May 1996
Note: The following article is contributed by Juliette Passer, Esq., President of the International Project Development Group (IPDG) in New York. Questions pertaining to this article may be addressed to Ms. Passer at Tel. 212-541-2485.
The Law on Taxation of Enterprises, Associations and Organizations of the Republic of Uzbekistan was amended for the 10th time on December 22, 1995 since its initial enactment on June 14, 1991. Superficially, such energetic legislative activity would suggest the encouragement of confusion. On closer examination, however, legislation of Uzbekistan in general, and tax laws in particular have continuously moved toward greater unification and standardization. In stark contrast with most of its neighbors Uzbekistan, with a recognized benchmark of cautiousness, continues to move forward in creating a stable economic and political environment for the developing business community of local and foreign companies, joint ventures, entrepreneurs, international and multilateral financial institutions and agencies. The government of Uzbekistan has continuously utilized taxation not as the only means of supporting itself, but as a tool for the encouragement of particular economic sectors or activities, emphasizing that taxation must be used to encourage the creation of wealth and accumulation of savings by the population.
In line with this policy, newly created enterprises pay lower taxes for the first two years. Joint ventures and foreign enterprises, as well as banks and insurance companies, continue to be taxed at lower rates. Companies are allowed to reinvest pre-tax profits into specifically targeted investment projects. Development of tourism in Tashkent, Bukhara, Samarkand, and Khiva is encouraged by a three-year tax holiday. The formation of financial markets is facilitated by exempting from taxation for three years as of July 1, 1995, most operations with income derived from stocks, bonds, depositary receipts, and promissory notes. All types of entities engaged in various agricultural activities are either exempt or taxed at lower rates. To encourage companies to reveal their incomes abroad, foreign tax credit is available up to the full amount of taxes due in Uzbekistan (carry forward of foreign taxes is not available). With the view towards greater unification and international standardization, the government of Uzbekistan, together with a team of Western experts, is revising a draft of the tax code due at the end of 1996.
It is also noteworthy, that having mandated tax audits for certain types of enterprises, the government was quick to recognize that there is an insufficient number of auditing firms to accommodate the number of annual returns for 1995. There, the Ministry of Finance issued an extension to July 1, 1996 for mandatory audits and authorized local tax agencies to accept tax returns, pending the completion of audits. Generally, companies must pay estimated taxes quarterly, with the annual return for the preceding year due by March 15. The rates and exemptions effective in 1996 are discussed in some detail below.
Profits Tax
As of January 1, 1996, most companies will be taxed at a flat 37 percent rate (down from 38
percent last year, and 45 percent in 1991), calculated on the basis of net profits with standard
deductions in Western terms, rather than on total income. The permitted deductions include
wages, interest for short-term bank credit, mandatory social welfare payments, local taxes and
excise and value-added taxes, certain advertising costs, depreciation and other costs of doing
business. In addition, three types of limited deductions are available from local authorities: (i)
profits contributed to investment projects and the repayment of credits obtained for such projects;
(ii) up to 30 percent of costs of expenses for the environmental protection measures; (iii) up to 1
percent of profits contributed to social welfare organizations, environmental and ecological
protection funds. The Law limits the availability of deductions and tax privileges to not more than
50 percent reduction of the tax base in comparison to the full taxable amount. The difference
between income tax and profit tax is the availability of deductions for wages and long-term
interest, allowed for calculation of taxable base for profit tax, but not for income tax. Joint
ventures and foreign companies could have made an election to continue to pay taxes on income
with all previously granted privileges by notifying local tax authorities by April 1, 1996. Banks,
insurance companies, and entertainment-related industry continue to pay taxes on total income at
applicable rates.
The following rates will apply in 1996 (for either profit or income tax): (i) foreign companies, their subsidiaries and representatives offices as well as joint ventures with more than 30 percent foreign participation pay 25 percent; (ii) insurance companies pay 35 percent; (iii) the Cabinet of Ministers may set lower tax rates for individual banks, but not below 20 percent; (iv) agricultural enterprises pay at graduated rates between 3 percent and 20 percent, relative to profitability; (v) casino, video, and audio rental stores, game stores, lottery organizers, and entertainment-related industries pay 60 percent; (vi) international freight forwarders pay 6 percent; (vii) companies exporting at least 30 percent of its products are taxed at half the applicable tax rates.
Passive incomes from source in Uzbekistan, such as dividends and royalties, derived by foreign companies not conducting commercial activities in Uzbekistan, are taxed at 20 percent, unless international agreements provide otherwise. Both individuals and legal entities conducting commercial activities in Uzbekistan, deriving profits from dividends, sales and purchases of stocks, bonds and other securities are exempt from taxation for three years from July 1, 1995. Repatriated dividends of foreign partners are taxed at 10 percent, unless international agreements specify otherwise. Currently, Uzbekistan has a very limited tax treaty network in place. Tax treaties have been signed with the UK, India, and Poland; the treaty with the U.S. is under discussion. A foreign participant of a joint venture must request confirmation of the tax privileges from the Ministry of Finance before repatriation, or within one year from the date of transfer.
