Taxation of Businesses in
Uzbekistan
May 2007
By Jahangir Kakharov, Bisnis Representative in Uzbekistan.
Contributions from Davron Akramov, Managing Partner, Norton Legal Law Firm.
INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
2007. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.
Background
Before gaining independence in 1991, the tax system of Uzbekistan was mainly composed of a limited number of taxes, such as tax from turnover, income tax, excise tax and local taxes[1]. The sources of income for the national budget were mainly taxes and income of state owned enterprises under the local (Uzbek) jurisdiction. Income generated by the sale of cotton, other raw materials and large enterprises under the jurisdiction of Moscow went to the budget of the Soviet Union. Therefore, it is difficult to estimate the real income side of the budget of the Republic of Uzbekistan at that time.
After gaining independence, the Uzbek government had to form its own independent fiscal-tax policy at a time of disruption of economic ties, recession in production, and a narrowing taxable base. The priority of that time was further deterioration of the economic conditions of the population, stratification of the population, and avoiding economic collapse. Financing of social programs required significant resources: in 1992, social expenditures reached half of all budget expenditures or approximately 45% of GDP. Therefore, the government had to look for sources of income for the budget. This lead to the creation of a taxation system with many types of taxes, high tax rates and a broad spectrum of tax breaks. However, by mid 1990s, it became clear that this tax system didn’t meet the demands of the economic development of the country.
In 1995-1996, Uzbek policymakers attempted to unify the tax system and lower tax burden by abolishing some taxes. Taxation of the natural resources industry became a significant part of the state budget, but the main part of the budget was still sourced from direct taxes.
Significant steps to streamline the taxation system of Uzbekistan took place in the beginning of 1998. The Tax Code of Uzbekistan was introduced on January 1, 1998 and some taxes and tax exemptions were abolished. The policy makers also attempted to lower tax burden and simplify the calculation and payment of taxes. The income structure of the state budget has also undergone a remarkable change as the main sources of it became direct and indirect taxes and the share of non-tax payments decreased. The importance of indirect taxes such as VAT and excise taxes also increased. Despite these improvements, the taxation system still had many shortcomings: a high tax burden and an uneven distribution among different sectors of the economy due to an inefficient allocation of tax breaks. Frequent changes in the tax system, inefficient tax administration, absence of clarity, and duplications of clauses of the tax legislation have been an obstacle for the economic development of the country.
During 2005-2007, a series of changes were made in the Uzbek tax system mainly aimed at decreasing the tax burden, simplifying the tax system, and unifying conditions of taxation for all taxpayers by abolishing tax breaks. Further new developments and changes took place in the taxation system of Uzbekistan in the beginning of 2007.
Currently, the Uzbek authorities are working on adopting a new edition of the Tax Code. This new Tax Code is intended to be a legal act of “direct application” i.e. the government aims to abolish normative acts in taxation and make the Tax Code a single legal document.
Principal
Taxes
The main legislation governing taxation in
Uzbekistan is the Tax Code, which, as noted above, entered into force on
January 1, 1998, and has been amended several times since. The last amendments
were introduced on January 1, 2007. The following taxes are most relevant to
businesses and legal entities (Article 6 of the Tax Code):
Republican Taxes:
- Corporate profit (income) tax;
- Personal Income Tax
- Value added tax;
- Excise tax;
- Subsoil use tax;
- Water use tax;
Municipal Taxes and Collections:
- Property tax;
- Land tax;
- Social Infrastructure Tax
- Miscellaneous taxes for commercial licenses.
Corporate
Profit (Income) Tax
According to a Baker & McKenzie report
“Doing Business in Uzbekistan 2007”, legal entities founded or registered in
Uzbekistan (and those registered overseas but with the main enterprise in
Uzbekistan) are deemed to be residents of Uzbekistan for tax purposes. They are
taxed on their profits gained in Uzbekistan and from overseas sources.
Non-resident legal entities operating in
Uzbekistan through a permanent establishment (the Uzbek State Tax Committee’s
Instruction No. 1416, dated 05.10.2004) pay tax on profits from sources in Uzbekistan
associated with the permanent establishment, reduced by the amount of
deductions stipulated by the Tax Code and Instruction No. 54 of the Ministry of
Finance of the Republic of Uzbekistan, dated 1999, in relation to such profit.
