The development of Kazakhstan does not stand still. The economic unrest of recent years, the consequences of the COVID-19 pandemic, and the disruption of supply chains have only affected the growth rate of the Kazakhstani economy.

Domestic businesses must constantly seek effective transformation and growth strategies in a new uncertain environment. This is also aided by widespread digitalisation, which affects all aspects of society, from online education and medical services to the introduction of new financial instruments and jobs in virtual reality.

The introduction of new financial instruments is influenced by societal demand: some expertise can immediately capture the Kazakhstani market, while others require more than a year for testing, the formation of appropriate operating rules, and the obtaining of permits for activities. This is necessary because any error made by a market participant can have irreversible consequences for the business, the population, and the economy as a whole.

State support for entrepreneurship entails the creation of a favourable institutional framework that does not place undue administrative load on firms.

The Astana International Financial Centre, whose regulatory framework was established utilising the best international practice – the UK, Singapore, Hong Kong, and the United Arab Emirates – is an example of a convenient and dependable regulatory system in Kazakhstan. The AIFC law, which is based on Common law of England and Wales, establishes all conditions for the safe conduct of business in Kazakhstan.

How does the AIFC combat the growth of Kazakhstan’s shadow economy?

The development of a set of anti-shadow measures to raise the degree of transparency, and thus the legality, of the activities of firms registered in the jurisdiction of the financial centre, is one of the most serious issues of the AIFC regulatory regime.

In particular, the Astana Financial Services Authority (AFSA) produced the AIFC Rules on combating money laundering, financing terrorism and sanctions in compliance with the norms and recommendations of the Financial Action Task Force on Money Laundering (FATF). For example, since its inception, the financial centre has enacted laws requiring the disclosure of the ultimate beneficial owner in order to prevent the routing of unlawful financial flows through its jurisdiction. This enables international organisations to conduct business in a transparent and risk-free manner.

In 2022, the Organization for Economic Cooperation and Development issued a study recognising the Astana International Financial Centre’s tax regime’s compliance with global tax transparency requirements. This means that the AIFC has sufficient capabilities to combat the use of its jurisdiction in the context of harmful tax practises.

To that purpose, on the proposal of the OECD and in conjunction with the Ministry of Finance of the Republic of Kazakhstan, AFSA issued Rules on the Substantial Presence of the AIFC Participants Applying Tax Exemptions for the payment of Corporate Income Tax, Value Added Tax in December 2021.

What is the purpose of these Rules?

International financial centres (including the AIFC) exclude their participants from paying corporate income tax on earnings from a variety of services, including banking, insurance, and investment. However, global practise demonstrates that the risks of preferential treatment abuse may be the other side of such preferences.

According to OECD data, governments lose 100-240 billion USD every year as a result of loopholes in national legislation and inconsistencies between different countries’ tax systems. This equates to 4-10% of global corporate income tax receipts.

Consider this simple example. Let’s imagine Bank X, which is licenced by the AIFC regulation to accept deposits and open accounts in other countries. Such a bank may not have a physical presence in the jurisdiction of the Kazakh financial centre, but it is tax exempt on income produced outside the AIFC. In this situation, Bank X will hurt many jurisdictions at the same time: the AIFC, where it is licenced, as well as the countries in which it operates.

The AIFC has met the OECD’s suggestion to impose the criterion of “economic presence” in order for Kazakhstan to comply with BEPS (Base Erosion and Profit Shifting) criteria by adopting the Rules on the Substantial Presence of Participants. Participants of the financial centre who benefit from these tax breaks must now verify their presence in the AIFC, according to the Rules. For example, in the example, Bank X should demonstrate the execution of core income-generating operations in the AIFC, as well as the commensurability of costs incurred and the number of people participating with the volume of activities. This means that revenues derived from activities outside the AIFC will not be tax-free.

What will this bring to Kazakhstan?

The international recognition of the AIFC in battling the shadow economy and negative tax activities may serve as a catalyst for those desiring to do business in Kazakhstan, both domestic entrepreneurs and foreign businesses that have been hesitant to invest in our country.

The AIFC is now a full-fledged platform for enterprises with a global business plan. A solid legislative framework and a favourable regulatory system based on Common law of England and Wales safeguard the financial stability of financial centre participants and prevent them from exploiting tax benefits.

The establishment of a transparent tax system, lauded by the OECD, is merely one of the new Kazakhstan's moves toward becoming a modern economy.