The Role of the Tax Systems of Ukraine, Russia and Kazakhstan in Attracting Foreign Investments: Comparative Aaalysis
by
VKTOR HOHOTS
A thesis submitted to the Faculty of Law in conformity with the requirements
for the degree of Master of Laws
Queen's University Kingston, Ontario, Canada
August, 2000
O Viktor Serhey Hohots, 2000
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Abstract
It is hard to undervalue the impact of foreign investments in a progressive
movement of transitional economies towards a fkee market economy. For this purpose, a
modernized and balanced tax system plays a central role in the improvement of the
general investrnent climate and attract more foreign investments.
Governmental monetary and fiscal policy and, particuiarly, tax policy can have a
major impact on the process of economic recovery of Russia, Kazakhstan and Ukraine. in
the market type economy, taxes play an important role in the distribution of income and
the allocation of resources, as well as have a decisive influence on the general economic
stabilization. The forms of taxation and the amount of tax burden make a direct impact on
the amount and structure of consumption and saving and, subsequently, on the arnount
and structure of foreign investments.
Of al1 the countries reviewed in this analysis, Kazakhstan has achieved the highest
success in improving its generai environment, prirnarily through the improvernent of its
t a system. Ukraine and Russia were not able to bring their tax systems to the Ievel of
simplicity, clarity and effectiveness of Kazakhstan, which has negatively affected their
cornpetitiveness in world capital markets. This study also provides for an analysis of
other factors influencing the general invrstrnent environment in these countries, including
the regulatory fiarnework, political and economic stability, currency regime, banking
system, labor resources, crime and infrastructure.
This study indicates that, in order for Russia and Ukraine to become more
cornpetitive in international capital markets and attract more investments into their
economies, it is increasingly important for these countries to M e r pursue the course of
improvement, stabilization and clarification of their respective tax systems. This task is
even more important for Ukraine, as far as it has to compete with the counbies possessing
enormous arnounts of natural resources, giving them an additional advantage in attracting
foreign investors.
Acknowledgments
First of all, 1 would like to express my most sincere gratitude to a distinguished professor
and expert in the Canadian and international taxation, my supervisor, professor Alex
Easson for his unconditional assistance, encouragement, continuous support and guidance
throughout the process of execution of this thesis.
1 also owe my special gratitude to the professor and coordinator of the graduate program
Sheila McIntryre, as well as professors Phil Goldman, Catherine Lahey and David
Mullan for their constant support and help with my work and studies. My special thanks
to the graduate assistant, Phyllis Reid, who was always there for me when 1 needed any
help.
While 1 feel deeply privileged and honored to be able to work and leam fiom these
wonderhl people, 1 alone, bear the responsibility for any shortcomings that this work
might have.
Table of Contents
Abstract
Acknowledgment
Table of Contents
1. Introduction
II. Detenninants of Investments C h a t e
A. Regdatory Framework Effecting
General Investment Environment
B. Political Stability
C. Economic Stability
D. Currency Regime
E. Commercial infiastructure and Banking System
F. Labor Resources
G. Crime and Corruption
H. Infrastructure
1. Tax system
III. Investment Climate in Russia
1. General Outlook
2. The System of Taxation in the Russian Federation
A. Interrelationship Between the Federal and Regional Budgets
B. Broadening the Tax Base
C. Federal Taxes
i) Profits Tax ii) Persona1 Income Tax
iii) Payroll Taxes
iv) Value Added Tax
v ) Excise Tax vi) Royalties
vii) Customs duties
viii) Replenishrnent and Environmental taxes
ix) Securities issuance tax and royalties
X) Road Fund taxes
xi) Stamp Duties
xii) Federal License Fees
D. Regional and Local Taxes
i ) Tax on the Property of Enterprise
ii) Sales Tax
iii) RoadUsersTax
iv) Educational Levy
V) Advertising Tax
vi) Tax on the Maintenance of Housing
Facilities and Land Duty
vii) Tax on Maintenance of Police Force
E. Double Taxation Treaties
3. Regulation of the Energy Sector
1. General Outlook
2. Taxation of the Energy Sector
IV. The General Investment Environment in Kazakhstan
1. General Outlook
2. System of Taxation in Kazakhstan
A. hrational Taxes
i) Corporate Incorne Tax
ii) Persona1 Income Tax
iii) Value Added Tax
iv) Registration Fee for Issue of Securities
v Customs and Excise Duties
vi) Minerai Resources Tax
vii) Payrolt Taxes
B. Local Taxes
i ) Land Tax
ii) Property Tax
iii) Vehicle Tax
iv) Business Registration Tax and the Fee to
Conduct Certain Businesses
V) Road Tax and Fee on Auction SaIes
C. Double Taxation Treaties
3. Energy Sector
A. General Outlook
B. Taxation of the Energy Sector
V. General Investment Environment in Ukraine
A. General Outlook
1. System of Taxation in Ukraine
A. National Taxes
i)
i i)
iii)
i v)
v
vi)
vi i)
viii)
ix)
x
xi)
xii)
xiii)
Corporate Incorne Tax
Persona1 Income Tax
Value Added Tax
Excise and Customs Duties
State Duty and Stamp Duty
Payroll Taxes
State Innovation Fund
Road Tax and Vehicle Tax
Land Tax
Natural Resowce Tax and Environmental Tax
Foreign Vehicle Transit Duty
Rent Tax and Tax for a Sale of FueVIubricants
Trade License
B. Local Taxes and Duties
C. Double Taxation Treaties
2. Energy Sector
A. General Outlook
B. Taxation of the Energy Sector
VI. Possible Lmprovements
1. Russia
2. Kazakhstan
3. h a i n e
VII. Conclusion
Bibliograpby
VITAE
vii
1. Introduction
For the economies of Russia, Kazakhstan and Ukraine the way out of the
economic crisis is directly comected to the reform of their tax systems, which would
ensure a stable inflow of budget revenues necessary for the state to filfil1 its functions.
AIso, a modernized and balanced tax system plays a central role in the improvement of
the general investrnent climate and heips to attract more foreign direct investments
drastically needed for modemizing and restructuring the econornies of those countries.
Foreign presence has a long history of existence in Russia, Ukraine and
Kazakstan, but active promotion of foreign investments by their governrnents has only
begun after the collapse of the Soviet Union. It has become obvious that neither country
has enough national savings at the current stage of its development to promote
sustainable growth. Al1 the countries equally need maximal inflow of foreign capital and
technology to be able to overcome the consequences of economic failure lefi by the
system of central planning and to facilitate transformation to a fiee-market economy.
Extemal resources must be attracted in the form of foreign investments, including direct
investment, portfolio investments or loans.'
Foreign direct investments (FDI) seem to be the most attractive form as they
would not only help to improve the balance of payments and the development of export
capabilities of different spheres of industry, but would also provide an infusion of outside
capital, technology, and expertise, and create jobs for domestic suppliers and
subcontractors. FDI is very attractive as a non-debt creating source of current account
finance, and more broadly as an indicator of growing international confidence in a
country's sustainability of the entire process of economic reform. A steady flow of FDI
would improve confidence of investors since al1 of the world's major credit rating
agencies include it among their indicators of international creditworthiness.
It will be argued in chapter II that the current share of accumulated FDI by
Kazakhstan, Russia and Ukraine was largely due to the early and successfûl introduction
of !he econornic and tax refonn by the respective countries. FDI volumes of Russia,
Ukraine and Kazakhstan will be compared with other foxmer Soviet Union Republics and
Eastern European countries. It will be argued that the countries that have accumulated the
greatest share of FDIs invested into the region were able to do so because they had started
reforming their tax systems earlier and more broadly.
Governmental loans should also be attracted because they have their positive
input in economic development. However, as a regular borrowing, govemmental loans
have their pnce and limits. Investors' attitude can also become negative especially when
emerging economies experience economic decline or crisis, which will make borrowing
more difficult and e ~ ~ e n s i v e . ~ Portfolio investments should be equally attracted, but they
can bring a high volatility to the market by bringing prices to extremely high levels when
the market is on a rise, and abandoning the market altogether, liquidating their shares at
any cost, what can be devastating especially in case of emerging markets like in Russia,
Ukraine and ~azaks t an .~
Business Information Service for the Newly Independent States (BISNIS),"Commercial Overview of Kazakstan". Ch. 2, December 1999, on-line (BISMS Main) ~hnp:iiwufw.bisnis.doc.gov~bisnis/country/kazakStan.hmi~ ' Emerging markets Group, "Commenrs" , Introduction, on-line: (Kazakhstan I-ferald Main) < h t r p : / / w w w . h e r a l d . a s d c . k z / p u b l i c / r e s e ~ ~
hid .
The markets of these countries attract foreign investors with their immense wealth
of mineral resources, expansive consumer market, and cheap though highly educated
labor forcea4 Even though there are various secton pnoritized by the governments of each
specific country, including infrastructure, riianufacturing, social sector projects, and
agriculture, investments in minera1 resources accounts for a major part of the overall
volume of capital inflow received by Russia and Kazakhstan for the last decadeS5
The state of the investment climate in Ukraine is in need of major improvements
and is currently rated as being far behind the one in Kazakhstan. Also, there are a great
number of similar problems that both Ukraine and Russia have to overcome in the near
fùture in order to improve their competitiveness on the market of foreign investments.
Unlike the Russian and Kazakhstani economies, that are strongly backed up by vast base
of natural resources, the Ukrainian economy is largely dependable on the supply of
energy resources fiom outside (mostly fiom Russia), which drastically increases its
foreign debts and cnpples its budget spending capabilities.
Ukraine has also inherited a small and weak private sector, a burdensome
industrial sector with the emphasis on heavy industries, including industrial metallurgy,
machinery-building and the agricultural sector crippled with the inefficient and dragging
process of privatization. Currently, Ukraine does not possess any particularly strong
sectors that would give it any cornpetitive advantage over Russia and Kazakhstan, which
are also actively involved in the campaign of attracting foreign investments.
-
See "Commercial Overview ofKazakhsran", Business idormation Service for the Newly Independent States, October 1999, on-line: (BISNIS Main) http://wv/w.bisnis.doc.gov/bisnis/co~ kazakhstan.htm> See also Frenkel W. and Sukhrnan M . "New Foreign Investment Regimes o/Russia and Orher Republics of rhe Fornier USSR: A Legislutive Analysis and Historical Perspective", Boston College of International and Comparative Law Review, Swnmer 1993, no. 16, p. 400 on-line: WL(BC1CLR)
In Russia and Kazakhstan the developing oil and gas sector has emerged as the
most capable one of integrating into the global economy. The share of the oil and gas
sector in overall exports of the Russian Federation constitutes about 45 %, an3 accounts
for about 60 % of foreign currency flow and 20 % of GD P.^ The same importance of
energy and mineral sector plays in the economy of K d s t a n , where even during the
time of a drop in world oil pnces, the export volumes were increased by Kazakhstan to
the point that revenue fiom export of oil and mineral products reached S7.854 billion.' It
accounted for 47% of al1 cumulative investment into the repubiic for the period from
1993 to 1998, and 82% in the first quarter of 1999.'
However, the system of taxation of the sector has not been properly refined and
even today it uses obsolete fiscal methods that do not consider financial results of the
companies. and imposes heavy taxation rates.9 According to a number of tax analysts, the
current tax systern of the Russian Federation, which was laid in 1991 is dramatically
confusing, and what in conjunction with other factors, such as political instability, scale
of bureaucracy and crime, and high levels of capital flight, makes the investment climate
extremely unfavorab~e.'~ Since the tax reform in Russia started, the initial package of tax
laws, necessary to support economic reforms and establish the market economy in the
country, was repeatedly changed and modified by various branches of the state power,
' See "The hvesrmenr Ciintore in Russia", Expert Institute, Ernst & Young, 1999, see Summary and Ch. 2.13. See also Gialdini L., "Kazakrtan Lisrs Prioriry Secrors for /nvesrment", International Taxation. lufy 15, 1997, on-line: WL (WTD)NEW See "The fnverrntent Climare in Russia", E x p e ~ hstitute, Ernst & Young, 1999, Summary. See "Commercial Overview of Kazakhstan", Business Information Service for the Newly Independent
States, October 1999, Ch. 2, on-line: (BISNIS Main) ~http://www.bisnis.doc.gov/bisnis/counay/ kazakhstan.htm>
Ibid. Sarnoyieniio V., "Tax Reform in Russia: Yesterday. Today and in the Near Furure" International Tax and
Investment Center, on-line: (ITIC-CIS Main) ~http:f/inicnet.org/publications/Defaul?.htm~ ' O See "The /nvesrment Climate in Russia", Expert Lnstitute, Ernst & Young, 1999, Sununary.
Such fiequent changes created a situation of confusion for both tax inspecton and
<axpayen."
Both Russia and Kazakhstan are considered to be major players capable of
attracting most of the foreign investments flowing into the region.I2 Both countries have
suffered an economic downtum after the cnsis that took place in most of the Asian
economies, inc!uding Russia. However, the economic downtum in Kazakhstan for the
lasr few years was less severe than in ~ussia." Nevertheless, three quarters of the Kazak
exports go to Russia, and a severe devaluation of the Russian cuiiency dunng the crisis
senously hurt Kaz& economy as well as economies of al1 the other newly-independent
states in the region, including ~kraine. '~ This paper will argue the relative success of
Kazakhstan can be explained by a more favorable tax treatment that creates a better
i nvestment,
This paper wiII pursue two objectives. First, it will highlight the unique character
of the reform process of foreign investment laws in each of the states under review. It
will provide a general overview of the legal fiarnework created by the states envisaged to
attract foreign investments, focusing in particular on an analysis of tax regimes of the
respective countries in order to determine the extent to which each particular system
encourages foreign investments. It will be argued that on a basis of analysis of al1 the
foreign investment climate deteminants, and tax regimes in particular, Kazakhstan
appears to have achieved the best resuIts in providing foreign investors with the most
I I Samoylenko V., "Tm Reform in Russia: Yesterday. Today and in the Near Future" International Tax and Invesanent Center, on-line: (ITIC-CIS Main) <http://inicnet.org/pubIications/Defauit~ " Collins S., "Narural Resources and Investment Potenrial Lure US Firms to Kanakhstan", Central Asian Hot Spot Senes, Aspen Law and Business, November 1995, on-Iine: (ITIC-CIS Main) ~http://inicnet.org/publications/Default.htrn~ '' See "Central Asia, Caucasus Performed Better in 1998 than Russia. Ukraine", on-line: (Kazakhstan Herald Main) ~hnp://~w.herald.asdc.kz~pubIic/researccomen 1 O . h d >
stable general foreign investrnent climate. Based on the results of the study, it will be
demonstrated that both the Russian Federation and Ukraine have to deal with numerous
obstacles, such as burdensome and ambivalent tax systems, political instability, lack of
modem infiastructure, weak banking systems, bureaucracy and crime. However, the
Russian Federation has been able to attract more foreign direct investments, not because
it has been able to provide a better overall investrnent climate, or because of its size, but
because of the major inflow of investments in the energy and minera1 sectors. l5
From the other side, Ukraine, does not possess such a rich natural resources base
as does the Russian Federation, and it will be argued that the only way for Ukraine ta
strengthen its position on the international capital markets is to achieve significant
improvements in al1 the problematic areas. Such first steps have already been taken by
the main ian Parliament through the introduction of the new Tax Code of Ukraine on
June 20,2000.
Second, on the basis of findings, recommendations will be given on what
rneasures should be taken to improve the taxation regime with the purpose of
improvement of the overall investing environment. Third, there will be mentioned
international obligations of al1 three countries in the area of avoidance of double taxation,
and specifically examining taxation of Canadian legal and physical persons conducting
business on their temtory under the appropnate double taxation treatie~.'~
IJ %id. " Sec "The lnverrment Ciirnate in Rurzia". Expert Institute, Ernst & Young, 1999, Ch. 2.13 16 International obligations of Russia, Kazakhstan, and Ukraine regarding taxation of Canadian enterprises and persons located and conducting business on their temtory wilI be only mentioned in general ternis
II. Determinants of the investment climate
1. Determinants of FDI
investors might decide to invest abroad for a variety of reasons, but the general
feature is a strive for maximization of their profits. They may also chose to invest in other
countnes for a purpose of diversification and minimization of their nsks, or if they need
to expend their market that became too tight for a specific business. Another reason for
decision to invest abroad would be availability of technology or know-how that gives
them an advantage over local enterprises in the foreign counties.
There are again a lot of reasons favoring investing abroad instead of exporting to,
or importing fiorn, other countries, or licensing their technology to firms in other
countries. An investor rnay choose to invest abroad as opposed to export its products
because it cm be more efficient, considering possible tariff barriers or transportation
costs. Another reason can be the nature of the product: it is not practicable to export
pastry, because it can be baked and sold having established a net of bakeries and shops
abroad. It can be more secure for investor to invest into production of a product abroad as
opposed to importing, because it might provide the investor with a better security of the
product's supply.
No matter what the real motives of the investor are, it appears that in addition to
the over-riding profit motive the principal objectives of most FDIs is either to gain:
- and extend the market for the product or service abroad; or
because of their individual nature and because they do not reflect the general national tax regime that is being the major focus of this comparative analysis.
- access to the natural or human resources located abroad, considering the higher level
of efficiency of investing abroad instead of their importation.
The final decision of the investor as to which country to invest in is generally based on
the overall assessrnent of the general investment ctimate of the country targeted for a
future investment.
FDI contributes to the transition and economic performance across the region in
three major ways. First, FDI rnay directly increase capital accumulation (even through
acquisition investments, capital accumulation tends to take place as part of modernization
and restructuring strategies. Second, it raises the productivity of the enterprise sector and
benefits export performance. Third, it generates technological and organizational benefits
for domestic suppliers and cornpetitors. In general, in the context of transition, FDI tends
to have a set of attributes that can contribute to forming market-onented institutions and
behavion. It does so through upstream and downsîrearn linkages and demonstration
effects. FDI pIays an important roIe in addressing the capital shortage related to low
dornestic savings and limited financial inter-mediation. For instance, in Kazakstan the
FDI into the energy sector contributed 27 % to gross fixed capital formation in 1997."
FDI can serve as the best indicator of a level of favourability of the general
investment environment. The concept o f 'investment climate' is related to the level of
'favorability' of conditions that rnay be made in the country (region, industry) in order to
attract investment~.'~ The investment climate can be evaluated on a b a i s of analysis of
17 "Easrent and Central European FDi Levels Up", news brief, East European Banker, Lafferty Publications Limited, June 1999, p. 2. 18 See "The Invesnnent CIimare in Russia", Expert Institute, Ernst & Young, 1999, Ch. 2.1.
the determining factors that facilitate investment climate and boost economic growth. The
overall assessrnent of investment climate is based on the following facto^'^:
a) the quality of legislation that regulates economic life and the level and effectiveness
of protection of foreign investrnent under the Iegislation;
b) stability of the political system, its predictability and ability to suppon an economic
transformation process;
C ) macroeconomics indicators, such as the condition of the budget, the balance of
payrnents, and state debt compared to GDP;
d) the general currency regirne and possibility of repatriation of investment profits;
e) the effectiveness and quality of the commercial infiastructure, banking system and
accessibili ty of borrowing;
f) a well-educated, technology-oriented labor pool;
g) crime and corruption
h) the state of transportation and cornunication infrastructure; and
i) the quality of the system of taxation and extent of the tax burden
Early and successful introduction of the economic and tax reforrn is directly
related to the increase of FDI inflow into the country. Table 1 demonstrates the
l 9 See "Comnrercial Overview of Ka=alrhsranV, Business information Service for the Newly independent States. October 1999, Ch. 2, on-iine: (BISNIS Main) ~http://www.bisnis.doc.gov/bisnis/cou~ kazakhstan.htrn> See also "The Intvsîment Climare in Russia", Expert Institute, Ernst & Young, 1999, Ch. 2.1.
countries of Eastern and Cennl Europa
! Czech Repubi~c Macedonia 1-
1 Poland
- Sources: EE
Table 1 Accurnulated Net Foreign Direct Invesmients for the period of 1989 to 1999
(In millions of U.S. dollars) -
Cumul Cumula- FDI FDI Former Cumul Cumula- FDI FD1 a-tive tive FDt inflow inflow Soviet a-tive rive FDI inflow inflow FDI inflow per Fer Union FDI inflow per F r inflow per capita capita Republics inflow per capita capita 1989- capita 1998 1 999 1989- capita 1998 1999 99 1989-99 99 1989-99 434 130 13 15 Russia 10.334 71 12 5 2.265 273 6 5 - 89 Ukraine 2.751 1 5 5 _ 15 1 O
I I I 1 1
1D (1 999) and World Bank ( 1999). !998 FDI Data estimated by EBRD."
indicators are projected in dollars per capita. This way the real input of investments is
reflected according to the size of the population of the respective country. Kazakhstan
was able to attract the highest per capita rate of FDI as compared to Russia and Ukraine.
This inference c m also be supported by the additional data in the table illustrating the
performance of a majority of the Central European countries (Hungary, Po!and and
Czech Republic) as well as Baltic States (Estonia, Lithuania and Latvia). Al1 the
mentioned countries started early in the transition and introduced comprehensive tax
reforms. Serious tax policy reforms in the Russian Federation and Ukraine did not take
pIace until the last half of the decade and the process was not completed until today.
'O European Bank of Reconstruction and DeveIopment "Transition Reporr Update". Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000, p. 15.
The focus of this work is on tax systems of the countries under review, but a brief
analysis of the non-tax factors mentioned in this chapter will be given.
A. Regulatory Framework Affecting the General Investment Environment
The importance of the clarity and effectiveness of the legal h e w o r k regulating
foreign investments as well as the overall economic activity within a country is hard to
underestimate. Since the moment al1 three countries started a process of economic and
legal reforms, the problems of vagueness of law, contradictory legal provisions and poor
implernentation remain the countries' key concerns.
Al1 specific problems and shortcomings of the legal systems of each of the
countries will be discussed in the following subchapters. However, for the purpose of a
better understanding of the major barriers to investments, this study will also rely on the
statistical ranking of the major factors-baniers of the legal systems of each respective
country. In al1 three cases the transparency of laws is perceived as the major legal barrier
Table 2. Legal System
(1 = most difficult aspect; 4 = least difficult)
to investment. The Pace of legal change is also a concern for investors, particularly in
Factors-barriers/ Countries Trmsparency of laws Technical temqarpon Pace of Icpl change
Russia and Ukraine. This difficulty in processing of changes in the legal systems also
-
'' Special Report of the international Tax and investment Center ([TIC), Moscow, June 1999.
RussiP
Sources: International Tax and investment Center (1999)"
1.73 3 1.82
hbrkhsran
1.92 2.92 2.33
Ukraine
1-83 2.93 1.83
implies a lack of development in the legal infiastruciure and may also be the problems of
bureaucracy and corruption existing in al1 three countries.
The fint significant achievement of the Russian govemment in attracting general
foreign investments was the adoption, in 1991, of the law on foreign investment~.'~ The
law included a number of important guarantees and privileges for foreign investors, such
as:
National treatment for foreign investors, except where specifically provided by law;
Guarantees against unlawfùl expropriation without proper compensation;
Simplified procedures of registration for foreign entities intending to conduct
business activities on the temtory of the Russian Federation;
Liberalized customs procedure for imports of equipment required for operation of the
business and expons of the produced products; and
The right to transfer abroad protits fiom the business activity.
The law became a clear indication of the intention of the Russian government to
prornote a liberalization of foreign investments, even though numerous decrees and
regulations have repeatedly modified it.
i i ) Kazakhstan
7 7 -- Law "On Foreign Investmencs in rhe RSFSR". Sovetskaya Rossiya, July25, 199 1.
Kazakhstan was the first of the three countries that was able to start fundamental
economic reforms directed towards the creation of the new regulatory system that would
help attract foreign investments to the country. These refoms include demonopolization,
privatization, debt resmicturing, banking reform, lifting profitability controls, trade
liberalization, setting an adequate govemment procurement process, tax and customs
reforms, etc.
Together with the significant progress that the Kazakhstan's Government has
made in implementation of the market refoms, there are some shortcomings and
deficiencies in the system. As it is in the case of Russia, although not to the sarne exient,
the laws and regulations in Kazakhstan are also subject to fiequent changes and
modification^.^^ There have been indications that attracting foreign investments is a
higher priority than supporting their presence in the country.24 The Government has also
been making promises that were not ultimately implemented. For instance, it promised
that the tendenng process would be conducted in an open and fair manner, though there
were a number of cases when tenders were issued just a week before the application
deadline, thereby limiting the cornpetition?
i i i ) Ukraine
Afier the collapse of the Soviet Union, Ukraine was the second largest republic in
terms of population and economic significance. Based on the analysis of its skilled work
23 BISNIS, "Commercial Overview of KmaWisran". December 1999, on-line: (BISNIS Main)
force, highly educated population and significant resources, a 1990 research done by
Deutsche Bank ranked Ukraine to have the best chances in successfiilly transfonning
itself into a modem market-onented ~ o c i e t y ~ ~
However, a very senous problem still lies with the tension between an
institutionalized bureaucracy still widely present in administrative echelons of the former
system, and a skeptical and impatient population awaiting credible and efficient
economic refoms and a legal environment that would secure and faciiitate domestic and
foreign investments. Thus, a market-oriented legal infiastructure is still at the early stage
of development in Ukraine. Fundamental regulatory mechanisms need funher
development in the areas of banking, corporations, securities reguiation and property
nghts in order to facilitate capital accumulation and financing techniques - two essential
elernmts for the development of a healthy and growing pnvate sector.
It has become increasingly obvious to intemal and extemal investmeni analysts
that the success in the transition of Ukraine to the market econorny will greatly depend on
the ability of the domestic legislator to provide an adequate legal infrastructure to create
and support an attractive and rewarding investment environment. The economy has
significantly suffered fiom huge deficits, inefficient state-run enterpnses, and high rates
of inflation, and it critically needs large inflows of foreign investrnents. To fil1 out the
conceptual and practical gaps created by an underdeveloped legal infrastructure and
discouraging investment climate, some fundamental legislation affecting the activities of
enterprises, business associations and foreign investments has been passed.
- -- -
'' BISNIS , "Investmenr Climate in Kazakhsran", December 1999, on-line: (BISNIS Main) <http://www.bisnis.doc.gov/bisnis/coun~/9808K07.han~ '' "The Soviet Union ar the Crossroaàs", Facts and Figures on the Soviet Republics, Deutsche Bank AG. 1990.
For the last decade, Ukraine has produced a substantial legislative body of
commercial, contractual and investment regulations. Many of the first laws in the
mentioned areas have gradually lost their contemporary importance and need to be
updated in order to cope with the developing business environment. The Ukrainian
legislative infrastructure also needs new civil and tax codes. The Russian and
Kazakhstani experiences have proven that a modem Civil Code would help to
significantly improve the overail legislative environment, especially in the areas of
contractual and commercial relations."
One of the first legal specialized reguiations targeting the establishment and
improvement of a favorable investment regime was the Decree No. 55-93 of the Cabinet
of Ministers of Ukraine "On the Regime of Foreign Investrnent", which came into effect
in June 1993. The decree originally provided for a 5-year tax holiday on profits for
enterprises with qualiQing foreign investments. However, the decree was consequently
repealed after the Ukrainian Parliament passed the new Law of Ukraine, " On the Regime
of Foreign Invesunent," in March 1996. The new law has established a variety of forms
and mechanisms for carrying out foreign investments in Ukraine, including the
mechanism of acquiring an interest in already existing companies in Ukraine or
establishg a new Company with a Ukrainian partner. The mechanism has also
estabIished rules and procedures for subsidiaries and branches wholly-owned by foreign
investors; the acquisitions of the rights to use land and/or concessions for the use of
" Paliashvili I., Presentation for the Country Focus Workshop on Ukraine and the 1998 International Conference on Contracnial Law and Agreements in Russia and the CIS, December 1998 on-line: (Russian ljkrainian Legal Group Main) chnp://www.rulg.com~
natural resources in Ukraine by foreign investors, independently or jointly with Ukrainian
legai entities or physical penons etc.28
However, one of the major cornplaints of the foreign investors regarding the
legislative system in Ukraine are its instability and constant modification. This instability
directly affects the investors' confiidence in b i n e ' s cornmitment to market reforms and
attract foreign investment. A good example of this destructive practice by the Ukrainian
Government is the recent change of the tegislation providing for tax holidays for foreign
investors. A 5-year tax holiday provided by the Decree "On the Regime of Foreign
Investments" of June 1993, was blatantly repealed by the Law "On the Taxation of the
Profits of Enterprises" of January 1, 1995. Such a practice bnngs considerable harm to
the trustworthiness of the Ukrainian general investment environment, and ultimatel y, to
the process of economic reform.
A. Political StabiIity
The existence of a stable political environment can also not be overlooked. War is
certainly very bad for development, what can be supported by the fact that 11 of the 28
econornies in EasterdCentral Europe and CentralEastern Asia have had amed conflicts
on their soi1 at some point of time during the last 10 years.29 Armed conflict between
Chechnia and Russia had a very detrimental effect on decision-making process of
foreign investors conceming fùrther investments in the country.
-- -
'' The Law of h i n e " On the Regime of Foreign Investment", of March 19, 1996, art. 3 09 "Cenrral and Eastern Europe: Conclusions", Janet Matthews Information Services, Quest Economic Database, June 1 1 , 1999, p. 24.
Another important factor was an ability of the national governments to obtain a
majority for successful launching of market and legal reforms. This problem has been
most apparent in Ukraine and Russia, where policy-makers have failed to take a
consistent line on the reforms. In Ukraine's Case Privatization is the obvious example,
with the presidential administration drafting various pnvatization prograrns, only to have
these stalled or thrown out by parliament, which had different objectives. In a case of
Russia, stability of market reforrns have been fatally disrupted by z constant tug-of-war
between the president, government, parliament and the economically powerful
'oligarchs'.
Among the three countries, Kazakhstan appeared as the only one capable of
attaining a political stability that allowed the President of the republic to obtain the
necessary political power to move the reforms ahead, even despite serious inter-ethnic
problems existing today in the country.
Opinion of foreign investors is also transparent in this regard. Foreign investors
were asked to comment on the question of the aspects of the political environment, which
constitute major barriers to the investing. The results produced proved that even though
Table 3. PoliticaI Environment
Sources: International Tax and ïnvesment Center (1999)~'
(1 = most difficult aspect; 4 = l e s t difficult)
- - - -- - - --
30 Special Repon of the international Tax and Investment Center (ITIC), Moscow, iune 1999.
Factors-bamers/countries Political environment
Russia 1 Ka=~khsîan 1 Ukraine 2.17 1 3.57 1 2-5
political stability is not the major obstacle to the investments, political uncertainly in
Russia and to the lesser extent in Ukraine has had an adverse effect investrnent potential
in both countries.
j) Russia
There are strong elements in Russian political circles supporting protectionism
which has aisen in response to a belief that free trade and foreign business activity in the
post-Soviet years has been a major cause of the industrial decline in the country. This
allowed some politicians to support policies of limiting foreign share holdings or property
ownership as well as increasing the tax burden on foreign bus in esse^.^' Also, there are
strong decentralizing tendencies among the republics of the Russian Federation for
political power and independence in carrying out economic and market ref~rms.~ '
The nationalization of foreign investments is prohibited by the Russian
investment regulations, except for nationalization following Iegislative action and where
deemed to be in the national interest. By law, such nationalization may be appealed to
the courts of the Russian Federation, and are to be paid with prompt, adequate and
effective ~orn~ensation. '~
i i ) Kazakhstan
j1 "Counrn? Cornniercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service, Ch. VIII. j7 This tendencies will be discussed in details in Ch. III.3.A. "Interrelationship Between the Federal and Resional Budgets".
The political situation in Kazakhstan continues to be the most stable of the
countnes under review? This can be explained that Kazakhstan is a constitutionai
republic with very strong presidency and the remainder of power divided among
executive, legislative and judicial branches of power. The president N. Nazarbayev is
considered to be a reform-oriented politician with far-sighted political vision and
pragmatic implementation. Political stability in Kazakhstan is usually considered to be a
result of his firrn grasp on power and ability to keep the opposition f?agmented. It is hard
to say whether Kazakhstan would remain as politically stable as it currently is without the
present market reform-oriented strong presidency.
Political factors, specifically questions of political stability and its influence on
the legislative consistency, deserve separate attention as they are important factors
influencing the decision-making process of potential foreign investors. Since Ukraine
became an independent state, it had suffered penods of political instability caused by
clashes between various political forces defined along the ethnic l i n e ~ . ~ ~
The population of the westem part of Ukraine has been actively supporting a
policy of doser integration with the westem economic and political organizations,
including EU and NATO. It also ardently supports the use of the Ukrainian language as
the only state language in the country, which has caused a wide and serious outcry in the
- -
'' "Countn. Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service, Ch. VILE. 34 Deerman A., "Kazakhsran: How a New Petroleurn Law Cm Fuel Economic Developrnent", Tulsa Journal of Comparative and international Law, Fall, 1993, Ch. 1, on-line: (WL)TLSJCIL
Eastern Russian-speaking part of the country. The language dispute has becorne a
fundarnent for a lot of other political and national priorities, including the dilemma closer
cooperation with Russia and the former CIS corntries, joining political and economic
organizations, including customs unions with the Russian Federation and the CIS
countries.