In addition to corporate tax, non-resident legal entities are subject to 10%
tax on transfer of profits abroad.
Non-resident legal entities’ profit not
associated with a permanent establishment is taxable at the source (at average
rate of 20%) according to aggregate income without deductions if the source of
profit is located in Uzbekistan. Local paying contractors shall be liable for
tax withholding.
Applicable
Tax Rates
In 2007 the general profit tax rate was
decreased to 10% - compared with 12% in 2006. However, there are exceptions to
this rule – for businesses generating income from auctions and entertainment
business the tax rate is much higher - 35%, and it is 17% for commercial
banks.
In 2007 a tax reform was introduced which
allows wages to be deducted from taxable base (this wasn’t allowed in 2006).
Certain entities receive the following
preferential profits tax treatment:
• A 50% profits tax reduction in cases when the
company exports 30% or more of the total sales volume of its products, work or
services; and
• A 30% profits tax reduction in cases when the
company exports between 15% to 30% of the total sales volume of its products,
work or services.
Legal entities generating income from
production, distribution and servicing of computer equipment and software and
related trainings are subject to a unified 5% tax rate.
Repatriation of profits of a permanent
establishment of a non-resident legal entity is subject to a 10% tax.
A Presidential Decree
of 20 June 2005 introduced a Unified Tax Payment for micro-firms and small
businesses, with certain exceptions (some of them listed above). Instead of
individual payments to profits tax, Pension Fund, Road Fund, School Fund and
tax on land rent/leased from the Government, a new general Unified Tax Payment
was made at 13% for most of types of micro-firms and small businesses.
On April 7, 2007, this rate was officially decreased to 10% by the Ministry of
Finance and State Tax Committee, which established a “Procedure of Calculation
of the Unified Tax Payment”.
Below is a brief summary of major developments in the Unified Tax Payment
Regulation and noted in the Tax News Reporter Newsletter of
PriceWaterhouseCoopers office in Uzbekistan.
Tax Payers:
The following legal entities are subject to the Unified Tax Payment (Annex 23
to the Presidential Decree No. PP-532, dated 18.12.2006):
- Micro-firms
and small enterprises (except for producers of alcohol
products, payers of unified land tax and fixed tax, PSA members) - Wholesale, retail sale and public catering companies
- Legal entities organizing lottery and other risk based games, and
- Private notary offices.
The Regulation provides for definition of wholesale / retail
sale companies, as follows: For the purposes of taxation, wholesale / retail
sale companies (or public catering companies) are legal entities whose core
(profile) activity is the sale based on the results of the preceding financial
year.
Sale is defined as the activity of
selling goods previously purchased for resale. Accordingly, sale of goods of
own production including sale through brand shops; sale of goods by brokers and
intermediaries are not deemed as sales activity for the purpose of the
Regulation.
Core (profile) activity is defined
as the activity generating the largest share of revenue in the aggregate annual
sales.
Separate Accounting
The Regulation retains separate accounting requirements for payers of the
Unified Tax Payment that are engaged in several activities and have different
bases for taxing the activities. However, this requirement is no longer
applicable to legal entities under the general taxation regime (i.e. those not
listed as payers of the Unified Tax Payment).
Thus, for instance, if a manufacturing company
performs sales along with the core production activity (as per the above
definition), it would not maintain separate accounting for these two
activities, as this company does not fall under the regulations of the Unified
Tax Payment.
Filing for the Unified Tax Payment is:
quarterly for micro-firms and small enterprises (due by 25th day of a month following
the reporting quarter, and
monthly for all other categories of the payers (due by 25th day of a month
following the reporting one).
Withholding
Taxes
Uzbekistan source income not connected to the
activities of a permanent establishment in Uzbekistan is subject to withholding
taxes.
Withholding tax rates for dividends, interest,
insurance, and premiums paid for insurance or reinsurance of risks is 10%.
Telecommunications and freight activities carry a withholding tax rate of 6%.
