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Zh.S.Yelyubayev Ж.С.Елюбаев
Legislative Developments in Kazakhstan
The Republic of Kazakhstan is known to have a systematized and codified law incorporating such branches as: civil law, environmental law, tax law, administrative law, subsoil use law, land law etc. Public relations in various areas of human activities are regulated by systematized regulatory legal acts, namely the Constitution, Presidential Decrees, Governmental Resolutions, acts of central agencies etc. The Kazakhstan law is not based on so-called precedents though the acts of the Supreme Court of the Republic of Kazakhstan facilitate establishing uniform law-enforcement practice. Historically the law of Kazakhstan has been and is based on the common law of the Kazakhs, on the law of the pre-revolutionary Russia (before November 1917) and the soviet law. After dissolution of the Soviet Union in 1991 and declaration of sovereignty and independence of Kazakhstan, during several years our county, first among the former USSR republics was able to re-orient its legislation to regulate established democratic processes and new relations in the sphere of state administration and market economy. During the period of parliamentary crisis (end of 1994 - early 1996), N.A. Nazarbayev, President of the Republic of Kazakhstan, subject to exclusive authority granted to him, issued a number of Decrees having the force of laws that became the legal framework for regulating subsoil use relations. These Decrees are: «On Licensing», «On Subsoil and Subsoil Use», «On Oil», «On Taxes and Other Obligatory Payments to the Budget», etc. Further the Decrees were amended and acquired the status of the national laws; a number of other legislative governmental and departmental legal acts were adopted to regulate complex relations in the sphere of subsoil use. It should be noted that as this sphere of the economy attracted the most significant foreign investments, relations therein are also regulated by legal acts pertaining to the use and protection of investments. I.e. there exists a complex system of legal acts proper application of which determines successful development of the sphere of subsoil use. Hence it is difficult to agree with those who believe that there are no laws in the Republic of Kazakhstan that properly and efficiently regulate the relations in this sphere of economy. The focus of such discussions might be the improvement of legislation, its further systematization and proper application, minimizing the number of government and departmental legal acts that contradict each other and create conflict situations. Unfortunately, it should be noted that the current practice of law enforcement in the sphere of subsoil use is not duly pursued adversely affecting business entities. The provisions of the laws and other legal acts are applied to a greater extent for the purpose of supporting the dictate of the state regulatory agencies and state officials. Many legal acts are unlawfully applied as a basis for interfering in financial and business activities of the companies operating in the sphere of subsoil use and as a source of illegal replenishment of the state budget and a mechanism of establishing monopoly in some other related spheres of economy. Recently active revision of key legislative acts and numerous amendments to the applicable laws is going in Kazakhstan. Frequent changes and amendments to laws and other regulatory legal acts render innocuous the essence and the concept laid as a basis thereof. Here is a spectacular example: during last several years numerous amendments (9 times) were made to the Laws of the Republic of Kazakhstan «On Subsoil and Subsoil Use» and «On Oil» which did not bring any essential legal novelty, they were aimed at resolving secondary economic and social tasks and secondary administrative issues. Thus, e.g. over a year ago the Law of the Republic of Kazakhstan «On Subsoil and Subsoil Use» was amended three times within three months (on December 29, 2006 and January 9 and 12, 2007). At the same time the said tasks and issues were and are subject to economic market mechanisms by improving contracting practice rather than amending laws. What are the issues that were attempted to be resolved by amending the above laws? In general, these are the issues - procurement of Kazakhstani goods and services; employment of Kazakhstani personnel; additional requirements to subsoil users that knowingly cannot be fulfilled for objective reasons (e.g. total prohibition to flare gas); the strengthening of the role of state agencies in controlling subsoil users’ activities, endless amendments regarding interpretation (construction) of certain terms and definitions. Meanwhile, it is my strong belief that subsoil users as well as other business entities would procure and use Kazakhstani goods and services only providing that they are competitive, qualitative and safe and meet other requirements of market economy. Resolving of this issue that is critical for the Kazakhstani economy by virtue of law would not improve the quality of Kazakhstani goods and services. Why does a Kazakhstani producer or services provider need to improve the quality of its products and services rendered if it can be «forced» upon the consumer by law. However, this key issue can and has to be resolved upon executing a subsoil use contract, when a subsoil user undertakes certain commitments to procure partial goods and services in Kazakhstan by bidding. Such approach would ensure increase of the interest of Kazakhstani producers and services providers in improving the quality of goods and services. This axiom of the market economy always needs to be taken into account. One of the key issues is the «stability of contract provisions». As per subsoil use, in early 1990’s Kazakhstan attracted first significant investments into the sphere of subsoil use in conditions when the practice of regulating relations in the oil and gas sector and the legal basis for developing market economy were not well established and there were no sufficient resources both for developing industry and resolving important social issues. Naturally, in these crisis conditions, foreign investors who came to Kazakhstan with significant investments to develop the oil and gas industry had to maximally protect their interests by signing contracts providing for return of