Taxation in Turkmenistan: removing the masks

Introduction

All that glitters is not gold. For example, corruption distorts the apparently liberal, yet inequitable, tax system of Turkmenistan. Making the rich pay a higher personal income tax rate than the poor would not necessarily make the tax progressive in practice.


Rates and penalties

At first glance, taxation in Turkmenistan appears liberal. Individuals currently pay a flat 10% income tax rate, low by world standards. (In comparison, China, a recognized example of successful gradual transition to a market economy, has a top personal income tax rate of 45% and a top corporate tax rate of 25%, reports Heritage Foundation.) Resident legal entities, except hydrocarbon resource operations contractors, pay an 8% business tax rate; non-residents pay a 20% business tax rate. They must also pay a property tax of 1% of the balance sheet value of the property and a value-added tax of 15%. Importers are exempt from excise taxes on goods, subject to these taxes.

Yet the tax authorities have substantial room for abuse. Suspecting actual or future evasion, they may demand premature payment. The tax service may also sue for collateral, amounting to the volume of the payment. Furthermore, according to Article 71 of the Tax Code, the state pays only half of the salaries of tax officials. The rest consists of 50% of the fines and penalties that the tax official had charged. Thus, it is dangerous for the taxpayer to comply fully: the tax collector may lose his or her salary, so false charges and property seizures occur, reports SoyuzPravoInform, a law firm, operating a database on the legislature of CIS countries.


Are Turkmenistani taxes equitable?

Economists identify two concepts of equity: horizontal equity and vertical equity. A tax system is horizontally equitable, if it equally treats individuals, similar in all relevant aspects. This is hard to objectively define. For example, many systems tax similar products differently, treating individuals with different tastes differently.

Marital status affects one’s ability to pay, but not all tax systems account for it. Studies in the United States have shown that in households with two workers, the one making less money (usually the woman), called the secondary worker, is usually more sensitive to the wage rate, and income taxes affect labor supply of secondary workers more than they do of primary workers. A government, concerned with the inefficiencies of taxation would impose a lower tax rate on the secondary worker, but many would call this system unfair.

Taxation in Turkmenistan is not horizontally equitable. There are no attempts to account for marital status differences. Furthermore, due to corruption, two individuals of the same social group may pay different amounts.

Vertical equity means that people, in a position to pay higher taxes than others, should do so. There are three criteria for determining this: a greater ability to pay, a higher level of economic well-being, and receiving more benefits from general government expenditures.

Controversies may arise, as to who has a greater ability to pay and who has a higher level of economic well-being. For example, an ill and a healthy person may earn the same income, and would be taxed equally. Questions arise, whether actual income or the hourly wage rate should be used to determine, how much should be taxed.

Under Turkmenistan’s flat rate tax system, all social groups pay the same rate of personal income. The business and property tax rates are low by world standards, so large entrepreneurs, most able to pay, and other beneficiaries of subsidies, could pay a higher share. Even on paper, the system is vertically inequitable by all three criteria, in comparison with most developed countries.

Taxes, productivity and wages

In this primarily Muslim (currently 89% of the population of Turkmenistan, according to the CIA World Factbook), patriarchal society, healthy adult males have traditionally been the primary workers. According to the World Bank, less than half (46% as of 1990, 47% as of 2014) of females age above 15 participated in the labor force, compared with 75% as of 1990 and 77% as of 2014 for males of the same age category. When a typical healthy male leaves the workforce, his family loses most or all of its income. Thus, male labor supply in Turkmenistan must be inelastic - it changes little, due to wage changes. Since most workers continue to work anyway, the few private firms pay their employees substantially less than they would have, if they were tax-exempt - taxes are shifted backward. (Rigid labor regulations prevent the wage from falling below the minimum wage, but discourage hiring new workers, so unemployment remains at 10% as of 2017, according to Heritage Foundation.)

Gender roles changed after the USSR’s demise. Many Turkmen men became involved in shipping imports, but customs officials would resort to search and seizure. Cross-border trade was safer for women, since the mentality of officers then precluded violence against them. Furthermore, thousands of men dropped out of the workforce, due to abuse of addictive substances, so many women became breadwinners, reports the Turkmenistan Chronicle, the website of the Turkmen Initiative on Human Rights, a non-governmental human rights organization.

