Kazakhstan: Subsoil Users And NIOKR (Research & Development)

Introduction

In the beginning of 2012, the Subsoil Law¹ (the "Law") was amended² with the provisions of subsoil users' obligation to finance annually scientific research, scientific technical and development works ("NIOKR³").

Considering the stability guarantees of contracts, such obligation arises for the subsoil users of hydrocarbons or solid minerals only if it is directly set out in their subsoil use contract (including by amendments to the contract).

According to the Article 76.12-1 (Subsoil User' Obligations) of the Law, subsoil users are obliged to finance annually NIOKR, performed by Kazakhstani suppliers of goods, works and services in the amount of not less than 1 % of the aggregate annual income under contractual activities upon results of the previous year.

We would like to remind that:

1. Kazakhstani suppliers of works and services deem to be Kazakhstani (a) citizens and (b) legal entities with 95 percent or more of employees being Kazakhstani citizens;
2. Kazakhstani manufacturer of goods deem to be Kazakhstani (a) citizens and (b) legal entities that produce goods of Kazakhstan origin (i.e. for which CT-KZ certificate is available).

From 10 January 2015 the Law was amended with following clarifications regarding this commitment:

1. In case of over-fulfillment of the obligation on financing of NIOKR upon the results of the current year, the subsoil user performs adjustment (offset) of the exceeded liabilities volumes for the following reporting periods;
2. In case of absence of Kazakhstani NIOKR suppliers, financing of these works performed by foreign suppliers is made under the permission of the Competent Authority.

The obligation to submit quarterly relevant forms of reports on execution of the obligation to finance NIOKR was set out as well.

Specifics of Procuring NIOKR

Please note that according to the subsoil users' procurement rules⁴, procurement of NIOKR can be carried out not through a tender or request of bids, but by direct procurement (i.e. from one source), provided that the local content in the works performed will be not less than 65 percent (i.e. the payroll fund of the contractor's employees being Kazakhstani citizens shall be not less than 65 percent in the general payroll fund of the contractor).

Content of NIOKR

A detailed list of the activities relating to NIOKR is set out in the List of Works Attributed to Scientific Research, Scientific Technical and (or) Development Works⁵.

The list consists of the following type of works:

1. elaboration of a technical assignment for research (scientific and technical) works (including 2 subtypes);
2. selection of the direction of research (7);
3. theoretical and experimental studies (7);
4. work on the synthesis and evaluation of research results (3);
5. preparation of technical proposals (4);
6. preliminary design (8);
7. engineering design (7);
8. elaboration of work documentation for manufacturing and testing of prototype, creation of pilot production (5);
9. preliminary tests (4);
10. development of normative and technical standards; and
11. support of implementation procedure (commercialization) of research and design work.

The subsoil user's actual costs for the below specified work will be considered as pperformance of the obligation to finance NIOKR, specifically, the works connected to:

1. activities under the subsoil use contract;
2. activities not related to subsoil contract aimed at obtaining products (value-added) with high added value;
3. research in the field of ecology;
4. the protection of labor;
5. ensuring safe operations;
6. energy conservation within the frameworks of the industrial activities; and
7. researches, carried out according to the Law on Science dated 18 February 2011 and the Law on State Support of Industrial Innovation dated 9 January 2012.

At that, the Law on Science states that the subjects of scientific and technical activities are:

1. employees of scientific organizations and higher education institutions engaged in research, scientific and technical activities, as well as the scientists, independently carrying out scientific and (or) scientific and technical activities; and
2. legal entities, higher education institutions, which principal activity is of scientific and scientific technical nature.

Organizations that do not meet the above requirement, in order to meet the goals set out in their foundation documents, are entitled to establish scientific departments in their structure.

Tax Exemptions

According to Article 108 (Deduction for Expenditures on Scientific Research and Scientific Technical Works) of the Tax Code dated 10 December 2008, all the expenses for scientific research and scientific technical works ("NINTR⁶") are subject to deduction except for those spent for acquisition of fixed assets, their installation, and other capital expenses. The technical assignment and the acts of acceptance of fulfilled stages of such works serve as the basis for deduction.