investments and generating certain profit. In such not simple political and economic situation there were signed first investment agreements and first contracts granting subsoil use rights and stipulating all terms and conditions for implementing investment projects and ensuring the balance of interests of both parties. The Republic of Kazakhstan granted to foreign investors certain tax benefits and preferences, exclusive conditions for export/import and currency transactions, exclusive rules for employing foreign labor, etc. All said rules were fixed in contracts and contracts were generally approved by the resolutions of the Government of the Republic of Kazakhstan or special acts of the President of the country. Such approach allowed Kazakhstan to create a positive and attractive investment regime, which is one of the factors of rapid economic growth and industrial development not only in the oil and gas sector but also in non-oil and -gas sector of economy. The attraction of foreign investments helped resolve serious social issues and establish Kazakhstan as a solid partner in foreign relations. Currently in the conditions of certain political and economic stability in the country there appeared many critics of the first investment agreements and subsoil use contracts who believe that Kazakhstan placed itself in unfavorable conditions in the relations with foreign investors and now it is time to revise the executed contracts to ensure the interests of the country and the Kazakhstani community. As a man if law I cannot support such proposals for the following reasons. First, during the time of execution of the first investment agreements and subsoil use contracts a number of important legislative and other acts effective in Kazakhstan allowed the Government of the Republic of Kazakhstan and national business entities attract foreign investments and grant certain benefits and preferences. For example Article 3 of the Law of the Kazakh SSR «On Foreign Investments in the Kazakh SSR» of December 7, 1990 (repealed) stated that «the subject of foreign investments in the territory of the Kazakh SSR can be enterprises, interests in the property of the Soviet legal entities, shares and other securities, other property and acquired property rights to use natural resources in the Kazakh SSR for the purpose of conducting business and other activities in the territory of the Kazakh SSR». Article 9 of the above Law stated that «foreign investment is allowed in any sphere of business and other activities except for production of direct military application». Legal entities with foreign participation were granted the right independently resolve issues related to the terms of employment, dismissal, working conditions and granting benefits, guarantees and compensations to all employees of an enterprise (Article 12 of the said Law). Property imported into Kazakhstan as investments of foreign investors other than for sale was not subject to customs duties (Article 16 of the said Law), etc. Secondly, the then Code of the Republic of Kazakhstan «On Subsoil and Processing of Mineral Raw Materials» of May 30, 1992 No. 1367а-XII (repealed) stipulated an option of granting subsoil for the use of enterprises with foreign participation and foreign legal entities and citizens on contract or concession terms (Article 10). In addition, subsoil was granted to the said entities under subsoil use contracts, in particular stipulating: terms and conditions of subsoil use; environmental requirements; annual quotes for useful minerals; terms of payment and amounts of royalty for subsoil use; environmental measures; special requirements to the applied technology; benefits granted (Article 14 of the Code), etc. Thirdly, at that time there were in effect other regulatory legal acts allowing the State to transfer to foreign investors subsoil and land plots for use, e.g. the Land Code of the Kazakh SSR of November 16, 1990; the Provision «On the Procedure for Granting Land for Use by Joint Ventures, International Associations and Organizations, Foreign Legal Entities and Citizens to Conduct Activities in the Territory of the Republic of Kazakhstan» approved by the Resolution of the Government of the Republic of Kazakhstan of July 3, 1992 No. 1516-XII (repealed); the Provision «On the Procedure for Realization (Transfer, Sharing and Sale) of Information on the Subsoil of the Republic of Kazakhstan» approved by the Resolution of the Government of the Republic of Kazakhstan of December 8, 1992 No. 1034 (repealed), etc. Thus, arguments of the «contemporary critics» on the invalidity of the actions of the Government of the Republic of Kazakhstan in respect to the transfer of subsoil to foreign investors and foreign legal entities allegedly without account of the national interests and in violation of the applicable law, as well as their initiatives to revise certain benefits and preferences granted to subsoil users are ungrounded and unrelated to the actual economic situation in the early 1990’s, when foreign investors were involved in the process of the economic growth of the country and its transition to the market basis. On the contrary, the current success of the country confirms the appropriateness of the acts of the President and the Government of the Republic of Kazakhstan, and current legislative provisions guarantee the stability of the executed contracts and strict rules and guidelines for amending such contracts. The provisions of the contracts executed at that time are to be retained; at least they cannot be changed unilaterally on the initiative of the State or national companies as it would contradict the provisions of the current legal acts. Article 383 of the Civil Code of the Republic of Kazakhstan stipulates that «An agreement should comply with the obligatory rules for the parties, which have been established by legislation (imperative norms), which are valid at the moment it is concluded. If, after an agreement has been concluded, legislation establishes obligatory rules for the parties other than those which were valid upon the conclusion of the agreement, the conditions of the concluded agreement shall retain their force, apart from those cases when legislation has established that its validity shall be extended to relations arising from previously concluded agreements». It is stated in part 3 of Article 4 of the Law of the Republic of Kazakhstan «On