Right now a key issue for the country is working out a unanimously suitable edition of the Constitution of Kyrgyzstan. Indeed, the document is important because it defines the basic parameters of the legal field for citizens of the country. Certainly Kyrgyzstanis are not indifferent to which system they live in: totalitarian, authoritarian or democratic.  

The tax code is a document that plays almost as important a role as the Constitution, because it defines the basic parameters of the legal field for businesses. The importance of the tax code can be proved with historical examples in the formation of European democracies, which emerged in the struggle to limit the powers of the monarchy in establishing and collecting taxes. In this regard, it is quite relevant to talk about the form of tax regime in Kyrgyzstan.

A tax regime, based on the principle of a partnership of business and the state, could be called a democratic tax regime. And a tax regime in which tax payers have no rights, the point of view of the state is the only correct one and there is a special body to control and suppress tax payers, could be called a totalitarian tax regime.  

The current edition of the tax code here (in the classification mentioned above) represents an authoritarian type of tax regime. The following norms prove such a notion: 

Division of powers

There is no division of powers, which is one of the elements of a constitutional state. The executive branch of power actively interferes with the activities of the legislative branch of power.

So part 1 of article 5 of the current tax code establishes the direct restriction on the legislation activity of parliament: 

Article 5 of the tax code of Kyrgyz Republic:

"Article 5. Order of introduction of amendments to the tax code

1. All projects of amendments to the tax code are subject to initial expert evaluation of the Ministry of Finance of Kyrgyz Republic prior to their consideration by the government and the parliament of Kyrgyz Republic.

Bills about introduction or abolition of taxes, exemption from taxes, are adopted only by approbation of government of Kyrgyz Republic."

It raises a lot of questions. Why does legislative work in taxation need the approbation of the government? What is the reason for such a demand?

The reasons given by officials are interesting: they say that if parliament adopts amendments to taxation, in the long run it will impact upon the state's budget. If this is the case, the government cannot fulfill the budget. There are no other reasons. The whole issue rests on budget fulfillment.

Their anxieties have no grounds however, because regarding taxes there is a norm according to which all amendments come into effect only starting the next year. It secures the invariability of the budget task of the government, and logically, the reasons the government give that it would be complicated to fulfill the budget (should legislators interfere in tax legislation) are artificial, strained and groundless. 

In general, as theory of state suggests, only the state that performs its powers under clear division of powers (legislative, executive and judicial) can be called constitutional. Any limitation of any branch of power means that the state is not constitutional. Draw your own conclusions.

Presumption of innocence

In the current edition of the tax code there is no concept of presumption of innocence or the honesty of the taxpayer. In general, those terms are not equal. But right now we are not interested in details. The issue is in the elementary mechanisms of the protection of a taxpayer's rights.

Since tax legislation contains mechanisms of coercion towards the taxpayer, such as required tax checkups and required reporting, there is a need to introduce the presumption of innocence into tax legislation. At the present moment tax officers directly abuse their positions in the process of tax checkups, and produce arbitrary extra charges that are not backed up by calculations or evidence. The taxpayer is initially assumed guilty and later, forced to prove innocence.  

Besides, taxpayers who are charged with extra fees, often wrongfully, for amounts exceeding 500 thousand soms, have criminal cases instituted against them. At the same time, criminal cases are instituted prior to the announcement of decisions on tax disputes in economic panels, in accordance with a civil process. It is lawlessness under visible legality!

The presumption of innocence of the taxpayer should contain the norm according to which it is prohibited to institute a criminal case prior to the announcement of the decision of the economic panel in accordance with civil process.   

Interpretation of dispute issues

The executive branch of power is entitled to the right to interpret the norms of the tax code, which contradicts the Constitution that defines also the order of interpretation (explanation.) According to the Law on normative legal acts, the body that approves the law is entitled to the right to interpret or explain norms.

Article 50 of the Law about normative legal acts:

«VII. Interpretation (explanation) of normative legal acts

Article 50. In case of vagueness of normative legal acts, wrong or contradictory practice of their application by the legislative body, which adopted relevant act, gives necessary explanation of its norms, drawn up in a special act.   

Article 51 of the Law about normative legal acts of Kyrgyz Republic:

"According to article 58 of the Constitution of Kyrgyz Republic the parliament gives official interpretation of adopted normative acts."

Article 58 of the Constitution of Kyrgyz Constitution:

"Article 58.

     1. Under parliament's jurisdiction are:

     1) Adoption of the Constitution, introduction of amendments and additions to current Constitution, and also adoption of the new edition of the Constitution in accordance with order given in current Constitution;

     2) adoption of laws;

     3) official interpretation of the Constitution and adopted laws;

..."