Royalties, rent, incomes from services provided including management services,
consulting fees, and other incomes except for those already taxed is 20%. It
should be noted that withholding tax rates might be reduced by applicable
international treaties. Uzbekistan is a signatory to double taxation treaties
with 43 countries. However, there is no double taxation treaty in place with
the US.
According to the above-mentioned amendments, income
of non-residents from works/services performed outside of the Republic of
Uzbekistan is not deemed as income from sources in the Republic of Uzbekistan.
Taxable
Base
In calculating the profits tax the taxable base
is comprised of the total revenues from sales (of products, work or services,
and other income) reduced by the amount of costs and expenditures incurred in
the revenue-generating activity, including the following:
- The amount of VAT deductions, excise tax, property tax, land tax,
subsoil use tax, water use tax, and customs duties;
- The amount of interest payments on short-term bank credits and on
credits of any other financial or credit institutions, excluding the
amount of any penalty due;
- The amount of expenditures related to issuance of securities;
- The amount of expenditures related to maintenance and rent of
company’s light vehicles;
- Interest on long-term loans from banks and other financial
institutions except for interest subject to capitalization and interest
which is related to overdue/delayed loans; and
- Expenditures on employee salaries and certain specified premiums
(excluding such expenditures effected by video salons, audio units,
casinos, and lotteries of non-state organizations).
The most significant
items of non-deductible expenditures for tax purposes are:
- Entertainment, and business travel expenses in excess of statutory
limits;
- Losses resulting from misappropriation of funds where the perpetrator
has not been apprehended, and some other expenditures.
Reductions
It is possible to reduce taxable profit by the
following amounts:
• Contributions to environmental and charitable
funds - up to 1% of taxable profit;
• Costs allocated to the development, expansion
and reconstruction of production - up to 30% of taxable profit.
Deduction of Losses
Losses from the sale of fixed assets used in business
activity for more than three years shall be deductible from aggregate income.
Losses arising upon the sale of securities shall not be deductible from
aggregate income.
Year-end loss of a legal entity may be
deductible from the next 5 years’ annual aggregate income, but not to exceed
50% of that year’s taxable income. Such loss can not be deducted if it occurred
when the legal entity was exempt from profits tax.
Depreciation
For profits tax purposes, the maximum
depreciation rates are as follows:
Cars, motorized tractor technology for use on
roads, special tools, inventory, accessories, computers and computer equipment
- 20%
Trucks, buses, specialist vehicles and
trailers, machinery, industrial equipment, forging and pressing machinery,
construction and agricultural machinery, and equipment and office furniture
-15%
Rail, sea, river and air transport, power and
heating equipment, electric and turbine equipment, electricity transmission and
communications devices, and pipelines - 8%
Buildings, constructions and structures - 5%
Depreciable assets not included in the above
groups - 10%
Declarations and Payments
The financial year is the calendar year for tax
purposes. Legal entities are required to file a tax declaration and financial
statements with the tax authorities by February 15 of the following year.
Representative offices of non-resident legal entities and enterprises with
foreign investments are required to file a tax return with the tax authorities
by 25 March of the following year.
State
Taxes
Value Added Tax
Value added tax (“VAT”) is a tax on the value
added in the course of the production, sale, and import of goods, work, and
services. VAT is payable on turnover related to the sale, export, and import of
goods, work, and services. The VAT rate is 20%.
Calculation of VAT is based on the following
formulas:
С vat = Оturn х Н / 100;
where С vat – amount of VAT;
Оturn – taxable turnover;
Н – VAT rate.
Article 71 of the Tax Code
provides a list of products and activities exempted from paying VAT. Amendments
to the Tax Code in 2007 added the following activities into the list:
- medical (veterinary) services (except for
cosmetology), sale of medicines and goods of medical (veterinary)
prescription, including sale by producers of such medicines and goods;
- sale of agricultural products of own production.
Excise Tax
The Cabinet of Ministers determines the
categorization of goods subject to excise tax, and the applicable rates. The
excise tax is not levied on the export of goods, work, and services, except to
those countries that impose the same tax regime on goods, work, and services
exported to Uzbekistan.
Excise taxes shall be calculated in accordance
to the formula:
(О х А) / 100
О – contract price with excise tax and without VAT;
А – excise tax rate.