Al1 the above-mentioned political and linguistic disputes have had a senous
effect resulting in the split in the Ukrainian Parliament along the ethnicllinguistic and
political lines, and deprived the Parliament of a coherent consensus needed for adoption
of cornmencing of coherent economic and tax refoms.
In addition there still exists a strong communist opposition in the Ukrainian
Parliament, which strongly opposes any progress in economic reforms and closer
cooperation of Ukraine with the Western financial and political organizations. Policy-
making is still unpredictable, highl y complex, bureaucratic, and confiised, so there are
chances that any advances made would be reversed.
C . Ecorroniic Stabifiiy
The Russian crisis in 1998 not only threatened the output recovery across the
region, but also put renewed pressure on the stabilization policies of most countries. The
breadth and Pace of economic restructuring and stabilization has varied significantly
arnong the three countries. The available evidence suggests that the scope, speed, and
35 "Business Report on Ukraine", Business Euro, 1998 on-line: (Business -Europa Main) <hrtp://\w.business-europa.co.uk>
stability of economic policy reforms significantly influenced the ability of the countries
to re-establish economic growth (or limit the economic decline) during the transition.
Table 4 demonstrates the current state of the general govenunent balances in the
three countries. Significant declines in the current account deficit in 1999 in al1 three
countries largely reflect a decline in irnports brought into the countries. The dollar value
Table 4. General govenunent balances.
Sources: EBRD ( 1999) and World Bank ( 1999). !998 FDI Data estimated by EBRD."
of imports fell in al1 of the three countries between 1998 and 1999. Russia has been the
major market of Ukrainian and Kazakhstani products, and appreciation of Ukrainian and
Kazakhstani currencies vis-a vis the rouble (devaIued by the Russian cnsis) did not allow
the two countries to be able to recover the previous volumes of their exports to Russia.
On the other side, Russia has been able to take advantage of the rising world oil pnces
and recorded a large curent account surplus in 1999.
i ) Russia
Russia's balance-of-payrnents has increased since 1998 (see table 4). Russian
exports fell from $18.5 billion in the first quarter of 1998 to S15.6 billion in the first
quarter of 1999, and imports dropped caused by devaluation, from $18.3 billion in the
j6 European Bank of Reconstruction and Development "Transirzon Reporr Updare", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000. p. 1 1.
first quarter of 1998 to 59.4 billion in the fint quarter of 1999." Exports are expected to
grow in the second quarter of 2000, due to stronger pnces for energy, greater
competitiveness of other C X ~ O ~ S . ~ ~ Low real income levels and the increased
competitiveness of lower-priced, domestically-produced import substitutes will be able to
constrain the inflow of imports.
The 1998 crisis has had a very negative impact on the inflow of investments.
Annual foreis direct investment into Russia fell fiom 54 billion in 1997 to $2.2 billion
in 1998 with portfolio investment falling even more sharply, from 9 17.3 billion in 1997
to S8 billion in 1 9 W 9 However, recent estimates predict that investments will nse in the
second quarter of 2000.~' Russia's officiai extemal debt is currently $152.4 billion, and
the Government has announced that it cannot meet its 1999 extemal debt payments of
S 17.2 billion and was able to pay only $9 bil~ion.'~ Russia missed scheduled payrnents in
19% to several international financial institutions, including London and Paris clubs."
i i) Kazakhstan
Kazakhstan has been ninning a trade deficit from 1992, which amounted in 1996
to S 752 million ( U S ) constituting roughly 3.5 % of GD P.'^ Government had to cut social
- - -
3 7 "Counfn Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. CommerciaI Service, Ch. IV. 38 Ibid. 39 Ibid. 4 0 "NIKoil Sees Major Inflow of Western /nvesfments ro Russia", Alexander's Gas and Oil Connections, VoI. 5. issue No. 7, A p d 27, 2000, on-line: <http://www.gasandoiI.com> 4 I "Counrp Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe. U. S. Commercial Service, Ch. IV. " Ibid- 43 "Coun y Commercial Guide: Kazakhstan", FiscaI Year 1 999, Show Case Europe, U. S. Commercial Service, Ch. II.D., on-line: (SCE Main) <http://www.sce.doc.gov.>
spending during the Russian financial crisis, which seriously affected the Kazakhstani
economy. In 1999 the deficit was about 3.6 % of the country's GDP." The budget for the
year 2000 indicated inflation growth equal to 10 %. Recently, the balance of payments
was improved pnncipally due to the increase in world oil prices.45
Ukraine was able to renew its foreign reserves since the second half of 1999,
following a substantial drap in foreign reserves in 1998 that also caused an increase in
budget deficit and made obtaining of foreign financing more d i f f i c ~ l t . ~ ~ Ukraine's almost
complete reliance on imports of oil and gas was continuously pushing the trade and
current accounts into deficit since the country's independence." Ukrainian external debt
service obligations will constitute about $ 3.2 billion (US) in 2000, and the larger part of
it will be paid for oil and gas imports.
The budget deficit in 1997 was % 1.5 (US) billion, and was expected to increase as
a result of the financial cnsis in Russia, which negatively affected almost al1 the former
Soviet republics.48
U "Comntercial Overview of Kazukkrun" of December 1999, Business Information Service for the Newly- Independent States (BISMS), on-line: (BISNIS Main) <http://www.bisnis.com> " "Counq- Commercial Guide: Kazakhstan", Fiscal Year 1999, Show Case Europe, U. S. Commercial Service, Ch. 11-D., on-Iine: (SCE Main) <httpY///www.sce.doc.gov.> 56 "Counrty Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Senrice, Ch. 11-D., on-line: (SCE Main) <http://www.sce.doc.gov.~ 47 "A Guide ro Doing B u i n a s in Ukraine" Department of Foreign Affairs and International Trade, Ch. 1.3. on-Iine: (DFAIT Main) <http://www.dfait-maeci.gc.ca>
ibid.
D. Currency Regime
The Russian crisis in 1998 not only dismpted the output recovery of its major
trading partners Ukraine and Kazakhstan, but also renewed pressure on their currency
stabilization policies. Table 5 demonstrates the end-year annual inflation rates for the
three countnes fiom 1992 to 1999 and a projection for 2000. Almost al1 countries in CIS
Table 5. Inflation
including Kazakhstan recorded an increase in inflation in 1999, which can be explained
by a lagged spill-over effect on prices from the currency depreciations that followed the
Russian crisis. In contrast, both Ukraine and Russia were able to bring their inflation rates
down. Russia was able to rapidly decrease the inflation fiom 84.5% in 1998 to 36.8% at
the end of 1999. ükraine decreased the rate only slightly fiom 20% in 1998 to 19.2 at the
end of 1999.
Although present inflation rates are not of any immediate problem for most
transition economies, al1 three countries face serious fiscal and curent account
imbaiances. Table 6 demonstrates that Russia and Kazakhstan were more successful in
bringins down the cument fiscal balances than Ukraine. In Kazakhstan the improvement
is
(change in year-end retaiWconsumer price level, in per cent)
t 9 European Bank of Reconstxuction and Development "Transition Report Update", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000, p. 9.
Sources: EBRD ( 1 999) and Worid Bank ( 1999). !998 FDI Data estimated by EBRD."
1997 10.9 1 1.3 10.1
1 Counny/ycar Russia Kazakhstan Ukraine
ZOO0 projec-tion 20.0 8.8 20.0
1998 84.5 1.9 20.0
1999estirnau 36.8 18-1 19.2
1992 2.506 2.984 2-730
1993 840 2.169 10.155
1994 204.4 1.158
1995 128.6 60.4
1996 21.8 28.6
401.0 ] 181.7 39.7
Table 6. General Government Balances
due mainly to cutbacks in expenditure rather then enhanced revenues.51 Low revenue
collection remains pervasive in al1 three countries. Russia was able to improve its fiscal
balance mostly because of higher output and profits that led to revenue collection that
was 40% higher than expected. The improvement of the Russia's fiscal balance (on a
cash basis) was also due to non-payrnent of the government to some Wcstem creditors.
Table 7 demonstrates the attitudes of foreign investors towards the currency
policies of the Russian Federation, Kazakhstan and Ukraine. The investors were asked
Table 7. Fiscal regime
(1 = most difficult aspect; 5 = l e s t difficult) [ Factors-barriers/countries 1 Russia ] Kaskhsîan 1 Ukraine ! Cürrcncy control 1 3.18 1 4 1 4.4
Sources: International Tax and Investment Center (1999)5'
where the fiscal regime constituted the most formidable bamier to investing. Instability of
the currency rates seems to be most troubling in Russia, what can also be explained by
the general detrimental effects caused by the 1998 Russian cnsis. In general, currency
control factor does not seem to be the major impediment to investments.
50 European Bank of Reconstruction and Development "Trattsition Report Updaie", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000, p. 1 1. 5 1 Ibid., p. 10.
The mbie is the only legal tender in Russia. Russian law provides for two major
types of operations with foreign currency: a) current operations, including importlexport
contracts and loans that do not exceed 180 days; and b) capital operations, including
investments, financiaI Ioans exceeding 180 days, and deferred import and export
payrnents for more than 90 days. Current operations have no limitations, while capital
operations generally require prior approval of the Central Bank of Russia (cBR).'~ The
New Tax Code of Russia also provides for ab les as the only tender that can be used on
the territory of the Russian Federation. It also requires that non-resident foreign
organizations and non-resident physical perrons may fiilfil1 their tax payment obligations
through the use of foreign currency se t t l emen t~ .~ Tax resident organizations are still
required to remit their taxes in r~bles . '~
Capital flight of hard currency out of the country is currently the major enemy in
the stabilization of the Russian currency. The CBR has substantially altered its exchange
rate policy and tightened its currency controls since the August 1998 financial cnsis.
Tighter controls have helped reduce capital outflows, thereby supporting the ruble? The
portion of the currency fiom export sale proceeds that is subject to mandatory conversion
52 Special Report of the International Tax and Investment Center (ITIC), Moscow, June 1999. 53 **Country Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe. U. S. CommerciaI Service. Ch. II-D., on-line: (SCE Main) <http://www.sce.doc.gov.> 54 Tax Code of the Russian Federation of January 1 , 1999, General Part, Chapter 8, an. 45.3. 55 Ibid. 56 "Counfry Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service, Ch. IV, on-lie: (SCE Main) <http://www.sce.doc.gov.>
was increased fkom 50 to 75 %." in March 22, 1999, CBR adopted a regulation that
requires residents purchasing foreign currency for prepayment of import contracts to also
deposit a ruble equivalent of the prepayment in a non-interest-bearing account at the
CBR. The real purpose of this regulation is unclear, as it basically makes the subject pay
double price of the contract to import prepaid goods.58 New regulations issued by the
Central Bank also impose limitations on the purchase of foreign exchange using ruble in
correspondent accounts and significantly increase bank reporting requiremerd9
ii) Kazakhstan
The Kazakhst.mi govenunent imposes minimal restrictions on the converting or
transfering funds associated with an investment into a freely usable currency at a legal
market-clearing rate. Due to the national currency (tenge) stability and suficient growth
of currency reserves, the National Bank of Kazakhstan (NBK) has allowed currency
convertibility since February 1996. Consequently, the application of Kazakhstan to adopt
Article 8 of the International Monetary Fund Charter was approved by the [MF in July
1996. Under this agreement, Kazakhstan has a duty not to restrict current account
transactions such as currency conversions or the repatriation of investment profits.
--
5 7 Scott C.. Starygin A., "1999 Russian T u Reform - Srill Waiting", World Tad Daiiy, J a n u q 1 8,2000, on-line: ( W r L ) \ D 5 8 Antel C., "Russia Enacrs Tm. Currency Changes", Tax Notes International, Xews Analysis. May 17, 1999, p. 2006. 59 Ibid. 60 See Repon of the Business information Service for Newly independent States (BISNIS) "Commercial Overvierv ofKaïakhsran", of December 1999.Ch. VI.
The present currency regulation environment allows the transfening of money
associated with the investment in foreign currency inside the country and abroad? That
allows foreign investors to settle their obligations, including the payment of wages to
their resident and non-resident employees, in foreign currency. There is no distinction
made behvcen resident and non-resident when opening bank accounts as well as there are
no restrictions on the type of accounts needed for investment or import/expon a~tivities.~'
hvestors may also convert and repatriate their profits fkom a business in Kazakhstan,
though in practice, conversions of tenge c m be limited due to the undeveloped nature of
Kazakhstan' s currenc y e ~ c h a n ~ e . ~ ~
iii) Ukraine
The Ukrainian currency (hryvnas) is presently the only official currency that can
be used in al1 transactions carried out in Ukraine between residents, as well as between
non-residents and residents, unless a license allowing payments in foreign currency has
first been obtained fiom the National Bank of Ukraine (NBU). Al1 the transactions
outside Ukraine between residents and non-residents must be in foreign currency? As an
exception, al1 commercial transactions between a resident and non-resident in the sphere
of 'trade turnover' must be carried out in foreign convertible currency and only through
authorized Ukrainian banking institution^.^^ Thus, in case a non-resident wants to carry
6' ibid. '' "Countv Commercial Guide: Kazakhsran 1999", Showcase Europe, Ch. V1I.B. on-line: (SCE Main) <hnp:il~vww.sce,doc.gov> '' Ibid. 04 See the Decree of the Cabinet of the Ministers of Ukraine No. 15-93 "On the Sysrem of Currency Regtiiarion and Currenq~ Conrro f ', an. 5. 65 Ibid., art. 7.
out commercial transactions within the scope of 'trade turnover' on the temtory of
Ukraine in the local currency, he/she would need to obtain an individual license h m the
NBU.
For the purpose of carrying out hard-currency transactions, residents must obtain
a license allowing payments in foreign currency ffom the N'BU. There are some
restrictions on the amount of cumncy that individual residents may export or import.
Resident legal entities are also subject to restrictions, although to a lesser degree,
considering that legal entities are permitted to carry on activities with a foreign party such
as the remittance of dividends, interest, fees, and payment for purchased goods. The
Ukrainian currency is presently being converted and is regularly traded at auctions held
by the Ukrainian Interbank Currency Exchange as well as the informa1 inter-bank
currency market?
E. Conmercial Infrasîrucîure and Banking System
It is of utmost importance for al1 three counties to develop and implement a
program for the restnicturing of the banking sector, as well as general market
infrastructure, what would allow the investor to borrow additional resources for financing
business projects. Statistical data based on responses of foreign investors investing in
Russia, Ulcraine and Kazakhstan proves the urgency of this matter. The results from
66 "Legal Framework Agecring Foreign Invesrmenr", Trade Mission of Ukraine, Apnl 1 5, 1 997 on-line (Brama Main) ~http://ww.brama.com>
Table 8. Commercial Infrastructure
(1 = most dif'fïcult aspect; 4 = least difficult) Factors-bamers/counties Currcncy control
Russïa 1 Katpkhsran 1 Ukraine 1.45 1 2 - 7
Sources: International Tax and Investment Center ( 1 999)67
Table 8 demonstrates that the commercial infiastructure is the major barrier for investing.
However, the situation in Russia seems to be worst among the three countries. The state
of development of banking systems also differs. The analysis of the sector is discussed
separately for each particular country.
Similar to the banking sectors in Kazakhstan and Ukraine, the Russian banking
system is relatively yomg and needs fùrther improvements. Considering that it only
started evolving in the late 1980s, there were about 1,500 banks in Russia at the end of
1998.~' In June 1999, eleven large and medium-sized banks lost their licenses after they
were revoked by the CBR.~'
However, commercial Iending remains a small share of Russian banks' business.
Today, long-term lending (over 1 year) comprises about 10 % of credits and many
Russian banks remain in precarious shape?' The development of a program for the
restructuring of the banking sector became essential. It should be recommended that CBR
shouId refrain in future fiom granting licenses to banks controlled by former managers of
67 Special Report of the International Tax and Investment Center (ITIC), Moscow, June 1999. as "Counrr3. Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service, Ch. VIII. 69 Ibid. 'O Ibid.
insolvent banks or to banks which are controlled by insolvent banks until those banks
have paid back their debts.'!
i i ) Kazakhstan
The Kazakhstani banking system continues to be one of the strongest among the
republics of the former Soviet union." Similarly to Russian and Iikrainian banking
systems, the Kazakhstani banking system in also in the process of transition due to the
consolidation of the indusny and the movement towards the adoption of international
banking standards under the control of the NBK. The thirty largest banks of the country
are currently able to conduct operations, issue bonds, certificates of deposit, and act as
custodians in the corporate securities markets, as weH as own stock in investment
companies and participate in NBK credit au~tions.'~
In 1998 there were only 76 remaining of the 84 established banks present in 1994
in Kazakhstan, with ten of the largest banks controlling approximately 80 % of banking
as set^.^' There are four main tiers in the system, including seven large domestic banks, 21
banks with foreign participation, four govemment-owned banks and 19 remaining srna11
Almaty-based banks and 25 regional bar~ks .~~ More and more foreign banks are
establishing their subsidiaries in Almaty, including Citibank and Societe Generale, which
established their subsidiaries in 1998.
" See "The Invesmrent Climare in Russia", Expert institute, Ernst & Young, 1999, Ch. 4.2.3. '" Report of the Business information Senvice for Newly independent States (BISNIS) "Commercial Overvieirt -- of Kazakhstan", of December 1999.Ch. VI. " Ibid. 7.1 "Coitnrry Commercial Guide: Kazakhstan 1999", Showcase Europe, Ch. VI1I.A. ' 5 Ibid.
Along with al1 the achievements that the Kazakhstani banking system has
achieved so far, there are aiso problems. Most private resident-owned companies have
limited their borrowing because of high interest rates and uncertainties about the
inflation's impact on costs and revenues. The inability to obtain loans at reasonable rates
also contributes to the overall fnistration of small and medium-sized entrepreneurs. Thus,
problems with obtaining loans, short duration of credit, inexperienced Ioan oficers, and
uncertainty in appiying new banking laws remain the obstacles.
iii) Ukraine
As with a majority of the sectors in the Ukrainian economy, the banking system is
still at its developing stage. It is a three-tiered system with the National Bank of Ukraine
and a major financial institution that regulates and oversees the general banking and
rnonetary system in Ukraine. Currently, there are about 250 commercial banks in
Ukraine, which constitute the ' £ k t tier' of the system and are the former specialized state
banks. They include a savings bank (Oschadbank), three specialized Iending banks
(industrial investment, agricultural and social development) and one Export-Import Bank
of Ukraine. These banks remain dominant in serving government prograrns in their
sectors.
The second tier of banks consists of commercial banks that were founded by
pnvate Ukrainian enterprises and entrepreneurs without involvernent of state money in
their funding capital. The second tier of banks is currently the Iargest of the goups. All
commercial banks face a problem of unstable macro-economic conditions and the
swelling discount rate and the threat that inflation might not be kept under control. Also,
the banking system remains fragmented and undercapitalized, which creates major
problerns with vade and project financing in
The third and the last tier includes banks with foreign capital. The Government
abolished a 15 % limit on foreign investrnents in domestic banks. Curent restrictions on
foreign banks have been eased and general barriers to market entry are considered to be
quite low with the curent regulation allowing banks to established the use of 100 % of
the foreign capital. There is the minimum capitaI requirement of 10 million Euros that
has to be met using the exchange rate at the date of statutory agreement, and shares of
each shareholder should not exceed 3 5 % of the registered capital.77
Also, there have been other significant positive changes taking place in the
system. As of June 1998, reporting and accounting standards in the banking system of
Ukraine were modified according to the Action Plan of the State Program of Transition
towards an International System of Accounting and ~tatistics.~' Also, there has been a
significant increase in confidence of people in the banking system, and particulariy a
progressive increase in time deposits at commercial banks. This has become possible
after the introduction of the Decree No. 996198 by the President o f Ukraine, "On
Measures to Protect Rights of Lndividual Depositors to the Commercial Banks in
Ulcraine". The Decree established an insurance fund for such deposits with the
guaranteed right for compensation for depositor's costs if no access to the deposit would
- --
7b "A Guide lo Doing Business in Ukraine", Department of Foreign Affairs and International Trade, on-line: (DFAIT Main) <http://dfait-maeci.gc.ca> 77 "Banking Sysrertl of Ukraine", Business Analysis, 1 999 on-line: ( W h i c a g o Main) ~htrp://~krchicag~.com~ 78 '*Overview ofrhe Ukrainicrn Banking Secror", U.S. and Foreign Commercial Service and US. Department of State, 1998 on-line: (BISNIS Main) ~htrp://www.bisnis.doc.gov/bisnsdcounûy/ bank9805.hm>
be provided. Such additional fùnds provided by the general population would help
commercial banks to mobilize a potential base to provide credits for investment projects,
which are primarily dedicated to the development of the production capacity of the
economy.
F. Labor Resources
The labor force in al1 three countries is considered as generally highly-educated and
technically competent, even though it sometimes lacks specialized training for the
manufacturing, management and service secton. in general, foreign investon consider
Table 9. Availability of local legal experts
the availability of the skilled labor to be quite satisfactory. It may also be inferred fiom
the table that investors do not generally have any significant problems with availability of
local legal experts.
(1 = most difficult aspect; 4 = least difficult)
Similarly to Ukraine and Kazakhstan, the level of literacy in Russia is
considerably high." RussiaYs labor market is fragmented, and the labor mobility across
Kazakhsran 1 Ukraine i Factors-barriersicountries
79 Spccial Report of the international Tax and Investment Center (ITIC), Moscow, June 1999. 80
1 a Availabili of local le al u rts 3.83 Sources: international Ta and Invesunent Center (1999)~~
Russie
regions is very low, which is consequently reflected in substantial differences in wage
and employment levels. For instance, Moscow has one of the lowest levels of
unemployment, and monthly incomes are up to three times higher than the average level
across the country. According to statistics of the International Labor Organization, the
average national unemployment in May 1999 was 10.4 million, or 14.2 % of the
workforce, with unemployment rates in various depressed regions of 40 %.''
However, with regard to the quality of the work force, the Swiss Beri Institute has
established that arnong 49 countries with low labor prices, Russia was characterized as
not a very favorable option for locating a manufacturing business.82 It indicated that,
contrary to the popular opinion conceming the low cost of Russian labor, the correlation
between salary and output of Russian workers are at 20 % of the maximum level. Also,
the labor force has a very limited number of workers with adequate qualifications and
work culture necessary for modem computerized rnanufa~turin~.~'
ii) Kazakhstan
Kazakhstan's workforce is considered as generally highly-educated and
technically competent, but it lacks trained labor in the manufacturing, management and
service sectors.&< However, during the last five years a great arnount of specialists with
secondary education and vocational training emigrated fiom the country. Labor force
- - - -
'' "Counrn Commercial Guide: Russia", Fiscal Year 2000, Show Case Europe, U. S. CornrnerciaI Service. Ch. VIII. '' See "The hvestment Chnaze in Russia", Expert Institue, Ernst & Young, 1999, Ch. 2.1. 83 Ibid. 84 See Repon of the Business Information Service for Newly independent States (BISNIS) "Commercial Overview of Kazakhsran", of December 1999.Ch. MI. on-line: (BISNIS Main) ~http://ww.bisnis.doc.gov>
participation rate in 1998 in Kazakhstan was at about 64% and the structure of the labor
force has been changing for the iast decade effected by the process of transition to the
market e c o n ~ r n ~ . ~ ~
Kazakhstan uses the Labor Code of 1973 (with arnendments of 1997) as the major
instrument regulating the relationship between employers and employees. The 1993 Law
of Kazakhstan on Professional Labor Unions has provided legal guarantees against
limitations of personai rights, including labor, social, economic, political or persona1
rights and freedoms as a result of a membership in a union, and prohibits the denial of
employment, the denial of promotion or the release Erom employment on the basis of
such rnember~hi~. '~ Recently, there was a distinct tendency by the Kazakhstani
govemrnent to put greater ernphasis on foreign firms to hire Kazakhstani nationals
instead of foreign workers. The new labor Iaw requires expatriates to obtain work permits
in order to be able to work in ~azakhstan."
&aine has a highly educated labor force with a very high literacy rate? After
the coIlapse of the Soviet Union the military-industrial complex in Ukraine made
available a great number of excellent specialists, engineers, and prograrnmers. According
to official Ukrainian sources, unemployment rates in the country for 1998 were as high as
- - - --
8 5 "Doing Business in Kazakhsran", Ernst & Young, August 15 1999, Ch. E. 1 on-line: (Taxcasr Main) chnp://www. taxcast.com> 86 Report of the Business Information Service for Newly Indepeadent States (BISNIS) "Commercial 0i.enierv ofKazakhsran", of December 1999.Ch. VI1.D.
Ibid. 88 "Commercial Guide of Ukraine", Country Commercial Guide, U.S. Department of State, fuiancial year 2000, Ch. VI1 (G), on-line: (U.S. Department o f State Main) <http://www.state.gov>
23 %." Apparently, such numbers seem to unrealistic, considering al1 the current
problems that the Ukrainian transitional economy has to deal. The International Labor
Organization has reported that the unemployment figures for the year of 1999 were as
high as 34 % when you include workers on unpaidhvoluntary leave and unreported
separations? Also, most experts agree that the reported unemployrnent figures are
senously understated, as underemployment of state enterprises increases and employment
in unofficial sector increases, attracting a great share labor force.9'
Even though the labor force is generally highly qualified, many Ukrainians are
not prepared to meet the demands of a new dynarnic, information-based commerce. The
former Soviet comrnand-administrative system discouraged creativity and entrepreneunal
spirit, which had a destructive effect on the growth of businesses in Ukraine. Companies
wishing to do business rnight need to invest additional time and resources in training of
personnel.
Wages in Ukraine are very low in comparison to those in Canada, and they are to
remain very low. The nominal average wage is in a range of about S 140 per month as of
May 1998." As a result of a faster growth in consumer prices as compared to the nominal
average wage, the real wages in 1998 were in fact 12.9 % lower than in 1997, and real
wages in 1997 were 2.4 % less than in 1996." Furthemore, there are some significant
differences in salaries between various categories of ernployees, where the average wage
of an unskilled worker is approximately $140; bilingual secretary or ofice manager
g9 "Country Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service on-lie: (SCE Main) <http://www.sce.doc.gov.> 90 Conitnercial Guide of Ukraine*', Country Commercial Guide, U.S. Deparunent of State, financial year 1999, Ch. VI1 (J), on-l&: (U.S. Depanment of State Main) <htrp://~&,state.~ov> 9' Ibid.
(English and Ukrainian) - fiom SSOO/month; and financial managers and chief
accountants, English-speaking, with a working knowledge of western accounting systems
- h m S 1000/month.~
G. Crime and Corruplion
The problem of crime also seems to be a factor of utmost importance, especially
in Russia. Foreign businessmen have been repeatedly blaming this social evil to be a
serious penl in doing business. These fears are based on several instances of physical
violence against foreign businessmen with fatal outcomes.
Other senous problems that have also been addressed by the investors are the
problems of corruption and bureaucracy. Table 10 illustrates a degree of difficulty that
Table 10. Corruption
(1 = most dificult aspect; 4 = l e s t difficult) Factors-barrierdcounmes 1 Russk 1 Kazakhsion 1 Ukraine Corruption 1 1.67 - 9 1 1.33 :
Sources: International Tax and investment Center ( 1999)~~
corruption causes to investors in each of the countries under review. Table 10 illustrates
that the problem has gained the most serious effect in Ukraine, followed by Russia and
Kazakhstan.
The level of difficulty that bureaucracy causes to investors is illustrated in Table
1 1. This factor is evaluated based on consistent parts of bureaucracy, including
93 " C o u n r ~ Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service on-line: (SCE Main) <http://www.sce.doc.gov~ 94 "A Guide ro Doing Business in Ukraine" Department o f Foreign Affairs and International Trade, Ch. 2.4 on-line: (DFAIT Main) <http://www.dfait-maeci.gc.ca>
Table 1 1.
regulatory requirements; Pace of processing different govemmental applications/forms;
Bureaucracy (1 = most difficuIt aspect; 4 = least difficult)
availability of information; relationships/communications; and market infrastructure.
The high level of crime in Russia not only scares away foreign businessmen from
investing in the Russian economy, but also significantty increases secunty costs of
businesses. It basically becomes another hidden tax on businesses including the need for
reaching an agreement with organized criminal groups, paying of bribes etc.97 The crime
rates in Russia are considered to be the highest among al1 the republics of the former
Soviet nio on.^'
Another significant obstacle to the activity of foreign businesses in Russia is a
widespread problem of corruption among the officers of al1 the Ievels of state power in
the Russian Federation. Corruption continues to spread with the fùrther liberalization of
Ukraine
1.29 2.71
3.29 3.33 1.5
- - - - ppp --
95 Special Report of the International Tax and Icvestment Center (ITIC), Moscow, June 1999. 9" Ibid. " See "The lnvesrment Climate in Russia", Expert institute, Ernst & Young, 1999, Ch. 1.2. 98 See in general Syfert S., "Capitalism or Corruprion? Corpotare Srmcrure, Western Investmenr and Contmercial Crime in the Russian Federation", New York Law School Journal of International and Comparative Law, No. 18, 1999 on-line: WL(hWSnCL)
Sources: International Tax and invesment Center ( 1999)%
Kazaûhstan
2-14 2.47
2.93 2.38 4
Factors-barriers/ Countries Repulatory Requirements Pace of processing different govemmental applications/forms AvailabiIity of information Relationships/communications Marker infrastructure
Russia
1.82 2.55
2.82 2.33 3.25
economy. The possible measures of elimination of this social crime include the further
reduction of Iicensed activities, enforcement of legal remedies in the prosecution of the
involved penons, support of the media in publicizing corruption case etc?
ii) Kazakhstan
Crime rates in Kazakhstan are considered to be iower than in Ukraine and
significantly lower than the rates in the Russian ~ederation."' However, there remain
serious problems in this area, including primarily corruption. In 1997, in order to fight
comption arnong public official, a Higher Disciplinary Council was created under the
President and the Law on Fighting Corruption was passed the Parliament in the spnng of
1 9 9 8 . ~ ~ ' However, al1 these measures have not been able to achieve any significant
success in combating of corruption and there had been no major prosecution and
dismissal of senior govemment of fi ci al^.'^^ A new Cnminal Code adopted in 1997 also
contains provisions regarding penalties for giving and receiving bribes and other
econornic crimes that spread with the liberalization of the market econorny.
iii) Ukraine
Since the break-up of the Soviet Union there has been a proliferation of crime, but
not just cornrnon crime, economic crime throughout most of the newly independent
- - - -
99 See "The invatment Climate in Russia", Expert institute, Ernst & Young, 1999, Ch. 4.2.8. 100 Report of the Business Information Service for Newly Independent States (BISNIS) "Commercial Overview of Kazakhstan", of December 1999.Ch. IV.
countries. Increasing crime and comption, while not being as senous a problem in
Ukraine as in ~ u s s i a , ' ~ ' is a significant factor inhibiting legitimate business activity and
foreign investment in Ukraine. Economic types of crime have included bribery, black
market activities, and extortion. Also, it was repeatediy reported by national and foreign
economists that the unofficiai economy in Ukraine is thriving and currently is one of the
biggest in Europe. According to western estimates, the unofficial economy in Ukraine
constitutes up to 20-30 % of the total national GDP, even though national experts indicate
that this figure might reach up to 50-60 %.
Another very serious problem that foreign businessrnen have been repeatedly
compIaining about is the problem of corruption of state officials. In an attempt to deal
with the problem, President Kuchma estabiished a national problem against corruption,
but there have been no significant changes (taking place) since the program's
introdu~tion. '~~ The Ukrainian civil service and regulatory systern has also been affected
by comption. The concept of a conflict of interest is still poorly construed, and many
officials and bureaucrats retain their commercial interests while in power. 'O6
Among the possible factors that have contributed to the rise of crime and
comption are the disappearances of the centralized control system of the old soviet
regime, the creation of novel property arrangements and the almost unlimited and
- - - - -- - - - - -- . - - - - - --p.- --
101 Report of the Business Information Service for Newly independent States (BISNIS) "Commercial Olvn*iertp of Kazafrhsran", of December 1999.Ch. IILB. 'O1 Ibid., Ch. VILA. 1 1. 1 O3 "Commercial Guide of Ukraine", Country Commercial Guide, U.S. Deparment of State, frnancial year 2000, Ch. III (B), on-line: (U.S. Department of State Main) <http://www.state.gov> 104 1 s haq .M.. "Foreign Direct Invesrmenrs in Ukraine Since Independence", CERT discussion paper, Herion-Watt University, Economic Department, May 1997, on-line: (CERT Main) <http://www.hw.ac.uk> 10s "Ovenlieu* of the Ukrainian Bunking Secfor", US. and Foreign Commercial Service and U S . Deparunent of State, 1998 on-line: (BiSNIS Main) ~http://www.bisnis.doc.gov/bisnis/counny/ bank9805.hm> IO6 "Counrr)l Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Senxe on-iine: (SCE Main) <h~://www.sce.doc.gov>
umeguiated access to retail markets.lo7 While there is an active cnminal legislation with
severe potential sanctions, some compt acts have been criminally prosecuted, but the
majority of those that were exposed encountered little or no action. Foreign observers
have raised the question of "selective justice" having its place in the Ukrainian judicial
~ ~ s t e r n . ' ~ ~ Al1 of the mentioned factors contribute to the general instability of the
investment environment and inhibit foreign confidence in the progress of the economy.