Furthermore, according to Article 133.5 (Decrease of Taxable Income) of the Tax Code, subsoil users can additionally apply the decrease of taxable income in the amount of 50% from the expenses for NINTR at creation of an object of industrial property which were deducted according to the Article 108 of the Tax Code. For this, such subsoil user shall have:

1. the title of protection document with regard to the object of industrial property, issued by the Ministry of Justice;
2. the conclusion of the Ministry of Education and Science confirming the amount of above expenses;
3. the conclusion of the Ministry of National Economy on the implementation of the NINTR result on the territory of Kazakhstan, in the tax period when the state registration of the title of protection document was performed⁷.

Lastly, Article 108-1 (Deduction of Subsoil User's Expenses on Transfer of Funds to Autonomous Cluster Fund) of the Tax Code entered into force from 1 January 2015, whereby a subsoil user is entitled to deduct the expenses actually incurred on the transfer of funds to the Autonomous Cluster Fund for financing of scientific research and scientific technical works [from 1 June 2015 the words in bold will be replaced by the words "projects of the participants to the "Park of Innovative Technologies" Innovation Cluster"] under the Law, in the amount of the positive difference, which is determined as follows:

Tech Garden

According to information from public sources⁸, the Kazakhstan Government has determined with how it wishes to allocate that 1% of the aggregate annual income that subsoil users must contribute to NIOKR.

It is planned that "Tech Garden" Fund, created on the basis of Special Economic Zone "Park of Innovative Technologies", where high-tech startups are to be created and developed, will receive such monies.

According to the conception "Tech Garden" Autonomous Cluster Fund (see also Article 108-1 of the Tax Code in the above section 1.4 of this article) must perform the functions of "Silicon Valley" in Kazakhstan.

However, subsoil users will still have the right to spend money on their own NIOKR. For this reason the exact amount which can be received by Tech Garden is still unknown.

Presumable the project financing will work on venture capital scheme.

Subsoil users will receive the list of projects, from which they will have to choose a company that develops a specific innovative product matching their needs to the fullest extent. Further, the company opens an account, and financing the chosen project through it. Venture principle of investment implies that the subsoil user will be able to get a share in the company, which will perform NIOKR for it, in accordance with the amount of financing.

Currently the provision which would expand the list of companies that are obliged to pay 1% of their aggregate annual income for NIOKR is under the consideration. In the long view, generation and distribution energy companies, transportation companies, banks and telecom may join this group.

Data for 2012-2013

According to the response of the Prime Minister dated 24 February 2014 No. 17-50/362⁹ to the parliamentary request, in accordance with the contractual obligations of subsoil users, the actual execution of NIOKR funding for 2012 and 2013 from hydrocarbons subsoil users amounted to 10.495 billion tenge (about USD 70 million), from TPI subsoil users - 5,699 billion tenge (about USD 40 million)¹⁰.

In 2012, according to reports of hydrocarbons subsoil users, 288 contracts with Kazakhstani companies (research, design institutes, consulting, construction companies, individual entrepreneurs, etc.) for the total amount of 3.923 billion tenge (about USD 26 million) were signed.

Footnotes

[1] The Law on Subsoil and Subsoil Use dated 24 June 2010

[2] The law on Introduction of Amendments to Some Legislative Acts of the Republic of Kazakhstan Regarding State Support of Industrial Innovation Activities dated 9 January 2012 No. 535-IV

[3] Abbreviation from Russian "nauchno issledovatelskiye, nauchno tekhnicheskiye i opytno konstruktorskiye raboty"

[4] The procurement rules were approved by the Government Decree dated 14 February 2013 No. 133

[5] Approved by the Government Decree dated 25 June 2012 No. 830

[6] Abbreviation from Russian "nauchno issledovatelskiye i nauchno tekhnicheskiye raboty"

[7] The procedure how to receive such conclusion is set out in the Government Decree dated 16 July 2012 No. 940

[8] Article of Irina Dorokhova "PIT Alatau Will Receive 1% of Subsoil Users' Income" - http://www.kursiv.kz/news/details/hi-tech/pit_alatau_poluchit_1_dokhodov_nedropolzovateley/ (Rus)

[9] http://m.zakon.kz/4615162-otvet-na-deputatskijj-zapros-premer.html (Rus)

[10] At the rate of USD 1 per KZT 150

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.