TRANSFER PRICING

The Law of the Republic of Kazakhstan On Transfer Pricing of 5 July 2008 regulates all matters arising in connection with transfer pricing and is aimed to prevent public revenue losses in international business operations and transactions related thereto. 

Transfer prices (transfer pricing) mean the prices that are established between related parties and/or are different from fair market prices taking into account the price range in arm-length transactions, and that are subject to control in accordance with the aforesaid law. 

Control over Transfer Pricing
The following transactions are subject to transfer pricing control: 
1) international business transactions covering the following:
- export and/or import of goods;
- performance of works and provision of services where one of the parties is a nonresident who carries out activities in Kazakhstan without a permanent establishment;
- transactions consummated by Kazakhstan residents outside the Republic of Kazakhstan in connection with the sale and purchase of goods, performance of works and provision of services;
2) transactions consummated in the Republic of Kazakhstan that are directly related to international business transactions (implying the sale and purchase of such goods, performance of such works or provision of such services which later become the subject of an international business transaction):
  • involving commercial minerals produced by a subsoil user who is a party thereto; 
  • when one of the parties is eligible to tax benefits; and
  • when one of the parties incurs losses as shown in tax returns for the last two tax periods preceding the year of the transaction consummation. 
Competent authorities exercise control by way of:
1) monitoring transactions;
2) running inspections; and
3) applying other procedures established by Kazakhstan law.
Monitoring is required with respect to international business transactions involving goods (works/services) the list of which is approved by the competent authorities (e.g., crude oil, gold, sugar, construction operations, marketing services, etc.).  Parties to such transactions must keep records of transactions monitoring and report to the competent authorities.  The accounting period is one calendar year. 
Inspections by competent authorities in connection with transfer pricing are required in the following events:
1) establishment of a deviation of the transaction price from the market price; 
2) receipt from government authorities of information on application of transfer prices; and
3) inspections carried out by competent authorities as to compliance with the tax legislation of the Republic of Kazakhstan and the customs legislation of the EAEU and/or the Republic of Kazakhstan, if there are no sources of information on market prices. 
In exercising control over transfer pricing, competent authorities are entitled to request from the parties to a transaction, government authorities and third parties information required to determine the market price and differential, as well as other data required to monitor transactions. 
If it is established in the course of an inspection that the transaction price deviates from the market price taking into account the price range, the competent authorities will make adjustments of the taxable items and tax-related items in the manner determined by Kazakhstan law.  Adjustments are made only if they increase or may subsequently increase the amounts of taxes and other obligatory payments to the budget. 
Adjustment of taxable items and tax-related items is required in the event of deviation of the transaction price from the market price which is determined as a mean average as stated in the source of information with respect to the following transactions with parties who: 
  • are incorporated in a tax haven;
  • are engaged in barter (exchange) transactions;
  • have incurred losses shown in tax returns for the last two tax periods preceding the year of the transaction consummation; 
  • are eligible to tax benefits; and
  • fulfil their obligations under transactions made by way of set-off of similar counterclaims (including set-off through assignment). 
Based on adjustment of taxable items and tax-related items, taxes and other obligatory payments to the budget are paid in the manner as if income or expenses from such transactions and other taxable items for the accounting period were determined based on the market price taking into account the price range, subject to default interests and penalties in accordance with the legislation of the Republic of Kazakhstan.
Taxable and/or tax-related items are not adjusted when the transaction price deviates from the market price, considering the price range, in the following cases:
1) fixation or determination of transaction price and/or pricing methodology in an international treaty ratified by Kazakhstan;
2) fixation of transaction price in intergovernmental agreements; 
3) exercise by the government of its pre-emptive right to buy affined gold for the replenishment of precious metal assets; and
4) fixation of transaction price and/or pricing methodology by the Kazakhstan Government.

The Law of the Republic of Kazakhstan On Transfer Pricing of 5 July 2008 provides for an option to enter into written transactions on use of transfer pricing between the competent authorities (tax and customs authorities) and transacting parties which set out the method and source of information used to determine the market price for a fixed period (maximum 3 years).