Market infiastructure is another very important element influencing the
investment decision-making. Table 12 illustrates the assessrnent of a difficuity related to
market infiastructure in each of the countries under review. The table demorxtrates that
commercial infrastructure and availability of distribution channels are mostly accessible
in Ukraine and to a lesser extent in Kazakhstan. It should be noted that availability of the
Table 12. Market Infrastructure
(1 = most dificult aspect; 4 = least difficult) 1 Factors-barriers' 1 Russia 1 Kazakhsran 1 Ukraine I
- - - -
I Oi 1s haq M ., "Foreign Direct investments in Ukraine Since independence", CERT discussion paper, Heriott-Watt University, Economic Department, May 1997, Ch. 4.6, on-line: (CERT Main) <http:/l~ww.hw.ac.uk> I os "Overvieiv of the Ubainian Banking Sector", US. and Foreign Commercial Service and U .S. Department of State, 1998, Ch. VI1 (F), on-line: (BISMS Main) <htrp:/l~~w.bisnis.doc.gov/bisnis/co~n~/ bank9805.htm> la9 Special Report of the Intemationat Tax and Invesûnent Center (ITIC), Moscow, June 1999.
Countries O Commercial Infrastructure
Lack of privarizarion proprams Lack of distribution channels Availability of local market Sources: International Tax and Investient Center ( 1 9 9 9 ) ' ~
1 -45 3 2.55 3 -09
- 7
3.08 2.3 1 2.77
7
1.8 2.8 3
market infrastructure is a common problem to al1 three countries, but Russia and to a
lesser extent Kazakhstan are additionally influenced by a factor of their extensive
geographic parameters. The last factor makes building of a new infiastructure (especially
automobile roads and rail roads) extremely diffkult and costly.
i) Rrissia
Infrastructure is seen as another clear weakness. Immensely extensive territories
mean huge transportation costs. This reduces the general attractiveness of the regions,
which are located far away Fom the sources of raw materials and sales markets.
Transportation services are outdated, and communication systems are both ineffective
and e ~ ~ e n s i v e . " ~ The absence of modem infrasûucture leads to a significant increase in
the start-up costs of a business.
i i ) Kazakhstan
The geopolitical situation of Kazakhstan in the center of EuroAsia makes it
dependent on the neighboring countries' transport links to get its goods to world markets.
Kazakhstan is largely dependent mostly on a pipeline system of Russia and sometimes on
Ukraine for transportation of oil and gas for export. There has been a lot of research done
on mapping a route for Kazakhstani pipeline in order to relieve the country's dependence
on the Russian pipeline system. A lot of work has been done to build
110 Dean R. " Considering Business Opportuniries in the Soviet Union in the 1990 's", Transnational Law, No. 24, 1991, p. 325.
the pipeline which
Vand. Journal of
would connect production fkom the Caspian Sea and the Tengiz field (currently, one of
the nchest oil deveiopment sites in Kazakhstan) to the Russian port of Novorossiysk on
the Black Sea,
Kazakhstan also has a railroad system that connects the country with Europe via
Russia, to Persian Gulf via Iran, and to the Pacific Rim via China. Currently, Kazakhstan
has signed cooperation agreement with China, Pakistan and Kirgyz Republic to upgrade
the road network."' A paved road network connecrs al1 major cities. However, the lack
of funds has lefi most routes poorly maintained.
iii) Crkraine
Most of the Ukrainian infiastructure was built back in the post-World War II years.
General slow-downs in the economy, investrnent cutbacks, and insufficient rates for
services have led to the general detenoration of this infiastructure. A particular problem
is the poor quality of roads. Even though the whole network of roads is large - 273.000
km of highway, the maintenance is the major concem, caused by bad workmanship and
low quali ty materials used for their construction. l l 2 Additionally, the communication
system, especially the telephone system, needs major investments. This system is
inadequate for both business and persona1 use, as there are only 8 million existing
-- -.
I I I "Counrv Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Service Ch. 1I.E. on-line: (SCE Main) <http://www.sce.doc.gov> ' '' Ishaq M ., "Foreign Direct Investments in Ukraine Since Independence", CERT discussion paper, Henott-Wan University, Econornic Department, May 1997, Ch. 4.7, on-line: (CERT Main) <http://www. hw.ac.uk>
telephone circuits serving about 52 million people, with the telephone density of 15 1.4
telephone circuits per 1 O00 persans. ' l 3
n i e poor state of Ukraine's telecommunications, energy systems, transportation,
and roadhighway infrastructure will need investments of up to $40 (US) billion dollars
over several decades.Il4 There have been continued attempts undertaken by the
international financial organizations to influx additional resources into the infrastructure.
Separate attention is going to be paid to energy conversion, projects that prornote
improved nuclear safety, and projects promoting private sector initiative in infiastructure
development and improvement. ' l5
1) T u systems
Economic refonns in al1 three countries affected almost al1 sectors of the
economy, with varying degrees of success. Tax reform has a special place in the general
reform process, and was recognized as crucial to the success of the countries' economic
transition."" a market-type economy, governmental tax policy can significantly
influence economic recovery in the countries through the distribution of income and
allocation of resources. The form and structure of the tax system and the amount of tax
burden can make a direct impact on the amount and structure of consumption and saving,
"j Ibid. IL1 "0r.ervierv ofthe Ukrainian Banking Sector", U.S. and Foreign Commercial Service and U.S. Department of Stace, 1998, Ch. II (E), on-line: (BISNIS Main) ~http://www.bisnis.doc.gov/bisnis/country~ barik9805 .hm> I I 5 Ibid. t l6 M. Maninez-Vazques and R. Mch'ab, "The Tax Refonn Experiment in Transitional Economies", National Tax Journal, Vol. LIII, No. 2, p. 273.
on the amount and structure of domestic and foreign investments.'" The overall level of
regulation and taxation in ail the three countries act as a deterrent for foreign investors,
because these factors reduce returns on investments. Levels of regulation and taxation
that reduce the afier-tax investment retum below that required to compensate the investor
for the inherent nsks undertaken act as an artificial bamier to investrnent in al1 three
countries.
Apart fiom modemization of the states' respective tax structure, al1 three
countries have been continuously experiencing problems with the tax administration and
enforcement inhented from the former socialist planned economy. Persona1 incorne tax
was not paid by individuals, but by their employers. The relatively small number of
taxpayers (employers) had basically resolved the question of compliance for the former
cornmunist regimes, allowing the states to audit any organization each year to enswe
such cornpliance. Tax administration and enforcement were aiso significantly facilitated
by the ability to track payments through the state banking system and by administratively
set pr ies and wages.
With diversification and expansion of the types of taxpayers and the overall
modemization of the tax system countnes had to concurrently resolve the problem of
restructuring of the mechanism of compliance and enforcement. Al1 the countries that
undertook tax reforms, generaIly focused their efforts on tax policy and ignored the
advice of western experts, gave low pnority to modernizing tax administration and
introducing modern accounting rules. The case of Russia is the best exarnple where the
recent 1998 crisis highlighted the risk that progress in macro-economic stabilization cm
II7 See Luzik P., "International merience of Tax Reform and Lessons for Ukraine", Discussion paper No. 99/03, Center of Economic Reform and Transformation, February 1999, p. 33.
be quickly reversed when underlying stnictural weaknesses are not addressed. Arnong the
three countnes, Kazakstan was the first one to introduce a comprehensive and modem tax
code in 1995. However, the country neglected the importance of reforming its tax
administration systems, which resulted in significant losses of revenue for the 1 s t decade.
Thus, it is crucial that the overall modernization of the tax systerns in the region should
be accompanied with the structural one.
Table 13 illustrates the responses of the foreign investors as to what aspects of the
tax regime they find most difficult. In Russia the availability of tax incentives, and tax
Table 13. Tax Regime
(1 = most difficult aspect; 5 = least difficult) 1 Factors-barrierd 1 Russh 1 Kaz~Winan 1 Ukraine 1
complexity seem to be most problematic, cornparing with Ukraine and Kazakhstan. On
Counnies Levels of tau rates
I Avaiiability of tax and invernent incentives 1 Tm administration 1 Tm regime cornplexity (averaee)
the other hand, tax administration is the major impediment in Kazakhstan. The tax
collection record in Ukraine and the levels of tax rates seem to be connected as high tax
Sources: International Tax and Invesment Center (1999)"'
rates might make businesses to go underground. The following three chapters will
2.8 3-8 2.3 3.33
I
examine each country in detail.
3.18 3.55 2.55
_ 2.33
3.33 3.83 1.85 2.38
III. Iavestrnent Climate in Russia
1 . General Outlook
During the last few years, Russian Govemmental oficials have been repeatedly
reassuring both foreign investors and the federal public that it is the officia1 policy of the
Russian Federatiou to support and encourage foreign investments. The Govemment has
been making attempts to attract investments in various sectors of the economy, though
rnostly relying on investments in the energy and resource sectors, based on the
presumption that it was the most attractive sector for foreign investors in the last decade.
The decline of world oil pices forced the government to take senous rneasures directed
on reforming the legal fiamework governing the country's oil industry. A widely spread
belief among the members of the Russian government that the oil and gas industry is
'unsinkable' has been a serious irnpediment to the creation of the investment-friendly
Iegal environment.'
2. The System of Taxation in the Russian Federation
If a venture with foreign investments is successfÙ1 in its business in Russia, it wilt
have to pay a variety of taxes. Taxation of business operations of foreign investors, and
118 Special Report of the International Tax and Investment Center (ITIC), Moscow, June 1999. Il9 Samoylenko V. , "The Fare of the Russian Tax Code: A Look from Inside rhe Srare Duma Walls", International Tax and Investment Center, on-line: (ITIC-CIS Main) <htrp://inicnet.org/publications/DefauIt.htm~
their earned profits and dividends, is clearly one of the most important factors in
assessing the attractiveness of the host country. The legal regime regulating taxation in
Russia recently underwent major changes and remains one of the most volatile areas of
Russian law. This chapter will concentrate on the genera; analysis of the system of
taxation of foreign legal entities conducting business on the temtory of the Russian
Federation.
The performance of the Russian tax system since its creation in 1991 can be
charactenzed as very poor.120 In fact, foreign investors have repeatedly stated that the tax
regime in Russia remains one of the major obstacles to foreign investments.12' There are
a number of reasons accounting for this.
First, political instability in Russia and inability of consolidation of the political
will to move reforms foward. The President of the Russian Federation and the Russian
Duma have been constantly fighting over the direction of reforms, what resulted into the
lost time advantage, which was used by countries like Kazakhstan.
The Russian tax system is extremely cumbersome, as there were about 30
separate federal taxes and 170 local and regional taxes.12' The tax-collecting system has
grown to 89 regional tax offices and 2,639 local tax offices with about 180,000
employees.'z' The size of the tax-collecting mechanism was not very helpful in
improving the tax coIlection, and annual losses to the Russian budget, c m be estimated
120 See "The Invesrment C h a t e in Russia", Expen hstitute, Ernst & Young, 1999, Ch. 2.1 1. '" Durinç the meeting of the President of the Russian Federation B. Yeltsen with American businessmen in Washington, the tax system was cited as one of the major factors for their hesitance to invest in Russia. See newspaper Rabochaya Tribuna, no. 170 ( 1 069) October 1, 1994, p. 1 . l x Hamson S., "Two Special T a Regimes: An Opporruniry for Foreign Investors?", International Bureau of Fiscal Documentation, European Taxation, October 1, 1996, vol. 36 - 1996, no. 10. '?j Himes S., "Russia S Tax Re/onnW, Observer, no. 215, January 1999, p. 26.
up to 25 trillion nibles (US S5 billion).124 The exaemely burdensome tax system
significantiy increases the chances of the already high-risk investments to be less
profitable.
Second, a great number of enterprises suffer fkom arbitrary actions of the Russian
tax and customs authorities, because of the incomplete nature of the tax legislation on
both federal and regionaVloca1 levels, which O ften creates areas of legislative
unce~tainty."~ Tax guidelines of the Regional State Tax Service (STS) authorities
frequently contradict the instructions issued by the central authorities, leading to
autonomous actions of the local tax authorities and unequal treatrnent of taxpayers.Iz6
Obtaining the necessaty information about the interpretation of changes in fiscal
regulations and fiequent modifications of the regdatory noms often constitute
significant difficulties by increasing the costs of monitoring legislation.12' It also
increases fiscal nsks that contribute to a negative assessrnent of the Russian investment
environment. 12'
Third, the modem Russian tax system still heavily relies on payroll, gross income
or expenditures, disregarding the determinants of the actual profitability.'29 The
accounting rules and principles used by the tax service in the former Soviet Union, which
were pnmarily designed to keep a record of the volume of the actually produced product
instead of concentrating on the profit that the producer made. 130
"" Freeland M , "Crackdown Planfir R W a n Companieî'Access ro Cash", Financial Times, March 22, 1996, p.2. "' See "The lnvesment Climate in Russia", Expert institute, Ernst & Young, 1999, Ch. 2. I 1 . '" Himes S., "Russia 's T a Reform", Observer, no. 215, January 1999, p. 26. "' See "The lnvesrmenr Climate in Russiu", Expert institute, Ernst & Young, 1999, Ch. 2.1 1 .
1bid. 129 Black, D., "Su You Wanr ro Invest In Russia? A Leghlarive AnalysCs of the Foreign lnvesrmenr Climate in Russia", Minnesota Journal of Global Trade, no. 5, Winter 1996, p. 142 on-line: WL 130 Himes S. , "Russiu 's T m Reform", Observer, no. 215, January 1999, p. 27.
Arnong the other factors, reiiance on high penalties and numerous exceptions for
a wide range of favorably treated taxpayen can be narned.'" One of the most significant
provisions of Part 1 of the newly adopted f a x Code of the Russian Federation is the
removal of the former extremely hi& 100 % tax penalties and replaced them with a fine
of 20 % for any tax deficiency, and 40 % if a criminal intention was f 0 ~ n d . l ~ ~
A. Interrelationship Betweeo the Federal, Republican and Regional Budgets
The inter-relationships between the federai and regional govemments have also
added to the complexity of the tax structure. The central govemment in Moscow has
granted a considerable amount of freedom to the Russian regional and local authorities.
Such a decentralization of the fiscal and budgetary regulation was primarily caused by
the emerging centrifuga1 political forces in the regions and republics of the federation, as
well as caused by the general inability of the central government to effectively regulate
and manage the regional economies. Economically powerful republics, such as Tatarstan,
Bashkortostan and Sakha (Yakutiya) have been able to bargain for exceptional powers in
econornic and budgetary areas as well as in the area of international relations.
During the period fkom 1991-1993, the budgetary system in Russia could be
characterized as one combining the features intrinsic to both the budgetary unitarism and
1 3 ' ibld., p- 26- 13' Tax Code of the Russian Federation of January 1, 1999, General Part, Chapter 16, an. 122. General pan of the Tau Code established general taxation principles, defmitions, penalties, and administrative procedural provisions. The Second Part establishing specific rates of the taxes was severely criticized by the previous Duma (Lower House of the Russian Parliament) members, and most probably be adopted by the end of 200 1.
budgetary federali~rn. '~~ There still is a continuing practice of non-payment fiom the
regional leaders to the Federal budget. This alarming practice imposed a task on both
federal and regional govemments to create a mechanism of inter-budgetas. relationship.
The Federal Government concluded power-sharing treaties with almost every Subject of
the Federation and signed separate supplemental treaties regulating budgetary
r e l a t i on~h i~s . ' ~~ In the context of these treaties, there were three major innovations
introduced. First, the Subjects could independently establish rates for the federal tax on
profits (on the portion paid into their budget)?' Second, a single n o m was introduced
for distribution of federal taxes between the federal budget and the budgets of the
Subjects. Lastly, a fùnd of financial support was introduced for economically weaker
regions.
The present supplemental treaties were a first attempt of the govermnent in
Moscow to reconcile the budgetary systems of the Federation and the regions; therefore,
they had as many glitches as the positive things that they had achieved. First, al1 the
supplemental treaties on budget regulation contain sirnilar provisions stressing supremacy
133 See Lavrov A., "Federalizing Russra S Budget System: A Thorny Parh", Current Digest of the Post- Soviet Press, Jury 5, 1995, vol. XLViT, no. 23, online: WL (TM) mereinafter, Federalizing Budget]. 134 This chapter included analysis of P o w e r - S h a ~ g Treaties and Supplemental Treaties signed between the state organs of the Russian Federation and the state organs of the following Subjects of the Russian Federation: republics - Tatarstan, Sakha (Yakutia), Bashkortostan, Kabardino-Balkar, Northern Osetiya- Alaniya, Buryatiya, Komi, Chuvash; krais - Krasnodarsk, Aitai, Khabarovsk; oblasts - Nizhni Novgorod, Irkutsk, Rostov, Sakhalin, Leningrad, Kaliningrad, Kaliningrad, Orenburg, Tver, Omsk, Sverdlovsk, Perm, Vologda, Bryansk, Chelyabinsk, Ulyanovsk, Saratov, Magadan; federal cities - St. Petersburg; autonomow o h g s - List'-Ordinsk, Buryat, Komi-Permyat. See also Mikhail Guboglo, "FederaIiPn Vlasti i Vlast' Federalizma", in Federalini Viasti i Vlast' Federalizma, Moscow, 1997. ' j5 Sre an. 2 of the Decree of the President of the Russian Federation No. 2270 of December 22, 1993 "On Cerrairi Changes irz Taxation and Inrerrelationship of Budgets of Diflerenr Levels", with additions and rirnendments as of December 24, 1993. online: WL (TST) Foreign Taxation. [hereinafter, Creating Federalism]. 134 Fromrneyer T. A., "Power-Sharing Treaties in Russia 's Federal System", Loyola of Los Angeles International and Comparative Law Journal, March 1999, p. 1, online: WL (KR) LYLAICU. [hereinafter Power-Sharing Treaties].
of the governmental control in certain areas."' uitroductory provisions provide that "'the
formation of the regionai budget and budgetary relationship between the regional and
9. 138 federal budgets are regulated according to the legislation of the Russian Federation .
Another common provision stipulates the procedure of formation of the federal
hnd for financial support of the Subjects of the Federation. It is created within the federal
budget, with subsequent distribution of the fund's assets to "needy" and "especially
needy" regions, on a basis of objective criteria and special formula^."^ The assets are
usually transferred for financial support of federal social welfare programs in individual
regions.'"O Before the supplemental agreements were signed, inter-budgetary relations
were rnostly camed out on the basis of "secret bargaining"' between the Subjects and the
central govemment in ~ o s c o w . '" The signing of supplemental agreements on the regulation of the budget and tax
relationships between the Center and the Subjects has also had several negative
consequences. One of them was an artificially created discnminatory environment in the
budgetary and tax system within the Federation. Four economically and politically
powerful republics, narnely Kareliya, Bashkiri ya, Tatarstan and Sakha (Y akuti ya), were
137 Ibid., p. 33. 138 See " The Supplemenral Treaty Berween the Russian Federation and the Adnlinisrration of lrh-utsk Oblasr Nt .4ma of Budger and T a Policies ," an. 1 , of May 27, 1996, See on-line: http://blac k.inforis.nnov.su/infobase/~.exei a/90.new/?doc= 14 149 139 See "The Supplemenral Treay Benveen the Organs of Srare Power of the Russian Federation and rhe ..ldtninistration of the Republic of Komi in Area of Budget and Tar Policies ," art.3, of March 20, 1996, See on-line: h~://black.infons.~ov.su/infobase/ wwwr.exe/a/90.new/?doc=35 1 19; See "The Supplemenral Treary Benveen the Organs of Srate Power of rhe Russian Federation and rhe Admin fsrrarion of Rostov Oblasr in Area of Budger and Tax Policies," art.3, of M a y 29, 1996, on-line: http://black. i n f o r i s . ~ o v . s u ~ i n f o b a s e / ~ a/90.new/?doc= 1 5483 ; See also "The Supplemenral Treay Benveen the Organs of State Power of the Russian Federarion and the Administration of Khabarovsk Krai iri Area oJBudger and Tax Policies ," art.2, of July 24, 1996, See on-line: ~i~:l/black.infori~~nnov.sulinfobase /wwu.r.exe/ a/90.new/?doc=34669 1.10 See Khabarovsk Krai, Budget and Tax Policies, art. 4, ibid; See also Power-Sharing Treaties, p. 33, supra note 43. 1.11 See Federalizing Budget, p. 1, supra note 40.
able to keep the special tax and budgetary conditions that they were able to get fiom the
central govemment in 1991-1993, using the political weakness of the enter.'" This
situation caused signifiant discord among the rest of the Subjects of the Federation, and
considerably complicated any possibility of persuading the rest of the regions to observe
the proposed uniform budgetary r ~ 1 e s . l ~ ~ The reluctance of the economically powerful
republics to comply with the uniform rules was primarily caused by the mechanism of
contribution to the "federal fund for financial support of the regions" into which a few of
the economically powerfùl republics were usually making the largest contributions.'"
The inability of the central government to align the payments of taxes by the
Subjects with the unifonn budgetary rules produced a series of adverse effects. Right
after the signing of the supplemental treaties with Kareliya and Yakutiya republics, the
federal budget received less than 5% of the total arnount of taxes due from Kareliya,
which was granted by the federal authorities to the republic in the form of tax credit~."~
Another serious problem emerged afier the introduction by the federal
govemment of the law "On the Tax System of the Russian Federation". The law provided
for supplemental taxes in addition to those already existing, which couid be enacted at the
federal level, stipulating that the Subjects could also set the rates of these taxes within
their j ~ r i sd i c t i ons .~~~ Local govemments, however, interpreted the provision in a much
broader sense which, eventually, turned out in a situation where the nurnber of types of
taxes rose to about 200.'" The federal govemment has reacted with the introduction of an
14' ibid. 14' Ibid. 144 See Power-Sharïng Treaties, p. 34, supra note 45. 145 See Federalizing Budget, p. 1, supra note 42. 146 Harrison S., "Two Special T m Regimes: An Oppormniry for Foreign fnvestors?", International Bureau of Fiscal Documentation, European Taxation, October 1 , 1996, vol. 36 - 1996, no. 10. 14' ibid.
arnendment to the law, prohibiting local authonties fkom introducing of their own
raxes.lJ8 The Constitutional Court of Russia rejected a petition filed by some of the
republics challenging the constitutionality of the law. The Court noted that the regions
have the right to impose only those taxes, which are specifically allowed by the federal
governrnent."g It also confirmed the legitimacy of the new Tax Code of the Russian
Federation, which cuts the number of taxes to thirty.lSO
B. Broadening of the tax base
The taxable base for the taxes imposed on the territory of the Russian Federation
was f in t defined in the law ''Conceming the Fundamental Principles of the Taxation
System in the Russian Federation" of December 27, 1991. The taxable base included
"income (profit), the value of specified goods, specified types of taxpayers' activities,
securities transactions, the use of natural resources, the property of legal entities and
physicai persons, the transfer of property, the added value of goods, work and services
rr 151 and other objects established by legislative acts .
There were numerous attempts undertaken by the government to broaden the tax
base through the reduction and revision of tax exemptions, arguably with the purpose of
fighting tau e v a ~ i 0 n . l ~ ~ Such measures were first implemented through a senes of
'" ibid. 149 Gurushina N., "Russian Consriturional Coun Says Regions ' Taxing Power Limites', Press Watch international, OMRI, March 25, 1997, on-line: W L (WTD) PWI.
ibid. 15' Ibid., art. 5. lZ2 Markina O., "Some Problems of Company Taxation", Bulletin for International Fiscal Documentation, April 1995, p. 163.
presidential decrees, which have abolished various exemptions previously granted to
taxpayers. '"
C. Federal Taxes
Federal taxes constitute the major share of collected revenue from activities of
investon. The following taxes are enacted by the federal govemment and are collected on
the whole temtory of the Russian ~ederation'":
1 ) Profits Tax
2) Persona1 income tax
3) Payroll taxes
3) Value Added Tax
5) Excises
6) Royalties
7) Customs duties
8) Secunties issuance tax
9) Replenishrnent tax
1 0) Environmental taxes
1 1 ) Road Fund taxes
12) Stamp duties
1 3) Federal license fees
' 53 See in general the Decree of the President of the Russian Federation No. 1004, "Concerning Some Quesrions of T a Policy" o f M a y 23, 1994. 154 See Law of the Russian Federation "Concerning the Fundamental PrincïpIes of the Taxation Sys~ern in ~ h e Russian Federarion" of December 27, 199 I , no. 2 1 18-1, an. 19.
i) Profits Tax
Thc main income tax applied to enterprises with foreign investments is profits tax.
Under the law of the Russian Federation "On the Taxation of the Profits of Enterprises
and Organizations", corporate enterprises with foreign investrnent, established on the
temtoiy of the Russian Federation, and international associations and organizations
engaged in business, have to pay tax on their profits.'" The tax is levied on the
permanent representative offices of foreign legal entities including "subsidiary, bureaus,
offices, agencies or any other business facilities prospecting or developing natural
resources or engaged in the construction, installation, assernbly, adjustment and
maintenance of equipment as defined in contracts, providing services and periorming
other works, as well as organizations and individuals authorized by foreign legal entities
i t 156 to represent them in the Russian Federation .
The taxable base is the gross profit of the enterprise fiom the "realization of the
products (works, services), of the fixed assets (including the land plots) and of the other
property of the enterprise, and also fiom the incomes fiom the extra-realization
i i 157 transactions . The total amount is reduced by the amount of material production costs,
amortization (at statutory rates), salaries, social contributions and administrative
espenses. Enterprises engaged in foreign economic activity would have to exclude the
155 Law of the Russian Federation No. 2 1 16-1 "On the Taxation of the Profîrs ofEnrerprises and Orgariizations", of December 27, 199 1 , an. 1. 15' Ibid., art. 1.4. 157 Ibid., art. 2.2.
paid export duties fkom the earnings fiom the products (works, services) rea~ization."~
The taxable base also does not include h d s received fiom foreign investors for the
purposes of financing production-purpose capital investments on condition that they will
be used up within one year afier the date of receipt. Otherwise, if the f h d s were not used
within one year afier receipt, they will be subject to taxation as part of non-sales incornes
"in the accounting period in which they were used otherwise than emarked or in which
II 159 the tetm for their being used as earmarked expired .
For assessrnent of the profits of foreign legal entities, The law provides special
particulars providing that:
a) The tax is to be levied only on that part of the entity's profits fiom its transactions in the Russian Federation. Profits derived by a foreign legal entity fiom foreign trade transactions conducted exclusively on behalf of the foreign legal entity and involving the purchase of products (works, services) in the Russian Federation shall be tax deductible, as shall be the exchange of goods and exports to the Russian Federation of products (works, services), whereby the legal entity becomes the proprietor of such products (works, services) under Russian Law until the latter crosses the state border of the Russian Federation, with the exception of profits received fiom the sale of products fiom warehouses owned or leased by the foreign legal entity in the Russian Federation;
b) If a foreign legal entity operates both in the Russian Federation and outside its borders, and does not keep separate accounts of profits which would help to identiQ the profits derived fiom the transactions conducted via a permanent representative office, the amount of profits may be calculated according to an agreement between the taxpayer and the tax authority controlling the former's remittances to the budget; c) Should it prove impossible to identify the profits received by a foreign legal entity fiom its transactions in the Russian Federation, the tax authority in charge shall have the right to calculate such profits on the basis of the gross income and production expenses involved, proceeding fiom a profit rate of 25 %.
Iss bid . , an. 2.3. IS9 ibid., art. 2.6.
If the Governent of the Russian Federation has an agreement with the other State
for avoidance of double taxation, as in case of Russia and Canada, the profits of the legal
person should be taxable only in a state of the permanent residence of the specified legal
person.'60 Although, if the business has a permanent establishment in both countries -
signatories to the agreement, the business profits may be taxed in the other State to the
extent as attributable to that permanent e~tab1ishrnent.l~~ Under the Bill-37, Russian tax
authorities must ailow for deductible expenses incurred for the purposes of the permanent
establishment of the legal entity including executive and general administrative expenses,
no matter if they were incurred in the State in which the permanent establishment is
situated or elswhere. 162
Income received by an enterprise in a foreign currency are taxed conjointly with
ruble earnings, provided that the foreign cwrency proceeds would be recalculated in
tubles at the exchange rate of the Central effective on the date when the enterprise had
identified the eamings fkom realization of the products (works, s e r~ i ce s ) . ' ~~ The tax paid
is split between the federal budget and the subjects of the Russian Federation, having
total profits tax not exceeding 30 %. The rate that the entity, including foreign legal
entities, has to pay to the federal budget is 11 %.lG The rates of profits tax set by the
subjects of the Russian Federation can be up to 19 %.16' The tax levied on the profit
received fiom mediation transactions and deals, insurers, markets, broker offices, banks
'& Canada's Bill (2-37 Relating to Agreements Between Canada and Numerous Countries for Avoidance of Double Taxation and Fiscal Evasion With Respect to Taxes on Income of May 17, 1996, Worid Tax Daily. October 9, 1996, art. 7.1 on-line: WL(WTD)ïTB 16' Ibid- '" Ibid., art. 7.2 163 Ibid., art. 2.7. '65 Law of the Russian Federation No. 2 1 16- 1 "On the Taration of the P r o m of Enterprises and Organizarions", of December 27, 199 1, art. 5. ' 6 5 Ibid.
and other credit organizations is set at rate that may not exceed 27 %? The rates were
recently reduced f?om a total of 35 % to the cunent 30 %, the federal tax rate was
reduced fiom 13 % to 11 % and the local share of the tax was reduced fiom 22 % to a
maximum of 19
The law provides that some foreign and Russian legal entities are exempt from
payment of profits tax. To qualim for exemption, the entity's income has to be received
from the performance of specid-purpose socioeconomic programs or from gratuitous
financial assistance, granted by international organizations and govemments of foreign
States, by foreign juridical and natural persons in accordance with intergovernmental and
interstate agreements.
However, the profits tax rates do not constitute the major problem in the sense of
financial burden for both Russian and foreign legal entities. The nominal rate of the tax is
low, but the effective rate is relatively high because of restrictions on deductions. 169
Persona1 income tax is levied on al1 individuals with Russian income, including
Russian and foreign citizens, and stateless persons.'70 The worldwide income of Russian
residents is also subject to the tax.I7' The rate of income tax is set at a maximum of 45 %
'& ibid. 16' Federal Law No . 62-FZ "On Amending rhe Law of rhe Russian Federarion on the T m on the Profi of Enterprises and Organizarions", of March 12, 1999, art. 5. l o g Law of the Russian Fedention No. 2 1 16-1 "On the Tararion of rhe Projks of Enterprises and Organizations", o f December 27. 1991, art. 6. 169 Set Antel S, . Starygin A., "1999 Russian Tar Reform - Stiïl Wairing", on-line: WL(WTD) "O The Law of the Russian Federaaon "On Incorne Tax on /ndividuals" of Decernber 7 , 1991, art. 1. I f 1 ibid., art. 2.
on individuals withmWhigh earnings". In Russia, one is considered rich if he/she eams
300,000 nibles annua1ly."' The rates are listed in article 6 of the Income Tax ~aw." '
Even though, the tax rate hike was approved by the International Monetary Fund,
some tax analysts consider the rate as a hindering factor in the govemmental policy of
increasing taxpayer discipline. Higher rates would force professionals that fit into the
"high earning" category to plan the remuneration of their payment in order to avoid
paying the tax.17' The tax on income of individuals is also regulated through international
agreements on avoidance of double taxation, as the one between the Russian Federation
and Canada, and provides for the rules of enumerating of tax on income and capital
received by persons conducting business on the State-signatory's t e m t ~ r ~ . " ~
Organizations including enterprises with foreign investrnents must pay payroll
taxes on employees' gross salaries. Payroll taxes are made to the following fùnds:
- The Pension Fund. The employer's contribution is set at a rate of 28 % of the arnount of
the employee's gross salary.'" An additional 1 % of pretax deduction is taken from the
employee's salary. '77
- -
"' It is approxirnately 51 8,000 (CAN). See also Antel C. "Russia Enacrr Tu. Currency Changes", Tax Notes international. May 17, 1999, p. 2006. l Ï 3 The Law of the Russian Federation "On Incorne T u on Individuals" of Decernber 7 , 1991, art. 6. 174 See also Antel C. "Russia Enacrs Ta. Currenq Changes", Tax Notes International. May 17, 1999, p. 2007.
Canada's Bill C-37 Relating to Agreements Between Canada and Numerous Couniries for Avoidance of Double Taxation and Fiscal Evasion With Respect to Taxes on hcome of May 17, 1996, WorId Tax Daily, October 9, 1996, art. 7.1 on-line: WL(WTD)'TTB
Procedure for Collecting Insurance Prerniums and Temporary Target Fee for the Benefit of the Pension Fund of the Russian Federation (Approved by the No, 800 of July 2 1, 1 WS), para. 9.1 177 ibid., para. 9.3.
- The Social Security Fund. Employer organizations and individuals (natural persons)
who employ individuals under labor contracts have to make a 5.4 per cent payments in
cash andlor in kind accrued for the benefit of the workers to the Social Insurance Fund of
the Russian ~ederation."~
- The Ernployment Fund. Employers also have to pay insurance prerniums to the State
Ernployment Fund of the Russian Federation at the rate of 1.5 per cent "of payments in
cash and/or in kind accrued for the benefit of workers on al1 grounds, whatever sources of
hnding are involved, including rewards under civil-legal contracts which subject is the
SV 179 performance of works and provision of services .
- The Medical insurance Fund. Employers must make payments of the accrual of
insurance prerniums at the tariff 3.6 % (of which 0.2 % is payable to the Federal Fund of
the Mandatory MedicaI insurance) for payments to the mandatory medical insurance
funds.