Would imposing higher personal income tax rates on richer taxpayers and lower rates on poorer taxpayers, instead of the existing flat rate, make the system more equitable, and how would it affect productivity? In many industries, such as trade, female labor supply may also be inelastic, implying that this change would not significantly affect productivity. However, because business owners would pay more in personal income taxes, the backward shift would partially or fully offset the progressive effect of this change. Without legislative amendments to penalties and compensation of tax officials, corruption and evasion would make fair collection impossible. The proposed system would be progressive on paper, but not necessarily so in practice.


Conclusion

Do not judge a book by its cover. Corruption distorts the nominally liberal tax system of Turkmenistan and exacerbates its inequity. Legal amendments are vital to fair tax collection in Turkmenistan.

References

CIA World Factbook. Turkmenistan. https://www.cia.gov/library/publications/the-world-factbook/geos/tx.html. 2017.

Heritage Foundation. 2016 Index of economic freedom: China. http://www.heritage.org/index/country/china. 2016.

SoyuzPravoInform. Turkmenistan’s tax legislation. http://tm.spinform.ru/nalogovaya_systema.html. 2005.

Turkmen Initiative on Human Rights. Women in Turkmenistan. Turkmenistan Chronicle. http://www.chrono-tm.org/2012/09/zhenshhinyi-v-turkmenistane/. 2012.

The World Bank. Labor force participation rate, male (% of male population ages 15+). http://data.worldbank.org/indicator/SL.TLF.CACT.MA.ZS. 2014.

The World Bank. Labor force participation rate, female (% of female population ages 15+). http://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS. 2014.

Troubled large Kazakh banks: to fail or to rescue?

Introduction

Is the devil as black as he is painted? Are bank runs always a calamity? Should Kazakhstani taxpayers be the beasts of burden in supporting banks? 


Rescuing Kazkommertsbank

In November 2016, President Nazarbayev promised to prevent the collapse of Kazkommertsbank, the largest bank in Kazakhstan. Poor management in the past made the Bank deficient in capital. According to Nazarbayev, the Government could support Kazkommertsbank, or the Bank could sell its shares to resolve the problem, reports KazWorld.info.

On January 20 of this year, Kazkommertsbank and Halyk Bank, the second largest bank in Kazakhstan, began preliminary talks about a deal. On March 2, the two banks signed a memorandum, according to which Halyk Bank could possibly purchase over half of Kazkommertsbank shares, reports the Kapital newspaper.

On June 15, Halyk Bank signed a deal to purchase 86.09% of Kazkommertsbank common stock for 1 KZT per share from Kenes Rakishev, Chair of the Board of Directors of Kazkommertsbank, and with the Governnment, to purchase 10.72% of shares, also for 1 KZT per share. Halyk Bank will inject 185 billion KZT to enable Kazkommertsbank to comply with capital requirements, reports Zarina Zhakupova, of Informburo.kz. Kazkommetsbank top management was replaced. On July 5, Halyk Bank announced that the deal is complete, reports Kirill Zhdanov, of Informburo.kz.

Both banks are linked to President Nazarbayev, implying a possible vested interest in the deal. Dinara Kulibayeva, President Nazarbayev's daughter and her husband Timur Kulibayev, have a controlling stake in Halyk Bank. Kenes Rakishev is the son-in-law of Ambassador Extraordinary and Plenipotentiary of Kazakhstan to the Russian Federation and former Vice Prime Minister Imangali Tasmagambetov.

This is not the first bank rescue in Kazakhstan. In 2009-2016, BTA Bank, Alliance Bank and Temirbank underwent nationalization and debt restructuring, to be re-privatized. In 2014, Kazkommertsbank bought BTA Bank, while Alliance Bank and Temirbank merged with Forte Bank, with the new bank taking the name of the latter.

Could the government have allowed large banks to fail? What were the alternatives?


Policies on poorly performing large banks

A troubled large bank triggers economic collapse, by eroding depositor confidence. Large depositors place their uninsured savings “under a pillow”, or invest abroad, decreasing output and increasing unemployment.

