CONCERNING TAX RATE AND TYPES OF TAXES
Question: If a foreign company (its branch) shall pay a profit tax, then how to define the tax base for payment of such tax under the contract for construction of the plant?
In accordance with Article 147 of Tax Code of Turkmenistan the payers of the profit tax are:
Legal persons – residents of Turkmenistan
Legal persons – non-residents of Turkmenistan conducting their activity in Turkmenistan through permanent representation or receiving profits from sources in Turkmenistan.
In accordance with Article 17 of Tax Code of Turkmenistan, for tax purposes a legal person is recognized as a resident of Turkmenistan if:
It has been established in accordance with legislation of Turkmenistan;
Its chief managing body (administration, management, board of directors or any other body) is located in Turkmenistan.
Non-residents of Turkmenistan are legal persons who in accordance with part 1 of the Article 17 of Tax Code of Turkmenistan are not residents of Turkmenistan.
For taxation on profits of foreign companies conducting their activity in Turkmenistan through permanent representations it is necessary to define what is referred to permanent representations. In accordance with Article 18 of Tax Code of Turkmenistan the permanent representation of the legal person – non-resident of Turkmenistan is a permanent place of activity through which fully or partially the business activity of the legal person is conducted, including the activity through the authorized person (physical or legal), unless otherwise specified in part 2 of Article 18 of Tax Code of Turkmenistan.
The following, in particular, is referred to a permanent representation:
Place of management, branch, bureau, office, agency, factory, workshop, shop or any other place through which such activity is conducted.
Object of taxation
The object of taxation on profit tax is a profit received by a taxpayer and also separate types of profits of a taxpayer within the reporting (tax) period.
The profit of legal persons is defined as an amount of gross income of a taxpayer, reduced to the amount of deductions specified by Tax Code of Turkmenistan and relating to such profit.
Non-residents of Turkmenistan are charged with profit tax for profits (income) received from execution of the activity in Turkmenistan through permanent representations and/or sources in Turkmenistan.
In accordance with general rule, the profit is defined as a difference between the income (profits) and expenses.
For foreign companies, executing activity in Turkmenistan through permanent representation, the object of taxation is profit (income) listed in the Article 179 of Tax Code of Turkmenistan.
Article 179 of Tax Code of Turkmenistan specifies the peculiarities of taxation of legal persons – non-residents of Turkmenistan conducting activity in Turkmenistan through permanent representation.
1. Legal persons – non-residents of Turkmenistan conducting activity in Turkmenistan through permanent representation, make computation of profit tax, submit tax declaration and pay the tax in accordance with the order established by Articles 149-177 of Tax Code of Turkmenistan.
2. At defining the taxable income of the legal person – non-resident of Turkmenistan conducting activity in Turkmenistan through permanent representation the following peculiarities are considered:
Only such part of profit is included into gross income, which has been received in connection with the activity in Turkmenistan and may be ascribed to permanent representation;
The gross income includes the profit from sales of shares of the legal person – non-resident of Turkmenistan (rights of share in capital), who’s property mainly consists of the property located in Turkmenistan and related to permanent representation.
The gross income does not include the profit received through foreign economic operations, including direct foreign-trade delivery of goods, made not through permanent representation.
The expenses incurred in relation with the activity conducted in Turkmenistan are deducted from gross income, notwithstanding the fact, were these expenses borne in Turkmenistan or outside. Such expenses do not include executive and general administration expenses, incurred by chief managing body of the foreign legal person outside of Turkmenistan, unless otherwise is specified by the international double taxation avoidance agreements of Turkmenistan.
Profit related to such permanent representation shall correspond to the profit, which may be received by separate independent legal person conducting same activity in same conditions.
3. If legal person – non-resident of Turkmenistan conducts an activity as in Turkmenistan, so outside and does not maintain separate records of profits and/or expenses, and also their separate elements that let to define the profit from the activity conducted by him on the basis of calculation, approved by the tax payer with tax service in the place of its registration in the capacity of the tax payer.
4. If a taxpayer being a legal person – non-resident of Turkmenistan receives profits, specified in part 2 of the Article 180 of the present Code, then tax deduction shall not be done by a person, who pays the income only at submission of written confirmation of the tax service on fact that to the date of issuance of such confirmation on rendering of services (execution of works) leads to establishment of permanent representation in Turkmenistan and paid profit received in connection with the activity in Turkmenistan is related to such permanent representation.
5. If the activity of the legal person - non-resident of Turkmenistan within the territory of Turkmenistan leads to formation of some permanent representations, tax base and tax amount are calculated separately for each such representation. All mentioned is not related to the activity, which is conducted within the unified technological process.
6. If the profits are included into the profit amount of foreign legal person conducting its activity in the territory of Turkmenistan through the permanent representation, from which in accordance with the Article 180 of the present Code the tax deduction has been made and transferred to the State budget of Turkmenistan, the tax amount subject for payment shall be reduced to the amount of tax deducted.
7. Foreign legal person conducting activity in Turkmenistan through permanent representation at defining the taxable base shall have right to take into account the labor expenses for employees of the permanent representation, incurred by chief managing body in accordance with labor contracts and defined in accordance with provisions of the Article 156 of the present Code.
It also has right to count labor and travel expenses of employees sent by chief managing body for execution of official duties to short-term and long-term business trips for work in the permanent representation, provided that such expenses shall not be considered as administering and general executive expenses.