The totaI amount of payroll expenses charged upon employers is about 38.5 % of the
gross salary of each employee.
iv) Value Added T a
In December 199 1, the Russian Parliament passed the law " Concerning the Value
Added Tax", which provided that any organization which has a status of legal entity,
178 Federal Law No. 1-FZ "On Tarifs ofInsurance Premiurns Payable to the Pension Fund of the Russian Federarion, the Social Insurance Fund of the Russian Federation. rhe Srare Employmenr Fund of the Russian Federarion, and the Mandatory Medical Insurance Fundsfor 1999" (with the Amendments and Additions of October 25, 1999), of January 4, 1999. art. 2.
conducts business operations and is located on the territory of the Russian Federation is a
subject to the value added tax (VAT)?' The rates imposed were initially set at 28 % for
sales at unregulated prices and at 21.88 % for most ~ o o d s . ~ ~ ' The current rate for al1
goods (work and services) is 20 %.la' The previous amendment to the law reduced the
rates for certain foods and children's goods to IO%, but it was canceled by one of the
govemmental decrees, setting the universal tax rate of 20%.
Currently, VAT accounts for over 40% of the Eederal budget revenue, and Russian
econornic analysts argued that its removal would "not guarantee that the business activity
,r 183 and the revenues fiom other taxes would significantly increase . The M F also
supported sustaining the higher rate arguing that "the tax is one of the most easily
collected taxes", which maintains significant importance in a situation of Russia's very
low level of collected taxes.lU AAer proposals to cut VAT were made by the Russian
Governrnent last year, the Constitutional Court of the Russian Federation struck down the
govemment's decision to impose a modified f o m of accrual taxation for VAT as
unconstitutional. lg5
The VAT is aIso applied to barter transactions and to cash sales and, similar to
Western European VATs, it is not applied to exports (sales of goods outside of the
179 Ibid., an. 3. 180 See the Law- of the Russian Federation "Conceming Value Added Tax" of December 6, 1991, No. 1992- 1. an. 2. I Y 1 Lieberman E., "Russia Modernkes Ifs Tax Sysrem. Bur Ghosrs ofrhe CESR Srill Haunr", Commercial Law and Practice Course Handbook Senes, Practicing Law Institue, March 22-23, 1993, p. 567, on-line: WL. ln' See the Law of the Russian Federation "Conceming Value Added T a " of December 6. 1991, No. 1992- 1, art. 6. '" SamoyIenko V., "The Fare of the Russian T m Code: A Lookfiom Inside the Srare Duma Walk", International Tax and Investment Center, on-lule: (ITiC-CIS Main) ~http://inicnet.org/publications/Default.htm> 184 "Russian Govenirnenr Says VAT Should Be 20 % in 1999", Reuters, Apr. 26, 1999 on-line: (CNN Main) < ~ ~ ~ ~ : / / c u s ~ o I ~ I L ~ ~ w s . c L I I ~ . ~ ~ ~ ~ 185 Himes S., "Russia 3 T a Reform", Observer, no. 215, January 1999, p. 28.
Commonwealth of Independent States (cIs))?~ VAT can also be applied to certain
services, depending on their VAT coven a significant portion of transactions,
but there are some major exemptions, including banking operations, operations with
securities, export of goods and services, insurance etc.'88 The taxable base for goods and
services provided within Russia and separate goods and services imported into Russia
consists of the invoice cost of the goods or services provided.'89 The VAT taxable base
on the imports is comprised of the customs value, the customs duty, and the excise duty
of goods and services imported into ~ u s s i a . ' ~
v) Excise Tau
The rates and procedure for payment of excise taxes in the Russian Federation is
regulated by the law of the Russian Federation "On Excise", No. 23-FZ of February 1,
1 996.19' The excise tax is instituted on the sale of ceriain products within the Russian
Federation. In fact, excise tax has replaced the sales tax that existed in the USSR, and
was mostiy imposed on luxury products.
The law imposes the rates of tax that Vary depending on the type of product.
Excises are levied on most of the lwury and 'vice' type goods, including alcohol,
- -
1 'ab L ieberman E., "Russia Modernizes ILS T a System. But Ghosrs ofrhe USSR Srill Haunr", Commercial Law and Practke Course Handbook Series, Practicing Law Institute, March 22-23, 1993. p. 567 on-line: WL. 187 See the Law of the Russian Federation "Concerning Value Added Tm" of December 6, 199 1. No. 1992- 1, an. 6. 1 SS Ibid., art. 5 . LW Ibid., art. 3. '90 Ibid., an. 4.4. 19' Law of the Russian Federation "On ficise" of February 1 , 1996, No. 93-FZ on-line: (IST Main) <http:/!www.ist.ni >
tobacco products, automobiles, jewelry, including also gasoline, gas and The rates
of excise tax on oil and gas are currently at 18 % of the value of production, unless they
are specifically subjected to a different rate or exempted by the govemmental decree.lg3
Excise duty c m also be imposed on imports e n t e ~ g the temtory of the Russian
Federation. The rate of the duty varies depending on the type of the imported product.
The tax base includes the customs value of the goods subject to the excise duty. These
goods include cigarettes, cars, alcoholic bwerages etc.Iw
Excise duty is also payable on oil, including gas condensate, extracted and
produced fkom deposits with relatively better mining, economic and geographical
charactensti~s.'~~ The rates of the excise duty, are set up specifically for particular
enterprises and are listed in a Resolution No. 1 1 lof the Government of Russia Federation
of November 1, 1 Y92 and No. 847 of Novernber 1,1992.'" For other enterprises and
economic entities, including foreign legal entities, which are not envisaged by the
mentioned resolution, the rates of excise duty would equal 18 %.19' Payers of the excise
duty on oil, including gas condensate, are "oil and gas producing enterprises and
associations of al1 organizational and juridical forms, including enterpnses with foreign
equity .. . and citizens effecting the extraction of oil, including gas condensate, on the
rr 198 tenitory of Russian Federation, its continental shelf and economic zone .
192 Ibid., an. 4. 193 Ibid., the rate was lastly modified by the Law No. 192-FZ of Eecember 29 1998. 194 See the Law of the Russian Federation "On the Cusroms Duries" of Febmary 5, 1997, No. 25-FZ. 195 See the Finance Ministry of the Russian Federation instruction No. 1 1 1 "On Procedure ofPaymenr for E-rcise Tar on Oil inciuding Gas Condensare", para 1 , Ruslegisline, News of December 1 , 1992, on-line: Lexis (Ruslegisline) News 1% Resolution of the Government of Russian Federation of November 1, 1992 No. 847 "Excive Dufy on Oil E-rcrracreci on RF Territory" on-line: Lexis (Ruslegisline) 19' See the Finance Minisay of the Russian Federation Instmction No. 1 1 1 "On Procedure ofPayment for ficise T u on Oïl including Gas Condensare", para 1, Ruslegisline, News of December 1, 1992, on-line: Lexis (Ruslegisline) News 198 Ibid., para. 4.
The decree by the Govemment of Russia Federation of July 27, 1992 No. 1375-r
provides for exemption for enterprises and organizations formed with the participation of
foreign capital, which supply oil and gas condensate of their own production for
export.'99 In accordance with the resolution, enterprises, which were registered before
January 1, 1992, contain no less than 30 % of the foreign equity and are "engaged in the
mining andor processing of oil and gas and effecting works (senices) towards irnproving
the output of the main products of the oil, gas and petrochemical industries, shall be
exempt from excise duty on the export of oil and gas condensate which they mine and
9 9 200 take out of the territory of Russia Federation .
vi ) Royalries
The Law of the Russian Federation "On Subsurface" and subsequently issued
related regulations require al1 the subsurface users to pay a fee for the use of the
subsurface, except in the instances stipulated in the 1aw.*O1 The fees imposed on the usen
of natural resources includeto2:
a) payments for the right to explore and apprise deposits. The payments are made
throughout the duration of the exploration work. The tax base will include the agreed
ISY Ibid. '* Ibid.. Annex 1. notes, para. 1 . The term of exemption with regard to each enterprise is established by the interdepanmental cornmission o f the Finance Ministry's Committee for Foreign Investments. the Econornics Ministry of Russia, the Fuel and Energy Ministxy of Russia, the Comrninee on Geology of Russia and the State Customs Committee of Russia. ' O ' Law of the Russian Federation "On Subsu$ace" of February 2 1 1992, No. 2396- 1 , an. 39.
Ibid., art. 42.
or estimated cost of work performed. The tax rate is set at 1-2 % of the cost of the
performed work;
b) payments for the right to prospect deposits of oil or mineral resources. Payments are
made by the prospector for the duration of exploration works. The tax base is ageed
or estimated by the sides to the agreement and include the cost of al1 the work
performed. The rates imposed on the user of resources Vary fiom 3 to 5 % of the
performed work cost;
c) payments for the right to extract commercial minerals c m be made on the b a i s of
one-time payments and regular payments by the user. If the payments are made
regularly, the total tax paid varies fiom 6-16 % of the total value of produced
resources. The regular payment rate is applied to the projected average of the annual
output. If the user makes a one-time payment, it wilI amount to no less than 10 % of
the value of the produced resources;
d) payments for the right of underground construction work. The tax base estimated
equals to the total cost of the work performed. The rate imposed varies fiom 1 to 3 %
of the totaI cost of the construction.
Royalties are also paid under the production sharing agreements.203
\ri i ) Custurtts Duties
The Russian Federation also imposes an export tax on certain types of goods that
are exported from the The tax is assessed in European currency (ECUs) either
'O' See discussion in Ch. 111.3.2 "Taxation of the Energy Sector" on p. 73.
as a percentage of the customs value of the good or a flat rate per ton of the exported
product. The tax payrnent ranges fiom 5 to 70 % or f h m 1 to 80,000 ECUs in cash
value.'05 The export regirne of the Russian Federation is based on a two-colurnn system,
which includes a base rate and a 50 % higher barter rate, which compensates for the loss
of mandatory hard currency
The Russian Govemment dso imposes hi& duties on exports of oil and gas and
on the export of certain other commodities. The duties levied on exports of oil have been
ranging from 21 ECU to 45 ECU per ton; and duties on other commodities range from
1.5 ECUs per ton to 150 ECUs per ton, making it considerably expensive for e ~ ~ o r t e r s . ~ ~ '
To make things wone, under the influence of certain powerful republics - Subjects to the
federation, the Central Govemment took the position that it can grant exemptions to
exporters conducting business in particular republics. Such an approach created a certain
degree of inequality in treating and broadening the discretion of state bureaucracy. For
instance, the Russian President ruled by his decree that in the Karelia region the tax can
be elirninated where the production is sold to pay for certain goods, including food and
equipment.'08 Ln some cases the tax was also eliminated for certain investments in oil
until the investor had recouped his initial e ~ ~ e n s e s . ~ ~
- -- - -
'@ See the Governmental Resolution of the Russian Federation on introduction of Expon Tariff on Goods Exponed from the Russian Federation, Decree No. 91 of December 3 1 , 1991, r e p ~ t e d in Econornicheskaya Gazeta, February 15, 1992, at 15 ' O 5 Ibid. =O6 Ibid. 'O7 Pollack R., Bernstein A. and Minakova L., "Foreign Invesrmenr in Russia: The Perspecrive of the Russian Governmenr and Problems Faced by Western Invertors", Commercial Law and Practice Course Handbook Series, no. A4-4420, March 22-23, 1993, p. 523. 'Os Lieberman E., "Russia Modemizes ILS Tay Sysrem, But Ghosrs of the USSR Still Haunr", Commercial Law and Practice Course Handbook Series, Practicing Law Instinite, March 22-23, 1993, p. 568 on-iine: W L '* Ibid.
The foreign investor would also have to pay import duties when importing
products on the tenitory of the Russian Federation. The tax is levied on the customs value
of the goods irnported and the tax rate ranges within 0-30 %ile of the value of irnported
goods, depending on the item. On certain imported products, the importing entity must
also pay customs clearance fee that equals 15 % o f the value of imported goods. The
legislation regulating imports provides that some imports are contributions to the charter
capital for entities with foreign investment and, in some instances, temporary irnports are
also exempt.
vi i i) Replenishment and Environmental Taxes
The law on subsoiI establishes the following types of payrnents that should be
levied on users of underground reso~rces~ '~ :
1) tender (auction) participation fee and a fee for the issuance of a license;
2) payments for the use of underground resources;
3) charges for replacement of the minera1 raw materials base;
3) excise tax.
The payrnents for the use of the minera1 resources are made by any natural and
legal persons of the Russian Federation, including "natural and the legal persons of
foreign states, regardioss of their fonn of o ~ n e r s h i ~ " . ~ ' ~ The rates of deductions for the
''O The Law of the Russian Federation No. 2395- 1 "On Underground Resources" of February 2 1 , 1992. an. 39. "' See Federal Law of the Russian Federation No. 187-FZ "On the Continental Shelfofthe Russian Federarion", of November 30, 1995, art. 40.
use of natural resources depends on the type and quality of the resource used, amounts of
production, etc.*12
The govemment also exempts certain categories of users of natural resources
from paying the deductions, including: a) the owners of the land plots who use the
resources to meet their direct needs without selling them; b) the subsoil users carrying on
regional geological and geophysical works, geological s w e y , other geological works
associated with the general geological investigation; and c) the subsoil users which have
received areas for the formation of specially protected geological facilities of scientific,
cultural, aesthetic, sanitary and health-protective importance.2 l 3
Al1 companies in the oil industry have to pay a tax for the restoration of the
pnmary resources (RPR). Pursuant to Article 60 of the Federal Law on the Federai
Budget for the Year 1997 the govemment has established a Fund for the Reproduction of
Mineral Raw Materials ~ a s e . ~ " The resources of the Fund are supposed to be used for
the reproduction of the minera1 raw material sources, including the geological
investigation of the subsoil of the Russian Federation and to compensate for the costs of
management of the State Subsoil Stock of the Russian ~ede ra t i on .~ '~ The rate of the
reproduction deductions for oil and gas condensate equals 10 % and is levied on the value
of mineral resources s o ~ d . ~ ' ~
"' Federal Law No. 224-FZ "On the Rares of the AlIocarions for the Reproducrion of the Mineral Ra~v-Marerial Base", of December 30, 1995, art. 1.
' 1 3 Instruction of the State Tax Service of the Russian Federation No. 44 "Dn rhe Order of rhe Calcularion and Paymenr IO rhe Budget and rhe Target-oriented Use of Deducrions for rhe Reproducrion of the Mineral- Ratr, Marerial Resources" of December 3 1, 1996, para. 9. "' Federal Law No. 29-FZ "On the Federal Budgerfor 1997" o f February 26, 1997, art. 1 . ''' Ibid., art. 60. "' Federal Law No. 224-FZ "On the Rares ofrhe Allocationsfir the Reproductio~ ofthe Mineral Raw- Marerial Base", of Decembcr 30, 1995, art. 1 .; See also Decision of the Govemment of the Russian Federation No. 986 "On rhe Approval of the Regdations on the Fundfor the Reproducrion of Mineral Raw Materials Base", o f August 2, 1997, available on-line: Lexis(Ruslegisline)
i x) Securities Issuance Tax
The Secunties law of the Russian Federation provides that every legal entity has
to pay securities issuance tax on the nominal value of newly issued securities."' The Law
defines securities transactions as "actions or intentions by the taxpayer designed to
acquire property rights to shares, savings certificates, and bonds regardless of their fom,
circulation tems and par value and bills of exchange by concluding contract and
VI 218 registering a prospect of capital issue .
The tax base includes the contract price and the registration of the prospectus of
capital i s~ue."~ The rate of a tax on every security transaction is at 0.5 % of the nominal
cost of the shares issued by the legal person or any other type of s e c u r i t i e ~ . ~ ~ In such
case, the issuer executing the primary issue of securities shall pay the tax in the form of
payment for registration of the issued prospectus.22'
The law exempts the following categories of taxpayers fiom payment of tax on
securi ties transactions2":
- legal and natural persons purchasing shares initially issued by a joint-stock Company
from the date of its registration by a govermental body;
- issuers executing the primary issue of securities; and
"' See the Law of the Russian Federation "On the T m Levied on Operarions wirh Securizies" of March 23 1998, No. 36-FZ, an. 1. "s 1bid. 219 Ibid., art. 2. "O Ibid., art. 3. '" Ibid. 171
"' Ibid., art. 4.
- legal persons executing in the established order, intermediary securities operations, on
the account and on behalf of a customer.
Taxpayers calculate the amount of tax independently, based on the contract value
or the par value of the arnount of issued securities and the corresponding tax rate. The
calculation of the tax on securities transactions executed in foreign currency is calcuiated
in rubles based at the exchange rate established by the Central Bank of the RSFSR and
enacted as of the date of registration of this transaction.223
x) Road Fund Taxes
Alf legal persons, including the enterprises with foreign investment, international
associations and organizations, conducting their business through "permanent
representative offices, foreign legal persons, branches and other similar subdivisions of
the enterprises, organizations and institutions that have their own balance-sheets and
settlement accounts, set up in the territory of the Russian Federation have to pay a road
taxe^".'^" The foreign legal entities - owners of transport facilities pay the following
taxes! which are directed to the Road Fund of the Russian ~edera t ion :~~ '
- the Fuel and Lubncant Sales Tax;
- the Motor Road User; and
- the Vehicle Owner Tax.
"' ibid., an. 5. "' Law of the Russian Federation No. 1759-1 of October 18, 1991 on the Highway Funds, an. 5 . '" See the Letter of the State Tax Service o f the Russian Federation No. ShS-6-07/6 1 1 "On Methodological Direcrions for the Conducr of Documenrary Inspections ofthe Taxpayers Paying Taxes for the Benejir of the Road Funds ro Be Used in Practical Operation" of September 14, 1998, see Methodological Directions for the Conduct of Documentq Inspections of the Taxpayers Paying Taxes for the Benefit of the Road Funds.
Legal entities, including foreign legal entities as well as the natural persons, pay
the fuel and lubncant sales tax on such commodities as automobile petroleum, diesel fuel,
diesel oils, carburetor engine oils, carburetor and diesel engine oils, cornpressed and
liquefied gas used as engine fÙe1."6 The tax, however, will not be levied if fbels and
lubricants are sold by one structural unit to another structural unit within one legôl
entity.12' The taxable base would include the revenue fiom the sale, or markup on resale,
or gasoline, diesel fuel, diesel and tractor oils, and compressed and liquefied gases used
as engine hiel.22s The tax is payable at a rate of 25 % of the total revenue re~eived."~
Al1 legal entities established under the legislation of the Russian Federation
including enterprises with foreign investment, international associations and
organizations pursuing entrepreneurial activities through permanent establishment,
foreign legal entities; branches and other similar units of enterprises, organizations and
institutions pay the motor road user ta^.'^' The taxable base includes the "proceeds
received from the sale of products (works, services) and the sum of the difference
between the selling and purchasing prices of the goods sold as a result of procurement,
supply and sale as well as trade activities".'"
During the computation of the tax base for the road user tax, organizations
pursuing the resale of fùels and lubricants compute the fuel and lubricant sales tax based
on the arnount of the difference between the s e l h g and purchasing pnces of these
materials. It is deducted fiom the arnount of the difference between the selling and
'" Ibid., para. 1. -,*- -- ' ibid. '" Ibid., pan. 2. x9 Ibid., para. 6. 230 fbid., para. 15. '3' Ibid., para. 16.
purchasing pnces of these materials"."* The tax rate equals 2.5 % of the proceeds from
the sale of products (works, services); and 2.5 % of the sum of the difference between the
selling and purchasing prices of the goods sold as a result of procurement, supply and
sale as well as trade a ~ t i v i t i e s . ~ ~ And the last, vehicle owner tax is payable on an annual
bais by the legal entities, the citizens punuing entrepreneurial ac tivities wi thout setting
up a legal entiw, foreign legal entities and citizens, who own vehicles at the fixed rates
(per h o r ~ e ~ o w e r ) . ~ ~ ~
The regulations provide for the exception fkom the motor road user and vehicle
owner taxes for foreign and Russian legal entities invited for the period of the
imp lementation of target social and economic prograrns (projects). They may be "related
to housing construction, creation, construction and maintenance of the vocational
retraining of military personnel, . . . credits and grants provided by international
organizations and the govements of foreign States, foreign legal entities and natural
persons under inter-governmental and inter-state treaties as well as the agreements signed
on the authorization of the Govemment of the Russian Federation by the bodies of state
t r 235 administration .
The related federal regulations define the stamp duty as "an obligatory payment,
est ab lis hed and operating across the entire temtory of the Russian Federation, collected
'32 Ibid., pan . 18. '33 Ibid,. para. 19. 234 ibid., para. 29. See the rates listed in the paragraph. 35 Ibid.. para. 23.4.
for the performance of legally valid actions or for the issue of documents by the bodies or
by the official persons, authonzed for t h i ~ " . ' ~ ~ The payers of the duties are the citizens of
the Russian Federation, foreign citizens and legal persons, applying for the performance
of legally valid actions or for the issue of docwnent~.'~'
Article 3 of the Stamp Duty Law provides the Stamp Duty is levied for:
- the statements of claim and other kinds of applications and complaints, filed with the general jurisdiction courts, with the arbitration courts and with the Constitutional Court of the Russian Federation;
- the performance of notary actions by the notaries of the state notary's offices, or by the authorized official persons of the executive power bodies, the bodies of local self-government and of the consular institutions of the Russian Federation;
- the state registration of the civil status acts and for other kinds of legally valid actions, performed by the bodies for the state registration of the civil status acts; and
- the issue of documents by the said courts, institutions and bodies; for the examination and the issue of documents, related to acquiring the citizenship of the Russian Federation or to forfeiting the citizenship of the Russian Federation, and also for the performance of other legally valid actions, defined by the present Law.
Amounts of Stamp Duties are listed in article 4 of the law depending on the object
that the duty is paid for.238 In order to certifi the deal, which is calculated in foreign
currency, and also if the foreign cwrency is the object of succession, the amount of the
stamp duty is transferred into rubles based on the exchange rate at the day of payrnent of
the stamp duty, quoted by the Central Bank of the Russian ~edera t ion.~ '~
'36 Law of the Russian Federation "On the Smte Revenue Duty" of December 9, 1991 arnended by the Fedenl Law No. 226-FZ "On Introducing the Amendmenu and Addenda to the law ofthe Rwsian Federcztion on the S n p e Dury" of ~ e c e i b e r 3 1. 1995, art. 1. "' Ibid., art. 2.
Ibid.. art. 4. '39 ibid.. art 4.4.26.
xi) Federal License Fees
The federal law on licensing of certain types of activities provides that legal
entities or individual businessmen have to obtain special permission (right) for the
carrying out of a licensable type of activity and observe the Iicense requirernents and
conditions imposed by the licensing body.2* The law provides that the licensee has to
pay license fees for carrying out a licensed a ~ t i v i t ~ . ~ ~ ' If a license has been issued by the
federal bodies of the state power, the activity may be carried out on the whole tenitory of
the Russian ~ederation.~'~
The effective period of a license is established by related regulations on the
licensing of a concrete type of activity, provided that it cannot be less than three years.2"
The federal laws and regulations on licensing of concrete types of activity may also issue
a license with unlimited time restriction, even though it can be cancelled in case if the
licensee does not comply with the noms regulating the license-related activity2& The
rate of the fee for the consideration of an application for a license is established by the
Russian Govemment for every concrete type of a c t i ~ i t ~ . ~ " The areas of activity requiring
licensing are listed in article 17 of the law and include certain types of manufacturing,
creation of design, operation and repair of oil and gas equipment etc.
'"O Federal Law No. 158-FZ "On the Liceming oflenain Types ofAcriviries" of September 25. 1998 (with the Amendrnents and Additions of November 26,1998, December 22, 1999), art. 2. 24 1 Ibid., an. 7.1. '" ibid., art. 7.2. Note that payment of license fees to a republican/regional governrnental authonties would enritle the payer ro conduct the business only on the temtory of that particular republic or region. As it was discussed above, some republics and regions have been able to bargain special tax privileges from the federal govenunent. Thus, for some businesses, especially those involved into energy and minera1 sector, it could be more beneficial to consult the regionailiocal legislation regulatïng taxation of foreign entities before registering the business federally. 245 ibid.. an. 8. '" Ibid. 24 S Ibid., an. 10.2.
D) Regional and Local Taxes
There are also a nurnber of regional and local taxes, which are set and collected
by regional and local authonties. Local authorities are entitled to a share of a split profits
tau, which may amount up to 19 % of the tax paid by enterprises located on the temtory
of the l o c a ~ i t y * ~ ~ It should be noted that, with minor exceptions, local taxes in al1 the
countrîes under are so-called "nuisance taxes", as they tend to bear mostly administrative
burden on foreign investors, rather than financial. Legislation of the Russian Federation
provides for taxes to be paid by foreign legal entities to the regional and local budgets."'
These are the following regional and local taxes to be paid by Russian and foreign legal
entities:
1) Tax on the property of enterprise (Assets t a )
2) Sales Tax
3) Road Users Tax
4) Educational Levy
5) Advertising Tax
6) Tax on the Maintenance of Housing Facilities
7) Tax on Maintenance of Police Force
8) Land Duty
'""aw of the Russian Federation "On the Taxarion ofthe Profits of Enrerprises and Organizarions" o f December 27, 1991, no. 21 16-1, art. 5. '"' Law of the Russian Federation "Concerning the Fundarnenral Principles of the Taxation Sysrem in rhe Russian Federation" of December 27, 199 1, no. 2 1 18-1, art. 20.
i) T a on îhe Property of Enterprise
The sum of the tax payrnents is charged in equal parts to the republican budget of
a republic within the Russian Federation, to the budgets of territories and regions, the
budget of the autonomous region, the budgets of autonomous areas and the budgets of
districts, cities and towns in the place of location of a t a ~ ~ a ~ e r . ~ ~ ' The tax is charged on
the annual average balance sheet value of fixed and intangible assets (less depreciation),
inventory, and certain defined expenditures on the entity's balance sheet. For foreign
legal entities or ventures with foreign investments, as subscnbed by lawZ4', depreciation
is calculated using the rates of the home country, but maximum limits are set by Russian
~aw.'~'
The maximum rate allowed by federal law should not exceed 2 % of the taxable
base?' Legislative (representative) bodies of the entities of the Russian Federation
establish the specific tax rates on the property of enterprises, determined depending on
the types of the activity of the enterprises. If the tax is not specifically set, then it is
presumed to be 2 %, as stipulated by the federal Law on the Property Tax of Enterprises.
i i ) Sales T u
Local sales tax must be paid by al1 foreign legal entities, companies and other
corporate entities having civil competence, set up under the legislation of foreign
248 Ibid., art. 20.1 .a. '49 There should be not less ttian 30 % of foreign investment in the total amount of assets of the entity.
countries, international organizations, branches and representative offices thereof set up
on the territory of the Russian ~ederat ion.~ '~ Sales tax payments shall be entered into the
budgets of the subjects of the Russian Federation, and into the local budgets, in the
amount of 40 and 60 % respectively, and is presumed to be used for the social needs of
poor groups in the population.2s3
The tax is levied on the value of the goods (work, services) being sold, retail or
wholesale, for cash payment, etc? The sales tax rate is set at up to 4 % and the sum of
the tax is established as the percentage share of the pnce of the good that corresponds to
the tax rate, without counting the sales tax, and has to be in the price of the good.2'5 The
higher limit of tax rate was raised in January 1,2000 from 2 % to a maximum of 5 %.
The federal budget for the year of 1998 initially proposed to allow regional taxes
of up to 5 % with the purpose of replacing a planned 5 % reductiori in the VAT rate for
1999."~ The change, however, was not passed by the Parliament and the VAT remained
the same and is assessed on the pnce of the goods in addition to VAT, which resulted in
an increased indirect tax burden.
250 Law of the Russian Federation No. 2030- 1 "On the Property Tax of Enterprises" of December 1 3. 199 1 (with the Arnendments and Additions of July 16, December 22, 1992, March 6, June 3, 1993, November 1 1, 1993, April25, June 23, August 22, 1995, January 8, 1998, February 10, May 4, 1999). arts. 3 and 5. 25' Ibid., an. 6. '" Law of the Russian Fedeation "Concerntng the Fundamenral Principles of the T w r i o n Sysrem in the Russian Federarzon" of December 27, 199 1, no. 2 1 18- 1, an. 2 "j Ibid., an. 20.e.
ibid.. an. 20.3. =55 Ibid.
iii) Road Users T a
The rnotor road user tax must be paid by entities under the legislation of the
Russian Federation including the enterprises with foreign investment, international
associations and organizations purçuing entrepreneurial activities through permanent
e~tablishrnent.~~' The tax rate is ranging fiom 1.25 % and to a maximum of 3.75 %. If
otherwise provided by the local authorities, the tax rate can be set at 2.5 %.258 The tax is
Ievied on proceeds received fiom the sale of products (works, services) and the sum of
the difference between the selling and purchasing pnces of the sold goods.259
iv) Educationaf Levy
A special fee is collected from legal persons to meet the needs of educational
establishments. The maximum rate allowed by the federal law is 1 % of the total
employment income paid to full-tirne and part-tirne employees. The rate, may also be
varied by every individual subject of the federation within the stipulated range.'"
' 5 6 See Antel S.. Starygin A., "1999 Russian T a Reform - S M Waiting", on-line: W L ( W ) '" Letter of the State Tax Service of the Russian Federation No. ShS-6-07/611 "On Merhodofogicof Directions for the Conducr of Documenrary fnspecrions ofrhe Taxpayers Paying Taxes for the Benefir of rite Road F u n k ro Be Used in Pracrical Operurion " of September 14, 1998, para. 15. "' Ibid., para. 19. 1'9 Ibid., pan. 16.
Advertising tax is levied on the cost of reimbursable services associated with
advertising a good or service. The maximum rate allowed by federal law is 5 %, but it
rnay be varied regionally.26'
vi) Tax on the Maintenance of Housing Faciïities and the Land Duty
The amount of the housing facilities tax is detennined on the basis of the
applicable rate and cost of sold goods (works, services) minus the sales. The tax is levied
at the maximum rate allowed by federal law that equals 1.5 %, and may be varied
ïegionally.26' Land duty is paid for the total amount of square meters used by the
Company.
vi i) Tax on Maintenance of Police Force
Maintenance of police force duty is levied on citizens and enterprises, institutions
and organizations, irrespective of their organizational legal forms, in order to maintain
the militia, improve temtories, fulfill the needs of educaion and for other purposes.263
The arnount of duties per annum may not exceed 1 % of the amount of 12 times of the
- - - - - - - - -
"O Law of the Russian Federation "Concerning the Fundamental Principles ofrlre Taxarion Sysrem in rhe Russian Federarion" of December 27, 199 1. no. 2 1 18- 1, art. 20.1 .d. "'~bid., art. 21.1 .h. "' Letter of the Moscow Department of the Ministry of Taxes and Fees No. 11-14/1739 1 "On rhe Order of the /nrroduction of rhe Sales T a on rhe Temioty of the City of Moscow" of June 23, :999, para 2. 263 Law of the Russian Federation "Concerning the FundamenraI PrincQles of the Taration Sysrem in the Russiari Federation" of December 27, 199 1, no. 21 18- 1, art. 20.1 .g
minimal monthly wage established by law? For natural and judicial persons the
regulation establishes a duty set at a 3 % of the annual wages h d calculated on the basis
of the minimal rate of rern~neration.~~'
E . Double Tawation Treaties
In the 1 s t decade, Russia has become a signatory to several agreements on the
avoidance of double taxation, inciuding the Tax Treaty with Canada signed in May
1 9 9 6 . ~ ~ In the case of Russia, the Treaty is applied to the taxes on income and on capital,
irrespective of the manner in which they are levied, i n ~ l u d i n ~ ~ ~ ' :
- tax on profits of enterprises and organizations;
- income tax on individuals;
- tax on capital of enterprises; and
- tax on capital of individuals
The treaty is applied to residents of both countries-signatones to the treaty,
provided that the terni 'resident', under the treaty, includes any person or legal entity that
is liable to a tax by reason of domicile, residence, place of management or any other
criterion.'" Generally speaking, this double taxation treaty provides for a procedure of
tau relief in the case of taxation of Canadian investor in Russia. It provides a deduction
for tax on income or capital paid to the source country against residence-based taxation in
'M Ibid. 2b5 Minimum rate of the remuneration of labour as kom April 1, 1996 is in the amount of 75.900 roubles a month. The exchange rate as o f March 2000, was 25 rubles = % 1.00, per dollar. '* See Bill C-37 "Agreemenr Berneen the Governmenr of Canada and the Government of the Russian Federarion for the Avoidance of Double Tararion and the Prevenrion ofFiscal Evasion With Respect to Tares on Incorne and on Capitar', of May 17, 1996, on-line: (WL)'ITR 'b7 Ibid.. an. 2.
anad da.^^^ A Canadian resident Company can make a deduction in computing its taxable
income of any dividend received by it out of the exempt surplus of a foreign affiliate
which is a resident of the Russian ~ederation.~'' According to the Treaty, profits, income
or gains of a Canadian resident, which are taxed in Russia are considered to arise fiom
sources in ~ u s s i a . ~ "
3. Regulation of the Energy Sector
A. General Outlook
Oil and natural gas can be found in many of the republics of the former Soviet
Union. However, Russia rernains the dominant force in oi1 and gas production. There are
some disagreements among the experts on the quantity of the oil and natural gas in the
country. However, a general agreement was achieved that despite some decline in oil and
gas reserves and the complexity of oil fields, Russia still has one of the nchest
hydrocarbon resource bases in the world.
