A groundbreaking tax innovation may drive investors away from the market, warns QAMS.

Members of the Kazakhstan Association of Minority Shareholders (QAMS) have submitted a series of proposals regarding the taxation of operations in the stock market to relevant ministries and agencies, as well as to the Parliament of the Republic of Kazakhstan, as reported by inbusiness.kz.

It is worth noting that a working group is currently active in the Mazhilis on the Tax Code project, which includes members of QAMS as of last week.

The proposals from the Kazakhstan Association of Minority Shareholders (QAMS) suggest that the tax policy regarding taxation should be more flexible. It is proposed to create tax incentives for citizens of Kazakhstan to encourage them to disclose their income, including from foreign markets. These tax incentives imply a threshold beyond which income from capital gains and dividends on securities would not be subject to taxation.

According to QAMS director Daniyar Temirbaev, the retail investment industry in Kazakhstan has developed significantly. As of the end of July this year, there are 4.6 million individual investment accounts registered in the depositories of KASE and AIX, including about 2.8 million in KASE's central depository and 1.8 million in AIX. The growth in the number of investment accounts is attributed to the involvement of state companies, with 70% of the representative list comprising state-owned enterprises.

QAMS members are convinced that Kazakhstan has every chance of entering the MSCI international stock indices.

"First and foremost, this will significantly enhance the investment attractiveness of the country's economy. However, for this to happen, tax legislation must be based on the principles of predictability, certainty, fairness in taxation, and ensuring investment appeal in non-raw material sectors of the economy, as trading on the stock exchange is a segment that allows Kazakhstan to develop its non-raw sectors," noted Daniyar Temirbaev.

What problems does the new Tax Code pose for investors?

From the association's perspective, the government is setting thresholds for securities that are quite subjective. Given that this year everyone will transition to personal declaration, administration will become simpler: each individual will submit their own declarations. This will eliminate the constant search for answers to the question of whether a particular security is subject to taxation.

QAMS anticipates that 90% of market participants will be able to declare their taxes independently. Additional taxes will be applied to incomes exceeding 100,000 MRP. Thus, only those who truly generate a fiscal effect will be declared.

Regarding dividends and capital gains from securities, it refers to fixed income, meaning the income received during the reporting year.

Major players and financial-industrial groups will also not be able to evade taxation if this cap is introduced.

In the new Tax Code, QAMS members are part of the working group and plan to request the ability to carry forward losses from operations with securities in foreign markets for three calendar years starting from March 2020. They also consider it important to account for related expenses, such as brokerage fees.

"According to current legislation, there is an exemption on capital gains without limits for trading on the domestic market. However, there is a limit of 30,000 MRP on dividends: taxation begins above this amount. We propose to set a cap on capital gains similar to dividends. This would have a positive fiscal effect, as tax authorities are currently focused on preventing schemes where securities are listed on the exchange but are merely present in registered listings without participating in trading. Majority shareholders may be present, but often there are only one or two shareholders, and they receive tax benefits. This is not entirely fair, as the company is not actually public. We decided to propose a more flexible approach: to set a cap on capital gains and consider only those securities that have been actually realized," emphasized the head of QAMS.

Meanwhile, the new Tax Code states that investors investing in the stock market through investment funds may also be subject to taxation. This may be related to the fact that many countries are implementing personal tax declaration systems to ensure tax payments at the individual level. Essentially, this concerns the structure of composite taxation.

"Investment funds and trusts will now be taxed at a rate of 20%. Additionally, these funds invest in shares and stocks of companies, which are also subject to a 20% tax at the operational level. Kazakhstan's tax legislation in this regard is innovative. If we introduce complete personal tax declaration, it may be worthwhile to establish a certain cap and not touch pass-through structures. We shouldn't become a laughingstock to the world. I hoped that someone would pay attention to what is written in the draft code published in July this year. Unfortunately, no one did, and it looks absurd. We may be the first to face taxation of pass-through structures," noted Arman Bataev, an expert and founding member of the financial and investment literacy school Finmentor.kz.

It has been noted that legislative and executive branches should pay attention to the fact that the stock market includes not only stocks and bonds traded on two local exchanges but also securities that Kazakh citizens purchase through local brokers. This segment is also subject to Kazakhstan's regulatory legislation.

Furthermore, to ensure the principle of certainty, it is necessary to eliminate the possibility of different interpretations of the norms regarding the taxation of operations in offshore countries. The new draft code contains a provision stating that if you trade through any broker and receive income in a country with preferential taxation or in offshore zones, you may be taxed on turnover. However, neither the current legislation nor the draft of the new code specifies what exactly is considered the place of the transaction — the exchange or the broker. This ambiguity allows tax authorities to interpret freely, which may lead to significant financial losses for investors. Therefore, QAMS suggests clarifying this norm in the Tax Code to avoid misunderstandings.

Expert Erkanat Abeni discussed the issues that Kazakh tax authorities may face when implementing the norms they propose.

The government is taking measures regarding taxation to replenish the budget, constantly seeking reserves to increase revenues. In this process, schemes involving shares are used, for example, Air Astana, where shares are bought back through the budget and the National Fund to replenish the treasury.

One of the reasons for such actions, according to the expert, is that many well-known financial-industrial groups have evaded taxes through the stock market. This occurred legally, as companies registered on AIX could maintain IPO status for several years, avoiding taxes as residents of the MFCA. Authorities want to eliminate this possibility, but their measures may negatively impact all investors, as there will be no distinction between large and small players. QAMS opposes such initiatives and proposes developing more balanced solutions.

"The government views the trading of Kazakh citizens on foreign stock markets as capital flight. However, in practice, people earn abroad and spend this money in Kazakhstan. Unlike officials and corrupt schemes that earn here and spend abroad, trading on foreign markets allows Kazakhs not only to earn but also to attract funds into the country," emphasized Erkanat Abeni.

According to him, the ability to trade on Western markets has increased the number of educated investors, contributing to the successful IPOs of national companies. Currently, there are about 4.6 million registered investors, but only 250,000-300,000 of them have active accounts. The rest are inactive accounts opened through banking applications. Since the Kazakh stock market is still in its infancy, the implementation of strict tax measures could lead to investors simply leaving the market.

The West's Experience in Protecting Investor Rights

For comparison, in the United States, there is an independent agency, FINRA, which unites brokers and protects investors' rights. Taxation in this country is structured such that if income is below a certain threshold, tax is almost not levied on it. Moreover, the tax system is differentiated: a progressive tax applies to those who earn more, while a minimal tax applies to low-income workers.

Additionally, the U.S. has implemented a comprehensive declaration and tax deduction system. This means that living expenses, such as housing rent or transportation costs, are taken into account when calculating taxes. People do not pay tax on the full amount of income because they have mandatory expenses. In contrast, Kazakhstan currently lacks such a system, but the government is attempting to implement similar norms.

The introduction of new tax measures in Kazakhstan may face administrative challenges. Unlike the West, where tax authorities focus on large taxpayers and do not pay attention to small amounts, Kazakhstan often applies a uniform approach to all. This leads to overloads in tax authorities, which do not always have enough qualified personnel.

"Many tax authority employees have no understanding of the stock market and its regulation. This creates difficulties in tax administration and audits. For instance, in a recent declaration for entrepreneurs, there was no field for indicating the name of the stocks, which calls into question the ability to effectively monitor income from these assets. As a result, tax authorities may simply apply desk audits and impose taxes without proper verification of information, leaving entrepreneurs to prove their case, which is a common practice in the country," added Erkanat Abeni.

Moreover, according to members of the QAMS association, the lack of clear norms and rules creates significant corruption risks. When tax