explained in the Regulation. As a result, the main issue stays unclear: what is the actual size of quota? Therefore, in order to protect rights of companies that need foreign workers it is necessary to more clearly identify and legally assign the method of determining the size of quota.
In point 3 of the Regulation of November 14, 2000 the Government gives instructions to the Ministry of Labor and Social Protection to allocate the size of quota to oblasts, cites of Astana and Almaty and according to groups of professions. In case of such allocation the more dynamically developed regions might get in the situation when quota is already used, but necessity in foreign workers is still present. While in less developed regions quota stays not called for. Therefore, lack in foreign employees would be felt even though the quota would not be used entirely and this will inevitably have negative impact on the economy as a whole. Also, the quota should be divided into quarters in order that companies may exercise their activity taking into account their foreign labor needs and without anxiety that the end of the year positions of foreign employees permitted by quota will have been completely filled and no new workers can be brought in for the rest of the year.
In conclusion, it should be noted that the introduction of a quota system first of all creates a negative impact on the general investment climate in the republic. Any limitation of the number of foreign citizens and individuals without citizenship having the right to work in Kazakhstan will be looked upon as limiting investment activity in Kazakhstan inasmuch as the majority of foreign investment requires receiving permission to work. Limiting foreign investment may lead to even greater unemployment in Kazakhstan. Thus, it is necessary to approach this problem very carefully. The ideal system would be one which, on the one hand creates incentives for foreign investors to hire Kazakhstan citizens and create new jobs, and on the other hand does not lessen the attraction that Kazakhstan has for the investor. In our opinion, setting quotas does not answer either demand.
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