The oil and gas sector accounts for approximately 45 % of Russian exports, 60 %
of foreign currency revenues and 20 % of GD P.^'^ Russia's hie1 and energy sector
controls approximately 5 % of world oil reserves and 34 % of world gas reserves, and is a
"' ibid., art. 4. 269 Ibid., art. 23. '70 - ïbid., art. 23.b. "' Ibid., art. 23.d. '" See "The Invesrment Climare in Russia", Expert institute, Ernst & Young, 1999, Ch. 2.13.
key sector of the e c ~ n o r n ~ . ~ ' ~ However, since 1985 Russia has been expenencing senous
probiems related to the deciine in the output of oil and gas exports from 550 million
tonnes in 1989 to 300 million tonnes in 1998.'7J Russia needs a substantial influx of
foreign investments to reverse the process of decline and prevent the continuing
shrinkage of the foreign currency reserves of the country.
Russian Duma has adopted several legislative acts regulating the energy and
mineral sector, including Subsurface Law, Law on Production Sharing Agreements (PSA
Law), and Law on Concessions. These legislative acts have been awaited by a lot of
potential foreign investors for almost a de~ade.'~' The delay was cause for several
reasons, including political and b~reaucratic.~"
B. Taxation of the Energy Sector
In the area of exploration of energy and minera1 resources, the government has
taken severai steps to encourage participation of foreign investments. Major progress was
achieved with the adoption of the Law "On the ~ubsurface".'~' The law govems the
relationship between parties in a process of the study, use and preservation of the
subsurface, waste products of mining industries and related processing The
law stipulated that the use of the subsurface might only be granted on the basis of
273 ~b id . '74 b j d -
"' PoIlack R., Bernstein A., Minakova L., "Foreign Investmenr in Russia: the Perspecrive of the Russian Governnienr and ProbIems Foced by Wesfern ~ n ~ s m r s " , Commercial Law and ~ G c t i c e c o k e Handbook Series, PLI Order No. A4-4420, March 22-23, 1993, p. 527, on-line:WL(LJR) 2'6 See in general. Ibid. "' Law of the Russian Federation "On the Subsurface", of October 28, 1992, on-line: <http://www.ist.rn> 278 Ibid., Prearnble.
licenses, which c m be granted by means of cornpetitive bidding or auct ion~.~ '~ The
regulation establishes nghts and duties of subsurface user^'^' as well as it provides main
guidelines on the use and replenishment of the minera1 resources. Subsurface usen are
required to pay a fee for the use of the resources, which i n ~ l u d e ~ ~ ' :
- payment for the right to use the subsoil;
- contributions for the replenishment of the minera1 and raw material resource base;
- licensing fees;
- excise tax; and
- rent payments for the use of water areas and areas of the sea floor.
In addition to the mentioned fees, subsurface users have to pay "taxes and other
charges and payments required by law, including payments for the land use and
geological information", though the user may be granted an allowance for depletion of
the subsurface under this la^.^'' The amount of fees for the right to conduct operations of
prospecting and exploration are detemined according to "economic and geographical
conditions, size of the subsurface area, type of mineral, the duration of operations, the
>r 283 extent to which the territory has already been explored and the degree of risk .
Under the Law on Production Sharing Agreements (PSA) Law, the Russian
governrnental authorities and the investor can conclude a production sharing agreement,
providing that the investor explores and produces natural resources and shares a part of
the produced matter wit3 the Russian govemment.284 The major advantage that PSA
'j9 Ibid, an. 13. Ibid., art. 22.
18' Ibid., art. 39. 282 hid.
'83 Ibid., art. 4 1. '& The Federal Law of the Russian Federation "On Production Shoring Agreernena" of Decernber 30, 1995, No. 225-FZ, art. 2.
agreement offers for the investor is that the investor will be able to initially recover al1 the
costs spent on the project, and it is only aAer the hl1 recovery of expenses that the
investor will be sharing a part of the product.
The Law provides for the following taxes and payments to be paid by investor -
Party to PSA agreementzg5:
Profits Tax;
Value Added
Payroll Taxes
Payment for the Use of Subsoil;
one-time payments (bonuses);
annual payments for conducting exploration (rentals);
royalties;
Annual payments for conducting an exploration are established per unit of subsoil
area used, depending to economic and geographical conditions, the size of the subsoil
area, the type of minera1 resources, the duration of the said works, the degree of
geological study of the subsoil area and the degree of risk invo~ved.~~ ' One-time
payments (bonuses) are established in accordance with the terms and conditions of the
PSA at the conclusion of the agreement, andior upon the achievement of a certain
r e s u ~ t . ' ~ ~ Royalties are established as a percentage of the production volume of raw
2 s s Ibid., art. 13. 2s6 VAT is only paid on the product sold within the territory of the Russian Federation. '" The Federal Law of the Russian Federation "On Production Sharing Agreements" of December 30, 1995, No. 225-FZ, art. 13.4. 286 Ibid.
minera1 matenals or of the value of the produced output and payable by the investor in
cash or in the form of a portion of produced mineral raw r n a t e r i a l ~ . ~ ~ ~
The profits tax is levied on the value of a portion of the profit defined as provided
for in the PSA and owned by the investor under the PSA. Such value has to be reduced
by2i".
- the arnount o f the investor's payments for the use o f borrowed funds;
- one-time payments by investor during the use of subsoil;
- other unrecoverable costs incwred by the investor
The PSA must also speciQ the other costs incurred by the investor under the
agreement, including the specific items and the accounting procedure for the purpose of
profits tax. Then, in the future, the profits tax base can be reduced by the amount of the
arising difference until it is fd ly re~overed.~ '~
Investor pays the VAT for the sale of the share of produced resource owned by
him under the terms and conditions of the PSA. Al1 the amounts of the VAT paid by the
investor over an appropriate penod for the inventory, as well as for the works and
services acquired by him for the purpose of PSA operations, can be deducted fkom the
arnount of VAT payable to the budget over that period.292 The operators (carriers and
other persons) involved in the PSA operations under separate agreements (contracts) with
the investor are exempt fiom the VAT and excise duties on imports of goods and services
to the temtorj of the Russian ~ederat ion.~ '~ However, the exemption can only be applied
to the imported goods intended for conducting the said operations in accordance with the
289 Ibid. Ibid., art. 13.2.
29' Ibid. 292 ibid., art. 13.3.
project documentation. Also, the PSA operaton are exempt fiom the VAT on exports of
raw mineral materials and products of their processing outside the customs temtory of
the Russian Federation to which the investor is entitled under the tenns and conditions of
the agreement. 29"
Foreign companies have been encouraged to participate in various projects on oil
and gas exploration, and the govenunent of the Russian Federation has tried to negotiate
urnbrella credits with various institutional investors. including the IMF and the major
ex port-irnport b a n k ~ . ~ ~ '
IV. The General Investment Environment in Kazakhstan
1. General Outlook
Simila. to Russia, the Kazakh economy is currently in a state of transition, and
Kazakhstan was one of the first post-Soviet states initializing a pnvatization program and
liberalking its national legislation in order to attract foreign investments. Because of its
exceptionally rich oil and mineral resources and its relatively stable political situation, it
is wideiy considered by the international business cornrnunity as one of the most
attractive of al1 the Soviet successor States for foreign invest~nents.~"
'93 ibid. 294 ibid. '9 5 Pollack R., Bernstein A. and Minakova L., "Foreign Investment in Russia: The Perspective ofrhe Russian Government and Problem Faced by Western Investors", Commercial Law and Practice Course Handbook Series, no. A4-4420, March 22-23, 1993, p. 5 15. 296 Ernst & Young, "Doing Business in Kazakhstan", International Taxation, October 1, 1994, on-line: WL(WTD)
Kazakhstan's nch resource base and highly-educated labor force together with its
geo-economicai location in the center of Euroasia, linking the fast growing Asian
industries and Western Europe, are important factors, that combined with effective
econornic reform, enhance the country's future ability to join the world's progressive
market economies.'" The laws regulating foreign investment activities in Kazakhstan
provide for a number of incentives, which include: a) up to 100 % tax relief on the first
five yem of the investment; b) up to 50 % tax relief on the second five years of the
investment; and c) partial customs duty exemptions on equipment and raw matenals
needed for the in~es tment .~ '~
Together with the significant progress that the Kazakhstan's Govemment has
made in irnpiementation of the market refonns, there are some shortcomings and
deficiencies in the system. As it is in the case of Russia, although not to the same extent,
the laws and regulations in Kazakhstan aïe also a subject to fkequent changes and
modification^.'^^ There have been indications that attraction of foreign investments is a
higher priority than supporting their presence in the country.'" One of the major
cornplaints that foreign investon have been continuously mentioning is tliat the principles
and rules incorporated in Kazakhstanis legislation suffer fiom their inadequate
irnplementation, mostfy because of corruption in govemmental circles. The Government
has also been making promises that were not ultimately implemented, for instance, that
tendering process would be conducted in an open and fair manner, though there was a
-- - -
"' BISNIS, "Commercial Overview of KazaWisran", December 1999. on-line: (BISNIS Main) ~http:llwuw.bisnis.doc.gov> '98 See in general the Law "On Srate Support for Direct /nvestment1* of February 1997.
BISNIS, "Commercial Overview o/Kazakhsranw, December 1999, on-line: (BISNIS Main) <http:lluww.bisnis.doc.gov>
Ibid.
number of cases when tenders were issued just a week before the application deadline,
thereby limiting the c ~ m ~ e t i t i o n . ~ ~ '
2. The System of Taxation in Kazakhstan
Kazakhstan was the first of the countries under review th2t started the reform of
its legal and tax systems in cooperation with IMF advisors, and was able to introduce a
new comprehensive tax code by 1995. This coliaboration proved to be very productive
and effective, and the timing of the adoption of the new code has proved to be great, and
gave the country a substantial cornpetitive advantage in attracting foreign investments as
compared with Russia and Kazakhstan. The Code's simplicity has also proved to be up to
international standards and requireinents of international inves tor~ .~~ ' Table 1 in chapter
II, demonstrates that the early and successful introduction of the economic and tax reform
is directly related to the increase of FDI inflow into the country. The indicators are
projected in dollars per capita, what reflects the real input of investments according to the
size of the population of the respective country. Kazakhstan was able to attract the
highest per capita rate of FDI as compared to Russia and ükraine.
Conipanies that are formed in Kazakhstan under its national law are taxed on their
world-wide income. Income that the foreign companies or persons have made through
their representatives permanently established in the country is taxed in Kazakhstan.
'O' BISNIS, "lnvestment CIimate in Kazakhstan", Decernber 1999, on-line: (BISNIS Main) ~http:/~www.bisnis.doc.gov/bisnis/country/9808K07.htm~ 'O' J. Maninez-Vazquez and R. McNab, "The Tar Reform Experimenr in Transirional Counrries", National Tas Journal, Vol. LIII. no. 2, p. 277.
Unlike in Russia, branches of foreign entities are taxed on Kazakhstani source in~ome'~',
e.g. taxed where services were performed, not where the payrnent for the service was
made. Incorne from the source located in Kazakhstan to a non-resident and not related to
a permanent establishment, is taxed at the source of the payrnent, and fbrther, on the total
income without deductions, excluding labor that is taxed as personal i n c ~ r n e . ' ~
The double taxation problem is avoided in the Canada-Kazakhstan Income and
Capital Tax Convention of September 25, 1996.305 The Convention, in particular, applies
to the incorne tax of corporations and individuals, and the tax on the property of legaI
persons and individ~als.~"
Recently, the Kazakhstani government has adopted a set of new laws, which have
brought some significant changes to the generaI tax climate. In April 1995, the
govemment had enacted the Tax Code of the Republic of Kazakhstan, which was later
arnended by the law o f July 16, 1999, and became effective in August 3, 1999."' The
Ministry of Finance has aiso issued tax instructions clarieing the determination and
payrnent of taxes.
The code applies international taxation principles of equity, economic neutrality
and simplicity, establishing that residents are liable tu both direct and indirect income in
Kazakhstan if they have been physically present on the temtory of the republic for 183
303 Edict No. 2235 Having the Force of Law of the President of the Republic of Kazakhstan "Concerning Tares and Ozher Obligaroty Payments ro the Budget", of April24, 1995, art. 35 pereinafter Law on Taxes to the Budget]. See also Repon of the Business Information Service for Newly Lndependent States (BISNIS) "Commercial Overview of Kazakhstan", of December I999.Ch. N. 3 M Law on Taxes to the Budget, ibid. 305 Ibid., see in general Ch. 7. job Canada-Kazakhstan Income and Capital Tax Convention and Protocol, signed on September 25, 1996, Tax Anaiysts, on-line: WL(WTD)ïTR, art. 2.3. Ln the case of Canada, the Convention applies to the taxes imposed by the Government of Canada under the Incorne Tax Act- 307 BISNIS, "Tar & Accounting**, Country report, on-line: (BISMS Main) <http://www.bisnis.doc.gov>
days in any consecutive 12-month period.308 Taxes on economic activity are less
contradictory and complex than the ones in Russia. The new Tax Code, however,
provides for significantly severe penalties for late or non-payment of taxes to the central
or regional budgets. For instance, recently, changes to the tax law provided that the
faiIure to remit and withhold VAT on transaction with a foreign legal entity that has not
registered as a Kazakh taxpayer is subject to a penalty in the amount of 100 % of the tax
Although it is not provided in the Tax Code, the Law of the Republic of
Kazakhstan "Concerning State Support to Direct Investments" of February 28, 1997,
provides for the tax holidays that can be granted in some cases as incentives for foreign
legal entities. The law, in particular, provides fo?lo:
- reduction in income tax, land tax, and property tax rates of up to 100 % for a penod of up to five years, and a reduction in the tax rates of up to 50 % for the following five years;
- full or partial exemption fiom customs duties on the import of equipment, raw matenals, and consumables required for implementation of the investment project; and
- natural gants, defined as non-monetary property or propnetary rights of the Republic of Kazakhstan granted to investors with the right of ownership.
1. National Taxes
According to the Law on the Payments to the Budget, Kazakhstani and foreign
legal entities have to pay the following taxes to the national republican budget:
308 See Repon of the Business Information Semice for Newly Independent States (BISNIS) "Commercial Overcliew of Katakhsran", of December 1 999.Ch. IV. jo9 Reese Jenkins, "Kazakhstan Amen& Tax Code. Including Transfer Pricing Provisions", Tax Notes International, Febmary 8, 1999, p. 562.
i) Income tax fiom legal entities
ii) Income tax Erom physical persons
iii) Value Added Tax
iv) Customs and Excise
v ) Tax on securities transactions
vi) Special-purpose payments and taxes of users of the subsurface
vii) Payroll Taxes
i) Corporate Income TQX
Article 30 of the Law on Taxes to the Budget provides for a similar tax base to
that of western countries, upon which the general tax rate for legal entities is 30 %."' The
entity will pay 10 % of corporate tax if it was exclusively derived fiom agriculture, as the
major mean of If the legal entity is registered in a special economic zone,
the corporate income tax rate is set at 20 %.313
Dividends and interest on shares, debentures and other securities belonging to
enterprises are taxed at the rate of 15 %.314 The rate also applies to payments remitted
overseas. The extent of income or withholding tax levied on amounts remitted abroad
may Vary if a double tax treaty applies. According to the Canada-Kazakhstan Income and
Capital Tax Convention, the business profits of a Canadian 'resident' will be taxable only
in Canada unless the Company carries on business in Kazakhstan through a permanent
-- - - -- - - - - - - -
3 I O See in general the Law of the Republic of Kazakhstan "Concerning State Support to Direcr lnvestmenxs" of Febmary 28, 1997. 51 1 Law on Taxes to the Budget, art. 30.1 ., supra note 267. 317 Ibid.. art. 30.2.
establishment situated tl~erein.~" In the case that the Canadian 'resident' carries on or has
carried on business in Kazakhstan, the business profits of the 'resident' may be taxed in
the other State, but only so much of them as is attributable to the a) permanent
establishment; b) sales in Kazakhstan of goods or merchandise of the same kind as those
sold though that permanent establishment; and c) other business activities carried on in
that other State of the same kind as those effected though that permanent
e~tabl ishment .~ '~ The Convention also provides for exemptions of expenses incurred by a
Canadian or a Kazakhstani resident for the purposes of the permanent establishment in
the other country, including executive and general administrative expenses incurred
Kazakhstani law provides for items that may be deducted in determining taxable
Lease payrnents are also deductible up to the amount of amortisation available
for the asses as stipulated in the lease c ~ n t r a c t . ~ ' ~ Interests on non-bank loans are not
deductib~e.~'~
313 ibid.. art. 30.3. 314 Ibid., art. 32. 315 Canada-A'azakhslan Incorne and Capirai T a Convention and Protocol, signed on September 25, 1996, Tas Analysts, on-line: WL(WTD)TTR, art. 7.1. 510 ibid., an. 7.1 . a b c . 317 Ibid.. an. 7.3. 318 See Law on Taues to the Budget, art. 4 1 , supra note 179. See also Country analysis by Ernst & Young, "Doing Business In Kazakhstan", October 0 1 , 1994, Ch. F.2, j19 See Law on Taxes to the Budget, art. 43, supra note 179. 320 See also Country analysis by Ernst & Young, "Doing Business In Kazakhstan", October O 1 , 1994, Ch. F.2.
ii) Personal Income Tax
The personal income tax rate depends on whether the person is resident of non-
resident of Kazakhstan. Non-residents are taxable on the source of income obtained only
in Kazakhstan, and residents are taxable on world-wide in~orne.~'' To be considered a
resident an entity or person has to spend 183 or more days within any continuous 12-
month penod, that begins or ends in a fiscal year, or represents the Government of
Kazakhstan a b r ~ a d ? ~ ~
There is no minimum period of stay in Kazakhstan in which a non-resident would
be exempted from tax in accordance with the legislation. A business trip in Kazakhstan of
one day could, under the current legislation, give a nse to Kazakhstani iiability, unless a
tax treaty appiies.3u
Article 29 provides the rates of persona1 income tax for individuals-residents. The
tau base for the individual's income is the difference between the total annual income of
the person as well as certain deductions stipulated by the law. Recently, legislation
regulating the persona1 income tax was amended providing for a rate increase from 15 to
20 % for taxpayen with monthly incornes exceeding the minimal wage3z4 and frorn 20 to
j" See Law on Taxes to the Budget, art. 30, supra note 179. See also Canada-Kazakhstan Incorne and Capifal T u Convenfion and Protocol, signed on September 25, 1996, Tax Analysts, on-Iine: WL(WTD)TTR, art. 7.1. 3'f Law on Taxes to the Budget, art. 5-22., supra note 179. 323 '* Tararion in Karakhsran", Coopers &: Limbrand Country Report, September 7, 1995, on-line: (Mondaq .Main) <http://www.mon&q.com~ 3'' Minimal wage in Kazakhstan is 21,000 tengelmonth (Kazakhstani cuncncy), what equals about ($350 (CAN)).
30 % for taxpayers in the highest income bracket." Persons eaming less than the
minimal wage would still remain subject to a 10 % income t a d z 6
h o m e of a non-resident fiom a Kazakhstani source, which is not related to a
permanent establishment, is subject to taxation at the source of payment based on the
aggegate income without deductions, at the folIowing rates:
- Dividents and interest - 15 %327
- Insurance payments, payable on insurance agreements - 5 %
- Telecommunication or transportation services - 5 %
- Royalties, services income including management senices, consulting, rent
payments and other income - 20 %
i i i ) Value--4 dded T a
Value-Added Tax is detennined as the difference between 'We amounts of Value-
Added Tax which are accmed on sold goods, work or services, and the amounts of tax
which are subject to payment for purchased goods, perfomed work or services
,9328 rendered . VAT is usually applied at a rate of 20 % on turn-over arising from the sale
of goods, works and services.32g VAT is also applied to the imports of certain types of
goods, works and services at the same 20 % rate330 and is not applied to exPorts."'
j3 ''Kazakhstan Parliamenr Approves Incorne Tax Hikes", Tax Notes International, M a c h 29, 1999, p. 1237. '" Ibid. j2' See also Canada-Kazakhstan Incorne and Capiral Tax Convenrion and Prorocol, signed on September 25, 1996, an. 10.l.b. 32a See Law on Taxes to the Budget, art. 53, supra note 179. 3'9 ibid., art. 54. 330 ibid., art. 66.3. 53 I ibid., 66.2.
iv) Registration Fee for Issue of Securities
The fee is paid by al1 legal entities and physical penons, "which carry out
transactions relating to the transfer of the right to own securities, and also those which
r, 332 carry out their issues, shall be the payers of the tax on securities transactions . The
taxable bases with the tax on securities transactions include the value of original and
additional issues of securities, except for Government securities issued on the temtory of
Kazakhstan; and value of the initial and additional issues of securities launched in the
temtory of the Republic of Kazakhstan, except for issues of shares for the value of
revaluation of joint stock societies' assets, in accordance with current ~ e ~ i s l a t i o n . ~ ~ ~
V) Customs and Excise Duties
Excise duties are imposed on certain types of goods manufactured in the territory
of the Republic of Kazakhstan and imported into the territory of the Republic of
Kazakhstan according to the Iist provided in Article 76 of the Law on Taxes to the
~ u d ~ e t . ' ~ "
Excise duties has to be paid by al1 the legal entities and physical persons, which
manufacture excisable goods in the temtory of Kazakhstan, import excisable goods, or
sel1 excisable goods.335 Rates of excise duties are approved by the Cabinet of Ministers of
j3' Ibid., aR. 87. 3'' Ibid., art. 88-
Ibid-, m. 74- 335 Ibid., art. 75.
the Republic of Kazakhstan in %age of the value of particular goods or of the physical
volume in a natural mea~urement."~ The rates of excise duty charged against certain
goods ranges fiom 20 % to 160 %.337
Even though Kazakhstan does not have discriminatory policies with regard to
imports, goods imported fiom CIS countries on the temtoxy o f Kazakhstan are subject to
preferential treamient. Goods imported from Russia and the Kyrgyz Republic, who are
rnernbers of the customs union are d ~ t ~ - f i e e . ~ ' ~ Importation o f goods is permitted on the
temtory of the republic fiom certain developing or least-developed countries free of duty
or at a reduced rate as part of the Generalized System of Preferences under the W T O . ~ ~ ~
vi) Minerai Resources Tan
Special payments must be made by subsurface users, according to subsurface use
contracts concluded with the Competent Body authorized by the Governent of the
Republic of ~azakhstan." Tax on natural resources includesu' :
- bonuses, which are paid for the right of the subsurface user to explore the resource;
- royalties, that are paid for the pnvilege of exploration; and
- excess profits taxes paid by al1 the subsurface users carrying out mining of minera1
resources that receive additional profits due to better conditions or that sel1 their
336 Ibid., art. 77. 337 See Country analysis by Ernst & Young, "Doing Business In Kazakhsran", October 0 1, 1994, Ch. F.2. 338 "Investmenr C h a r e in Kazakhsran", Counay Report, BISNIS, 1998, on-line (BISNIS Main) <http:ll~ww.bisnis.doc.gov> 339 Ibid. 340 See Law on Taxes to the Budget, an. 94.1, supra note 179. 34 1 Ibid., art. 94.
outpiit at better than expected prices. The tax is paid if its amount and payrnent terms
are stipulated in the exploration andor production agreement.
Tax rates are set for every specific subsurface user by the Cabinet of Ministers and differ
among resource, and are unique to each ~ocation."~
vii) Payroll Taxes
Employers who employ Kazakhstani citizens are required to make contributions
to the Social Security Fund, Pension Fund, and Employrnent Fund. Contributions are
enumerated based on the gross salaries paid to such employees. The contributions' total
to be paid by the employer equals to 3 1.5 % where 1.5 % is paid in social security
payments, 25 % in pension and accumulative Pension Fund contributions, 3 % in medical
insurance payments, and 2 % in employrnent assistance.
2 . Local Taxes
Kazakhstani as well as foreign Iegal entities and physical persons who cany on
business activity on the temtory of the republic have to pay local taxes and levies, which
are set by decisions of local Councils, unless republic law provides otherwise. As it is in
the case with the local Ukrainian and Russian regional and local taxes, the Kazakhstani
local taxes are also predominantly "nuisance taxes". These taxes include the following:
1 ) Land tax
3'" See Report of the Business Information Service for Newly Independent States (BISMS) "Commercial Overview of Kuzukhsran", of December 1999.Ch. IV.
2) Property tax
3) Vehicle tax
4) Business Registration Tax
5) Road Tax
6) Fee on Auction Sales
7) Fee to conduct certain businesses
i) Land Tax
Legal entities and individuals (including lessors at the rates specified for certain
categories of land under lease) are subject to land tax on a plot of land or area of land
granted to them for ownership and use.3u The rates Vary depending on location and
quality of the land and any water supply on the land; the business results or activities of a
land owner or user do not affect the rates.345 The land tax is an annual fixed payment per
unit of land.
i i ) Properi), Tax
Legal entities and physical persons, which have taxable assets under the right to
own, to manage entnisted properties to business authority or operational management,
must pay the property Tax on main productive and non-productive assets of legal
j4' ibid., Part 1. Compare to 38 % of payroll taxes paid by business entities in the Russian Federation. EU See Law on Taxes to the Budget, supra note 179.
Ibid., art. 108.2. ''6 ibid., art. 13 1.
entities and physical persons, which engage in entrepreneurial activities, is paid annually
at a rate of l per cent of the value of the indicated a s ~ e t s . ~ ~ '
Tax on the property of physical persons, which is not used in entrepreneurial
activities, has to be paid annually out of the value of imrnovable property as defined by
the authorized body by the Governrnent of the Republic of Kazakhstan, according to the
rates provided under the law? Budgetary and non-profit making organizations and the
National Bank of Kazakhstan are exempt fiom payment of the ta^.'^^
iii) Vehicle Tax
Legal entities and physical persons which have transport vehicles registered by
the Kazakh state registration organs, no matter if the vehicles are owned or used, have to
pay the tax on transport ~eh ic les .~~ ' The tax base and rates of the tax are indicated in the
Article 128 of the law, and is paid annually on a given vehicle type at the rate from 1 to 8
%, calculated as a %age of the monthly calculation base of kilowatt power of the
~ e h i c l e . ~ ~ '
- p~
jJ7 rbid., 133.1. '" Ibid., art. 133.2. Article 133 provides the rates upon which the property tax must be paid by the payer. 349 Ibid., art. 133.
ibid., art. 126.
iv) Business Registration Tax and the fke to conduct certain businesses
Local municipal organs of state power collect registration fees for the
establishment of legal entities and conduct of individual business activity."' The rates of
the fees Vary from locality to locality, and are stipulated in the regulations of the locality
where the business is to be set up. Businesses also have to pay for licenses to conduct
certain businesses, for instance, in areas of mining, telecommunication, utilities.
v) Road Tax and Fee on Auction Sales
There are four separate taxes that must be paid by the business entities to the
Road und."^ The most significant one among them is the highway users' tax. The tax is
applied at the rate of 1 % of the cost of production in computing the Profits ~ a x . ' ~ Even
though the tax is deductible, the payment of 1 % of the gross receipts c m be a substantial
financial burden for certain smaller bus in esse^.^^^ Al1 business entities participating in
auction sales have to pay a fee set up by the local a u t h ~ n t i e s . ~ ~ ~
- -
35 1 Ibid.. art. 128. 3 5 2 BISNIS, "Commercial Uvervieiv of Kazakhstan", Country report, (page numbers are not available for this document) on-line: (BISNIS Main) <http://www.bisnis.doc.gov> 3 5 3 Law o f the Republic of Kazakhstan "Concerning the Road Fund' of December 19, 199 t . 354 Ibid., art- 4.2. 355 Bedel J., Horowitz D., and Nordberg C. A. Jr. "Stangers in a New Land: U.S. Lawyers Corne ro A'azakhstan", Journal of International Taxation, Vol. 4, No. 7, July 1993, p. 307 on-line: WL(JINLT) 350 BIShTS, "Commercial Overview of lYezaWlstan", Couatry report, on-line: (BISNIS Main) <http://www.bisnis.doc.gov>
C . Double Taxation Treaties
In 1994, Kazakhstan renounced the double taxation treaties negotiated by the
former Soviet Union as of Januay 1, 1995. Currently, Kazakhstan is a Party to a
numerous bilateral tax treaties with United Kingdom, United States, Pakistan, Hungary,
Poland etc. In September 1996, Kazakhstan also signed a double-taxation treaty with
Canada, which was ratified and entered into force on January 1, 1996.)~'
The treaty provides the tax treatment for investors and, in many cases, reduces or
eliminates the tax liability at the sources, thus supporting greater investrnent. Also, it
provides the general definitions of the areas where the double taxation is to be avoided,
and the subjects of taxation to be residents of Canada. For the Canadian resident
investing in Kazakhstan, the treaty provides that the double taxation will be avoided3?
- as a deduction fiom the tax on the income of that resident, an arnount equal to the
income tax paid in Kazakhstan;
- as a deduction from the tax on capital of that resident, an amount equal to the capital
tax paid in Kazakhstan.
I t also provides relief from the double taxation, the assurances of non-discnminatory tax
treatment, the cooperation between Canadian and Kazakhstani officials, and the exchange
of tax information.
The Canada-Kazakhstan Tax Treaty is applied to al1 taxes imposed on the total
income, on the total capital, or on the elements of the income or of the capital as well as
357 "Conwnrion Benveen the Governmenr of the Republic of Kazakhstan and the Governmenr of Canada for the Avoidance of Double Taxation and the Prevenrion of Fiscal Evasion", of Septernber 25. 1996 on-Iine: ( W L ) r n '" ibid., art. 23.
the taxes on gains from the alienation of movable or immovable property, as well as the
taxes on capital appreciation.359 in the case of Kazakhstan, the treaty is applied to the tax
on income and the tax on the property of legal pesons and i n d i v i d u a ~ s . ~ ~ In the case of
Canada, the treaty is applicable to the taxes irnposed under the Income Tax Act.
4. The Energy Sector
A. General Outlook
Kazakhstan is very important to the world energy markets because it contains
significant oil and gas reserves. According to various estimates, Kazakhstan has roughly
16 billion barrels of oil reserves, and may have another 30 billion barrels under its portion
of the Caspian seabedSM' Presently, Kazakhstan is the second largest producer of oil
arnong the countnes of the former Soviet Union after the Russian Federation, producing
about 500 million barrels of oil daily.362 Kazakhstani officia1 sources estimated thai
Kazakhstan could eam S 700 billion in revenues just fiom offshore oil and gas fields over
40 years.363
The major obstacle for Kazakhstan in exploiting its oil and gas resources is the
difficulty of transporting the product to world markets. Kazakhstan uses mostly Russian
network to export oil and gas outside the country.3M Predominantly, oi1 goes through the
359 Ibid., art. 2. ibid. art. 2.3.
361 "Counrr-y Commercial Guide: Kazakhstan", Fiscal Year 1999, Show Case Europe, U. S. Commercial Service, Ch. V.A., on-line: (SCE Main) <http://www.sce.doc.gov.> 361 "Reporr on Energy Sector in Kazakhstan", Energy Information Administration, Aprïl2000, on-line: (LSwest Main) <http://www.users.uswest.net> 363 Ibid. 3& Derman B ., "Kazakhstan: How a New Perroleum Law Con Fuel Economic Developrnenf", Tulsa Journal of Comparative and International Law, Fall, 1993, p. 59 on-line: (WL)TLSJCIL
pipeline system, by rail through Russia to the Black Sea and the Baltic, and by barge
across the Caspian to Baku.
B. Taxation of the Energy Sector
Al1 taxes and additional special payments that are levied on investrnents in natural
resources are listed in the Law on Taxation System in ~azakhstan.'~' The Law provides
for the two major models of taxation for subsurface usen, depending on the main type of
~ o n t r a c t s . ' ~ ~ The fint model prescribes the payment of all types of taxes and other
obligatory payments by subsurface usen as established in the legislation of the Republic
of Kazakhstan. The second model is envisaged only subsurface users of a share to the
Republic of Kazakhstan under the production sharing agreements (PSAs), including:
1) income tax fiom legal entities considering income tax to be withheld at the source of
payment;
2 ) tax on net income of permanent establishments of foreign legal entities;
3) value-added tax;
4) bonuses (surcharge payments);
5) royalties;
6) levy on state registration of legal entities;
7) levy for the right to engage in certain types of activities; and
8) other obligatory payments as established in legislative acts of the Republic of
Kazakhstan and which are not stipulated in this PSA model
365 Law* on Taxes to the Budget, supra note 267. 366 Ibid., art. 94- 1.
The special-purpose payments and taxes include the following:
1) bonuses: subscnption bonus, commercial discovery bonus, and extraction bonus;
2) royalties;
3) tax on windfall profits
Al1 the users of subsurface are payers of the envisaged by the law bon use^.^^'
Subscription bonus is a one-time tixed payment that is made by the subsurface user for
the nght to geological exploration of the subsurface, geological prospecting and
subsequent extraction and/or extraction. It is paid by users of the subsurface on !he
condition of concluding a contract for relevant operations in accordance with the
procedure established by the Kazakhstani legislation. Subsurface users also pay a
commercial discovery bonus, which is a one-time fixed payment and is paid by
subsurface users in the case of a commercial discovery in the contract temtory. The 1s t
one is extraction bonus, which is a fixed payment and it shall be paid by a subsurface user
periodically upon attaining certain stages in developing subsurface or certain levels of
extraction. Starting amounts of subscription bonuses are set by the Cabinet of Ministers
of the Republic of ~azakhstan.~" The procedure, final amounts and any other conditions
for the p a p e n t of bonuses are additionaily established in the contract.