It seems that it is written in clear and plain language that the parliament gives the official interpretation of adopted laws. At the same time the title of chapter VII equates the meaning of terms "interpretation" and "explanation". 

However, according to article 18-1 of the tax code, the right for explanation is given to the Ministry of Finance, i.e. to the executive branch of power, which contradicts the Law on normative legal acts.  

"Article 18-1. Explanation of norms of the tax code of Kyrgyz Republic

Ministry of Finance is entitled the right to explain norms of the tax code of Kyrgyz Republic..."

Tax inspections

The Tax Service is entitled to the right to conduct tax inspections. Regular documentary tax inspections are conducted once per year, cross-inspections - with no frequency limitation.  

At the present moment tax checkups are not an instrument with which the state budget can be recharged. In reality, as a result of tax checkups the budget gets only 3 percent of all tax collections. At the same time, a large part of tax collection goes to the maintenance of staff inspectors of external checkups.

According to Kyrgyz businesses and foreign experts, including those of the World Bank, the mechanism of tax checkups is designed only for the staff of the Tax Service to charge money and exactions.   

On average, a tax inspection costs about $400 for a business, in this a case bribe to the tax inspector is implied.

As expert research showed, in civilized countries tax checkups are applied only if there are grounds to suspect a taxpayer of dishonest tax payment. 

Regarding other taxpayers there is the small but very professional staff of the Tax Service, which performs work of a mainly analytical character. Such a system should certainly provide very strict sanctions, including criminal responsibility, towards those people who evade taxes. 

Tax rates

Kyrgyzstan has very high tax rates. At the present moment, VAT rate, including VAT for import is fixed at 20 percent in Kyrgyzstan. In Kazakhstan this rate amounts to 14 percent. There is no sense and economic logic to this number. Any business making decisions on where to import goods will choose Kazakhstan because the losses for VAT on import will be significantly less.

That is why, even where there are markets in Kyrgyzstan, it is more profitable to export goods to Kazakhstan and then using illegal import (smuggling) bring them back to Kyrgyzstan. 

If we do not count our officials silly, thanks to whom such wild ratios on taxes were fixed (compared with our neighbors) we have to acknowledge that there should be sense in constructing such a system.   

Is there any sense in increasing smuggling? Indeed, there is sense for customs officials, who take the bribes. The more smuggling, the better it is for customs officials.

The same can also be said of taxes. The higher the tax rate, the more difficult they are to pay, and logically more businesses are forced to operate in the shadow economy.

According to official statistics, tax at present amounts to 20 percent towards the GDP of the country. However, any business will say that it is a fiction and should one pay everything provided by tax legislation then the real tax burden on separate kinds of businesses would amount to up to 50 percent from taxpayer profit. 

There is one simple conclusion: at the level of statistics it is visible that not every taxpayer pays taxes. If all taxpayers have been paying taxes, tax collection would amount to 50 percent from GDP, but not 20 percent as it is now.

The conclusion is that tax rates in Kyrgyzstan are artificially overstated. It is not done accidentally or without thinking. It is done to chase businesses out of the legal field. A business that is chased out of the legal field is forced to solve problems using corruption. Thus, the tax system in Kyrgyzstan is worked out and supported in such a way by officials that bribe takers get serious shadow financial revenue besides their budget salary.

It is worth adding that the issue of tax rates should be considered at the level both of tax rates and other elements applied to calculate the amount of tax due, including amounts of non-taxable income.

For example, in the U.S. the maximum rate for income tax amounts to 35 percent, and in Kyrgyzstan this rate is 10 percent. And this case is used by unprincipled officials as evidence of acceptable tax rates in Kyrgyzstan. However, if we take into account the amount of non-taxable income, then the picture dramatically changes. The non-taxable income amount is $200 in Kyrgyzstan, whereas in the U.S. the amount is $7000. Impressive? It means that the U.S. citizen who has an income of $7000 does not pay income tax at all, and at the same time, a Kyrgyz citizen should pay income tax of about $620 from this amount.  

The complex features evident in a lack of clearly formulated and protected rights of tax payers, the lack of real division of powers, lawlessness manifested in tax checkups and high tax rates mean that there is an authoritarian tax system in Kyrgyzstan.

We are not a totalitarian tax system for any one reason. A body of pressure in the form of the Tax Service is relatively loyal to non-payers, which allows the taxpayers to "solve problems" in almost any situation, even in the case of persistent tax evasion. 