The government may permit bankruptcies, while spending money on compensating the affected parties. For example, during the Great Recession, the government of Iceland allowed three large banks to go bankrupt and created an agency for borrowers, to apply for debt forgiveness. Its banks were too big to bail out, since their overall assets were 20 times the state budget. Eventually, revenues from tourists, who totaled 1.5 million in 2015, compared with 500,000 visitors on average before 2008, triggered recovery, though wages are still lower than before the crisis, reports BBC.

State support may be unnecessary for preventing bank runs. A bank may sell some or all of its shares to another bank, through a merger or an acquisition. In the former case, the two banks become a single new entity; in the latter case, the stronger bank purchases most or all of shares of the problem bank, taking over its operational decisions. Mergers and acquisitions kill two birds with one stone: depositors sustain their accounts; the Government retains its funds.

Bank mergers and acquisitions have shortcomings. It may be hard to find a buyer, willing to absorb bad loans, so its shares may sell for symbolic prices. Yet depositors may still view the new bank as “too big to fail”, ignoring news about its financial performance. Also, the banking industry becomes more concentrated, increasing the monopoly power of banks.

The central bank may provide last-resort loans to private banks. However, the bank may still default. Also, the money supply increase pulls inflation.

The Government may partially or completely nationalize system-forming banks, to increase bank capital and re-negotiate debt payment terms, a procedure called debt restructuring. Nationalizing banks can be expensive. For example, the Treasury Department had spent $700 billion on American commercial banks alone after the crash of September 2008, reports the Forbes magazine. However, toxic (high-risk and illiquid) assets may become more valuable if the economy rebounds, making the bailout less costly on net in the long run.

Saving failing banks is inequitable. Poorer depositors receive their insured deposits if the bank fails. Yet last resort lending and nationalization safeguard rich depositors at the expense of other taxpayers: rich depositors are more likely to invest better anyway, since they can hire consultants.


Re-privatizing banks

Re-privatizations are common after bank nationalizations and debt restructurings. The Government or the new owner may create a “bad bank”, to separate toxic assets from the rest, then remove them from the balance sheet. Since this procedure does not always reveal all such assets, the sale may take months or years.

Keeping the bank nationalized opens another can of worms. A state-owned bank prevails over private banks in competition. Managers do not worry about bankruptcy and their compensation is not tied to profit. Supporters of state ownership for all banks argue that credit allocation is too important to be left to the private sector. Yet state-owned banks often charge less than the market interest rate, implying a subsidy, difficult to assess. The banks compete for state funds, rather than clients. Having the upper hand over the regulator, bank administrations may be abusive. For example, they may spend too much or too little on equipment. They may also be too cautious in lending and other operations.


Conclusion

Taxpayers often pay to save large banks and prevent an overall economic collapse. Private entities are not always willing to buy troubled banks, so nationalization or bailout loans may be needed. Alternatively, the government may allow banks to fail, and compensate the parties that the collapse would affect. Discussions about troubled large banks are likely to continue in the future.



References

BBC. How did Iceland clean up its banks. http://www.bbc.com/news/business-35485876. 2016.

Forbes. The big bank bailout. http://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#4c3c2e643723. 2015.

Kapital. Halyk Bank and Qazkom signed a memorandum on the possible purchase of shares. https://kapital.kz/finance/57990/halyk-bank-i-kazkom-podpisali-memorandum-o-vozmozhnoj-pokupke-akcij.html. 2017.

KazWorld.info. Nazarbayev promised to prevent Qazkom collapse. http://kazworld.info/?p=59235. 2016.

Zhakupova, Z. Halyk Bank will buy Kazkommertsbank shares for 1 tenge. https://informburo.kz/novosti/za-1-tenge-kupit-narodnyy-bank-akcii-kazkommercbanka.html. 2017.

Zhdanov, K. Halyk Bank concluded a deal on buying Qazkom shares. https://informburo.kz/novosti/narodnyy-bank-zavershil-sdelku-po-pokupke-akciy-qazkom.html. 2017.