The subsurface uscrs, which cany out extraction of usehl minerals and
processing of technogenic formations, must pay royalties for the nght to use the
subsurface, which are taxed on the volumes of useful minerals extracted by a subsurface
user.369 Additional income that forms with subsurface users from the activities under
cornparably better natural conditions, or under comparably better market conditions and
367 Ibid., art. 95. 368 ibid., art. 98.
which consequently have a higher proportion of profits, is used as the base for taxation
with the tax on windfall profits.370
Al1 types of bonuses and royalties are deducted before calculating taxable income
for income tax and for tax on excess profit.37' The subscnption bonus is not subject to
deduction when determinhg taxable income for income tax and tax on windfall profits of
subsurface üsers. Commercial discovery bonus, extraction bonus and royalties shall be
deductible when determinhg the taxable income for income tax and tax on windfall
profits of subsurface users.
Tax on windfall profits and al1 types of bonuses are payable by subsurface users
in a monetary f o r ~ n . ~ ~ ~ Royalties may be paid both in kind and in the monetaxy fom. It is
allowed to combine the monetary fom of payment with the payment in kind. Ln the case
of paying royalties in kind, the contract must stipulate the destination md conditions for
supply of extracted production.
Exploration and mining companies, including oil and gas companies, were
relieved by the recent arnendrnents to Kazakhstani tax law. Currently, the Iaw provides
that the govemment does not have a right to change the taxation terms written into
subsoil use contracts between the govemment and a subswface user. These terms, which
are determined for each contract after an obligatory state evaluation, are now fixed for the
duration of the subsoii use ~ontrac t .~ '~
369 Ibid., arts. 96. 100-2. ''O Ibid,. art. IOO. 37' Ibid.. art. 94-5.1.2. "' ibid., art. 95- 1.
V. The General Investment Environment in Ukraine
1. General outlook of the economic infrastructure
Ukraine has inherited an unbalanced economy with a tiny pnvate sector, a
dominance of production of industrial goods, colossal amounts of unfinished
consmiction, and a huge stock of unsecured financial liabilities to the population
associated with savings in the former Moscow central banks.'" Similar to Russia and
Kazakhstan, Ukraine has inherited large industrial and agricultural sectors, and relatively
small natural resource sector apart f?om inefficient coal industry. The growth of these
sectors was supported by USSR economic policy, which mostly focused on the
development of heavy industries (with a great share of military related production) at the
expense of other industries in Ukraine. For instance, in 1990 the output of femus metals
and machinery constituted 44.2 % of industrial output production whereas output of food
industry constituted 14 % of industrial production. The ratio between production of
industrial and consumer goods was about 70:30, and it was combined with a deficit of
most consumer goods and products.375
The current Ukrainian economic infrastructure has tied the country to CEE and
f/SU commodity markets and made it extremely dependable on the supply of energy,
machinery and increasingly expensive raw matenals fiom abroad. In 1992, the average
pnce of imported oil increased by 1 13 % compared to 199 1. In 1993, the average price of
imported oil doubled (and reached 76 % of the world market pnce), and the average of
. - -- .. . .
j Ï 3 Polkinghorne M., Tracey A, and York R., "Law and T m Developments" Financial Times Asia Gas Report. August 1998, Issue No 15, on-line: (Coudert Brothers Main) ~http://www.coudert.com>
imported natural gas quadrupled (and reached 52 % of the world market price) compared
to 1992. As a result, in 1994 Ukraine had to pay 15.5 % of its GDP (compared to 2.5 % in
1990) for the impon of energy.376
2. The System of Taxation in Ukraine
Current tax legislation has been under the pro cess of constant revision and
modification, which has not made it much more coherent, but added a factor of instability
to the tax system. During the period of 1997-1998, the govement of Ukraine
cornrnenced a tax reform with the purpose of reducing the number of taxes. President
Kuchma issued several decrees aimed at introducing a single uniform tax system for
small businesses, and a single uniform agricultural tax that is calculated based on the
value of the land. 377 Also inûoduced was a procedure for writing off and restructunng
VAT debts for producers of agricultural products as well as a system of reduction of the
payroll tax to 37.5 % beginning January 1, 1999.378
Like many other tax systems, the Ukrainîan one is also based on value-added tax,
persona1 and corporate income tax. The value-added tax, corporate income tax and
personal incorne tax made up about 43 % of total govemment revenues in the third
3 74 See Luzik P. , "/nternarional Experience of Tax Reform and Lessonsfor Ukraine", Discussion paper No. 99/04, Center of Econornic Reform and Transformation, Febniary 1999, p. 2 on-Iine: (CERT Main) <http:llwww.hw.ac.uk> '" %id. 3 76 ibid., p. 5. 3 75 " C o u n q Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S . Commercial Senrice on-line: (SCE Main) <http://www.sce.doc.gov> 378 Ibid.
quarter of 1998.~" Arnongst the most significant taxes are: a 20 % VAT; corporaie
profits tax that amounts up to 30 %; a persona1 income tax, which is based on an
employee's income, and ranges from 20 to 40 % for the majority of employees in foreign
companies operating in Ukraine. There are also payroll taxes to be paid by employen to
the Social Insurance Fund, Pension Fund, and Employrnent Fund, with total contributions
amounting up to 37.5 % of wages paid by ernployers to their ernployees.380
On December 28, 1994, the ukrainian Parliament passed the lôw "On the
Taxation of the Profits of the Enterprises" (the "Corporate Tax Law"), which is currently
goveming the system of taxation of legal entities in ~ k r a i n e . ~ ~ ' The law abolished the
concept of taxing "dokhod", which was defined as the difference between the value of
products (works, services) sold and their cost of production (not including employee's
salaries and the most recent interest paid on borrowed funds). Since the adoption of the
law, the concept of a tax on profits has replaced the former concept of " d ~ k h o d " . ~ ~ ~ The
laws "On Value Added Tax" and "On Corporate Profits Tax" were passed by Parliament
dunng the first half of 1997. This provided a more favorable VAT and corporate tax and
bnnging some changes to the tax structure that would make it more compatible with
those found internationally. However, the langage of the laws and procedural issues,
together with abundant amendments, often add unnecessary cornplexity to the laws and
create additional problems for corporate taxpayers.
379 See Luzk P. , "lnrernarional Experience of Tar Refonn and Lessons for Ukraine", Discussion paper No. 99/04, Center of Econornic Reform and Transformation, February 1999, p. 2 1 on-line: (CERT Main) <htrp: l l \~~~~.hw.ac .uk> 580 "Commercial Guide of Ukraine", Country Commercial Guide, U.S. Department o f State, financial year 2000, Ch. N (A), on-line: (US Department o f State Main) ~http://www.state.gov> 38 1 The Law of Ukraine "On the Taxarion ofthe ProJts of Enterprises", of December 28, 1993. No. 33994- B P on-line: (Rada .Main) <hrtp://www.ra&.kiev.ua> 382 "Legal Framework Aflecring Foreign Investment", Trade Mission o f Ukraine, Apnl 15, 1997 on-line (Brama Main) <http://ww.brama.com>
The tax system reform has also affected the system of tax administration and
collection. The State Tax Administration responsible for the general implementation of
tax laws was granted broader powers since 1997. It incorporated the Ukrainian State Tax
Police and became accountable directly to the ~ r e s i d e n t . ~ ~ ~
Both ükrainian and foreign entities pay taxes on a quarterly basis. It is very
important for foreign investors to thoroughly examine the regdatory and taxation system
before designing the distribution system, because with the adoption of the laws in 1997,
the Ukrainian tax system grants broader pnvileges to companies that distribute their own
prod~~ts .3m
Prior to the enactment of the Corporate Tax Law-, al1 permanent establishments of
foreign non-resident companies had to be registered with the Ministry of Foreign
Economic Relations and Trade of Ukraine. However, this procedure was changed with
the adoption of the law. The State Tax Administration also issued a separate order
canceling the requuement to register permanent establishments by non-re~idents."~
Recently, the Parliament of Ukraine passed in the first reading a first cirafi of the
comprehensive Tax Code of Ukraine, which will codifL al1 the active tax laws and also
bring some significant rate changes to the major taxes. The new code has reduced the
number of taxes corn 36 to 24, lowered income tax fiom 30 % to 20 %, the VAT rate
from 20 % to 17 %, and would reduce the individual income tax to a ceiling of 20 % fiom
383 "Couttrtl. Commercial Guide: Ukraine", Fiscal Year 2000, Show Case Europe, U. S. Commercial Sem ice, Ch. VI ( A ) on-line: (SCE Main) ~hnp://www.sce.doc.gov> 3s4 "A Guide to Doing Business in Ub-aine" Department of Foreign Affairs and International Trade, Ch. 2.5 on-line: (DFAIT Main) <http://www.dfait-maeci.gc.ca> 385 See the Order of the State Tax Administration "Regulations on the Procedure for Registration of Permanent Esrablishmena of Non-Residents in Ukraine as lncome T a Payers" of January 16, 1998, No. 23; See also The Law of Ukraine "On rhe T i r i o n of the Profirs of Enterprises", o f December 28, 1994. No. 335194-BP, an. 8.
its current 40 %.386 The Ukrainian government has also planned to introduce a five-year
moratorium for changes on tax legislation.
A. National Taxes
The Law of Ukraine "On the System of Taxation" provides for the following
national taxes to be paid by both foreign resident and non-resident companies, which
conduct entrepreneurial activity and have their sources of income on the temtory of
~ k r a i n e : ~ ~ '
1 ) Corporate Income Tax
2) Persona1 Income Tax
3) Value Added Tax (VAT)
4) Excise and Customs Duties
5) Stamp Duty
6) State hovation Fund
7) Road Tax
8) Land Tax
9) Trade License
10) Sale of FueVlubncants Tax
1 1) Vehicle Tax
12) Foreign Vehicle Transit Duty
-
386 "Tar Code Makirrg Irs Way Through VR", Eastern Economist Daily, July 13, 2000 on-line: WL (ALLNEWS)
13) Rent Tax
14) Naturai Resource Tax
15) Environmental Pollution Tax
1 6) Payroli Taxes
17) State Duty
i) Corporate Income T a
The current version of the Corporate Tax Law provides for new tax rates for
entities in Ukraine, and in order to take the Ukrainian tax system closer to the Western
principles of taxation, it has additionally modified their tax bases. The 5-year tax holidays
that were available for Ukrainian enterprises according to the Decree of the Cabinet of
~ i n i s t e r s ~ " was consequently repealed by the Corporate Tax Law. However, al1 the
enterprises that were registered on or prior to December 24, 1993 could stili qualiS for
the tax holiday under the decree.
The Corporate Tax Law defines the object of taxation to be the gross incorne of
the enterpnse, which includes the revenues fiom the sale of products (works, services)
and other material values and property (including basic funds of production). It also
includes al1 other non-matenal assets, broker places (excluding the realization in
387 The Law of Ukraine "On the System of Taxation" o f Jwie 25, 1991, No. 39, art. 14. 388 Decree of the Cabinet of Ministers of h i n e "On rhe Regime of Foreign Investment" of June 5 , 1993, No. 55-93.
exchanges) and profits from non-trading operations deducted from the amount of
expenses for these ~ ~ e r a t i o n s . ' ~ ~
Uniike previous tax legislation, the Corporate Profit Law provides for more
explicit definitions of permitted costs and expenses, residents and non-residents, usual
pnce as opposed to market price, fiee financial aid, bad debts, related persons etc. For
instance, interest payments for loans incurred for working capital needs and for the
acquisition of fixed and intangible assets required for curent production needs may now
be included in the cost of production.3g0 Payments for investment management and
depository senices, expenses connected with the payrnent of dividends and expenditures
for printing and issuing shares and other securities can also be included in the cost of
production.391
The new corporate income tax legislation incorporated the ability for a business
entity to adjust the value of its fixed assets (except for assets that are subject to
accelerated depreciaiion) in line with the inflation rate if the annual inflation rate exceeds
1 O %.39' The business entity must accept that the difference between post-adjustrnent and
pre-adjustment value of fixed assets is also a form of capital income, and a part of it is a
subject to profit tax. Being a product of a capital income and annual depreciation rate, it
usually does not leave a business entity rnuch better off after inde~ation.~"
389 T h e Law of Ukraine "On the Taxation of the Profits ofEnterprises", of December 28, 1994. No. 33994- BP, an. 2. 3 9 0 ibid., arts. 3.1.3 and 3.1.4. 39' ibid., arts. 3.1.8 and 3.2. 392 The Law of h i n e "On Arnendrnents ro the Law of Ukraine On the Thxarion ofthe Profit of Enrerprises" of M a y 22, 1997, No. 283-97-BP, art. 8.3.3. j9' See Luzik P. , "international Ejrper-ience of T a Refinn and Lessons for Ukraine", Discussion paper No. 99/03. Center of Economic Refonn and Transformation, February 1999, p. 36 on-line: (CERT Main) <http://www.hw.ac.uk>
On the other side, Lhe overall structure of the Corporate Tax Law remains too
'schedular', as it separates the rules for assessment and taxation of insurance and re-
insurance and investrnent income. Also, the new legislation creates restraining conditions
for domestic corporations to legally diversi@ their assets, by placing limits for a legal
portfolio abroad because of inability to obtain tax credit for foreign tax on passive income
and capital gains.'w
The Corporate Tax Law has established the basic rate for a corporate tax equal to
30 %.395 The rate of taxation for profits gained from intemediary activities or from
carrying out auctions is 45 %. The auctions that involve securities, ownership interests in
legal entities, currency values and other financial instruments are taxed on a basic rate of
60 %.396 Enterprises involved in the sphere of agricultural production and that use their
own pmduction facilities, or which are engaged in the construction of homes, condos and
other facilities in villages and rural areas, or in certain other types of agricultural
production activities are exempt Corn payrnent of the corporate income ta^.)^'
Pnor to the adoption of the Corporate Tax Law, legislation had set very
conservative depreciation rates. For most types of equipment used for 8 to 10 years,
accelerated depreciation was only pennitted for enterprises with qualiQing foreign
investment, enterprises involved in military conversion m d those operating in the
prioritized branches of the Ukrainian e c ~ n o r n ~ . ' ~ ~ That allowed enterprises to determine
their own accelerated rates of depreciation, but such rates could not be higher than twice
-- -
j9" ibid. 395 The Law of Ukraine "On the Taxation of the Profits of Enterprises", of Decernber 28, 1993. No. 33994- BP, art. 10 396 Ibid. 397 The Law of Ukraine "On Enterprises and Organtkarion Income Tar" of February 2 1, 1 992, No. 2 146- 12, art. 5.1.
that established by the applicable regulations and may not lead to an increase in the prices
of products made by the enterprise.399 The Corporate Tax Law does not contain any
separate provisions reguiating taxation of capital gains, which makes them taxed on at
same basic rate of 30 %.
The Corporate Income Tax Law establishes niles and regulations for taxation of
foreign legal entities carrying out business activities on the temtory of Ukraine through
their "permanent establishments". The Law defines a foreign permanent establishment as:
a) any structure in Ukraine, which is not a legal entity through which a foreign legal
entity either partially or fülly carries out business activities in Ukraine or; b) an individual
who represents and is employed by a foreign legal entity in ~ k r a i n e . ~ In addition to the
national legislation, the question of determination of whether permanent establishment
exists is a subject to the provisions of any applicable tax treaties.lO'
The new Ukrainian legislation on profits tax has a very particular approach to the
issue and redemption of corporate debt instruments, including bonds, annuities,
certificates of deposit etc. The Corporate Tax Law provides that receipts fiom the issue of
corporate bonds, certificates of deposit, and some other corporate securities (except for
stocks) at nominal value constitute a part of gross corporate income, and interest
payments and redernption outlays constitute a part of gross corporate e ~ ~ e n s e s . ' ~ ~ If this
1s the case, an acquisition of corporate debt securities receives the same tax treatment as a
-- ---
398 "Lrgal Framework .4flecring Foreign Investment*', Trade Mission o f Ukraine, Apnl 15, 1997 on-line (Brama Main) ~iinp://www.brarna.com> 399 The Law of Ukraine "On the Taxution of rhe Profits ofEnterprlires", o f December 28, 1994. No. 33994- BP, an. 8. 400 Ibid., arts. 2.1.2. and 2.1.4. 40 1 Ibid., art, 19. 'O2 The Law o f Ukraine "On the Taxation of the Profits of Enterprises", o f December 28, 1994. No. 335194- BP. art. 4.
purchase of raw matenals for production, and an acquisition of corporate ~ecuri t ies~~'
would become a part of gross corporate expenditures. Similarly, redemption of corporate
debt securities receives the same tax treatment as, for instance, revenues from sales, and
receipts from redemption constitute a part of gross corporate income for investors. Thus,
it becomes obvious that this construction of the corporate tax base effectively increases a
cost of bond finance and bank loans making them more favorable as opposed to corporate
bonds, certificates of deposit, and sorne other corporate s e c ~ r i t i e s . ~ ~
The profits of permanent establishments are taxed at a basic rate of 30 %. For
purposes of this tax, profits are deemed to be the revenue, which the permanent
establishments would have obtained if it a) were a separate independent enterprise
involved in sirnilar activities on the same conditions as the foreign legal entity, and b) had
acted independently with respect to the foreign legal entitya5 Passive source income
received by non-residents who do not cany out business activities on the temtory of
Ukraine, and which are received in a f o m of dividends, interest, lease, royalty payments
and payrnents for insurance premiums, as well as from technical engineering services is
subject to a withholding tax of 15 % upon repatriation from ~ k r a i n e . ~ ' ~
In the case of Canadian investors, such repatriation would also be subject to the
Canada-Ukraine Incorne and Capital Tax Convention, which provides that proceeds
received fiom dividends, interest, royalty payrnents, capital gains and persona1 sentices
arising in a Contracting Party and paid to the resident of the other Contracting Party may
'O3 Long-rem debt instruments and annuities are exception in this case, as long-term debt instruments and annuitic& are subject to tax treatment similar to acquis&on of intangible assets. and depreciation rules would apply to the incwed acquisition costs. See Luzik P., "lnrernotional Experience of Tax Reform and Lessonsfir Ukraine", Discussion paper No. 99/04, Center of Economic Reform and Transformation, Febniary 1999, p. 36. 'OJ Ibid. 405 ibid., an. 13.5.
be taxed in that other tat te.^' The Convention provides that the profits of a Canadian
enterprise should only be taxable in Canada unless this enterprise carries on business in
Ukraine through a permanent representative located in ~ k r a i n e . ~ ~ If the enterprise carries
business through a permanent representative, the profits may be taxed in Ukraine, but
only to the extent that is attributable to that permanent representative.JOg In this scenario
the profits that this enterprise would be expected to make will be attributed in Ukraine as
if it is a distinct and separate enterprise engaged in any kind of activity4'0 It would also
be assumed that such an enterprise would cany out business totally independently with
the enterprise of which it is a permanent establishment and with al1 other persons.
The Convention provides that deductible expenses of that enterprise incurred for
the purposes of the permanent establishment should be allowed, including executive and
general administrative expenses, whether incurred in Ukraine or e~sewhere.~' ' However,
no such deductions are allowed if the permanent establishment has paid any amounts to
the head office or any other offices, by way of "royalties, fees or other similar payments
in retum for the use of patents or other rights, or by way of commission, for specific
sentices performed or for management, or, except in case of banking enterprise, by way
of interest on moneys lent to the permanent establishment by the enterprise. * r J I Z
The new Corporate Tax Law has created a tax regime for corporate debt
instruments that had a very negative effect on foreign investors, including those from al1
the countries, which have a double-taxation treaty with Ukraine. Particularly, it has
4M Ibid. 13.1 107 Canada-Ukraine lncome and Capital T a Convention of March 4, 1996, arts 1 1. 12, 13 and 14 on-line: (WL) wTD 408 Ibid.. art. 7.1. 'O9 Ibid. "O Ibid., an. 7.2. '" Ibid., art. 7.3.
affeczed foreign investors who own 1.9 billion worth of Ukrainian treasury bills. On
December 16, 1997, the Ukrainian Parliament passed amendments to the Law on
Taxation of Enterprise Profits and applied it retrospectively to July 1, 1 9 9 7 . ~ ' ~ As a
result, a 30 % tax on the profits fiom treasury bills was applied retrospectively to al1 non-
residents, irrespective of whether the non-resident was eligible to a tax relief under
double-taxation treaties. Such a shortsighted legislative move pushed the banking system
into total confiision. Some Ukrainian banks operating as custodians in this market have
decided to withhold the 30 % tax from investments profits in treasury bills purchased
after Juiy 1, 1997, covering both matuity proceeds and secondary market sales. Other
goups of banks decided to withhold only the 30 % tax fiom gains realized at the maturity
of bills purchased before July 1, 1997. The last group of banks decided not to withhold
the tax at all, citing the supremacy of international law over the national one.
Retrospective enactment of the amendment discouraged foreign investors from increasing
their portfolios, and seriously undemined the already very weak confidence of foreign
investors in the stability of the investment environment in ~ k r a i n e . ~ ' ~
ii) Persorrat I n corne Tax
Questions of persona1 income taxation are pnncipally regulated by the
Degree of the Ukrinian Cabinet of Ministers 'On Persona1 Income Tax" of December
26, 1992 and the Law of Ukraine "On Taxation of Persona1 Income" of December 26,
"' Ibid. ' 1 3 '*Taxarion ofPc'an-Resident Debt /nvestors", position paper, American Chamber of Commerce, Kyiv, Ukraine, 1998, on-Iine: (ACC Main) <http://www.amchamukrauieekiev.ua> "' Ibid.
1992. This legislation provides for rules in the taxation of income of Ukrainian citizens
and foreigners. For purposes of this iegislation, the following physical persons must pay
personal income tax?
- Residents - defined as citizens of Ukraine and foreign individuals who are physically
present in Ukraine at least 183 days in a calendar year; and
- Non-residents - defined as citizens of Ukraine and foreign individuals who do not
qualiQ as resident.
Residents are taxed on their aggregate worldwide income and non-residents are
taxed on al1 income derived fiom sources in Ukraine, but they are not eligible to receive
exemptions or deductions available to residents. The regulation provides for tax
exemptions for about 25 categories of incorne ranging fiom social welfare payments to
inheriiance and lonery ~ i n n i n ~ s . ~ ' ~ It also lists kinds of irregular income that are taxed at
reduced rates."' Certain categories of persons are totally exempt from taxation, including
fdl-time students, seasonal agriculhiral workers, veierans
The persona1 income tax base for workers includes not only their earnings, but
also "stock dividends" and the value of social and material benefits received at their place
of employment. The employees of joint ventures are specifically mentioned in this
~ a t e ~ o r ~ . . ' ' ~ The rates of income tax range from 12 % to 30 %."O The legislation uses a
withholding tax system, with the employer paying the tax on behalf of the employee.
The legislation does not provide any clear definition of persona1 income, and
there is still no separate category for capital gains. It only provides that taxable income is
4 15 The Law of Ukraine "On Taxation of Personal /ncorneW of December 26, 1992, art. 1. 416 Ibid., arts. 3 and 9. r i 7 Ibid., art. 10. "' Ibid.. art, 4.
deemed to be the difference between the aggregate arnount of a taxpayer's annual income
and the aggregate exemptions available to such a taxpayer under the applicable Wainian
tax legislation.i21 Applying deductions available under the relevant legislation may
fùrther reduce taxable income.
It looks rather unusual that the relevant legislation recognizes three major income
categories - employment income, income fiom independent business or profession, and
other i n ~ o r n e . ~ ~ ~ Al1 the specified categones have different sets of tax rates as well as
different rules concerning exemptions and deductions. For instance, a 10 % to 40 % tax
rates is applied to primary employment income, and income from independent businesses
and professions.423 A 20 % tax rate is applied to secondary employment income and any
Ukrainian source income for non-residents, and a 20 % to 60 % rate is applied to
royalties etc? Such preferential tax regimes established by legislation for different
forms of persona1 income can create an environment where people would change their
persona1 income structure and, consequently, could create some distortions in
e c ~ n o r n ~ . " ~
A taxpayer may get a tax credit towards Ukrainian taxes if he/she has made
income tax payments outside Ukraine. In such a case, the taxpayer must provide written
achowledgment fiom the foreign tax authority that such foreign taxes have actually been
paid. However, the total foreign tax paid may not exceed the amount of Ukrainian
ibid., an. 7. 4 20 Ibid., art. 8. '" Ibid., art. 2.
See Luzik P., "Inremarional Experience of T a Reform and Lessons for Ukraine", Discussion paper No. 99103. Center of Economic Reform and Transformation, February 1999, p. 33. '"3 The Law of Ukraine "On Tararion ofPersonal Income" of December 26, 1992, see tax rates provided in articles 8, 14, 17. '"' Ibid., an- 20.
persona1 income tax due, unless otherwise is specified by international tax agreements to
which Ukraine is a ~ i ~ n a t c . r ~ . ~ ~ ~ Ukrainian or foreign non-residents who have a Ukrainian
source income are taxed by the source of income.
The legislation provides for numerous deductions and exemptions, which have a
narrowing effect on the personal income tax base. Among the major exemptions are
interest denved kom persona1 bank accounts, savings certificates, governrnent bonds,
agricultural income, governrnent lottery winnings, inheritance etc. In addition to the
standard tax-free allowance, qualified taxpayers such as veterans, military personnel and
other categories are entitled to make up to 10 additional dedu~t ions .~~ ' Many of these
deductions and allowances lack better elaboration and economic justification. In their
current, state they can easily be used with the purpose of tax avoidance/evasion, and
consequently, keep actual income tax revenues l~w. ' '~ Additionally, the legislation does
not provide for the possibility to cany-over business and professional losses, which
creates an environment with a serious bias against business r i ~ k . ~ ~ '
iii) Value Added Tax
Commercial transactions involving the realization or sale of goods, labor or
services in Ukraine are subject to the value added tax (VAT), which is taxed at a 20 %
rate. The VAT c m be levied at a rate of zero % on exports of goods and provision of
'" See Luzik P. , "hernalional Experience of T m Reform and Lessons for Ukraine", Discussion paper No. 99/03, Center of Economic Reform and Transformation, Febmary 1999, p. 33.
The Law of Ukraine "On Taxation ofpersonal Incorne" of December 26, 1992, art. 5. '" Luzik P. , "Inrernarional Experience of T m Reform and Lessons for Ukraine". Discussion paper No. 99/03, Center of Economic Reform and Transformation, February 1999, p. 33. '" ibid.
ibid.
services to be used outside Ukraine, on international transport services and the import of
items classified as critical imports by the Ukrainian Government. 430 The VAT is
calculated and paid on a basis of the value added at each level of production. It must be
remitted on the difference between the VAT received fiom purchasers and that paid to
supplies with respect to other production costs. Payers of the VAT are both Ukrainian
and foreign legal entities and physical persons, who c m y out business activities on the
territory of
The liability of a VAT payer equals the arnount levied on the taxable transactions
within a reporting period. It arises at the earlier of the dates of either the dispatch of
goods to the customer, or receipt of payment fiom the c~s torner . '~~ The VAT credit is
equal to the amount which a taxpayer is entitled to offset his or her VAT liability in a
reporting penod. The VAT offsetting rights arise on the earlier of the dates of either the
date of payment to the supplier, or the date of obtaining the VAT voucher, which is used
for the recording of each taxable tran~action.~~'
Value added taxation replaced the former turnover tax that existed in Ukraine
until 1992. The newly enacted tax only remotely resembled the analogous VAT system
used by the EU counties and needed fiirther elaboration and clarification. The current
legislation offers a number of exemptions fiom the payment of VAT, which negatively
influences general corporate commercial strategies and lowers the budget revenue. The
VAT Law provides for exemptions for limited number of goods, including raw materials,
component parts, equipment, machinery and other goods and materials. It also provides
'30 The Law of Ukraine "On Value Added Tax" of April3, 1997, No. 168/97-BP, art. 6. "' ibid., art. 2. "' ibid., art. 7. "' ibid.
exemptions for energy supplies (oil and gas) imported by commercial enterprises for
production purposes and their own needs, with the exception of goods imported with the
purpose of r e s a ~ e . ~ ~ ~
Another important problem is double taxation, which increases selling prices and
creates strong incentives for illegal activities. For instance, the sarne supplies in Ukraine
c m be subject to the VAT, excise and custom duties, where the VAT is usually levied on
the amount, which already includes excises and customs duties (for i ~ n ~ o r t s ) . ~ ~ ~ Such
imbalances in a system of application of the VAT, in conjunction with other taxes,
creates a major problem in encouraging non-registered economic transactions, capital
outflow, barter transactions, tax evasion etc. Al1 these factors drarnatically distort the tax
system and the adequate investment environment in general.
iv) Excise and Customs Dulies
Tobacco, alcohol, certain meat products, coffee, fiels, cars and sorne other luxury
products are subject to excise duties, which are levied in accordance with the rules and
procedures established in the Law of Ukraine "On Certain Question Concerning Excise
Taxation" of November 16, 1995 and the Presidential Decree "On Rates of Excise Duty
on Petroleum Products" of June 24, 1998. The rates of excise duties Vary depending on
the type of product and range from 10% to 50%."~
434 Ibid.. art. 5 . 435 Luzik P., "lntenational Experience of Tax Reform and Lessonsfor Ukraine", Discussion paper No. 99/04. Center of Economic Refom and Transformation, February 1999, p. 37. 4 3 6 The Law of IMaine "On Certain Questions Concerning Excise Taxation" of November 1 6, 1 995, an. 5 .
Customs duties are levied at different rates depending on the status of the country
that is the source of goods. h p o n duties are levied in accordance widi the Ukrainian
Unified Customs Tariffs, which were approved on January 13, 1993. The Tariffs provide
for different levels of custom duties for products being imported in Ukraine, including
preferential, most-favored nation, and ful l status nation. The differences among the rates
applied depending on the status of the country can be very substantial. The first leveI is
applied to products onginating fkom the following countrie~:~~'
a) from countries with whom Ukraine bas entered into a customs union;
b) fiom countries with whom Ukraine has created special customs zones;
c) fiom countries which have provided 'preferential" treatment to Ukraine pursuant to a
bilateral agreements; and finally
d) countries, which are classified as "developing countries" by Ukraine, except for those
products from developing countries, which fa11 within classification No. 25-97. 438
The second level is applied to the countries that have p t e d Ukraine a most
favored nation treatment and to products fiom developing countries, which fa11 within
ciassification No. 25-97. By 1998, Ukraine had established a rnost favored nation regime
with 30 countries. The third ievel is applied to the rest of the irnporting countries.
v) State Duties and Stamp Duties
The presidentiai Decree "On State Duties" provides that al1 the legal entities and
physical pesons must pay "state duties" for issuance of official documents by
"' The Law of Ukraine "On rhe Un$ed Cusroms Tanf* of February S,l992, an. 22.
ernpowered state agencies and nie decree provides for various fees and duties
tha; are imposed by judicial and arbitrage agencies, various ministries etc. The list
includes duties for applications and appeals of creditors for judicial proceeding by
arbitrage, transactions with real estate, notary certification etc?' The fees Vary from
fixed amounts of money in local cumency to 30% of the amount of money that are
transferred by citizens outside of the territory of Ukraine.
All the subjects who carry out export operations on the territory of Ukraine must
pay stamp duties. The Law "On Stamp Duty" was effective until January 1,2000."' The
rates of the starnp duties depend on îhe value and kind of exported goods, and range fiom
10 to 20,000 Ukrainian hryvnas.442
vi) Payroll Taxes
Employees in Ukraine are guaranteed social security and pension benefits to the
extent that their employer has made contributions on their behalf. Both resident and non-
resident employers must make payments to the Pension Fund and Social Security
und.") Such contributions are paid separately in addition to the employees' salaries.
The Law of Ukraine "On Compuisory Payment to the Social Security Fund" estabIishes
the following rates of contributions to be made by employers:
- Pension Fund - 32%;
-138 See appendix to the Law of Ukraine "On Amendmenrs ro rhe Law On rhe Uni/ied Cusrorns T a r ~ r of $xi1 3. 1997.
Decree of the Cabinet of Ministers of Ukraine "On Srare Dury" of January 2 1, 1993, No. 7-93, an. 1. 440 Ibid., art. 2. 44 1 The Law of Ukraine "On the Sysrem of T u r i o n " of June 25, 199 1, No. 39, art. 14.22. u' The Law of Ukraine "On Stump Dufy" of M a y 13, 1999, No. 643-XIV, art. 4.
