June 1998

by Irina Begjanova

Knowing what taxes to expect and how they are calculated is a challenge in most NIS countries, where tax regulations are usually in transition and difficult to interpret. Turkmenistan is no exception. The country's tax code is currently being revised and existing tax legislation is based on several laws and regulations amended by presidential decree. It is possible, though, to identify some key pieces of the tax puzzle which are most relevant to foreign companies. Until the new tax law is adopted, legislation of importance to the foreign investor includes: value-added, profit, and property taxes; special taxation for small enterprises; and favorable taxation in free economic zones. Foreign investors should also be prepared to register with the State Chief Tax Inspectorate (SCTI) before beginning operations in the country.

State Tax Service
The State Tax Service of Turkmenistan administers the country's tax system. The tax service has a wide range of powers and reports directly to President Saparmurat A. Niyazov. U.S. companies should remember that the tax service can: suspend a company's ability to make bank transfers if a tax inspection team believes it is being prevented from investigating a company's activities; withdraw overdue taxes from a local bank account if it finds that a company has not paid its taxes in a timely manner; and order law enforcement officials to freeze a company's assets and bring a suit against the company. A fine of 0.3 percent is charged for each day taxes are overdue.

Types of Taxes
Foreign companies, their branches or representative offices, and foreign individuals doing business in Turkmenistan must pay value added tax (VAT) of 20 percent. VAT must be paid every 10 days (payments greater than 5 million Turkmen manat), monthly (payments between 2.5 and 5 million manat), or quarterly (payments less than 2.5 million manat). VAT is not levied on cargo transiting the country, urban mass transit, apartment rental, a variety of services, industrial property copyright operations, medical services, and sales of medicine, medical items, and equipment.

Foreign investors, their subsidiaries, and representative offices are subject to a 25 percent profit tax. Those engaged in operating commodity, stock, or labor exchanges, or brokerage and intermediary activities are charged a profit tax of 45 percent. Profit tax is paid once a year.

Newly created enterprises are exempt from profit tax payments during the first year of profitable operation if 70 percent of the profit is derived from production of agricultural commodities, consumer goods, or building materials. During the second year of profitable operation, such enterprises are charged 50 percent of the profit tax. This privilege is not extended, however, to enterprises that lease state-owned equipment, are created on the basis of abolished state enterprises, are newly privatized, or are joint-stock enterprises with state equity participation exceeding 50 percent.

Also exempt from the profit tax are religious organizations, businesses that employ the handicapped (not less than 50 percent of the total number of employees) or produce items for the handicapped, and designated educational organizations. A foreign firm that invests more than 30 percent of a joint venture's working capital in hard currency is exempt from profit tax payments while it is recovering its initial investment. Finally, certain other exemptions are available to representative offices.

A property tax of 1 percent per annum is charged for commercial assets. Enterprises with foreign investment, branch offices, and representative offices of foreign companies are all subject to property taxes. Property tax may also be paid in the following manner: first quarter, at a 25 percent rate; first half of the year, at a 50 percent rate; first three quarters of the year, at a 75 percent rate.

An excess payroll tax of 50 percent is levied on the amount of an enterprise's overall salary fund that exceeds its nontaxable salary fund. The nontaxable salary fund is calculated using the company's payroll list, the country's official monthly average salary, and coefficients that vary depending on the sector of the Turkmen economy. The nontaxable overall salary fund may vary depending on the economic efficiency of an enterprise. The following enterprises are exempt from the excess payroll tax payment: enterprises involved in crop cultivation and cattle breeding; enterprises operating in free economic zones; and casinos, as well as audio- and video-rental and slot-machine businesses.

Free Economic Zones
Turkmen and foreign companies with operations in Turkmenistan's free economic zones are exempt from profit tax for the first three years of operation. An enterprise with foreign investors whose investment was more than 30 percent in hard currency (excluding equipment and technology) pays 50 percent of the profit tax rate during the following three years and 30 percent during the subsequent 10 years of operation. Profits reinvested in export-oriented production, high technology, scientific research, environmental protection, training, or infrastructure development within the free economic zones are tax exempt.

Dual Taxation
Turkmenistan has no dual taxation treaty with the United States. Technically, the dual taxation convention between the Soviet Union and the United States is still in force, although this fact has few practical consequences. For more information, visit BISNIS Online at http://www.mac.doc.gov/bisnis/cables/980423tu.htm.

Irina Begjanova works at the American Embassy in Ashgabat.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)