TURKMENISTAN: NEW TAX CODE FOSTERS FOREIGN ASSISTANCE

UNCLAS SECTION 01 OF 03 ASHGABAT 000377

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E.O. 12958: N/A
TAGS: PGOV EAID ECON EFIN EPET TX
SUBJECT: TURKMENISTAN: NEW TAX CODE FOSTERS FOREIGN ASSISTANCE



1. (U) Sensitive but unclassified. Not for public Internet.


2. (U) SUMMARY: On March 17 President Berdimuhamedov passed a law
amending the Tax Code of Turkmenistan for the sixth time since he is
in office. The March 17 amendments are the most numerous and
significant so far. The majority of changes seem to represent an
effort to streamline and clarify tax procedures. However, the new
code also addresses such important tax categories as the taxation of
government transactions, foreign assistance, and, more importantly,
petroleum operations and non-residents that many foreign companies
have been pushing for. END SUMMARY.

TAXATION OF THE GOVERNMENT


3. (U) The new code provides several tax privileges to the
government. Government agencies and local governments are
explicitly exempted from the property tax paid on fixed assets and
stocks. The sale of goods and provision of services by government
agencies and local governments have not been considered taxable
transactions for VAT (value added tax) purposes. However, the new
changes specifically mention that the National Fire Fighting
Service, Customs Service, Certification of Goods and Services are
not subject to the VAT. Similarly, goods and services donated to
government agencies and local governments are exempt. Previously
such benefits were granted only to non-profit legal entities.

TAXATION OF FOREIGN ASSISTANCE


4. (U) The earlier version of the Tax Code exempted from VAT the
sale of goods and provision of services in the framework of foreign
assistance. However, the new amendments add to this category
humanitarian, financial, and technical assistance and loans provided
to Turkmenistan by individuals, not just by foreign states or
international organizations as previously.


5. (U) The March 17 Code also describes in more detail who
specifically is exempted. (NOTE: The previous version of the Code
simply stated that assistance is exempt from the VAT. END NOTE.)
Exempted entities include those authorized by foreign states,
international organizations or individuals to sell goods or provide
services as well as entities determined to be recipients of such
assistance and loans, and suppliers or service providers for
above-mentioned authorized entities or recipients of such assistance
and loans that are paid from assistance funds.


6. (U) Humanitarian or charitable assistance provided under
intergovernmental agreements or by the decision of the government
will be exempt from the excise tax (currently levied on alcohols,
fuels and car imports). Donated goods and services provided under
humanitarian or charitable assistance, intergovernmental agreements
or by the decision of the government will be excluded from the
calculation of gross income from the sale of goods and provision of
services for the purposes of the corporate income tax.

TAXATION OF PETROLEUM OPERATIONS


7. (U) According to the Tax Code, taxpayers involved in petroleum
operations have the right to a refund of the VAT paid on goods and
services (zero VAT rate). The new amendments provide a list of
taxable transactions that are subject to the zero VAT rate.
Specifically, these include the sale of goods and provision of
services for petroleum operations of entities that are contractors
or subcontractors under the Petroleum Law of Turkmenistan, except if
such goods and services are used for non-petroleum operations, used
for petroleum and non-petroleum operations or the use of such goods
and services cannot be determined beforehand. In these cases,
contractors or subcontractors under the Petroleum Law should notify

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their vendors before receiving invoices. The amount of VAT paid for
goods and services used for petroleum or other operations by
entities operating under the Petroleum Law can be credited towards
the total VAT payable.


8. (U) Corporate income tax is levied on the difference between the
gross income and income deductions. The definition of gross income
has not been amended and includes income from the sale of goods and
services and non-operating gains (interest on any debt instruments,
dividends, insurance compensation, positive exchange rate difference
in transactions and increases in the value of foreign exchange
assets and decreases in the value of foreign exchange liabilities).
However, Article 172 in the new version of the code, on corporate
income tax rates, has a new clause whose purpose is unclear, but
that may offer a pretext or formalization of gross income of
petroleum operators that includes non-operating gains. The
Corporate Income Tax rate for petroleum companies remains 20%.

TAXATION OF NON-RESIDENTS


9. (U) Article 17 of the tax Code defines residents as entities
registered (established) in accordance with the legislation of
Turkmenistan or headquartered in Turkmenistan. All other entities
are considered non-resident. Non-residents can be taxed directly if
they operate in Turkmenistan through permanent representations or
their tax can be withheld by an appropriate tax agent.


10. (U) Permanent representation of a non-resident legal entity is a
permanent location of such an entity's business activities,
including management site, branch office, bureau, office, agency,
factory, workshop, shop or alike. The new Code also added the
following as permanent representations: any site of exploration,
development, and/or production of natural resources regardless of
the term of operation. This includes a mine shaft, mine, oil and/or
gas well, quarry, onshore or offshore drilling derricks and/or
wells, as well as any site of installation, assembly, set-up,
setting into operation, repair and/or maintenance of equipment at
the above sites, including all types offshore platforms.


11. (U) Permanent representation starts from the date of issuance of
a license for exploration, development and/or production of mineral
resources or from the date of commencing such work, signing of a
construction site transfer letter or from the date of commencing
actual work. Construction sites or assembly locations, and
warehouses in Turkmenistan used for sale (supply) of goods are
treated as permanent locations.


12. (U) The calculation and payment procedure of the corporate tax
for non-residents operating through a permanent representation is
identical to those of residents. However, there are several
distinctions. The gross income and expenses are only related to the
activities conducted in Turkmenistan. The newly introduced
amendments detail what items cannot be counted as expenses. These
include overseas headquarters' management and general administrative
expenditure of legal entities (except if provided for a relevant
double taxation treaty). The code states that none of the expenses
of overseas branches and representative offices of foreign entities
can be accounted for as deductions in defining the taxable income
related to its activities in Turkmenistan via permanent
representation. Exceptions are expenses, directly related to
activities in Turkmenistan, that are not accounted for as expenses
in calculating income of such branches and representative offices
overseas. This should be documented appropriately (for example by
an auditor's report) and on the condition that such expenses are
accounted for separately. The code provides for deductions of
payroll expenses and expenses of temporary duty staff seconded to a
temporary representation from the taxable amount, provided they are

ASHGABAT 00000377 003 OF 003


not included in the administrative or management expenses.


13. (U) Permanent representations of non-resident legal entities are
liable at the source in Turkmenistan to withhold tax on income
taxable that they pay to a non-resident without a permanent
representation in Turkmenistan, unless they can furnish a written
confirmation from the relevant tax division that their provision of
services leads to establishment of a permanent representation in
Turkmenistan and paid income from activities in Turkmenistan relate
to that permanent representation. Tax withheld by a permanent
representation is deductible from the representation's total tax
amount due.


14. (SBU) COMMENT: The newly revised Tax Code, although passed on
the same day as the new Law on Foreign Investments, will not have a
significant effect on foreign direct investment in the country,
since most important amendments concern companies that are not
resident in the country. Generally, such companies provide
petroleum or construction sectors related services. However,
taxation of non-residents, including petroleum service companies,
has been subject to wide interpretation by Turkmenistan's tax
authorities, and is now made more transparent, although more
burdensome. That the new Tax Code considerably eases tax burden on
foreign assistance and can facilitate the logistics of processing
assistance funds is also a positive change. END COMMENT.

HOAGLAND