- Social SecurityFund-4%
- Unemployment Benefit Fund - 1.5%
The total contributions amount to 37.5% of the total amount of the employees'
salaries, constituting a considerable extra financial burden. Employers must also make
contributions to the Chornobyl Fund at rate of 12 % of the arnount of the employee'
salary.
vi i) Sfute Innovation Fund
Legal entities and ph iysical persons engaged in commercial activity on the
territory of Ukraine must make payment to the Ukrainian innovation Company, which
was created on the basis of the former Innovation h und? The Innovation Company
undertakes al1 the powers and obligations of the liquidated Innovation Fund. The rates
charged by the Company are paid by businesses monthly at the rate of 1% of sales
tumover.
viii) Road Tax and Vehicle T a
The Law "On Road Tax" has was passed in December 1991 The payers of the
tax are al1 the resident and non-resident Iegal entities and physical persons-owners of
types of vehicles indicated in the Law. Tt is levied on the tumover at a 1.2% rate.
sJ 3 The Law of Ukraine "On the System ofTuxarion" of June 25, 1991, No. 39, art. 14.16; See also Law of Ukraine "On Compulsory Payment ro the Social Secuniy Funà" of June 26, 1997, No. 402/97-BP, art. 1. .SI Decree o f the Cabinet of Ministers of Ukraine "On Creation o f Ukrainian innovation Company" of Apnl 13,2000, No. 654, art. 1.
Wholesale and retail businesses are charged 0.06 % of their turnover for road tax
purposes.
The tax on vehicles is levied in accordance to the Law of Ukraine "On Taxation
of Vehicle Owners" of February 18, 1997. It is levied on the owners of vehicles and other
transportation devises at rates that depend on the capacity of the vehicle's engine. The
law specifies the types of vehicles - objects of the tax. The rates range fiom EURO 0.5 to
EURO 4.55 per 100 cubic centime ter^.^
ix) Land T m
According to the Law "On Land Tax", resident owners of the land must pay a
land tax to the budget. The National Land Register determines the tax rate, depending on
the nature of the land, its location, and does not depend on the results of economic
activity on the land."' The tax is paid monthly in advance.
x) Nafural Resources Tar and Environmental Tax
The Ministry of Environment of Ukraine establishes the methodology and rates of
payments for environmental pollution resulting fiom economic activity, which must be
paid by al1 resident and non-resident legal entities and physical persons who, as a result
us The Law of Ukraine "On Road Tbx" of December 1 1, 199 1, No. 1963-MI. 446 The Law of Ukraine "On Taxarion of Vehicle Owners" of February 18, 1997, No. 75-97 - BP, an. 3.
The Law of Ukraine "On Land Tm" of July 3, 1992, No. 2535-XII, art. 4.
of their activity, cause pollution to the en~ i ron rnen t .~~ Rates for specific types of
pollution are established by the Cabinet of Ministers of Ukraine, and include pollution of
atmosphere with vehicles and other means of transportation, pollution of water objects,
and disposal of toxic wastes into the g r o ~ n d ? ~
xi) Foreign Vehicle Transit Duty
The Law of Ukraine "On the System of Taxation" was arnended in November
1999, with a provision empowering Ukrainian Customs to charge foreign transit vehicles
with a one-time fixed transit d ~ t y . ~ ~ The rate of the duty is estabiished by the Cabinet of
~Llinisters of Ukraine.
xi i) Rent T a und T a for a Sale of FueUZubricants
Al1 oil and gas cornpanies, which obtain their revenue fiom a Ukrainian source of
income, must make rent payments to the national budget of Ukraine.451 The current tariff
of rent for 1 ton of oil of own payment equals S3 (US) per ton."* Rent payrnent for
development of natural gas is implemented based on a rate of $5 (US) for 1000 cubic tons
4 1 8 M inistry of Envuonment of Ukraine "Methodology of Enumerating of Paymenrs for Causing Eniironmcntal Pollution" of May 24, 1993, No. vd930523, art. 1.2. 449 See -4nnexes 1 and II to the "Procedure of Enumerating of Paymenrs for Enrironmental Pollution" of March 1, 1999, No. 303. 450 Amendrnent to the Law of Ukraine "On the Sjzrtem of Taxation" of November 2, 1999, No. 51, art. 1. "' Degree of the Ministry of Economy, Ministry of Finance and National Oïl and Gas Cornmittee No. 1413- 787-5767.
Decree of the Minisûy of Finance of Ukraine "On Amendments to the Procedure of Calcularing and Irnplementation ofRent Payments for Oil and Gas of 20.02. f 998, NO. 39" of September 19, 1999, No. 13 1 an. 1.
of gas.453 The total amount of rental payment solely depends on the volumes of the
developed oil and gas for the budget year.
xiii) T d e Licensc
The Law of Ukraine "On Registration of Certain Types of Entrepreneurial
Activity" regdates commercial activity involving credit transactions, cash and other
types of commercial settlement instruments, involving transactions with foreign currency
exchange (including cash transactions in foreign c ~ r r e n c ~ ) . ~ " The law applies to both
resident and non-resident subjects of entrepreneunal activity and structural counterparts
of Iegal entities (affiliates, representative offices etc.), which are involved in the specified
types of commercial transaction^.'^^ The local municipal organs set the cost of the trade
license enabling the subjects to conduct the specified by the law commercial activities.
However, the law stipulates marginal cost that can be charged depending of the location
of the business of the purchaserf6
B. Local Taxes and Duties
The Law of Ukraine on the System of Taxation provides also for a number of
local taxes that must be paid by resident and non-resident legai entities and physical
ibid. 4 sa The Law of Ukraine "On Patenting of Certain Typm of Entrepreneurial Activiry" of March 23, 1996, No. 98/96 - BP, art. 1. 45s Ibid., art. 2. 4 56 Ibid., art. 3.4.
penons."57 As was mentioned earlier in the case of Russia and Kazakhstan, local taxes in
Ukraine also primarily perform an administrative role, rather than constitute any
significant financial burden on the taxpayer. However, it should be noted that the
Ukrainian legislation imposes the smallest arnount of local taxes than it is in the case of
Russia and Kazakhstan. The law provides for the following local taxes and duties:
1 ) Advertising Tax
2) Communal Tax
3) Hotel Duty
4) Vehicle Parking Duty
5) Market Duty
D . Double Taxation Treaties
Sirnilady to Russia, Ukraine has indicated that it will adhere to the tax treaties
entered into by the former USSR until such time as it has entered into its own tax treaties.
Presently, Ukraine has ratified its own treaty with approximately 20 countries, and
several treaties have aiready been signed, but are still awaiting an approval. Also, it is
currently negotiating tax treaties with another dozen countries. Ukraine and Canada have
signed a Treaty on Avoidance of Double Taxation in March, 1996.458
The treaty is applied to the persons who are residents of either of the countries-
signatones to the ~ r e a t y ~ ' ~ , providing that in the context of the treaty, the term "'person"
1 5 7 Decree of the Cabinet of Ministers "On Local Taxes and Duries" of May 20, 1993, No. 56-93, art. 2 1. "* "Convention Between Canada and Ukraine for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion" of March 4, 1996 on-line: (WL)'ITR 159 Ibid.. art. 1 .
can include "an individual, a company and any other body of penons" in the case of
Uh ine . ui the case of Canada, the texm "person" also includes an estate, a trust and
partnership. For the purpose of the taxation under the treaty the terni "resident of a
Contracting State", this includes the physical persons and legal entities liable to tax in the
respective States and the State-signatory's government or its fragment.460
In Ukrainian context, the Treaty is applied to the tax on the profit of enterprises,
and the income tax on the c i t i ~ e n s . ~ ~ ' In the case of Canada, the Treaty will be applied to
the taxes irnposed by the Govemment of Canada under the income Tax AC^.^^^ According
to the provisions of the Treaty, the taxes paid by a Canadian company in Ukraine on
profits, income or gains nom Ukrainian sources can be deducted fiom any Canadian tax
payable in respect of such profits, income or gains.463 Under the Treaty and in order to
compute Canadian taxes, a Canadian company-resident in Canada can deduct, in
cornputing its taxable income, any dividend received out of the exempt surplus of a
foreign affiliate which is a resident of Ukraine.
Ukraine is important to world energy markets because of its geographical
location, which makes it a critical transit center for exports of Russian oil and natural gas
to Eastern and Western Europe. It is also one of the largest energy consumers in a world.
ibid,, art. 4.1. 4 6 I ibid., art. 2.
Ibid.
However, Ukraine is far behind the Russian Federation and Kazakhstan regarding the
potentiai for development of oil and gas deposits, which already attract significant
foreign investment into the energy sector.
Ukraine has significantly smaller oil reserves than Russia or Kazakhstan. The
estimated volumes equal to about 395 million barrels and most of them located in Eastern
Ukraine in the Dnieper-Donets region.4G Ukrainian gas reserves are estimated at 800
billion cubic meten, and cmde oil resources are estimated at 147 million tonnes. Most of
the resources lie at a depth of 4 to 7 kilometers, making the process of extraction very
e ~ ~ e n s i v e . ~ ~ ' Over the last two decades, production of oil in the country declined by more
than 60 %, which was caused mostly by a general decline in the economy and the
inability of most of the major industrial enterprises to pay for increasing oit pnces.'66
The Ukrainian energy sector heavily relies on imports, which constitute about 80
% of current Ukrainian needs? Most of the imports come fiom the Russian Federation.
The government gave orders to local administrations to reduce gas consumption by 20%
fiom current levels and has adopted a National Program "Oil and Gas of Ukraine to the
year 2010" in order to meet at least half of the country's oil and gas needs within the next
11 to 12 years. The reason for dus move is the gradua1 decline in oil and gas resources in
Ukraine. The shallower and larger oil and gas pools have been depleted, and there are
- --
463 Ibid.. an. 23.1 .a. 4 s "Caspian Sea Region Counrry Anaiysls Brief' Energy information Administration (Eh), GGU University Library Guide, Analysis of Ukraine, June 1999, on-line: (EiA Main) <http://www.eia.doc.gov> "' "The Guide to Doing Business in Ukraine", Deparnent o f Foreign Affairs and International Trade, May 1998, Ch. 111.3.2. on-line: (DFAIT Main) <http://www.dfait-maeci.gc.ca> 464 ''Couni0 Anabsis Briefi Ukraine", GGU University Library Guide, June 1999, on-iine: (GGU Main) <hnp://~-.eia.doc.~ov>
Ibid,
only some reserves leA in smaller, deeper and less productive reservoirs, which are more
expensive to find, to drill and to produce.'68
Even though oïl and gas resources are being gradually depleted, Ukraine is rich in
minera1 deposits, including iron ore, manganese ore, rnercury, titanium and
However, existing mines need substantial investments for their modernization. The
mining industry has been continuously troubled by shortages of spare parts, unsafe mines,
failure of customers to pay for products, corruption and worker strikes.
The major share of minera1 production comes from coal, the production of which
has also decreased in the 1 s t decade to less than a half.'70 Al1 the mentioned factors have
also influenced the production cost of coal. According to the estimates produced by the
British firm International Mining Consultants, 3,200 of the 7,500 workers could be laid
off with no drop in output. The snidy indicated that th: amount of production by
Ukrâinian mines is half that of a similar mine in ~o land . "~
ï h e other important sector that so far produces great amounts of revenue is the
pipeline network that transports oil mostly fiom Russia to the importing countries in
Eastern and Western Europe. As previously mentioned, Ukraine's geographic size and its
strategic location on the crossroads of Europe and Russia, makes it very important
conveyer of oil and natural gas. Like the rest of the industry, the pipeline systern needs
major investments to sustain the 20-year old system. Ukrainian ministerial officials
466 "Highlighfs: Ukraine", UN-ECE Gas Center, on-line: <http://pc1S .tema.it/ungcpubdbIOULHTM> 449 Ukraine used to produce about 50 per cent of the entire Soviet output of iron ore and 40 per cent of manganese ore. "Business Report on Ukraine", Business Euro, 1998, Ch. VII, on-line: (Business -Europa Main) <http://www. business-europa.co.uk> 470 "Counrty Analysis Briefi Ukraine", GGU University Library Guide, June 1999 on-line: (GGU Main) ~http:/!www.eia.doc.gov> "' Ibid.
estimated that repairs of almost 500 kilometers of a pipeline were needed in 1998, but
there were enough resources for repairs of only 26 kilometers.472
According to the program launched by the government, foreign investments will
be used to finance a rnajority of the projects directed on development of the remaining
resources and the pipeline transit systern. Before the Law on Production Sharing
Agreements was passed by the Parliament of Ukraine in June 1999, investments in oil
and gas sectors were mostly p laced through joint venture agreements. Currentl y, foreign
investos have been complaining about the numerous barriers to investing in Ukraine,
including the unwillingness of the country's leadership to achieve consensus on the need
to achieve any significant changes in economic and legal refom and privatization.473
Investors have also mentioned a lack of understanding of international financial
procedures, fiequent resistance to western technologies by local parinen, and an
extremel y burdensome and confùsing tax system.
B. Taxation of Energy Sector
In September 1999, the Ukrainian Parliament finally passed the Law on
Production Sharing Agreements (PSA), which was eagerly awaited by numerous
potential foreign investors for years.'74 Before the law was adopted, there were two
principal ways for foreign companies to obtain the nght to exploit natural resources in
-- - ---
"' Ibid. 473 Paviiashvili I., Dmitriev V., Burger E. "The Needfor and Future o/Production Sharing Legislotion in Uhruine", B N A Eastern Europe Reporter, Vol. 8, No. 19, November 1998 on-line: ~hrrp://www.nilg.com/ukrJ~a.hmi> 474 The Law of Ukraine "On the Producrion Shanng Agreements" of September 14, 1999, No. 1039-XIV.
~ k r a i n e . ~ ~ ~ A fint way was throua the establishment of joint venture with a Ukrainian
Company, which had obtained a license for exploration or extraction of naturd resources.
The second type of cooperation was through the agreement on joint activities by
establishing an agreement with a Ukrainian company-license holder to jointly exploit the
resources.
With the adoption of the PSA Law, the general procedure as weil as the
guarantees given to foreign investors significantly improved. Under the iaw, the parties'
relationship is regulated by the production sharing agreement signed b y both parties,
governing the work on exploration and extraction of minera1 resources. The !aw
determines the sharing of extracted products, their transportation, processing, storage,
utilization and s e ~ l i n ~ . ~ ~ ~ The Cabinet of Ministers of Ukraine and relevant local
authorities are the state parties to the agreement. One or more Ukrainian or foreign legal
entities or citizens can be the other part of the agreement and must cary out a mutual
responsibility for the implementation of a PSA."~ Based on the agreement, an investor is
commissioned by Ukrainian authorities to perform al1 the work at his own expense and
risk, and is to be compensated with the product after it has been extracted and shared. A
significant advantage the Ukrainian PSA Law offers over the Russian one is that lists of
subsoil areas subject to PSAs in Ukraine are approved by the Cabinet of Ministers, rather
than by the Parliament.
The law establishes a special tax regime for the investor. It provides that the
investor is only subject to the following taxes and mandatory payments throughout the
- - -
475 "Legal Framework Affecting Foreign Invesment", Trade Mission of Ukraine, Apnl 1 5 , 1 997, Ch. Business Enterprises, on-1ine (Brama Main) <http://www.brarna.com> 476 The Law of Ukraine "On the Production Sharing Agreemenrs" of September 14, 1999, No. 1039-XIV, art. 2.
term of the validity of the PSA agreement, which may extend up to fi* years. 47s I,
accordance with the law, the investor must pay certain taxes in sharing production instead
of cash payment and is exempt fiom certain mandatory and local state taxes. The law
provides for the following taxes to be paid by the investor:
1. Value added tax;
2. Tax on the profit of enterprise;
3. Fee for geological exploration works perfomed at the expense of the state budget
4. Payroll taxes such as payments Social Security Fund and Pension Fund;
5. Payments for the use of mineral resources specified in the production sharing
agreement;
6. Payments for the issuance of special permits/licenses
Under the PSA agreement the value added tax must only be paid on the product
that is subsequently sold in ~kra ine . "~ The investor and subcontractors involved in PSA
activities do not pay VAT and custom duties (except custom fees) on goods and
equipment shipped into Ukraine and used for implementing a PSA, and shipped out aAer
a PSA agreement is c ~ m ~ l e t e . ' ~ ~ This equipment is not subject to exporthmport licensing
and quota limitation. Foreign investors have repeatedly complained that the Law does not
adequately specify the expenses that are deductible for profit tax cal~ulaiion.'~~ Also, the
477 Ibid., art. 5. 4 78 Ibid., art. 25. a 79 Ibid., art. 25.6. "O ibid., art. 25.7. 481 Pavliashvili I., Dmitriev V., Burger E. "The Need for und Future of Production Sharing Legislotion in Ukraine", BNA Eastern Europe Reporter, Vol. 8, No. 19, November 1998. Ch. II1.B.
law provides that the investor is also exempt fiom paying profit repatriation tax for the
profit received under a P S A . ~ ~ '
The product obtained by an investor under a PSA is subject to VAT payrnent
when sold localIy, and is not subject to any tax and custom duty payrnent (except custom
fee) when exporied fiom ~kraine ."~ However, the Law does not provide for any
simplified procedure for the customs clearance of items imported in comection with the
implernentation of a PSA. Additionally, the PSA Law neither allows for an excise tax
exemption for property imported into Ukraine nor does it allow for the temporary import
of goods (equipment) for a period longer than a year.
The law provides that a part of the extracted product that is intended to
compensate the investor's expenses ("compensation product") should not exceed 70 % of
the total extracted during the calculation period (usually one quarter), until the investor's
expenses are reimbursed in Unlike the Corporate Profit Law, which limits the
cany-forward of loses to a period of five years, PSA legislation specifically aIlows
investor to contribute its expenses to subsequent tax periods for taxation purposes without
any iirnitati~n.'~~
The procedure and amount of fee payment for geological exploration performed
at the expense of the state budget are specified individually by every PSA?~ The Cabinet
of Ministers may terminate, suspend, or restrict the investor's nght to utilize mineral
resources under a PSA, when there is a direct hazard to hurnan life, health or to the
environment. The investor's nghts are to be restored once the restrictive factors are
The Law of Ukraine "On the Production Sharing Agreernenfx" of September 14. 1999. No. 1039-XIV, art. 25.3 483 Ibid., art. 25.7. "' Ibid.
removed. The law also prohibits the unilateral withdrawal of h d s f?om the investor's
bank accounts opened in Ukraine to service the activities under a PSA.
Foreign investors c m also participate in the transportation and distribution of
natural gas under the Law on Concessions of July 1999 .~~ ' The Law provides that
existing facilities may be offered in concession to private companies, including foreign
investors, allowing also private companies to constnict new faciIities for the
ûansportation and distribution of natural gas under concession agreements.488 The
Ukrainian government provides state guarantees for private investments made under
concession agreements as well as approves the list of state-owned facilities that may be
offered by concession tenders. Other govemmental agencies, such as the Ministry of
Energy and Fuel and Naftogas of Ukraine may submit suggestions to the Cabinet of
Ministen in order to include certain facilities in the list. A list of municipal facilities
O ffered for concession tenders is approved by plenary sessions of local municipali t i e~ . "~
The Cabinet of Ministers approves concession tenders for state-owned facilities
and local municipalities approve tenders for municipal fa~ilit ies. '~ Concessionaire must
pay a concession fee upon the signing of a concession agreement with the authonties for
activities or facilities offered in conces~ion.~~' Concession agreements may be signed for
a period of 10 to 50 years.4g2 In order to perform a concession agreement on
transportation and distribution of natural gas, concessionaire will need to obtain an
-
485 Ibid., art. 25.4. 486 Ibid., art. 25.8. 4s 7 The Law of Ukraine "On Concessions" of July 16, 1999, No, 997-XIV, art. 3.2 on-line: (Ra& Main) <http:/hw.rada.kiev.ua> "' Ibid., art. 3. 1 8 9 Ibid., art. 3.3. 490 Ibid.. arts. 6.3. and 6.4. 49 1 Ibid., art. 6.7. 192 Ibid., art. 9.1.
appropnate license.") State authorities-parties to a concession agreement must obtain and
not disclose the concessionaire's commercial secret, and should not interfere in
commercial activities of the conce~sionaire.'~
The concessionaire has to use locally developed technologies, materials and
equipment, if the concession agreement does not speciQ o ther~ ise . '~~ Upon completion
of the agreement, the concessionaire must retum the concession facility back in an
appropriate technical condition, and may retain ownership rights for the product and
profit received under it.'% The concession offering entity cames the nsk of accidental
crash or damage of the concession facility, unless the concession agreement specifies
otherwise. The concession agreement does not offer any special tax exemptions for
concessionaire, as does the PSA. The concessionaire is subject to the import duties, VAT
and excise duty for products irnported into Ukraine for activities under concession
agreements to be paid as required by Ukrainian iegislation.497
V. Possible Improvements
1. Russia
In the case of Russia, significant changes to the system of taxation have been
made through the introduction of the new Tax Code on July 3 1, 1998. Only Part 1 of the
code was adopted, and it would be hard to speak about any concrete changes in the
- -
193 Ibid., art. 1 1. 494 Ibid., an. 17.2. 495 ibid., art. 18.2. 4% Ibid., art. 20.1.
system without adoption of the entire document. The first part o f the code has set out the
fundamental principies of the new, revised Russian tax systen:. It has refined some
concepts, including the rights and duties of a taxpayer, the competency of the Russian
Tax Service as well as a change in some procedural norrns.
The major change that has corne with the adoption of the first part of the code is
the substantial improvement of the taxpayer's status. The code has replaced the
provisions of the 1991 Law on the Fundarnentals of Taxation in the Russian Federation,
and adopted the universal principles of faimess and equity found in tax regulations of
many industnalized western c o u n t ~ i e s . ~ ~ ~ Even though the improvement of the taxpayer's
status seems like a positive change, the Russian Tax Service has not been able to find an
effective alternative to the previous extremely hi& fines in order to improve tax
collection.
The new tax code has drarnatically decreased the number of taxes fiom about 200
to 30, which has simplified the system to some extent. This has brought more clarity to
the system, as well as slightly reduced the tax burden, provided that after numerous taxes
were abolished, the major taxes were also increased to partially compensate for the lost
499 revenues.
The Russian tax system still relies heavily upon payroll, gross income, or
expenditures in calculating profitability. There have been numerous proposals made in
the Russian Parliament to abolish turnover taxes in favor of a system of indirect sales
taxes, as far as it is considerably easier to administer VAT than a direct sales tax. It
49: Ibid., art. 26. 498 Voltc henko M., "Russia Modfm Its T a Legis lation: New Russian Tar Code Signijicanrly Impro ves Tuxpayer 's Statu", Woridwide Tax Daily, December 7, 1998, para. 13, on-line:WL(WTD)SPR '* ibid., para. 1 .
would simpli* the administration of the taxes, given that the number of retailers in
Russia is much higher than the nurnber of producers and who~esalers.~" The need for
such changes that wouId make taxation of the retail sector more efficient. It was also
supported by the World Bank estimate, providing that 70 % of the taxable income in
Russia's retail sector is ~ n r e ~ o r t e d . ~ ~ '
There are numerous other problerns that the Russian tax system has to overcome
in order to imprwe the general tax and investing climate. They wouid include
arbitrariness and corruption among the State Tax Service representatives and the need of
formulation of tax policy by the centralized authority, which would ensure uniformity
and preclude contravening locally-designated policies. Thus, while 'fiscal federalism'
may be accepted in conducting tax collection, it should not be permitted in a tax policy
form~lation.~~' Even though the legislation provides for limits on deductibility for
essential business essentials, including scientific research, planning and development
expenses, business entities should also be afforded full deductions in order to attract and
encourage progressive growth of the hi-technology sector.
Kazakhstan has apparently been one of the most successful countries in the region
in irnplementing tax reform and attracting foreign investments to rebuild its economy.
The tax system is solidly based on the Tax Code, which was adopted in 1995, which gave
5 0 0 Herzog T., "Russian T a S'stem From Soviet Era Needs Reform in Almosr Every Phase", Journal of International Taxation, Vol. 8, No. 3, March, 1997, p. 116, on-line: WL(JINLT) SO 1 Ibid., p. 1 17.
ibid., p. 1 14.
Kazakhstan a comparative advantage by providing a stable and clear tax environment to
foreign investors before other counties in the region. The code contains ail tax laws in
Kazakstan, including the local ones. The nurnber of taxes was reduced from
approximately 50 to about 13 plus obligatory fees.
The new strearnlined and simplified tax system has considerably eased and
facilitated the investors' comprehension of their Iiabilities. The tax code has also
provided for a more strict control of any modifications through the system of their
obligatory adoption by the Ministry of Finance and the State Tax ~ e r v i c e . ~ ~ ~
There are also several important improvernents to the tax system that can be made
to fbrther increase the volume of foreign i n v e s t r n e n t ~ . ~ ~ One of the most important ones
concerns the unavailability of tax credits for VAT paid on capital goods, which basically
makes an investor pay 20 % tax on the value of in~estment .~ '~ Such improvement seems
to be of particular importance for Russia - country critically interested in foreign
investments.
Some tax analysts have also proposed that the Kazakh tax system should switch
from the conventional income tax to a flat taxM6. The flat tax is more simple and straight
forward, and encourages savings and investment, avoiding the inherent income tax
problem such as the mis-measurement of the tax base because of inflation."' It was also
suggested that the flat tax would be particularly beneficial for taxation of natural
503 McClure Jr., Charles E., "Lessonsfiom Tax Refonns in Kazakhstan", Tax Analysts. February 24, 1997, on-Iine: WL(WTI))NEW
%id. 'O5 See Law on Taxes to the Budget, art, 54, supra note 179. 5 0 6 It has also been called a cash-flow tax. See Ibid. s07 Ibid.
resources, because it would use economic rents as its tax base (the excess of income over
the costs of production including the cost of equity capital).M8
3. Ukraine
Like the Russian Federation and Kazakhstan, Ukraine faces a tough challenge of
overcoming numerous problems encountered with the economic and political transition
since its independence. Its political system still remains unstable, crime and bureaucracy
remain major obstacles on a course of fiuther improvement of the general investment
environment. Foreign investors confiont the legal impediment related to various areas,
including lack of clear legislation, erratic implementation of laws and decrees, and the
lack of confidence in Ukrainian legislation. However, the Ukrainian tax system remains
one of the most important obstacles hindenng the process of improvement of the general
investment environment, and consequently, the inflow of foreign investments into the
economy. European Bank of Reconstruction and Development characterized current state
of Ukrainian tax system as one, where "legal rules do not impose major obstacles to
creating investment vehicles and security or to repatriation of profits, however, they are
,, 509 in need of considerable improvements .
The tax reforrn that commenced in 19954997 has brought some changes to the
t a system of Ukraine, reducing the total number of taxes, introducing a single uniform
tax for small businesses, unifonn agricultural tax base on the value of the land and
procedure of writing off and restructuring of VAT debts for agricultural producers, and a
'Ofi ibid.
slight reduction of a general payroll taxes. However, al1 these changes have not been able
to make the general system of taxation much more effective and encouraging.
One of the improvernents of the tax system would be through the broadening of
the tax base through the Iiberalization of value added and income/profit taxati~n.~"
Broadening the s p e c t m of taxpayers would allow decreasing the tax burden currently
laid on the shoulders of that small fiaction of profitable entities, avoid significant
gains/losses in the future associated with changes in the tax5" This would also help to
reduce the tax burden in order to get back more taxpayers from operating in the shadow
economy.
It is vitally important that the improvement process of tax system comprises the
introduction of fair and effective rules of assessment and collection of persona1 income.
The personal incorne tax maximum threshold should be lowered to encourage savings,
which would be consequently reinvested back into economy. The income tax system
should refiain from using numerous deductions, except for standard deduction if it is used
instead of tax-fiee al l~wance."~
The key legislation regulating the collection of corporate income tau also lacks
significant improvements, such as proper stnicturing and providing several key
definitions. A complex structure of the legislation and inaccurate definitions contribute to
the increase of public and private costs of tax administration and cornpliance. The
- -- - - - - --
'O9 Ishaq M., "Foreign Direct Invesrmenrr in Ukraine Since Independence", CERT discussion paper, Herion-Watt University, Economic Department, May 1997, Ch. 4.1. 5'@Stuben, N.,"Concepmal Smcture of the T a System in Ukraine", September 1997, on-line: chttp://www.tax.com> ' ' ' 1s haq M., "Foreign Direct Investmenrs in Ukraine Sînce Independence", CERT discussion paper, Heriott-Watt University, Economic Department, M a y 1997, Ch. 4.1. 5 1' Luzik P., "International Experience of T a Refonn and Lessons for Ukraine", Discussion paper No. 99/03, Center of Economic Rciorm and Transformation, February 1999, p. 45.
legislation should eliminate barrien for legal portfolio investments abroad by providing a
possibility of obtaining tax credit for foreign tax on passive income and capital ,gains.'"
Issues of clarity, stability and predictability of the tax system also deserve
separate attention. Ukrainian tax authorities have been repeatedly making interpretations,
which conflict with official laws and decrees. A good example of this would be
cancellation of the decree providing £ive-year tax holidays for qualified foreign investors
after January 1, 1995, or abolishing of VAT privileges for goods produced by enterprises
with foreign investments in 1 995 .'la
Currently, there are several proposals to reform the VAT in ~kra ine .~ ' ' One of
them is an introduction of a European version of value-added tax with a broad base and a
single reasonable tax rate. This introduction would reduce general administrative costs
and allow cross-checking between VAT and corporate ôssessrnent~.~'~ Another proposal
Iooks for exclusion of taxable supplies fiom any additional indirect taxes where it is
practically
The Ukrainian tax system needs further synchronization to reconcile common
matters among al1 the regulative noms. These measures would attract foreign investors,
who may appreciate compatibility in tax mles as much as the difference in tax rates.
Currently, it is being done through the introduction of a new Tax Code of Ukraine, which
\vas passed by the Parliament of Ukraine on July 13, 2000. In the area of effectiveness of
5 13 Ibid., p. 36. "' Five-year tax holidays were repealed by the Corporate Profit Tax of 1995. VAT privileges were abolished in spite of the fact that Cabinet of Ministers' Decree "On the Regime of Foreign Investments" of May 1995 exempted companies with foreign investrnents from al1 types of taxes for five years.
Luzik P., "/nrernarional Experience of T a Rejorm and Lessonsfor Ukraine", Discussion paper No. 99/04, Center of Economic Reform and Transformation, February 1999, p. 45. "6 ibid. SI7 Stuben, N.,"Conceptual Srmcrure of rhe T m System in Uhaine", September 1997, on-line: chnp://www.tax.com>
legal rules on investment, the European Bank of Reconstruction and Development placed
Ukraine in the second category, defining the niles of the country as: "Legal rules are
usually unc1ea.r and sometimes contradictory. Legal advice is ofien difficult to obtain.
rr 518 The administration and judicial support of the law is rudimentary .
VI. Conclusion
The analysis of the systems of taxation in Russia, Kazakhstan and Ukraine
demonstrates that there has been a great amount of work done by the govemments and
parliarnents of the respective countries in order to improve and encourage foreign direct
invesmient that would Eurther fuel the process of market transformation. There are
numerous achievements as well as numerous deficiencies and irregularities that have to
be rectified in order to facilitate the infusion of foreign investments in their developing
economies.
Kazazakhstan has made substantial progress in transforming its economy into a
market-based system. The country's macro-economic indicators were stabilized, and the
domestic market is fairly liberalized and opened to foreign competition. At the time when
the overall regulatory role of the state was considerably reduced, its political leadership
was able to achieve and sustain reform-oriented political and economic initiatives. The
country's GDP is on a rise again, afier the dramatic consequences of the Russian crisis,
which affected almost al1 CIS republics. The resuits of the most recent economic reports
518 Ishaq M. , "Foreign Direcr Invesnnenrs in Ukraine Since Independence", CERT discussion paper, Henott-Watt University, Economic Department, May 1997, Ch. 4.1.
published by the European Bank of Reconstruction and Development indicated that the
annual inflation rate has also fallen fiom a peak of 3,000 % in mid-1994 to a record low
levels of 1 1 % by the end of 1 997, and is projected to reach 8.8 % by the end of 2000. The
country's external deficit has slightly increased during the last few years, but mostly
because of the imports of capital goods needed to deveiop Kazakhstan's rich natural
resources. The problem of hancing the extemal deficit does not currently constitute a
major problem since the country has significantly benefited fiom large foreign direct
investrnent inflows, mainly into the gas and oil sectors.
The country has been able to achieve significant positive results in the
transformation of its tax system. On advise of UIF tax experts, the Kazakhstani tax
system reform was started quite early, which gave the country a comparative advantage
as compared to the Russian Federation and Ukraine. The reform has brought the tax rates
to a rensonable level, and helped the government to bener stnicture and use special
incentives for investors-
Refonn of the system of taxation was predominantly based on the reform of the
general tax policy, and it must be admitted that the country was able to achieve
significant improvements. It was dramatically modified and brought up to the
international standards. The policy has modified VAT and excise taxes, revised export
taxes and introduced a modem western-style global income tax on individuals.
The country has also introduced a new simplified and refined comprehensive Tax
Code, which includes al1 the taxes collected on the temtory of Kazakhstan. However, like
Russia and Ukraine, in Kazakhstan one of the major pitfalls of the tax reform was its
predominant preoccupation with tax policy. Kazakhstan, in particular, neglected to follow
a western advise, and gave a low priority to modernizing tax administration.
Both Ukraine and Russia have not been even able to finish the work on
modemization of their respective tax policies. Largely infiuenced by the lack of political
unity and will to proceed with the generai economic refoms, including reform of their
respective tax systems, the parliaments of both countries have been continuously
modimng and reverting the legal rules affecting activity of the foreign investon.
