Important Information on the Application of Payroll Tax Holidays
On April 20, 2020, the Government of Kazakhstan published Resolution No. 224, which, among other things, provided tax holidays for individual income tax, social tax, mandatory pension contributions, mandatory professional pension contributions, social contributions, contributions and deductions for compulsory social health insurance (hereinafter “salary taxes”). Exemption from salary taxes is provided to different categories of business and for different periods:
1) Micro, small and medium-sized businesses (hereinafter referred to as “SMEs”) that are engaged in certain types of activities (a list of OKED codes is attached to the resolution), – for the period from April 1 to October 1, 2020;
2) Large businesses also according to a separate list of types of activities - for the period from April 1 to July 1, 2020.
Salaries for which months are exempt from taxes?
After the first reading of the resolution on salary tax holidays, it may seem that wages for April-September in the case of SMEs and for April-June in the case of large businesses are exempt from taxes.
In fact, the criterion for applying the exemption is not what month the salary is paid for, but the period when the obligation to pay salary taxes occurs. According to the Government Decree, exemption from salary taxes is provided “for obligations for which the payment (transfer) deadline occurs in the period from April 1 to October 1, 2020” (from April 1 to July 1 for large businesses). Accordingly, if the deadline for paying salary taxes occurs from April 1 to October 1 (for SMEs) or from April 1 to July 1 (for large businesses), then the exemption will apply.
In this regard, it is important to understand when the deadline for payment (transfer) of each of the salary taxes comes in order to determine the salaries of which months are subject to tax holidays.
Personal income tax (IIT) must be transferred on income paid no later than 25 calendar days after the end of the month in which the income was paid. Therefore, if wages for March were paid, for example, on March 30 or 31, then the IIT for it is transferred by the employer (tax agent) until April 25. This means that in this case, the salary for March is exempt from the IIT, since the obligation to transfer the IIT arose in the period from April 1.
In the same way, social tax, compulsory pension contributions, compulsory professional pension contributions, social contributions, contributions and deductions for compulsory social health insurance are paid by the 25th day of the month following the reporting month. Therefore, these taxes, contributions and payroll deductions for March must be paid before April 25 and are also subject to tax holidays.
If we further follow this logic, then as a result, for SMEs, wages for March, April, May, June, July and August are exempt from taxes, but not for September, since for wages for September, wage taxes must be transferred until October 25 (that is, after October 1, 2020). For large businesses, salaries for March, April and May are exempt from taxes, but not for June, for which salary taxes are paid until July 25 (that is, after July 1, 2020).
It turns out that the state exempted salaries for 6 months for MBS and 3 months for large businesses from taxes. For SMEs, salaries for March-August inclusive (and not April-September) are exempt from taxes; for large businesses - for March-May inclusive (and not April-June).
Due to this interpretation of the resolution, in practice, some employers will have difficulties applying holidays to salaries for March. The Government Decree on tax holidays was signed on April 20, 2020. Considering that the deadline for paying salary taxes for March was until April 25, by April 20, many employers managed to transfer taxes on salaries for March 2020. For SMEs that previously received a deferment on the payment of all types of taxes and payments until June 1, 2020, this is not entirely relevant. But large businesses (which did not receive a tax deferment) could pay salary taxes before the resolution was signed. At the same time, the legislation of the Republic of Kazakhstan provides for the possibility of returning excessively (erroneously) paid taxes, contributions and deductions. Therefore, large businesses that hastened to transfer salary taxes on wages for March have the opportunity to correct their reporting and apply to the relevant authorities for a refund.
It should be separately noted that the Labor Code of the Republic of Kazakhstan allows the payment of wages until the 10th of the next month. Therefore, in practice, there may be cases when, for example, wages for August are paid in the first ten days of September. In this situation, different approaches are possible in applying tax holidays to:
- salary taxes withheld by the employer from the employee’s income (personal income tax, mandatory pension contributions, mandatory social health insurance contributions) - these taxes and contributions are paid by the employer before the 25th day of the month following the month in which the income was paid. Therefore, if the salary of an SME employee for August is paid not in August, but on September 1-10, then the deadline for paying salary taxes withheld from the employee will occur before October 25 (that is, after October 1). In this regard, there will be a risk that salaries for August will not be exempt from personal income tax and these contributions.
In the same way, large businesses should pay attention to the payment of salaries for May. If the payment is not made in May, but in the first ten days of June, then the deadline for paying “withheld” salary taxes will come before July 25 (that is, after July 1), which will also create the risk of “losing” part of the tax holiday on salaries for May.
It may make sense to pay wages for August (for SMEs) and for May (for large businesses) before the end of August and May, respectively. This will minimize these risks.
- wage taxes paid by the employer at his own expense (social tax, social contributions, contributions to compulsory social health insurance and compulsory professional pension contributions) - for these types of taxes and deductions, the payment deadline is not tied to the period and fact of payment of the employee’s income. Therefore, in relation to these types of salary taxes, the exemption for August wages paid in September and May wages paid in June should be applied, since the deadline for payment of these taxes will be before June 25 and September 25, respectively.
How to calculate the amount of salary to be paid (net salary) during tax holidays?
In practice, in most cases, wages are reflected in employment contracts ingrossamount, that is, excluding personal income tax (10%), mandatory pension contributions (10%) and contributions to compulsory social health insurance (1%), which are withheld by the employer from the employee’s salary and transferred to the budget, the Unified Pension Fund and the Social Health Insurance Fund. Therefore, for such cases, the exemption provided by the state from payment (and, accordingly, withholding) of salary taxes will formally entail an increasenet(net) amount of the employee's wages. The increase will occur in the amount of taxes and contributions that are covered by the salary tax holiday and which should not be withheld by the employer in accordance with the Government Decree of April 20, 2020.
In order tonetthe amount of the salary was paid in the same amount, it is advisable for the employer and employee to sign an addition to the employment contract, which would provide for a proportionate reductiongrosssalary amounts for the corresponding period (in relation to salaries for March-August for SMEs and for March-May for large businesses).
Almat Daumov
Partner
GRATA International