Market Price Determination Methods

One of the following methods is applied for the purpose of the market price determination:
1) comparable uncontrolled price method;
2) cost plus method;
3) resale minus method;
4) profit split method; and
5) transactional net margin method.
The primary method is the comparable uncontrolled price method which implies the comparison of a transaction price for goods (works/services) with the market price, taking into account the price range, for identical (or, in their absence, similar) goods (works/services) in comparable economic conditions.  In determining the market price for goods (works/services), information on prices for goods (works/services) existing at the time of sale of such goods (works/services) is taken into account. 
The comparable uncontrolled price method is used to determine the market price by way of external and/or internal comparison.  In an external comparison, the comparison is performed between comparable transactions between a party to the transaction and its related party and between two unrelated parties.  In an internal comparison, the comparison is performed between comparable transactions between a party to the transaction and its related party and between the same party to the transaction and an unrelated party.
In the cost plus method, the market price for goods (works/services) is determined as a sum of costs (expenses) incurred and a mark-up ("plus element of profit").
The determined costs (expenses) relate to production (acquisition) and/or sale of goods (works/services), transportation, storage, insurance, etc.  The mark-up is determined in the manner to ensure the average rate of return established for the relevant field of activity which is calculated based on the rate of return range under comparable economic conditions.  The rate of return (profitability) for the relevant field of activity is determined on the basis of the data obtained from Kazakhstan government statistics authorities, state revenue authorities and other sources of information.
The resale minus method is the method whereby the market price for goods (works/services) is determined as a difference between the price for which such goods (works/services) are sold by the buyer in the subsequent sale (resale) and confirmed costs (expenses) incurred by the buyer in the resale (net of the price for which the goods (works/services) are bought by the buyer from the seller) and a margin.  The margin must be within the margin range. 
The profit split method determines the profit from a transaction that must be split between transacting parties on the basis of economic evaluation, functional analysis, arm-length agreements and the profit that would be earned by such parties if there were no related parties. 
The transactional net margin method is based on determining a net margin that would be received from the transaction unrelated parties in comparable economic conditions.  The net margin is determined on the basis of one of the following factors based on the accounting records:
– net book value of assets;
– sales; and
– costs.


Sources of Information Used for the Market Price Determination

For the purpose of determining the market price of goods (works/services) and other data required to apply the methods of market price determination, the following sources of information (subject to the Kazakhstan Government approval) are used in the specified order of priority: 
1) officially recognized sources of information about market prices;
2) sources of information about exchange quotations;
3) data of government authorities, competent authorities of foreign states and organizations on prices, differential, costs and conditions affecting the deviation of a transaction price from the market price; and
4) information programs used for the purpose of transfer pricing, information provided by transacting parties and other sources of information.


Three-tier Transfer Pricing Documentation

In pursuance of the OECD (Organisation for Economic Cooperation and Development) recommendations and Kazakhstan Law On Transfer Pricing of 5 July 2008, all members of an international group operating in Kazakhstan are bound by the obligation to prepare and present the “three-tier” transfer pricing documentation.
An international group means a group of parties (members of such international group), including the parent company of the international group, which cumulatively meet the following criteria:
1) the aforementioned group of parties includes at least one party which is recognised as a resident of Kazakhstan or, if it is not recognised as a resident of Kazakhstan, conducts business in Kazakhstan via its structural subdivision or permanent establishment;
2) such parties are related to each other by virtue of control and/or interest; and
3) such parties prepare consolidated financial statements, or financial statements of such parties are ignored in preparing consolidated financial statements solely on account of their size or materiality as determined by the International Financial Reporting Standards or other internationally recognised standards of financial reporting adopted by stock exchanges for admission of securities to trade.
The “three-tier” transfer pricing documentation obligatory for an international group includes the following documents:
• country-by-country reports;
• prime reports (with effect from 1 January 2019);
• local reports (with effect from 1 January 2019); and
• statement of an international group member (with effect from 1 January 2018).
Local reports must be submitted by a resident member of an international group on an annual basis, and country-by-country and prime reports must be submitted by a resident at the request of competent authority.  The reports must be executed in the form and manner prescribed by the competent authority.