In the case of Ukraine tax reform has been stalled for the last decade
predominantly because of the absence of political consensus that resulted from the
division along ethnic and politicai lines. On one side, there is mostly Russian-speaking
population of the Eastern Ukraine and the Cnmea that strongIy supports a closer
economic and political integration, and customs union with Russia and the CIS countries.
On the other side, there is a predominantly Ukrainian-speaking population of western and
central parts of Ukraine that supports establishment of closer ties with the western
European countries and economic organizations, including the adoption of a western type
tax system. Ukraine was able to pass the new tax code in a first reading only last June.
In the area of fiscal policy, Ukraine w s continuing to make progress towards
economic stabilization. The rates of inflation were brought down by the end of 1998
since their steep decline that started in 1991 -1 992. Currently, Ukraine was also able to
reduce the budget deficit and straighten up its monetary policy. Some of the progress was
lost afier it was affected by the Russian cnsis, but by the end of 1999 the country
managed to maintain a measure of financial stabilïty. Since 1997, inflation was up ten per
cent fî-om 10 % in 1997. However, in 1999 it reached 20 % and is expected to stay the
same for the year 2 0 0 0 . ~ ~ ~
There is no doubt that throughout the last few years economic developments in
Ukraine had a negative effect on the investors confidence in emerging market economies
following the crisis in Russia and Southeast Asia in 1998, that also caused significant
outflows of capital. The current budget deficit remains at 2 % of the country's GDP,
down îÏom 25 % and 16 % in 1992 and 1993 r e ~ ~ e c t i v e l ~ . ~ ~ ~ However, the budgetary
situation remains difficult. Cash revenues were weaker than expected partly because of
the weak economic situation, but mostly because of delays in implementation of a
comprehensive economic and tax reforms.
International financial institutions have aiso been concemed with the stalled
economic reforms in the country. The major concem of the current tax reform includes
major structural measures, such as M e r revision of the persona1 income tax, VAT and
business profits tax. Government failed to reduce the nurnber of tax exemptions and other
structural obstacles such as the earmarking of revenues.
Continuous modification of the country's tax was repeatedly criticized by foreign
investors as one of the most destabilizing factors hindering the inflow of FDI in the
country. The most famous examples are the canceilation by the 1998 Profits Tax Iaw of
five-year tax holidays for companies with qualified foreign investments previously
offered by the Cabinet Decree in 1995. In August, 1999 the Cabinet of Ministers
abolished tax privileges for joint ventures with foreign investments and restored them
519 Table 5 , Chapter 11. See also European Bank of Reconsttuction and Development "Transition Repon Upciare", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000, p. 9.
four days later, motivating such action by the intention to fil1 up the budget and clear off
social payment arrears. The govemment canceled the resolution four days later
influenced by the fact that joint ventures bnng the majority of oil products into Ukraine.
The government also gave more importance to the fact that foreign ventures provide fuel
and keep fuel prices 10w.'~'
The Parliament's constant revision of foreign investment legislation seriously
undermined the country's promises contained in the prior legislation, and mistrated plans
of a lot of investors. The recent cancellation of tax holidays is particularly disturbing,
because they can be retroactively revoked at any tirne. The revocation of the tax holidays,
and particularly the cmde methods of their cancellation, has proven disruptive primarily
to foreign investors' morale. A11 these factors together have had a negative effect on the
overalI economic performance of the country, what can be proved by the FDI inflow
indicator~.'~
Curent rules and regulations create unbearable obstacles both for Russian and
foreign investors, what has an effect of slowing down foreign investments. Foreign
investors determine that major diseases of the Russian economy are an inadequate and
unbalanced system of taxation, customs regulations, and cumency laws.'*'
The Russian tax system has performed very poorly for the last decade for a
number of reasons. First of all, it is very cumbersome, complicated with the temtoriai
''O Table 4. Chapter II. See also European Bank of Reconstruction and Development "Transition Reporr Wpdare", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000, p. 1 1 . '" "Uhrainian Cabinet Resrores T m Privileges for Joint Enterprises", British Broadcasting Corporation, August 20, 1999. '" See Table 1 , Ch. II. See also European Bank of Reconstruction and Development "Transirion Reporr Wphre", Economic transition in Cenaal and Eastern Europe, the Baltic States and the CIS, May 2000, p. 15. ''' A. Andryukin, " What do Foreigners Seek in Rursia", Commercant Daily, November 16, 1999.
structure of the Russian Federation. In addition to the federal tax regulations and applied
with them rates, foreign investors has to take into consideration the regulations of about
56 republics, krak, oblasts and regions - subjects of the Russian Federation. This resulted
in& about 30 federal taxes and over 200 local and regional taxes-Using the momentary
weakness of the central govemment in Moscow, Russian most powerfùl republics, such
as Tatarstan and ingushetia were able to obtain most favorable tax treatment out of the
rest of the subjects of the Russian Federation. This disbalance in the tax regulatory
frarnework has created a 'tax anarchy' where each of the subjects of the Federation could
enact its own taxes and give its separate interpretation of the tax regulations.
The ability of Russia to start implementation of economic refoms was also
complicated by the continuing political instability. In addition to militaiy conflict in
Chechnia in 1998, for the last decade, the Russian Durna was dominated by the
Communist Party, which has become a major irnpediment in comrnencing cornprehensive
economic reforms, including the tax refonn.
Like Ukraine and Kazakhstan, Russia has started reforms in the sphere of tax
policy giving the last pnonty to the modernization of its tax administration and
introduction of international standards of bookkeeping and accounting. The levels of
evasion are epidemic, as the nominal tax rates are very high. Because foreign companies
are outsiders and have more at nsk, they c m not afford to ignore taxes as do many local
companies. Therefore, in order to fil1 out the budget, the tax rates imposed are very high,
considering that they are paid by a very few taxpayers.
This situation has dnven a lot of small businesses underground or made them
choose cash payments and barter as alternative ways of conducting business. Also, there
are nurnerous exemptions for a wide range of favorably treated taxpayers. Because of the
absence of clear legislation and procedures, as well as ineffective coordination and
interpretation of the tax legisiation by the Russian State Tax Service, Russian tax
inspectors have acted autonomously, leading to a very uneven treatment of taxpayers.
Not surprisingly, the outcome is a tax system, which fails to produce adequate
revenue to government. The current system with its many exemptions, underdeveloped
international tax d e s and dubious treaties with tax havens has also been prone to
facilitate a substantial capital flight and scare away foreign investon. Therefore, a major
cornprehensive refonn is long overdue and represents the only feasible escape from the
current situation.
Russia and Kazakhstan have been heavily relying on revenues from the
development of energy and mineral resources. This allowed both countries to receive a
sipificant inflow of revenues fiom their exports. On the other side, Ukraine has to find
the ways to receive the money inflow into the budget by finther improving the general
investment environment. Even though Ukraine does not have such massive natural
resources as the other two countries do, in order to be more cornpetitive on international
capital markets, it has to provide a maximally favorable investment environment through
improvement of al1 the other factors influencing investment. Otherwise, it will not be able
to cornpete with its neighboring natural resource titans, and will remain an outsider on
international capital markets.
The current attractions and obstacles to FDI of each of the countries cm be
surnmarized in the following table:
Table 14 Attractions and obstacles to foreign investors
Country/ 1 Russian Federation
2. Vast domestic consu- mer market;
3. Cheap and skiIled la- bor;
attributes Amactions
Obstacles
1. Mineral resources;
Crime; Conuption; Political instability; Legal uncertainty over investor nghts; De ficient tax system; Infrastructure Weak bank system
--
1. Political stabi!iv; 2. Mineral resources: 3. Cheap labor; 4. Balanced and moder-
nized tax system; 5. Currency regime 6. Strengthening bank sys-
Kazakhstan
1. Vast domestic market; 2. Geopolitical location; 3. Cheap and skilled labor, 4. Infrasmicture
Ukraine
The results in the table clearly demonstrate that Kazakhstan has an overall higher nurnber
of attractions as compared with the Russian Federation and Ukraine. It also supports the
findings that Kazakhstan was most successfûl in resmicturing and modemizing its tax
system as well as in attracting foreign direct investrnents.
Al1 three countries face numerous problems with their tax regulations related to
their consistency, mechanisms of implementation, and bureaucratie barriers. The finding
in the table are also reflected by the fact that Kazakhstan has been able to create the most
simple and stable taxation system, as well as a lower crime level, and more stable
political environment than in Russia or in Ukraine. Out of the three countries, Kazakhstan
has also provided the most favorable general tax holiday provisions for foreign investors.
The Kazakh t a system provides for fewer taxes, imposes lower rates on investors
and has been less fiequently modified that has been the case in Russia and Ukraine. This
situation can be partly explained by the unitary structure of Kazakhstan, which has been
tem 1. Relatively small cousu-
mer market 2. Bureaucracy 3. Comption 4. Infrastmcnirc
1. Crime; 2 Corruption; 3. Political insîabihîy; 4. Legal uncertainty over
investor rights; 5. Deficient tax system
ultimately able to provide a stable general investment climate through strong political
control of tax policy formulation by the central governrnent. By contrast, the tax system
in Russia and, to a lesser extent, in Ukraine remain very complex and unpredictable,
where foreign investon have to pay varying and constantly changing republican, regional
and additional local taxes.
Based on the findings of this study, a variety of different factors make a good tax
system. One of the central positive elements of a good system is its clarity. Dubious and
very complex tax systems create more space of arbitrary interpretation by the tax
collection senice. Consistency in interpretation is a concurrent requirement. A good tax
system should also tend to have a small nurnber of taxes. The system should be based on
major taxes, such as, personal income tax, business profits tax and VAT, with a limited
number of excises. The system should also offer reasonable rules of deductions,
depreciation, loss carryover and other mechanisms of facilitation of economic activity of
the subjects of taxation.
Al1 three countries have become Parties to investment and taxation treaties with
Canada and other countries in attempt to avoid tax barriers to cross-border transactions
and investment. The tax treaties signed by each of the three countries with Canada are
primariIy directed towards avoidance of double taxation. While these treaties can not and
do not resolve al1 the problems related to cross-border taxation, they undoubtedly indicate
a continuing interest of al1 three countries in encouraging foreign investments.
Bibliography
Legislation -
Legislation of the Russian Federation:
In rem arion al Agreements
- Canada's Bill C-37 Relating to Agreements Between Canada and Numerous Couniries for Avoidance of Double Taxation and Fiscai Evasion With Respect to Taxes on Income of May 17, 1996, World Tax Daily, October 9, 1996 on-line: WL(WTD)TTB
Na tio rz al L egislation
T a Code of the Russian Federiztion of January 1, 1999, General Part on-line: Lexis (Ruslegisline)
The Law "On Foreign Investments in the RSFSR", July25, 199 1 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Subsuflace", of October 28, 1992 on- line: <http://www.ist.ru>
The Law of the Russian Federation "Concerning the Fundamental Principles of the Taxation System in the Russian Federation" of December 27, 199 1, no. 2 1 18- 1 on- line: Lexis (Ruslegisline)
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The Law of the Russian Federation "On Amending the Law of the Russian Federation oti rhe Tau on the Profit of Enterprises and Organizations", No. 62-FZ, of March 12, 1999 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "Concerning Value Added Tu" of December 6 , 199 1, No. 1992-1 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On Excise" of FebruaIy 1 , 1996, No. 93-FZ on- line: (IST Main) <http://www.ist.ru >
The Law of the Russian Federation "On the Customs Duries" of February 5, 1997, No. 25-FZ on-line: Lexis (Ruslegisline)
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Law of the Russian Federation "On Subsurface" of February 2 1 1992, No. 2396-1 on- line: Lexis (Ruslegisline)
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The Law of the Russian Federation No. 187-FZ "On the Continental Shelfof the Russian Federation", of November 30, 1995 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Rates of the Allocations for the Reproduction of the Mineral Raw-Material Base", No. 224-FZ of December 30, 1995 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Federal Budget for 1997 No. 29-FZ of February 26, 1997 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "Or1 the Rates of the Allocations for the Reproducfion of the Mineral Raw-Material Base", No. 224-FZ of December 30, 1 995 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Highwuy Funds" No. 1759- 1 of October 1 8, 199 1 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Sfate Revenue Duy" of December 9, 199 1 arnended by the Federal Law No. 226-FZ "On lntroducing rhe Amendments and Addenda fo the law of the Russian Federation on the State Duty" of December 3 1, 1995 on-Iine: Lexis (Ruslegisline)
The Law of the Russian Federation "On Income Tax on Individuals" of December 7 , 199 1 on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On the Licensing of Certain Types ojActivities" No. 158-FZ of September 25, 1998 (with the Amendments and Additions of November 26, 1998, December 22, 1999) on-line: Lexis (Ruslegisline)
The Law of the Russian Federation "On Tanffs of lnsurance Premiums Payable to the Peusion Fund of t he Russian Federation, the Social Insurance Fund of the Russian Federation. the State Employment Fund of the Russian Federation, and the
Mandatos. Medical Insurance Funds for 1999" No. 1 -FZ (with the Amendments and Additions of October 25, 1999), of January 4, 1999 on-line: Lexis (Ruslegisline)
- The Law of the Russian Federation No. 2030-1 "On the Property T a of Enterprises" of December 13, 199 1 (with the Amendments and Additions of July 16, December 22, 1992, March 6, June 3,1993, November 1 1,1994, Apnl25, June 23, August 22, 1995, January 8, 1998, Febmary 10, May 4, 1999) on-line: Lexis (Ruslegisline)
Decrees
- Decree of the President of the Russian Federation No. 2270 of December 22, 1993 "On Certain Changes in Taxation and Interrelationship of Budgets of Drfirent Levels", with additions and arnendments as of December 24, 1993 online: W L (TST) Foreign Taxation
- Decree of the President of the Russian Federation No. 1004, "Concerning Some Questions of 7' Policy" o f May 23, 1994 on-line: Lexis (Ruslegisline)
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Instruction of the Finance Ministry of the Russian Federation No. 1 11 "On Procedure of Payment for Ercise Tax on Oil including Gas Condensate", para 1 , Rus legisline, News of December 1, 1992 on-line: Lexis (Ruslegisline) News
Resolution of the Government of Russian Federation of November 1, 1992 No. 847 "Excise Dury on Oil Exctracted on RF Territory" on-line: Lexis (Ruslegisline)
The Governrnental Resolution of the Russian Federation "On Introduction of &port Tariff on Goods Exported from the Russian Federation", Decree No. 91 of December 3 1, 1 99 1, reprinted in Economicheskaya Gazeta, February 1 5, 1992
Instruction of the State Tax Service of the Russian Federation No. 44 "On the Order of the Calculation and Payment to the Budget and the Target-oriented Use of Deductions for rhe Reproduction of the Mineral-Raw Material Resources" of December 3 1, 1996 on-line: Lexis (Ruslegisline)
the Letter of the State Tax Service of the Russian Federation No. ShS-6-07/611 "On Melhodological Directions for the Conducr of Documentary Inspections of the Tarpayers Paying Taxes for the Benefit of the Road Funds to Be Used in Practical Operation" of September 14, 1998 on-line: Lexis (Ruslegisline)
Procedure for Collecting Insurance Prerniurns and Temporary Target Fee for the Benefit of the Pension Fund of the Russian Federation (Approved by the No. 800 of July 2 1, 1998) on-line: Lexis (Ruslegisline)
Letter of the State Tax Service of the Russian Federation No. ShS-6-0716 1 1 "On Methodological Directions for the Conduct of Documentaty Inspections of the Tàxpayers Paying Taxes for the Benejil of the Roud Funds to Be Used in Practical Operation" of September 14, 1998 on-line: Lexis (Ruslegisline)
Letter of the Moscow Department of the Ministry of Taxes and Fees No. 1 1 - 1411 739 1 "On the Order of the Introduction of the Sales T m on the Tem-toty of the City of Moscow" of June 23, 1999 on-line: Lexis (Ruslegisline)
Power-Sharin P Treaties
" n e Supplemental Treaty Beîween the Rwian Federation and the Administratiou of Irkutsk Oblast in Area of Budget and T a Policies ," of May 27, 1 996 on-line: h t t p : / / b l a c k . i n f o r i s . ~ o v . s d i n f o b a s e / ~ c = 1 4 149
"The Supplemental Treaty Beiween the Organs of State Power of the Russian Federation and the Administration of the Republic of Komi in Area of Budget and T m Policies ," arî.3, of March 20, 1 996 on-line: http://black.infons.~iov.su/ infobase/wwwr.exe/a/90.new/?doc=3 5 1 1 9
"The Supplemental Treaty Between the Organs of State Power of the Russian Federation and the Administration of Rostov Oblast in Area of Budget and T m Policies," art.3, of May 29, 1996 on-line: http://black.inforis.nnov.su/infobase/ wwwr.exe/ a/90.new/?doc=15483
The S~rpplemental Treaty Berneen the Organs of State Power of the Russian Federotion and the Administration of Khabarovsk Krai in Area of Budget and T a Policies ," art.2, of July 24, 1996 on-line: http://black.inforis.~ov.su/infobase /wwwr.exe/ a/90.new/?doc=34669
Legislation of Kazakhstan:
International Agreements
- Canada-Kazakhstan Income and Capital Tax Convention and Protocol, signed on September 25, 1 996, Tax Analysts on-line: WL(WTD)TTR
The Law "On State Support for Direct Investment" of February 1997 on-line: < http ://www . herald.asdc. kz/research/index. h t m b
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Decrees
- Decree of the President of the Republic of Kazakhstan having the force of Law, "On State Registration of Legal Entities", of December 10, 1993 on-line: chttp ://www.herald.asdc.Wresearch/ index.html>
- Edict of the President of the Republic of Kazakhstan having the force of Law No. 2828 "On the Subsurface and lts Utilization" arnended by the Law of the President of the Republic of Kazakhstan of August 11, 1999 on-line: < h ~ p : / / w w w . h e r a l d . a s d c . k z / r e s e i l r ~ h / c o ~ I ~
- Edict of the President of the Republic of Kazakhstan having the force of Law "On Accounting Having the Effect of Law", of December 10, 1993 on-line: chttp ://www. herald.asdc.Wresearchl index.htmb
- Edict No. 2235 Having the Force of Law of the President of the Republic of Kazakhstan "Concerning Taxes and Other Obligatov P ayments to the Budget", of April 24, 1 995 on-line: chttp://www.herald.asdc.kz/research~index.htmI~
Legislation of Ukraine:
International Agreements
- Canada-Ukraine Income and Capital T m Convention signed on March 4, 1996 Tau Analysts on-line: WL(WTD)TTR
- The Law of Ukraine "On the System of Taration" of June 25, 1991, No. 39 on-line: (Rada Main) chtrp://ww~.rada.kiev~u~
- The Law of Ukraine "On the T m t i o n of the Profis of Enterprises", of December 28, 1994. No. 335194-BP on-line: (Rada Main) <http://www.rada.kiev.ua>
- nie Law of Ukraine "On Amendments to the Law of Ukraine On the Taration of the Projir of Enferprises" of May 22, 1997, No. 283-97-BP on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Enterprises and Orgoriization Incorne Tax" of February 2 1, 1992, No. 2 146-12, art. 5.1 on-line: (Rada Main) <http://www.rada.kiev.u;~
- The Law of Ukraine "On Taxation of Personal Incorne*' of July 5, 1 99 1 , N 1 306-XII on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Value Added Tàx" o f Apnl3,1997, No. 168/97-BP on-line: (Rada Main) chtrp://www.rada.kiev.u~
- The Law of Ukraine "On Cemin Questions Concerning Excise Taxation" of November 16, 1995 on-line: (Rada Main) ~http://www.rada.kiev.ua>
- The Law of Ukraine "On the Llnified Cusfoms T a n ? ' of February 5, 1992 on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Amendments to the Law On the Unified Customs Tarzy' of April 3, 1997 on-line: (Rada Main) <http://www.rada.kiev.u@
- The Law of Ukraine "On Stamp Dufy" of May 13, 1999, No. 643-XIV on-line: (Rada Main) ~http://www.rada.kiev.ua>
- Law of Ukraine "On Cornpulsory Payment to the Social Security Funcï' of June 26, 1997, No. 402197-BP on-line: (Rada Main) <http://www.rada.kiev.ua~
- The Law of Ukraine "On Road Tar" of December 1 1, 199 1 , No. 1963-XII on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Tarntion of Vehicle Owners" of February 18, 1997, No. 75- 97 - BP on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Land Tar" of July 3 , 1992, No. 2535411 on-line: (Rada Main) ~http://www.rada.kiev.ua~
- TlieLawofUkraine"0nPatentingofCertain TypesofEntrepreneurialAaivity"of March 23, 1996, No. 98/96 - BP on-line: (Rada Main) Qttp://www.rada.kiev.ua>
- The Law of Ukraine "OH the Production Sharing Agreements" of September 14, 1999, No. 1039-XIV on-line: (Rada Main) <http://www.rada.kiev.ua>
- The Law of Ukraine "On Concessions" of July 16, 1999, No. 997-XIV, art. 3.2 on- line: (Rada Main) <http://w.rada.kiev.ua>
Decrees
- Decree of the Cabinet of Ministers of Ukraine "On the Regime of Foreign Irrvesrntent" of June 5, 1993, No. 55-93 on-line: (Rada Main) <hnp ://www.rada.kiev.ua>
- Decree of the Cabinet of Ministers of Ukraine "On State Duty" of January 2 1, 1993, No. 7-93 on-line: (Rada Main) <http://m.rada.kiev.ua>
- Decree of the Cabinet of Ministers of Ukraine "On Creation of the Ukrainian I>rnovation Company*' of Apnl 13,2000, No. 654 on-line: (Rada Main) <http:I/www.rada,kiev.ua>
- Degree of the Ministry of Economy, Ministry of Finance and National Oil and Gas Cornmittee No. 14/3-787-5767 on-line: (Rada Main) <http://www.rada.kiev.ua>
- Decree of the Minisüy of Finance of Ukraine "On Amendments ro the Procedure of Calculafing and Implementation of Rent Paynients for Oil and Gas of 20.02.1998, No. 39" of September 19, 1999, No. 13 1 on-line: (Rada Main) Qttp://www.rada.kiev.ua>
- Decree of the Cabinet of Ministers "On Local Taxes and Duties" of May 20, 1993, Xo. 56-93 on-line: (Rada Main) <http://www.rada. kiev.ua>
- The Order of the State Tax Administration "Regulations on the Procedure for Regisfration of Permanent Establishments of Non-Residents in Ukraine as Inconze Tar Payers" of January 16, 1 998, No. 23 on-line: (Rada Main) <http://mv.rada.kiev.ua>
- Instruction of the Ministry of Environment of Ukraine b'Methodoto~ of Enumerating of Paynlents for Causing Environmental Pollution" of May 24, 1993, No. vd930524
- Annexes 1 and II to the b'Procedure of Enumerating of Payments for Environmental Poiitrrion" of March 1, 1999, No. 303 on-line: (Rada Main) <http://www.rada.kiev.ua>
Seconda- Material: Country Reports
Amencan Chamber of Commerce, " Taration of Non-Residerr t Debr Investors", position paper, Kyiv, Ukraine, 1998 on-line: (ACC Main) cht~://www.amcharnukraine.kiev.ua>
Business Information Service for the Newly Independent States (BISNIS), "Tax Q Accounting", Country report on-Iine: (BISNIS Main) ~http://www.bisnis.doc.gov>
Business Information Service for the Newly Independent States (BISMS), "hvestrnent CZimate in Kazakhstan", December 1999 on-line: (BISNIS Main) ~ h t t p : / / w w w . b i s n i s . d o c . g o v / b i s n i s / c o ~ 7 . h t m >
Business Information Service for the Newly Independent States (BISNIS), "l)rvestment CZimate in Kazakhstan", Country Report, BISNIS, 1998 on-Iine (BISMS Main) <http://www.bisnis.doc.gov>
Business Information Service for the Newly Independent States (BISNIS),"Commercial Overview of Kazakstad', December 1999 on-line (BISNIS Main) http://www.bisnis.doc.govlbisnis/ country/kazakstan.ht~
Business Euro, "Business Report on Ukraine", 1998, Ch. VII, on-line: (Business - Europa Main) ~http://www.business-europa.co.~k>
Department of Foreign Affairs and international Trade "A Guide ta Doing Busi~tess in Ukraine" on-line: (DFAIT Main) <http://www.dfait-maeci.gc.ca>
Department of Foreign Affain and International Trade, "The Guide to Doing Business in Ukraine", May 1998, Ch. IIi.3.2 on-line: (DFAIT Main)
East European Banker, "Eastern and Central European FDI Levels Up", news brief, Lafferty Publications Limited, June 1999
Emst & Young , "The Invesrment CZimare in Russia", Expert Institute, 1999 on-line: WL(WTD)
Emst & Young, "Doing Busi~zess in Kazakhstan", International Taxation, October 1. 1994 on-line: WL(WTD)
Energy Information Administration (EIA), "Caspian Sea Region Country Analysis Brief' GGU University Library Guide, Analysis of Ukraine, June 1999, on-line: (EiA iMain) <http://www.eia.doc.gov>
European Bank of Reconstruction and Development b'Trunsition Report Updare", Economic transition in Central and Eastern Europe, the Baltic States and the CIS, May 2000
GGU University Library Guide, "Country Analysis Brie$ Ukraine", June 1999, on- line: (GGU Main) <http://www.eia.doc.gov>
Janet Matthews Information Services, "Certtral and Eastern Europe: Conclusions", Quest Econoniic Database, June 1 1, 1999
Show Case Europe, ''Country Commercial Guide: Ukraine", Fiscal Year 2000, U. S. Commercial Service on-line: (SCE Main) <http://www.sce.doc.gov>
The International Tax and Investment Center (ITIC), "Report on Transition in CIS' , Moscow, June 1999
Trade Mission of Ukraine, "Legui Framework m c t i n g Foreign Investment", , April 15, 1997 on-line (Brama Main) <http://www.brarna.com>
UN-ECE Gas Center, "Highlighw: Ukrairie", on-Iine: W - E C E Main) <http://pclS.tema.it~ungcpubdb/OULHTM>
US. Department of State, "Commercial Guide of Ukraine", Country Commercial Guidefinancial year 2000 on-line: (U.S. Department of State Main) <http://wvw.state.gov>
Monograpbs
- Bedel J., Horowitz D., and Nordberg C. A. Jr. "Stangers in a New Land: U.S. Layvers Corne to Kazakhstan", Journal o f International Taxation, Vol. 4, No. 7, July 1993 on-line: WL(JINLT)
- Black,D.,"So YOM WanrioInvestIn Russia?ALegislativeAnalysisuftheForeigr~ Iwestrnenr CIimate in Russia", Minnesota Journal of Global Trade, no. 5, Winter 1996 on-line: WL(MJGT)
- Co Ilins S ., *bNatural Resources and Investment Poten tial Lure US F i m s ro KariaX-hsran", Central Asian Hot Spot Senes, Aspen Law and Business, November 1995 on-line: (ITIC-CIS Main) ~http://inicnet.org/publications/Default.htm~
- Coopers & Limbrand, "Taxation in Kazakhstan", Country Report, September 7, 1995 on-line: (Mondaq Main) <http://www.mondaq.com>
Dean R. "Considering Business Opportunities in the Soviet Uniou in the 1990 Y, Vand. Journal of Transnational Law, No. 24, 199 1 on-line: WL(V1TL)
Frenkel W. and Sukhman M. "New Foreign Invesrmenr Regimes of Russia and Other Repzrblics of the Former USSR: A Legislative AnaZysis and Hisiorical Perspective", Boston College of International and Comparative Law Review, Summer 1993. no. 16 on-line: WL(BC1CLR)
Frommeyer T. A., "Power-Sharing Treaties in Russia 5 Federal Sysrenr", Loyola of Los Angeles International and Comparative Law Journal, March 1999 online: WL (JLR) LYLAICLJ
Gialdini L., "'Kazahtan Lkts Priority Sectors for Investmeni", International Taxation, July 15, 1997 on-line: WL (WTD)MW
Harrison S., " Two Special T m Regimes: An Opportuni@ for Foreign Investon?", International Bureau of Fiscal Documentation, European Taxation, October 1, 1996, vol. 36 - 1996, no. 10 on-line: WL (WTD)NEW
Herzog T., "Russian Tax System From Soviet Era Needs Reform in Almost Every Phase", Journal of International Taxation, Vol. 8, No. 3, March, 1997, on-line: W L ( J N T )
Himes S., "Russia 's T m Reform", Observer, No. 2 15, January 1999
1s haq M., "Foreign Direct Investments in Ukraine Since Independen ce", CE RT discussion paper, Heriott-Watt University, Economic Department, May 1997, Ch. 4.1
Stuben, N.,"Conceptual Structure of the T a Sysiem in Ukraine", September 1997, on-line: <http://www.tax.corn>
Jenkins R., "Kazakhstan Amends Tax Code. lncluding Transfer Pricing Provisions", Tax Notes International, February 8, 1999 on-line: WL(JLR)
Lavrov A., "'Federalizing Russia S Budget System: A ntorny Path", Current Digest of the Post-Soviet Press, July 5, 1995, vol. XLW, No. 23 online: WL (TNI)
L ieb ennan E ., "Russia Modernizes Its Tax System. But Ghosts of the USSR Still Hamr", Commercial Law and Practice Course Handbook Senes, Practicing Law Institute, March 22-23, 1993 on-line: WL(JLR)
Luzik P., "'international Experience of Tax Reform and Lessons for (Ikraine", Discussion paper No. 99/04, Center of Economic Reform and Transformation, February 1999 on-line: (CERT Main) chttp://www.hw.ac.uk>
McClure Jr., Charles E., "Lessons front T a Reforrns in Kazakhstan", Tax Analysts, February 24, 1997 on-line: ihl(WTD)NE W
Pavliashvili I., Dmitriev V., Burger E. "The Need for and Future of Production Sltaring Legislation in Ukraine", BNA Eastern Europe Reporter, Vol. 8, No. 19, Novernber 1998 on-line: <http://www.nilg.com/ukr~sa~htm>
Pollack R., Bernstein A. and Minakova L., "Foreign Investment in Russia: The Perspective of the Russian Government and Problems Faced by Westeni Investors", Commercial Law and Practice Course Handbook Series, no. A4-4420, March 22-23, 1993 on-line: WL(JLR)
Samoylenko V., "Tax Reform in Russia: Yesterday, Toduy and in ~ h e Near Furure" International Tax and investment Center on-line: (ITIC-CIS Main) ~http://inicnet.org/publications/Default.htrn~
Samoylenko V., "The Fate of the Russian Tar Code: A Look from Inside the State Duma Walls", International Tax and Investment Center on-line: (ITIC-CIS Main) <http://inicnet.org/publications/Default.htm~
Vol tchenko M., "Russia Modijies Ils Tax Legislation: New Russian T u Code Sign~ficantly Improves Tàxpayer 's Status", Worldwide Tax Dai ly, December 7, 1 998 on-line: WL(WTD)SPR
"Cenfral Asia, Caucasus Performed Better in 1998 than Russia, Okraine", 1999 on- line: (Kazakhstan Herald Main) <http://www. herald.asdc. kz/public/research/ cornentA O.html>
Secondary Material: Articles
Antel S.. Starygin A., "1 999 Russian Ta. Reform - Still Waiting", Tax Notes International, March 1999 on-line: WL(WTD)
Antel C. "Russia Enacts Tax, Currency Changes", Tax Notes International, May 17, 1999 on-line: WL(WTD)
Guboglo M., "Federalizm Vlasti i V l a d Federalizma", in Federalizrn Vlasti i Vlast' Federalima, Moscow, 1997
Gurushina N., "Russian Consritutional Court Says Regions ' Taxing Power Liniitecî', Press Watch International, OMRI, March 25, 1997 on-line: WL (WTD) PWI.
Eastern Economist Daily, "Tax Code Making Its Wajf Through VR", July 13,2000 on- line: WL (ALLNEWS)
- Freeland M, "Crackdown Plan for Russian Companies ' Access to Cash", Financial Times, March 22, 1996 on-line: W L W W )
- Markina O., b'Sonte Problems of Company Taration", Bulletin for International Fiscal Documentation, Apnl 1995 on-line: WL(WTD)
- Business Information Service for the Newly Independent States, "Commercial Overview of Kazakhstan", October 1999 on-line: (BISMS Main) http://www. bisnis.doc.gov/bisnis/country/ kazakhstan. htm>
- "Central Asia, Caucasus Pe$ormed Better in 1998 than Russia. Ukraine", Kazakhstan Herald newspaper, 1999 on-line: (Kazakhstan Herald Main) ~http://www.herald.asdc.Wpublic/researcW cornent11 O.htxnl>
- Emerging Markets Group, "Comments" , Introduction, newspaper "Kazakhstan Herald", on-line: (Kazakhstan Herald Main) Qttp://www.herald.asdc.kz/ public/researchkoment/ 1 O. htmb
- Edi tonal note, newspaper "Rabochaya Tribuna", no. 170 (1 069) October 1, 1994
- "Russian Government Says VATShouldBe 2OPercent in 199V',Reuters,Apr.26, 1999 on-line: (CNN Main) ~http://custornnews.cm.com~
- "Kazakhstan ParliumentApprovesIncon~e TaxHikes",TaxNotesIntemational, March 29, 1999 on-line: WL(TN1)
- "NIKoil Sees Major Inflow of Western Investments to Rusia", Alexander's Gas and Oil Connections, Vol. 5, issue No. 7, April 27, 2000, on-line: http://www.gasandoil. corn>