Investments» of January 8, 2003 No. 373 that «the Republic of Kazakhstan guarantees the stability of the terms of agreements executed between investors and state agencies of the Republic of Kazakhstan, except for cases where an agreement is amended by agreement of the parties». There are two exceptions when these guarantees do not apply to: «amendments to the legislation of the Republic of Kazakhstan and/or entry into force and/or amendments to international agreements of the Republic of Kazakhstan whereby the procedure and terms of import, production and sale of excised goods are changed»; as well as to «amendments to the legislative acts of the Republic of Kazakhstan to ensure national security and environmental safety, public health and ethic conduct». Pursuant to the provisions stipulated in Article 71 of the Law «On Subsoil and Subsoil Use» «Subsoil users shall be guaranteed the protection of their rights in accordance with legislation. Amendments and additions to legislation, which deteriorate the position of subsoil users, shall not apply to the contracts concluded prior to the introduction of such amendments». These guarantees «shall not apply to changes in the legislation of the Republic of Kazakhstan concerning providing for the defense capacity, national security, environmental safety and health protection». A similar provision is contained in Article 57 of the Law of the Republic of Kazakhstan «On Oil» of June 28, 1995 No. 2350. The issues of stability of the agreements are regulated by the Law of the Republic of Kazakhstan «On Production Sharing Agreements (Contracts) in Offshore Oil Operations» of July 8, 2005 No. 68. Thus, the applicable legislation of the Republic of Kazakhstan stipulates a general rule on the stability of executed investment agreements and subsoil use contracts, and the State guarantees their stability. The existing exceptions to the general rule are not subject to wide interpretation and relate, first and foremost, to the issues of ensuring national security, environmental safety, health protection and ethic conduct, as well as to the issues of excised goods turnover. Given this, the attitudes existing in the community and statements of individual politicians on the necessity to revise previously executed investment agreements and subsoil use contracts contradict the provisions of the effective law and defame the positive investment image of the Republic of Kazakhstan. As per future legislative acts regulating relations in the sphere of subsoil use, it is known that currently the Government of the Republic of Kazakhstan is initiating the adoption of a new Law «On Subsoil and Subsoil Use» and a new Tax Code, where I do not see new clauses ensuring the balance of interests of all participants in the useful activities in the sphere of subsoil use. However, in the current situation of a relative political and economic stability in the country, it is probably reasonable that the state finding new approaches to protecting its interests in the sphere of subsoil use and investment activities, however, these approaches should not prejudice the stability of previously concluded subsoil use contracts and investment agreements. For example, the Draft Law of the Republic of Kazakhstan «On Subsoil and Subsoil Use», whatever advantages, unfortunately, does not make any conceptual changes, in general it reproduces the provisions of the applicable subsoil use legislation. There is nothing specific and progressive therein, as it stipulates the authority of the state and is not socially focused. Subsoil is to be developed in compliance with the balance of interests of all participants of legal relations because such type of useful activity requires significant capitals, i.e. investments. Its anti-market provisions discourage investors because none of investors will investment money if there is a risk of losing them. As per the new Draft Tax Code, I would like to tell that its provisions is a step forward, however, it contains provisions that are anti-market and anti-investment. Thus, clause 2 of Article 307 of the Draft Tax Code (as of August 1, 2008) states that «the tax regime stipulated in a production sharing agreement (contract) executed between the Government of the Republic of Kazakhstan or the competent authority and a subsoil user before January 1, 2009 and subjected to obligatory tax audit, as well as the tax regime of a subsoil use contract approved by the legislative act of the Republic of Kazakhstan shall be retained and shall apply exclusively to the parties to an agreement (contract) within its entire effective term, and shall not apply to the persons who are not the parties to an agreement (contract), and may be changed by mutual agreement of the parties». At the first glance, it is an excellent provision to ensure the stability of tax benefits and preferences granted to a subsoil user, however, the conditions in which it is applied excludes its merits. Why have I arrived at such conclusion? The analysis of this Article shows that in order to ensure the stability of tax regime under «old» production sharing agreements (PSA), such PSA passed an «obligatory tax audit», and other subsoil use contracts were approved by the «legislative acts of the Republic of Kazakhstan». In this connection it should be noted that at the time of concluding subsoil use contracts of any type, for example in 1993-1995 there was no legislative requirement to conduct an «obligatory tax audit» (see Article 14 of the Code on Subsoil and Processing of Mineral Raw Materials of May 30, 1992) or their «approval by the legislative acts of the Republic of Kazakhstan». In such situation where can the subsoil users-investors who concluded their subsoil use contracts in the early 1990’s obtain a document confirming that an «obligatory tax audit» was conducted or a «legislative act» by which such contract was approved. Thus, having considered the above provision for the new Draft Tax Code, the state would require that subsoil users who have «old» subsoil use contracts submit the documents that do not and could not exist. In case of failure to confirm such legally significant facts, the tax authorities would automatically apply thereto the new tax regime, which is a gross violation of the principle of equity in contractual relations, especially in the sphere of investment activity.
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