Travel expenses at that are accepted:
In actual amounts for legal persons – residents of a foreign country with which Turkmenistan has signed Double Taxation Avoidance Agreement;
Within norms established by legislation of Turkmenistan – in other cases.
8. None of the expenses of foreign branches and representations of foreign legal person may be considered as deductions at defining the taxable profit related to its activity in Turkmenistan through permanent representation, except expenses directly related to the activity in Turkmenistan, which are not considered as expenses at defining the profits of such branches and representations abroad and must have corresponding documentary confirmation (for example, auditor's conclusion), provided that special accounting is conducted.
Taking into account the above said, it comes that for tax purposes the branch office of the Company is considered as non-resident, since its main managing body is located out of Turkmenistan.
In accordance with the Article 172 of Tax Code of Turkmenistan, non-residents shall pay 20% of profit tax. But such profit tax shall be paid from the profit that has been received through the activity conducted in Turkmenistan and not from the definite contract.
Regarding payment of VAT we inform that this tax is regulated by the Article 95 of Tax Code of Turkmenistan.
Article 95. VAT payers.
1. VAT payers are legal and physical persons – individual entrepreneurs at conducting taxable operations, specified in the Article 96 of Tax Code of Turkmenistan.
2. VAT is not paid by:
· Central Bank of Turkmenistan;
· Persons being contractors and subcontractors in accordance with Law of Turkmenistan “On hydrocarbon resources”. Part 1 of the present Article is applied to such persons at conducting of taxable operations not related to oil production works;
· Legal persons of private form of ownership (except persons who are executing their activity in accordance with Law of Turkmenistan “On hydrocarbon resources)”;
· Individual entrepreneurs per activity to which the simplified system of taxation is applied.
In accordance with paragraph “d” of the Article 96 of Tax Code of Turkmenistan the following is not considered as taxable operations of VAT:
Sales of goods, execution of works, rendering of services within the projects and programs of international humanitarian, financial and technical assistance and loans (credits) granted to Turkmenistan by foreign countries or international organizations or physical persons. All above-said is related to persons:
Authorized by foreign countries, international organizations or physical persons to conduct such sales of goods (works, services);
Who are the suppliers (executing works and rendering services) under the contracts signed with above-mentioned authorized persons and recipients of such assistance and loans (credits), who are paid at the account of specified means.
In accordance with the Article 103 of Tax Code of Turkmenistan VAT rate comprises 15%.
Question: If the company shall pay property tax then:
- should the branch office pay tax for temporary imported construction and office equipment (including foreign rented equipment)?
- should the branch office pay tax for equipment, spare parts and materials delivered under the Contract, declared in the name of the branch office and handed over to the Client on “turn-key” conditions after signing the Act on acceptance?
As for payment of property tax we inform that this tax is regulated in accordance with Articles 138-146 of Tax Code of Turkmenistan.
In accordance with the Article 138 of Tax Code of Turkmenistan the payers of the property tax are legal persons, who possess the property in accordance with property right, full economic administration or operative (trust) management in accordance with legislation of Turkmenistan, which is subject to taxation in accordance with the Article 139 of Tax Code of Turkmenistan, unless otherwise specified in the Article 138.
The payers of the property tax are legal persons, who possess the property in accordance with property right, and also legal persons of state form of ownership, who in accordance with order established by legislation of Turkmenistan, have received on their balance the property that is an object of taxation in accordance with the Article 139 of the present Code, unless otherwise specified by this Article.
At disposal of property to leasing or concession the payer of the property tax is correspondingly the leasing recipient or concessionaire.
At disposal of property to rent (except legal person of state form of ownership) the payer of the property tax shall be the lessor. At passing the state and municipal property to rent the taxpayer shall be the balance keeper.
At operation of the construction facility that was not put into operation in the established order or was not counted in the form of main means, the obligation on payment of the tax in relation to such facility shall be borne by the Client; the Contractor in such case shall be released from payment of tax for such facility.
If the object of taxation is in common shared property of some people, the taxpayer shall be each of such people.
The taxpayer for objects of taxation, which are in common shared property, may be one of the owners of such objects of taxation upon agreement between them.
The objects of taxation, except the property, listed in part 3 of Article 139 of Tax Code of Turkmenistan are:
a. for legal person – resident of Turkmenistan – main means of industrial purposes and also material circulating assets, used in production activity;
b. for legal person – non-resident of Turkmenistan, who’s activity in Turkmenistan is executed through the branch office, representation or permanent representation – the property, specified in paragraph “a” of part 1 of the present Article, located in Turkmenistan and being a part of property of the branch office, representation or permanent representation.
Property tax rate in accordance with Article 142 of Tax Code of Turkmenistan is defined at the rate of one (1%) percent of tax base for tax period.
Estimated rate of property tax for corresponding reporting period is defined as follows:
0,25 percent of tax base for the first quarter;
0,5 percent of tax base for the first half-year;
0,75 percent of tax base for 9 months;
1 percent of tax base for 1 year.
Taking into account all above, we may say that payers of the property tax are legal persons, who have property in accordance with the right of property, since temporary imported construction and office equipment (including rented foreign property) is not the property of the branch office and that is why he will not pay the property tax for such equipment. These main means shall be included by the branch office to off-balance account. The balance keeper of main means shall be the head office of the company.
Branch office shall pay property tax in accordance with Articles 138 and 139 of Tax Code of Turkmenistan for all main means specified on the balance of the enterprise up to their passing to the Client through Act on passing-acceptance.