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Irina Galkina: “Legalization of assets: continuation with new meaning”

“In Kazakhstan, the already lengthy campaign for the legalization of capital and real estate, which began in 2014, will be prolonged. Apparently, the government believes that the longer is the period when Kazakhstan citizens can take their assets out of the shadows, the more impressionable the result will be. Experts believe that this is not true. In addition, it is planned to transform the model of legalization, but the proposed changes are quite controversial”, said Irina Galkina, chief editor of the news portal Millioner.kz (Almaty, Kazakhstan), in an article written for cabar.asia.

Sovereign Kazakhstan’s economy today needs the inflow of capital as never before. The main export item – oil – does not bring the income to the state treasury, due to a collapse in prices. Thus, it no longer helps perform all social and investment programs. Foreign investments are insufficient. The shadow economy is still at a high level. In such circumstances, the economy of Kazakhstan requires a qualitative and historically necessary breakthrough to implement numerous budget programs and global projects.

Legalization, of course, will not globally solve these problems but can be a good support for the budget. Apparently, it was the idea of the government when they started the third wave of legalization. For the people, it was an unexpected move, but for the government, it was quite predictable.

The financial background of the amnesty of 2014-2015 is obvious. The country would be receive not only hidden capital but also paid fees – from the capital and drom the legalized property. Initially the government planned that the assets would be legalized to a sum worth a total of $ 10-12 billion. The calculation had common sense: this money, comparable with foreign investments in the semi-annual terms, would begin work for the domestic economy. If a 10 percent fee were paid for this entire amount, the treasury would receive at least $ 1 billion. Such amount would not hurt.

As a reward for the return to the legal economic field, the pardoned Kazakhstanis will, of course, declare their income and assets without any fear to be punished later. Kazakhstan is going to begin this form of declaration from 1 January 2017.

Background. Kazakhstan

The people of Kazakhstan are already well familiar with what an amnesty of capital is. It is when businessmen and officials (alas, there are no ordinary people among them) return the money hidden abroad. The first act of public pardon took place in 2001. Scale of legalization was insignificant – only $ 480 million was legalized during the past month – from July 14 to August 14.

Of course, experts say, is extremely low, considering that the Kazakh capital abroad accounts for tens of billions. But, on the other hand, it was an impressionable victory, since there was created, in general, a good precedent of coming out of shadows without any legal and other consequences.

The second wave of legalization (from 3 July 2006 to 1 August 2007) affected not only money, but also property. Individuals and business entities have been involved in this process. As a result, there have been legalized money and property valued at $ 6.8 billion, and the budget was replenished by fees for amnesty for $ 483 million.

Legalization #3 (from September 2014 to December 31, 2015) is the most liberal. So, the capital returning to the country should be placed in a special account in the bank and be untouchable in the next five years, then the one who returns the capital does not have to pay any taxes. It is also possible to purchase government securities, bonds of banks, national managing holdings, securities of national companies, development institutions, shares in the framework of the “National IPO» program, or, eventually, buy items on the program of the second wave of privatization. But if the owner decides to cash the “non-cash” before the expiration of five years, that is  to withdraw the money from bank account, he/she will have to pay 10% to the budget.

The main difference between the third wave of legalization and the second: it applies only to private individuals: companies and firms may not participate in it.

Where does the “shadow” come from?

Only a few people – those who are well acquainted with the economic underwater currents – can give a professional answer to this question. We will not take into account the wild time of accumulation of capital (1990). It is already far in the past. Now people use more clever schemes to take capital abroad. For example, a company enters into a kind of fictitious contract for the supply of goods to Kazakhstan: goods are not imported, but the capital leaves the country. Some time ago, the Ministry of Finance of Kazakhstan paid attention to some doubtful flows of goods, suspecting that something was fishy here. The Central Bank of Russia went further: it even has estimated that fake Russian importers could bring abroad through Kazakhstan up to $ 10 billion, and through Belarus – up to $ 15 billion. The lack of customs borders makes it possible.

Experts speak also about other sources of illegal capital: “kickbacks” or “payoffs” pre-laid in the investment projects which are realized on the territory of Kazakhstan, understating export prices for goods supplied to all kinds of offshore companies, and offshore companies themselves…

It is clear that only the business elite uses such schemes, ordinary Kazakhs and even medium-sized businesses have nothing to do with that.

In 2012, according to the World Bank estimates, the shadow economy amounted to 19.2% of GDP, or 5.8 trillion tenge. Official monetary authorities adhere to the same figure. So, in preparation for a third legalization, in 2014, the National Bank also voiced this figure by taking 2005-2012 as a basis. According to it, the main share of non-observed economy (64.6%) are in such sectors as trade – 22.9%, agriculture – 15.6%, transport – 14.1%, and real estate transactions – 12, 0%. According to some definitions, in Kazakhstan, non-observed economy includes only the hidden and informal activities, this concept does not include illegal activities.