Joint ventures with foreign partners investing in projects included int eh Investment Program of the Republic of Uzbekistan continue to be tax exempt for the first five years of operations. Joint venture with more than 30 percent foreign participation, specializing in processing of agricultural produce, food industry, recycling, or manufacturing of construction of materials or agricultural machinery, are tax exempt for two years from the date of registration.
Newly created enterprises are taxed at 25 percent of the applicable tax rates for the first year of operations and at 50 percent of the applicable tax rates for the second year. Newly established companies, specializing in tourism in Tashkent, Bukhara, Khiva, and Samarkand in addition to a three-year tax holiday are taxed at reduced rates after profits are generated; the first year at 50 percent of applicable rates; second year at 75 percent of applicable rates, and third year at full rates. Various tax holidays are provided for the holders and licensors of patents. In addition, there are nine types of companies which are tax exempt, including companies employing invalids, veterans, or students, postal service, city transit services, other than taxi, and non-commercial companies ( which include state-subsidized enterprises).
Penalties for late filing, under-reporting, and other tax law violations include personal liability for the officers of enterprises and penalties assessed against the companies. Violations by the tax authorities also include personal responsibility of the tax agents and a process of administrative complaint filed with the local tax agency. Complaints must be answered within 30 days from the date of filing. Unsatisfactory decisions may be appealed to the regional and state levels. Filing of a complaints does not stay the payment of taxes, unless local tax agency authorizes the non-payment of the disputed amount pending the outcome of the review.
Value-Added Tax
Value-added tax (VAT) is levied on products and services at the rate of 20 percent (up from
18 percent last year ). Banks and insurance companies are exempt.
Insurance and reinsurance services provided by insurance agents are also exempt, as well as
operations with local currency, such as deposits, payments by checks, wire transfers, and other
similar transactions and operations with securities with the exception of printing and custodial
fees. Among other enumberated exeptions (39 in total) are various social and educational
services, engineering and contracting for residential construction, transportation and
freight-forwarding for exported goods and foreign goods in transit on the territory of
Uzbekistan.
Excise Tax
Excise taxes are levied on a number or luxury goods--mostly imported ones--such as alcoholic
beverages, tobacco products, machine-made rugs, jewelry, silver utensils, gasoline and kerosine,
gas and oil condensates and cotton seed oil and cotton yarn. Rates range from 65 percent for
gasoline and vodka to 10 percent for rugs. The Cabinet of Ministers of Uzbekistan sets the rates
and selects goods to be taxed.
Enterprise Property Tax
All legal entities and their subsidiaries and representative offices are subject to the 2 percent
property tax. The tax is calculated on the basis of the book value of assets used in the commercial
activities. Newly established enterprises are exempt for the first two years and enterprises
engaged in tourist activities in Tashkent, Bukhara, Samarkand, and Khiva are exempt up to three
years from the date of registration or until profits are generated, whichever is earlier. The Cabinet
of Ministers of Uzbekistan may establish different exemptions for banks and insurance companies.
Certain types of properties are exempt, such as automobiles and storage facilities for agricultural
products, residential and cultural facilities as well as telecommunications satellites. Automobile
owners, however, are subject to the local transportation taxes as discussed below.
Natural Resources Use Tax
Both legal entities and individuals are subject to the tax for extracting natural resources in
Uzbekistan. The rates vary from 1 percent to 5 percent of the extracted volume, depending on
the industry. In addition a special tax (paid into the Fund for the Regeneration of Natural
Resources) is levied on the cost of resources produced by the extracting enterprises. For
example, natural gas is taxed at 21.4 percent, gas condensate at 4.6 percent, oil at 12.5 percent,
gold and wolfram concentrate at 7 percent, and coal at 3.4 percent. The list contains 28
items.
Mandatory Social Fund Payments
All employers will continue to make mandatory contributions in the amount of 40 percent of the
payroll; 36 percent of which is contributed to the social welfare fund, 2 percent to the labor
unions fund, and another 2 percent to the unemployment benefits fund.
Local Taxes
The Law expressly authorizes the Republic of Karakalpakstan, the city of Tashkent, and regional
administrations to levy local taxes, which are set each year together with the state budget.
Currently, local taxes include water consumption tax, transportiation tax, advertising tax, land tax
and clean-up tax. Local tax authorities should be consulted for the types and rates of these taxes.
Please note that not all local taxes may be deductible, therefore in addition to the local tax
authorities, the Ministry of Finance or the State Committee on Taxation must be consulted. The
land tax is calculated separately for each region and city, and then in turn according to a
qualitative chart approved by the government. The rates are expressed in some per one hectare of
land. The transportation tax is calculated on the basis of the size of the vehicle's engine. For
example automobiles are taxed at 18.8 soms (approximately $.50) per horsepower, or 26.25 soms
($.73) for each kilowatt of engine power. Different rates apply to motorcycles, trucks and motor
boats. The city of Tashkent has set the clean-up tax for 1996 at 2 percent of profits, payable by
local companies. Water tax is payable by industrial and agricultural companies and electric power
plants on the use of both surface and underground waters.
**Provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)