Main Provisions of the Law of the Republic of Kazakhstan "About State Control When Applying Transfer Prices"

RusEnergyLaw JOURNAL • 2'2003/Table of Contents • Article

On January 5, 2001 The President of the Republic of Kazakhstan signed the Law of the Republic of Kazakhstan "About State Control When Applying Transfer Prices" (hereinafter referred "the Law"). This Law establishes basic regulations for realization of state control when applying transfer prices and also the provisions for rating the prices applied as transfer prices.

1. Transfer price

What does it mean – transfer price? In accordance with article 2 of the Law transfer price is "a price that differs from the evenly formed market price applied when conducting transactions established by the Law". Thus the notion "transfer price" is formed from two key criteria:

1) the price being applied by the parties shall differ from the evenly formed market price;

2) a transaction the price of which differs from the market price shall come within the parameters described in the Law itself.

2. The order and methods of the market price determination

From the information mentioned above a question can emerge: how can we determine the evenly formed market price? Article 7 of the Law establishes the following methods:

1. the method of the comparable uncontrolled price;

2. "expenses plus" method;

3. the method of subsequent realization.

The method of the comparable uncontrolled price is applied in the presence of transactions on identical (in case of their absence – similar) goods at the appropriate market of goods, works and services (hereinafter – goods) and this method establishes a market price from the prices for identical (in case of their absence – similar) goods sold under the comparable conditions to a purchaser not related with the vendor.

The "expenses plus" method is a method when the market price of goods is determined as a sum of expenses and extra charges. In this case all confirmable direct and indirect expenses for production (purchasing) and (or) realization of goods, transport charges, storage costs, insurance and other expenses shall be taken into account. Extra charges are established in such a way that it could provide average level of economic efficiency appropriate to the given scope of activity.

The method of subsequent realization is a method when the market price is determined as difference between the price at which the goods were realized by the purchaser after subsequent realization and confirmable expenses taken by the purchaser at on-selling without taking into account the price at which the goods were bought by the purchaser and his extra charge. Extra charges are established in such a way that it could provide average level of economic efficiency appropriate to the given scope of activity.

The "expenses plus" method and method of subsequent realization are applied in the absence of transactions on identical (in case of their absence – similar) goods at the appropriate market of goods, works and services and also in the case of impossibility to determine the appropriate prices failing information sources or their unaccessibility.

Apart from the determination of the market price the Law provides the opportunity of taking into account the conditions affecting the diiference between the price market and the price being applied. Such conditions are the following:

1. quantity (volume) of the goods being supplied (for example the consignment volume), количество (o6ъем) поставляемых товаров (например, объем товарной партии), the works being performed and the services being rendered;

2. quality of goods being supplied or purchased, availability or absence of packaging and easy-to-use prepacking;

3. terms of obligation performance;

4. payment terms and conditions usually being used in transactions of the given type and other conditions that can affect the prices;

5. usual discounts and extra charges to the prices in transactions between non-interrelated persons. In particular discounts and extra charges made under the following conditions are taken into account:

seasonal variations in customer demand for goods (works, services);

loss of quality of goods or other consumer characteristics;

partial improvement or repair of lost quality or other consumer caracteristics of goods;

expiration (forthcoming expiration) of the use-by date or realization date of the goods;

marketing policy when forwarding new goods (works, services) having not any analogues at the market and also when forwarding goods (works and services) to new markets;

realization of test patterns and models of goods with the purpose of their representation for consumers.

The difference between the price being applied and the market price is not a reason for correction of taxation objects.

According to article 9 of the Law any information sources may be used for determination of the market price of goods, including:

1. sources of information about market prices for goods;

2. officially recognized resources of information about exchange quotations;

3. the information being submitted by the participants of transactions to the authorized bodies.

The list of the official sources of information on market prices is determined by Goverment Regulation of the Republic of Kazakhstan No. 788 as of 09.06.2001 "About approval of the list of official information sources concerning market prices for specific types of goods subject to state control at application of transfer prices in international transactions". In accordance with this list the following information sources are acknowledged as official:

Petroleum Argus (Oil export and Neftepanorama editions);

News agency "Reuters" (Energy 2000 and Commodities 2000 editions);

Metal Bulletin Journals Ltd. ("Metal Bulletin" journal);

The McGraw-Hill Companies (Platt,s Crude Oil Marketwire H Platt,s European Marketscan), and also other sources stated in the mentioned Regulation.

In other words, any information about prices, discounts, extra charges etc. obtained from the stated sources of information is acknowledged as official and mandatory for state authorities of the Republic of Kazakhstan and may substantially affect the state control application to one or another transaction using transfer prices.

3. The transactions coining within the state control if the transfer prices are applied

According to article 3 of the Law the state control for discovering the cases of transfer prices application is exercised on the following types of transactions:

1. between interrelated or interconnected parties;

2. on barter transactions;

3. when fulfilling obligations for transactions being performed by means of taking into account a similar counter claim (including set-off for cession);

4. at settlement of the transactions with the persons registered (residing) in foregn countries or having accounts in foreign banks whose legislation does not provide a possibility of disclosure and submission of the information about financial transactions or if preferential tax treatment is applied in the locality of their registration (residing) including offshore areas;

5. at settlement of the transactions with the juridical persons having tax priviliges or for which another taxation rate is set that differs from the rate set by tax legislation.

6. at settlement of the transactions with the juridical persons having losses according to the information given in tax statements during the last two tax periods previous the year of settlement of the transaction;

7. when performing international business operations (i.e. with participation of non-residents of the Republic of Kazakhstan) in the case of discovering the fact of difference between the transaction price and market price of more than 10% in both directions from the market price.

Thus the Law establishes seven conditions (types of transactions) to which the state control may be applied if transfer prices are used. If only one condition from mentioned above is present, it is enough for application of such control.

4. The consequences of exercising the state control in the case of transfer prices application

According sub-section 5 of article 5 of the Law if the fact of difference between the market price and transaction price (i.e. if the fact of transfer price application is discovered) the authrised bodies correct the objects of taxation. I.e. in this case additional charging of income-tax, VAT, excise, royalty, excess profit tax, customs fees is performed and such additional charging is calculated in such a way as if the incomes and expenses from these transactions and other taxation objects would be determined upon the basis of the market price. Additionally penalties and fines are imposed.

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