Background. Third countries

Peruvian economist Hernando De Soto, who wrote his book “The Mystery of Capital”, of course, could not even suspect that his idea of ​​legalizing the ownership of the poorest layers of population would become so much viable in the post-Soviet space. [1] This finding of a South American is striking in its simplicity. A comparative analysis of the four countries with very different cultures and political systems – Peru, the Philippines, Egypt and Haiti, helped him realize that they share not only poverty but also imperfect economic policy. The data collected by him confirm that the poor in these countries have accumulated quite a lot of money and property, in order to successfully participate in the capitalist development. In Egypt alone, the property of the poor exceeds 55 times the volume of foreign direct investment, including the cost of construction of the Suez Canal and the Aswan Dam. Total private estate, accumulated by the poor in the countries of the Third World and former communist countries that has no legal status, estimated by this prominent economist, was at least $ 9.3 trillion at the time of writing his monograph (2000). But because of the old laws on property, these countries cannot turn it into liquid capital.

De Soto recalls that currently developing States are experiencing the same crisis as the one through which the now developed countries in the era of the Industrial Revolution had passed, when they were still typical Third World countries suffering from the dominance of the black market, mafia organizations, mass poverty and blatant disregard for the law. Western countries, argues de Soto, found a way out about 150 years ago and began to prosper, without realizing what, actually, they had done for this. A reason for the success lies in the fact that they just changed the laws on property …

Critical eye view

The difficulties faced by the process of legalization in 2014 are obvious. Since September 2014, when the next “way out” of the shadows started, there were legalized 292.6 billion Tenge, including the property situated in the territory of Kazakhstan: there were legalized 30 901 sites and securities worth 218.9 billion Tenge; the property located outside the Republic of Kazakhstan: there were legalized 17 sites and securities in the amount of 636.5 million Tenge; legalized money in the amount of 73.0 billion tenge.

Expectations in terms of legalized capital have not been met, to put it mildly, and the legalization of foreign real estate in general has not happened at all: 17 applications were filed on foreign assets, with only 14 of them regarding the real estate.

The Chairman of the National Foundation for Financial Services Michael Klenchin in an interview [2] analyzed the law on legalization and suggested to extend the term of legalization, to review the rules on the collection of fees, or exclude it in some cases, to work out mechanisms for the legalization of property acquired indirectly but through the purchase of shares of foreign companies abroad, which, in turn, were owners of large assets, to make the procedure for the assessment more detailed – how, on the basis of what criteria, and according to reports of which evaluators the value of foreign real estate should be determined.

Particular attention was paid to the legalization of foreign real estate. First, buying property abroad is not prohibited by Kazakh legislation, so the mere fact of the acquisition of foreign property may not be illegal. Secondly, no legislation of Kazakhstan provided for an obligation to inform the government of the purchase. In addition, having bought real estate abroad, its owner is not required to pay any taxes in Kazakhstan. Therefore, the requirement to pay a fee of 10% to the state budget of Kazakhstan is not lawful.

So, not all objects of foreign real estate acquired by Kazakhstan citizens require legalization as such. If a person has acquired property for legal income but not for the money used in corruption schemes, he/she does not need to participate in the legalization. And Kazakhstan tax authorities may not apply any sanctions with respect to such property and their owners.

Meanwhile, in all the clarifications regarding the legalization of foreign property, the competent authorities emphasize that all owners of real estate abroad, without exception, must go through an act of legalization. Lawyer Mikhail Klenchin in this case is sure that the tax authorities confused the terms “legalization” and “declaration”. The best option, legitimate and justified, in his opinion, is to oblige the Kazakhs having property abroad just to declare it. This step is mutually benefitial and logical: on the one hand, there are no legal consequences for the owners of such facilities, on the other hand, it will give the government full information about the foreign assets.

More and more questions

By the first anniversary of the third wave of legalization, the Ministry of Finance of RK announced that, probably, the period of withdrawal of the real estate and capital out of the shadows would be extended for a year, until the 31st of December 2016.

Innovations awaiting this process were announced by the vice-minister of finance Ardak Tengebaev [3].

The first thing that is proposed is to legalize assets by transferring to a bank account without obligation to their storage, without payment of duty, with disposal at one’s discretion without restrictions. In the case of lack of cash deposit in banks, the legalization will be held with the payment of a fee of 10%.

Second: concerning the property situated both on the territory of Kazakhstan and abroad, the right to which is issued for a subject of legalization or for an improper person, the legalization is suggested to hold by submitting a declaration to the bodies of state revenues without corresponding commissions.

Third: providing guarantees against unlawful harassment by law enforcement agencies. Even an bill was developed for this purpose.