Contract price shall be calculated in accordance with the formula:
О
= (С х 100) / 100 - А, где:
О - contract price with excise tax and without VAT;
С – estimated price of a manufacturer;
А – excise tax rate.
Excise
duties are used to protect import substitution industries and even specific
firms from competition from imports. This “double protection” from the excise
duty system, in addition to the tariff protection, is provided to various
sectors, including carpets (imports of which carry an excise duty of 90% while
local producers are paid the revenue gained from a 5% excise duty), crystal
goods (30% excise duty/5% of revenue paid to local producers), video and audio
apparatus (45%/5%), kitchen silver batteries (20%/5%) and furniture (10%/ 5%)
(except furniture for schools or hospitals which are charged 5% with no
refund). There are many items for which excise duties are paid on imports but
are not paid by import substitution producers, for example, imported sunglasses
carry 30% excise duties and there are no duties on local production. Similarly, imported refrigerators - 20%
versus zero for locally produced, sugar and sugar based confectionary 20% to
30% and zero, and tea 10% and zero. All
excise duties on imports are in addition to tariffs and customs fees.
Subsoil Use Tax
The Cabinet of Ministers establishes the rates
of “subsoil use tax”. These rates vary depending on the type of subsoil. The
subsoil tax rates in 2007 have decreased compared to 2006 in the fuel sector.
For instance, subsoil tax rates for use of natural gas decreased by 28%, for
unstable gas condensate by 12%, and oil by 20%.
Water Use Tax
The Cabinet of Ministers also fixes the rates
for water use tax. Legal entities that use water in their activities for
production and technical needs are subject to this tax. Amendments to the Tax
Code in 2007 increased the 2006 rates by 1.5 times.
Obligatory
Payments
School Tax
A Resolution of the Cabinet of Ministers of
December 28, 2004 requires all legal entities to pay a tax equal to 1% (reduced
by VAT and applicable excise tax amounts) of their annual turnover to the
Nonbudgetary Fund for School Education Development.
Road Tax
Every legal entity in Uzbekistan must pay
generally 1% (with certain variations for different businesses) of their annual
turnover to the Road Fund. This money is intended for the development of roads
and highways in Uzbekistan.
Local
Taxes and Collections
Both legal entities and individuals are subject
to numerous local taxes that are not deductible for profits (income) tax
purposes. Many are insignificant except for the administrative burden.
Property Tax
Corporate property tax is imposed at a rate of
3.5%. The taxable base includes among other things annual average depreciated
value of:
- All fixed capital assets; and
- All intangible assets.
There are number of tax exemptions and
benefits. For example, export-oriented entities enjoy the following
preferential property tax treatment:
- A 50% property tax reduction if the company’s exports represent 30% or
more of the total sales volume of its products, work, or services;
- A 30% property tax reduction if the company’s exports represent 15% to
30% of the total sales volume of its products, work, or services.
The property of representative offices of foreign
legal entities is exempt from property tax. Large joint ventures are also
exempted from property tax
Land Tax
The land tax is paid at rates fixed by the
Cabinet of Ministers. Amendments to the Tax Code made in the beginning of 2007
increased the rates from 2006 by 1.5 times.
Other Local Taxes
Some other local taxes, charges, and fees
levied by the government authorities of the autonomous Republic of
Karakalpakstan, the oblasts, and the City of Tashkent and their rates are as
follows:
|
Taxes |
Rates |
|
Tax on use of gasoline and diesel |
60 Soum per liter |
|
Tax on use of
gas |
50 Soum per kg |
|
Infrastructure
development tax |
8% of the net profit of the enterprise |
|
Licensing fee on the right to trade spirits
and tobacco |
5 minimum monthly wages (minimum monthly wage
currently is about $10) per month of trade |
|
Charge for the right to trade |
3.5 minimum monthly wages per month of trade |
|
Charge for registration of individuals and
legal entities engaged
in entrepreneurial activity |
4 and 5 minimum monthly wages (respectively) |
Penalties
Breaches of tax legislation may result in the
following penalties (article 135 of the Tax Code):
- In the event of concealment of income (profit), the entire amount of
income (profit) concealed will be recovered from the taxpayer, together
with a fine of the same amount.
