Kazakhstan’s Mining Sector: Legal Framework and Ways to Improve It
Dennis C. Price, President of the Mining Association of Kazakhstan
This article represents an overview of the legal framework for Kazakhstan’s mining sector. Notably, at present there are many companies and organisations, such as the Mining Association of Kazakhstan, the Kazakhstani Oil Association, the American Chamber of Commerce, the European Business Association, and the Council of Foreign Investors under the President of Kazakhstan, who are continuing their interaction with the various Kazakh ministries and agencies involved in eliminating gaps in the existing legal framework.
Taxes and other Statutory Payments
The tax laws in Kazakhstan are quite complex, and are still under ongoing development. This implies a great deal of instability as far as investment is concerned, since it becomes virtually impossible to establish any reliable estimates as to the future tax burden. Presently, taxes and other statutory fees might include fees for environmental contamination, VAT, royalties, land tax, land rent, payments to the pension fund, securities tax, fees for the use of surface water resources, social tax, profit tax, and an individual’s income tax.
In the summer of 2001 a new Tax Code was adopted, and it will come into force on 1 January 2002. This new law has incorporated a number of developments, which allow differing opinions to be taken regarding their positive potential. However, we deem it critical that an investor should familiarise himself with these amendments in detail.
There are two Acts directly concerned with investment, On Government Support for Direct Investments and On Foreign Investments. Another important document which deserves careful study is the bill On Investments proposed by the Kazakh government.
The provisions of these laws appear largely unfavourable for those investing in mining in general and, in particular, for overseas investors. As for the bill On Investments, it definitely represents a dramatic step backwards, since it removes the basis for the many initiatives which might be feasible under the law currently in force. Furthermore, this document limits the rights of foreign investors in the settlement of disagreements by an arbitrage.
Article 6 of the Act On Foreign Investments, which contains stabilisation provisions for foreign investors, is absent from the new law On Investments. The mining sector needs long-term investments, and these need certain guarantees. With the abolishment of the stabilisation provisions, the risks associated with mining projects can be expected to increase drastically.
The transitional stabilisation provisions of the bill are limited in their term to ten years from signing the contract for the companies which had their contracts signed under the old law.
The government has declared that the playing field should be made equally favourable for both foreign and domestic investors. However, in reality the stimuli for potential investments have waned.
Revision of Existing Contracts
The Kazakh government has announced its intention to revise the main contracts with foreign investors that had been signed previously, especially in the mining sector.
The formal explanation was that Kazakhstan’s interests and positions need to be secured; however, this initiative has been dubbed «a slow nationalisation» in investors’ circles. Thus, it has become doubtful whether the investors that are currently active in Kazakhstan will remain interested in their further operations here, and whether any new players will enter the country.
Transfer Pricing Law
The state has the full right to protect itself from unlawful transfer pricing. However, the existing Act On the State Control of Transfer Prices contains two key provisions which run counter to international standards.
First, the law does not distinguish between cognate and non-cognate parties. For example, penalty provisions may be equal for two parties that are interrelated or interdependent, and even for third parties.
In mining, forward sales contracts are a proven defence against price fluctuations. Under the existing law, these may be prohibited. For a company having permanent customers, a long-term deal should be welcomed rather than proscribed.
Second, international standards of transfer pricing allow a price variation of up to 20%, whereas the Kazakh law permits only 10%.
These issues are a source of concern, especially to those mining sector players that principally intend to export their output.
The Act On Employment sets forth the rules for establishing quotas and issuing permits for the use of foreign labour in Kazakhstan. These measures, devised by the government in an attempt to protect the Kazakh labour market, however, have an adverse impact on foreign investors. The issue might well be more complicated than it seems to be, and the adopted limitations are likely to become a bottleneck for future capital flows into the Kazakh economy and, ultimately, lead to a deterioration in the employment levels of the local population.
Quotas. The government’s quotas on foreign employees are based on some very unclear conditions within each particular region involved. For 2001, the limit was set at 0.15% of the country’s able-bodied population, which means about 10,500 jobs for foreigners. This level was reached as early as in the first quarter of the year, and there is no confidence that the government is in favour of providing concessions to foreign companies that need additional quotas.
Categories. Foreign labour is classed in three categories, which are senior managers, managers and specialists, and unskilled workers. It is therefore necessary to set up different criteria for each of the categories.
Permit for the use of foreign labour. Now that the government quotas have been imposed, foreign companies can only use the numbers of foreign personnel that correspond to «expected» demand. However, what if there is a need to employ a foreign specialist, but the quota has already been exhausted?
Visas. A foreign employee can apply for an entry visa only after his permit for employment in Kazakhstan has been approved.
Training of Kazakh personnel. In any every case, a company is required to submit a plan for training its Kazakh employees who are intended to replace foreigners.
As is known, the main drain on Kazakhstan’s population is the continuing migration of various ethnic groups to their countries of origin. In many instances, these emigrants are qualified specialists, and their departure has hit the quality of Kazakhstan’s manpower hard. That is, there is a good reason to encourage labour import instead of fighting it.
Limitations on Import of Equipment
Any equipment or technology which is new to Kazakhstan requires numerous permits in order to be brought into the country, despite the fact that it might have been in use elsewhere for many years. The government is also vigorously promoting its import substitution programme, which prioritises the maximum use of domestically made goods and materials. For this movement to be readily supported, the Kazakh-made products must be both reasonably priced and of good quality. Unfortunately, for some local suppliers this programme has been a tool for making their prices skyrocket.
Excessive Government Control
Complaints about excessive interference by the government have been expressed by many members of the Mining Association. For example, the companies are required to receive approval not only for their mineral deposits, but also design plan and expected cash flows.
There are many ways in which the government could perfect the investment climate for Kazakhstan’s mining sector. The changes seen recently and the open dialogue between the government and the foreign investors’ community allow us to look into the future with optimism. Kazakhstan has vast mineral deposits and excellent opportunities for attracting sustained investment flows into its economy. Undoubtedly, this potential will be realised in the near future, conditional on further improvements in the national investment policy.
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