Amendments to the law “On amnesty of citizens of the Republic of Kazakhstan, oralmans and persons having a residence permit in the Republic of Kazakhstan in connection with legalization of property” will be discussed at the autumn session of Parliament, probably in a matter of urgency. But there are fears that the law will be again raw and imperfect.

After the profile Ministry decided to simplify and modernize the model of legalization, there are even more questions arise. Here are just a few of them:

On legalization of capital.

In the new version, now a person has just to bring the money to the country, and he/she is released from any obligations that existed before – using the money only for a specific purpose – the purchase of securities for the KASE, or leave them untouched as much as 60 months. As of July 1, 2015, in second-tier banks, there were opened 135 savings accounts and accumulated 72.268 billion Tenge, with the major share of Almaty among the regions – 90 accounts for more than 66 billion Tenge. This money are so far preserved, and if the changes to the law on legalization are passed, and one no longer needs to pay a fee of 10%, this money will be immediately withdrawn from the banks, and possibly from the economic turnover. Is it the purpose of the government?

Next. What should be done in respect of that part of the legalized money and already withdrawn from the banks (talking about the capital that has been “cleaned up” by paying a 10 percent fee)? Leave it as it is or return a 10 percent duty to its owners? This dilemma, I think, is not speculative, but quite real, because people will not agree with a different approach to the capital legalized within the same action.

In addition, did the people in the Finance Ministry think thoroughly, offering to legalize the capital without any encumbrances. The financial goal of legalization will not be achieved – the budget will not receive the injections, which it could get through a 10 percent fee. In addition, if the money were out of legal circulation, no taxes were ever paid. Is it just in this case to exempt them from payment of the fee? After all, the logic of legalization is that no one asks, where the money came from (by the way, it can be corrupt money), but they should be taxed.

On legalizing property.

When property is legalized in the territory of the Republic of Kazakhstan, everything is clear. The concept of “legalization” per se means the transition from illegal to legal status. Since the property was illegal, the taxes for it were not paid. And now, to give legal status of such property, one must pay a 10 percent tax. This requirement, as is the case with the legalization of capital, is perfectly legal. After all, this property could emerge as a result of investments of “unclean” money.

As for real estate abroad, in theory, only the property that was acquired on the illegally obtained money for with taxes in Kazakhstan were not paid should be subject to legalization. This property is subject to legalization, and the fee for it should be mandatory. If the foreign property was acquired for legal income, the process of legalization should not touch it, and its owner just needs to declare it in the State Revenue Committee. This how the scheme should look ideally. Officials from the Ministry of Finance cannot accept the fact that most of the foreign real estate, which is owned by Kazakhstan, should be freed from the process of legalization, and from the payment of the 10 percent duty. Moreover, the agency plans to impose on foreign property owners an obligation to estimate the value of their property, and possibly, to extend the norm of legalization not only to immovable, but also to movable property. The mechanism is absolutely incomprehensible: how and who will detect overseas property, how to asses it …

On foreign accounts.

To date, the tax legislation has a norm, which obliges every citizen of Kazakhstan having money abroad to submit a declaration to the tax authority stating the amount on foreign accounts. If a person has not filed such a declaration, in accordance with the Administrative Code, for the first time he is exempted from liability. But if he does not submit the declaration for the second time in a row, the amount of the fine will be 15 MCI. Now the Finance Ministry proposes to impose a fine of 250 MCI for not providing a declaration on the accounts. Such an initiative of financial authorities is quite controversial. On the one hand, the idea of ​​introducing administrative liability for failure to declare foreign bank accounts is reasonable. On the other hand, very often Kazakhstan citizens, going for vacation abroad, are forced to open bank accounts for any small service, like for renting a car or paying the apartment rent. Or, for example, those who study or work abroad open accounts, too. Of course, it is not right to expose them for administrative liability with huge fines. But most importantly – the National Bank of Kazakhstan carries out the financial monitoring in the country for several years, and in principle, it has full information on disinvestment – who transfers the money, in what amounts, for what purposes, etc. So is it worth applying draconian penalties against the owners of all accounts in foreign banks, if the authorities anyway know about them?

Instead of an epilogue

The third wave of legalization is a prologue to the upcoming universal declaration of income. However, it is hardly possible to equate the full financial accountability of the state and the reduction of the shadow economy, a decrease in the level of corruption in government. Legalization is only a means to learn about the assets of citizens a little more. All depends on the mechanism of legalization. The main thing is not to confuse those who would like to start their lives from scratch.

[3]. Internet newspaper Zonakz.net, July 24, 2015. https://zonakz.net/view-legalizacija-nemnogo-drugaja.html

Irina Galkina, independent journalist

The views of the author do not necessarily represent those of CABAR

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