- A penalty of 1% per day on tax due is applied for a failure to file
(or for late or incomplete filing of) tax returns. This penalty is limited
however to a total of 10% of the tax due;
- For engaging in any type of activity without a license, all income
(profit) gained from such activity shall be recovered, together with a
fine of the same amount; and
- A penalty of 0.7% of total taxes due is applied for each day of
overdue payment of taxes and fees.
Entities not registered with the tax
authorities in a timely manner are subject to the following sanctions:
- Where activities were performed for any period up to 30 days without
registration with the tax authorities, a penalty of fifty times the
minimum monthly wage (but not less than 10% of income) becomes due; and
- Where activities were performed for more than 30 days without
registration with the tax authorities, a penalty of one hundred times the
minimum monthly wage (but not less than 50% of income) becomes due.
Where a taxpayer commits several breaches of
tax legislation, financial sanctions are applied separately in respect of each
breach.
Recently the Uzbek government has passed
several acts directed to liberalization of minor tax offences. According to the
Presidential Decree No. PP-3622, dated June 24 6, 2005, taxpayers who committed
minor tax evasion are only subject to administrative (not criminal)
prosecution. In the past, the tax authorities could impose sanctions directly
on taxpayers. Today, the tax authorities can penalize taxpayers only by
bringing a lawsuit to court.
Tax Incentives
In order to create incentives for foreign
investments in the country, Uzbekistan’s foreign investment regime offers
certain incentives for major foreign investors.
By a special resolution of the Cabinet of
Ministers, a company with foreign investment may be granted extra tax
exemptions, depending upon the importance of the company’s project to the
Government, the volume of the investment to be made, and other factors. An
investment program of US$ 20 million or more requires the consent of the
Cabinet of Ministers.
It should be noted that only enterprises
registered with the Ministry of Justice are considered to be a production
enterprise with foreign investment and enjoy the abovementioned incentives
granted by the Government exclusively for production enterprises with foreign
investment. President Resolution of April 11, 2005 stipulates that direct
foreign investments (existing or new) in certain areas of economy (textiles,
construction materials, dairy products etc.) without the guarantee assurances
of the Government of Uzbekistan are entitled to tax exemption on profits,
property, and certain other taxes provided that a number of other conditions
are met, such as a requirement to reinvest income generated from such
privileges into the development of this entity.
All enterprises producing consumer goods and goods for children are entitled for tax breaks in accordance with the Resolution of the Cabinet of Ministers of Uzbekistan as of November 13, 2002, #390.
On March 14, 2007, a Presidential Decree
regarding “additional measures to stimulate modernization, technical and
technological re-equipment of production” was issued with the aim to stimulate
continuous re-equipment to increase production of high-quality, competitive and
export oriented production of goods.
In accordance with the Decree, enterprises are:
- eligible within 3 years to reduce taxable base for Corporate Income
Tax by the amounts directed to modernization, technical and technological
re-equipment of production, repayment of loans taken for these purposes,
and leasing income, less annual depreciation;
- exempt from property tax on new technological equipment put into use
for the period of 5 years.
Micro firms and small
enterprises with production facilities, applying the simplified taxation
regime, are eligible to reduce the taxable base for Unified Tax Payment by the
value of new technological equipment, but not more than 25% of taxable base.
Contact Information
U.S. companies and individuals interested in learning more
about conducting business in Uzbekistan
are encouraged to contact BISNIS office in Tashkent. BISNIS offers a wide range
of advisory services and logistical support to assist U.S. companies to enter
this market. For additional information about how BISNIS Tashkent can help your
business, or for answers to specific questions regarding industry sectors,
please direct inquiries to:
Jahangir Kakharov,
BISNIS Representative in Uzbekistan
Tel.: (99871) 143-51-54
Fax : (99871) 143-51-54
E-mail: Jahangir.kakharov@mail.doc.gov
For more information on Uzbekistan, visit BISNIS online
at http://www.bisnis.doc.gov/bisnis/country/Uzbekistan.cfm
BISNIS (www.bisnis.doc.gov)
is part of the U.S. Commercial Service (www.export.gov).