Kyrgyzstan: Yet Another Tax Amnesty

Government forced to revise plan to allow people to own up to undeclared assets.

By Asyl Osmonalieva in Bishkek (RCA No. 581, 30-Jun-09)

A bill allowing people to declare assets and unpaid tax without fear of retribution has sailed through the Kyrgyz parliament, after an earlier version had to be amended because of objections that it would help money-launderers.

A revised version of the bill was passed on June 25. The legislation, termed “an amnesty for undeclared taxes and customs duties and legalising property”, is designed to reduce the amount of business activity that takes place in the illegal or black economy.

The bill first came before parliament on June 10. Eight days later, the parliamentary committee on defence, security, law and order and legal reform sent the bill back to the government for revision.

Legislators complained that it left too many opportunities for people to declare and “legalise” assets obtained through criminal activity. That, they argued, would hardly be good for Kyrgyzstan’s reputation abroad.

Presenting the bill to parliament on June 10, the minister for economic development and trade, Akylbek Japarov, said its aim was to provide transparency, reduce the black economy, increase investment, incentivise enterprises to legalise businesses currently run in the grey economy and determine the origin of capital and property.

Speaking the same day, the deputy minister for economic development and trade, Aydar Mokenov, said the illegal economy accounted for somewhere between 18 and 70 per cent of the total, depending on how it was calculated. The National Statistics Committee gives the lower estimate of 18 per cent, whereas the United Nations Development Programme says it is over 50 per cent and some independent sources put it as high as 60 per cent.

Along with the new tax code adopted last year, the tax amnesty bill is part of plans to raise government revenue through improved tax collection.

The law targets individuals and firms that are ready to come clean about undeclared taxes, customs duties and assets. The economic development ministry estimates that assets worth 400 million US dollars will come out of the shadows.

The amnesty will be effective from October 1 to December 31.

A previous capital amnesty, launched in 2007, was seen as a complete failure because businessmen proved reluctant to reveal undeclared assets.

For members of the parliamentary committee reviewing the current bill, the most controversial issue was a provision exempting businesses from prosecution for criminal offences such as bribery and extortion for the period up to the end of 2008.

The Communists, who are a minority in a parliament dominated by the Ak Jol party, were particularly vocal in expressing concerns about the exemption, and also about the fact that businesses that joined the amnesty would not have to undergo tax inspections for the period concerned.

“This law proposes to forgive the all bureaucrats who have stolen property from the state; we cannot do that because everyone is equal before the law,” said Communist leader Iskhak Masaliev. “On the pretext of protecting entrepreneurs, there’s an attempt to legalise corruption among bureaucrats.”

The concerns raised by parliamentarians forced the government to revise the law in several areas, so that the capital amnesty explicitly excludes funds obtained through money-laundering, abuse of power, the issuing of illegal contracts and purchase orders, misuse of one’s official position, and general bribery and corruption.

Funds derived from other forms of activity such as illegal dealing in precious metals and smuggling will, however, be eligible for declaration without punishment.

Kubanychbek Aydaraliev, head of the economic development ministry’s department for fiscal policy, acknowledged that these areas had been hotly discussed within government as well as parliament.

But he said the amendments would have little effect on the way the amnesty worked, as the main thrust of the law – getting people to declare property and unpaid taxes – remained unchanged.

Experts agree the government is right to be doing something about the black economy since its existence on such a massive scale undermines tax collection, fuels corruption, and gives rise to a distorted view of the economy as a whole.

Moreover, the bigger players in the black economy are often powerful figures who use political connections to guarantee they will not be touched. Some are allegedly part of the organised crime world.

Analysts say the latest attempt to get people to declared capital and unpaid taxes faces several obstacles – the current economic crisis, recurring political instability in Kyrgyzstan and the pervasiveness of corruption.

Kemal Izmailov, director of the Institute for Public Policy Research and Analysis in Bishkek, says the current period of economic slowdown is not the right time to embark on such initiatives, as hard-pressed businesses have more incentive than ever to conceal income from the state.

He prescribes a carrot-and-stick approach, saying that in parallel to the amnesty, government needs to demonstrate that it will be tough on those who get caught afterwards.

Izmailov believes businesses will take the bait only when they are absolutely sure that promises of immunity will not be broken later on.

“Businessmen will go for legalisation as long as the government gives clear guarantees that people [who do so] will not be persecuted down the line,” he said.

Nikolai Bailo, a member of parliament from the Communist Party, believes the success of tax amnesties hinges on a country’s political stability.

“In Central Asian countries including Kyrgyzstan, there have always been problems with political stability, where decisions by the former political elite get cancelled by their successors,” he said.

The recent history of Kyrgyzstan, where the long-standing president Askar Akaev and his administration were ousted in 2005 after a popular uprising, is a reminder that the people in power and the policies they have approved can change,

Bailo is sceptical about the outcome of a tax amnesty, as he thinks only a handful of small and medium businesses will take part, and none of the big fish.

“We won’t catch the financial sharks,” he said. “High ranking bureaucrats who’ve built up their capital by committing financial crimes would not want to risk it.”

An expert in political economy, Bazarbay Mambetov, argues that the reverse is the case, and fears that big business will exploit the amnesty.

“If the bill is passed, a small group of people will simply legalise property that they have acquired illegally,” he said.

Mambetov suspects the current bill resulted from lobbying by businesses that have acquired public property such as factories in privatisation deals of dubious legality.

At the same time, he said, the government bureaucracy is so riddled with corruption that if a powerful businessman faces problems for not paying taxes or other illegal activity, he can always get out of it by handing over a bribe.

Asyl Osmonalieva is an IWPR-trained journalist in Bishkek.