Tax reform: myths and reality

At the beginning of 2004, relevant bodies started work on a new edition of the tax code. The authorities set up a state commission and expert group on developing the new edition. At the same time it was expected that the state commission would equip the expert group with a concept, or at least a vision, of the common outlines of the new tax code, which the expert group would realize in articles of the tax code.

But such cooperation did not happen from the very beginning. Co-chairmen of the state commission were saying good words on the new approaches to taxation, that Kyrgyzstan is a state with a service economy, about the necessity to take into account the realities of tax systems in neighboring states, and about the partnership of the government and society in the tax sphere, etc.  

However, those words did not reflect on the efforts of the expert group. Composed of former and current officials of the Ministry of Finance and the State Tax Inspection, the expert group started its work. After some time, a discouraged public had the chance to see the outlines of the future document, which provided following: 

a) seizure of property without court decision (that contradicts the Constitution),

b) general registration in the Tax Service of everyone, including foreign citizens, who have bank accounts,

c) additional types of checkups, such as raids, chronometry, cameral checkups and monitoring,

d) all disputed issues in tax legislation are solved by the Ministry of Finance,

e) there is a "tax post" introduced which does not exists in the current edition, where a tax inspector resides at the taxpayers' place for an indefinite time, with all the consequences,

f) voluntary payment of tax is destroyed. It means that all businesses in Kyrgyzstan's markets should provide reports to the Tax Service from now on,

j) in the same text of the project, certain non-market taxes were introduced: "road tax" and "deductions for the prevention of emergency situations," the abolition of which was promised to businesses since the end of XX century.

It became clear that with the adoption of such a tax code, legal businesses will most likely disappear from Kyrgyzstan. And only those businesses will work whom the Tax Service will allow. It is not up for discussion: the Tax Service will get marvelous powers.

From this very moment, professionals who know tax legislation realized the greatness of the idea of the Ministry of Finance to create a totalitarian tax system in Kyrgyzstan. It became immediately clear that it is the last line. If one is defeated in this "battle", there will not be any opportunity for revenge.  

So, businesses decided to work out their own alternative edition of the tax code. This version was worked out and even submitted to parliament by one MP.

Taxes proposed by business community:

1. Profits tax
2. VAT
3. Excise tax
4. Income tax
5. Social tax
6. Land tax
7. Property tax
8. Retail tax
9. Tax from natural resources users 

The system proposed by the business community does not pretend to be original. There are almost the same taxes as in the governmental version of the tax code; excluding road tax and deductions for the prevention of emergency situations (those two taxes are not listed in the edition proposed by the business community.) At the same time there are substantial differences regarding VAT and Social tax.  The VAT rate for the services sector amounts to 10 percent, for other sectors of activity it is 15 percent.

Regarding social tax, which was offered by the business community instead of a deduction for state social insurance, the sources of tax are the same as they were in deduction; specifically, the salary of employees and the expenses of employers. At the same time, tax rates are significantly changed, which amount to 15 percent according to the following formula 15%=8%+7%. 8 percent is deducted from the employee's salary, i.e. the rate remains the same, and employer pays 7 percent from salary fund, instead of 21 percent at the present moment.

VAT rates (10 and 15 percent) and Social tax (15 percent) are fixed at relatively high levels. The level was calculated from numerous meetings with business representatives. Such rates are the highest threshold under which businesses can still pay taxes. If the rates are higher, businesses would tend to go black, i.e. under the protection of corrupted officials of the Tax Service.

There is one more important element. Tax payment is always a painful process. And resorting to a singularly oppressive body in the form of the Tax Service and Financial Police has never had the desired results anywhere in the world. It is necessary to achieve consensus within society, a certain type of public agreement in which the state takes responsibility for setting a SOUND tax policy, and the society AGREES to pay taxes. When society refuses to pay taxes, no repression will help. Businesses will work either in the shadow or abroad.

On the other hand, the rationality of taxes is dictated by the necessary public expenses of the state, such as the expenses for defense, public security, law and order, medicine, education and others. And that is right. Logically, a public agreement (the tax code) between society and state on taxes should contain such a list of taxes and rates that are low enough for the possibility to develop and pay taxes, while at the same time being high enough to allow the state budget to be formed in sufficient volume.

Right now politicians do not care about the tax code. In fact, spring 2007 demonstrated an annual intensification of political health of Kyrgyzstan (which has become normal). Nevertheless, the long drawn-out tax reform should be concluded. We hope that the legislators will not treat the adoption of the new edition of the tax code as being of secondary importance.

Sergei Sabko, Director General, "Consultant" Company