VZCZCXRO4835
PP RUEHAG RUEHAST RUEHBI RUEHCI RUEHDF RUEHIK RUEHLH RUEHLN RUEHLZ
RUEHPW RUEHROV RUEHVK RUEHYG
DE RUEHAH #0377/01 0861020
ZNR UUUUU ZZH
P 261020Z MAR 08
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 0489
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE PRIORITY
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RUEHBJ/AMEMBASSY BEIJING PRIORITY 1363
RUEHKO/AMEMBASSY TOKYO PRIORITY 1230
RUEHIT/AMCONSUL ISTANBUL PRIORITY 1799
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UNCLAS SECTION 01 OF 03 ASHGABAT 000377 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
AID/W FOR EE/EA 
PLEASE PASS TO USTDA DAN STEIN 
COMMERCE FOR HUEPER 
ENERGY FOR EKIMOFF 
TREASURY FOR BAKER/LANIER 
FRANKFURT ALSO FOR IRS 
 
E.O. 12958: N/A 
TAGS: PGOV EAID ECON EFIN EPET TX
SUBJECT:  TURKMENISTAN:  NEW TAX CODE FOSTERS FOREIGN ASSISTANCE 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2. (U) SUMMARY:  On March 17 President Berdimuhamedov passed a law 
amending the Tax Code of Turkmenistan for the sixth time since he is 
in office.  The March 17 amendments are the most numerous and 
significant so far.  The majority of changes seem to represent an 
effort to streamline and clarify tax procedures.  However, the new 
code also addresses such important tax categories as the taxation of 
government transactions, foreign assistance, and, more importantly, 
petroleum operations and non-residents that many foreign companies 
have been pushing for.  END SUMMARY. 
 
TAXATION OF THE GOVERNMENT 
 
¶3. (U) The new code provides several tax privileges to the 
government.  Government agencies and local governments are 
explicitly exempted from the property tax paid on fixed assets and 
stocks.  The sale of goods and provision of services by government 
agencies and local governments have not been considered taxable 
transactions for VAT (value added tax) purposes.  However, the new 
changes specifically mention that the National Fire Fighting 
Service, Customs Service, Certification of Goods and Services are 
not subject to the VAT.  Similarly, goods and services donated to 
government agencies and local governments are exempt.  Previously 
such benefits were granted only to non-profit legal entities. 
 
TAXATION OF FOREIGN ASSISTANCE 
 
¶4. (U) The earlier version of the Tax Code exempted from VAT the 
sale of goods and provision of services in the framework of foreign 
assistance.  However, the new amendments add to this category 
humanitarian, financial, and technical assistance and loans provided 
to Turkmenistan by individuals, not just by foreign states or 
international organizations as previously. 
 
¶5. (U) The March 17 Code also describes in more detail who 
specifically is exempted.  (NOTE: The previous version of the Code 
simply stated that assistance is exempt from the VAT.  END NOTE.) 
Exempted entities include those authorized by foreign states, 
international organizations or individuals to sell goods or provide 
services as well as entities determined to be recipients of such 
assistance and loans, and suppliers or service providers for 
above-mentioned authorized entities or recipients of such assistance 
and loans that are paid from assistance funds. 
 
¶6. (U) Humanitarian or charitable assistance provided under 
intergovernmental agreements or by the decision of the government 
will be exempt from the excise tax (currently levied on alcohols, 
fuels and car imports).  Donated goods and services provided under 
humanitarian or charitable assistance, intergovernmental agreements 
or by the decision of the government will be excluded from the 
calculation of gross income from the sale of goods and provision of 
services for the purposes of the corporate income tax. 
 
TAXATION OF PETROLEUM OPERATIONS 
 
¶7. (U) According to the Tax Code, taxpayers involved in petroleum 
operations have the right to a refund of the VAT paid on goods and 
services (zero VAT rate).  The new amendments provide a list of 
taxable transactions that are subject to the zero VAT rate. 
Specifically, these include the sale of goods and provision of 
services for petroleum operations of entities that are contractors 
or subcontractors under the Petroleum Law of Turkmenistan, except if 
such goods and services are used for non-petroleum operations, used 
for petroleum and non-petroleum operations or the use of such goods 
and services cannot be determined beforehand.  In these cases, 
contractors or subcontractors under the Petroleum Law should notify 
 
ASHGABAT 00000377  002 OF 003 
 
 
their vendors before receiving invoices.  The amount of VAT paid for 
goods and services used for petroleum or other operations by 
entities operating under the Petroleum Law can be credited towards 
the total VAT payable. 
 
¶8. (U) Corporate income tax is levied on the difference between the 
gross income and income deductions.  The definition of gross income 
has not been amended and includes income from the sale of goods and 
services and non-operating gains (interest on any debt instruments, 
dividends, insurance compensation, positive exchange rate difference 
in transactions and increases in the value of foreign exchange 
assets and decreases in the value of foreign exchange liabilities). 
However, Article 172 in the new version of the code, on corporate 
income tax rates, has a new clause whose purpose is unclear, but 
that may offer a pretext or formalization of gross income of 
petroleum operators that includes non-operating gains.  The 
Corporate Income Tax rate for petroleum companies remains 20%. 
 
TAXATION OF NON-RESIDENTS 
 
¶9. (U) Article 17 of the tax Code defines residents as entities 
registered (established) in accordance with the legislation of 
Turkmenistan or headquartered in Turkmenistan.  All other entities 
are considered non-resident.  Non-residents can be taxed directly if 
they operate in Turkmenistan through permanent representations or 
their tax can be withheld by an appropriate tax agent. 
 
¶10. (U) Permanent representation of a non-resident legal entity is a 
permanent location of such an entity's business activities, 
including management site, branch office, bureau, office, agency, 
factory, workshop, shop or alike.  The new Code also added the 
following as permanent representations: any site of exploration, 
development, and/or production of natural resources regardless of 
the term of operation.  This includes a mine shaft, mine, oil and/or 
gas well, quarry, onshore or offshore drilling derricks and/or 
wells, as well as any site of installation, assembly, set-up, 
setting into operation, repair and/or maintenance of equipment at 
the above sites, including all types offshore platforms. 
 
¶11. (U) Permanent representation starts from the date of issuance of 
a license for exploration, development and/or production of mineral 
resources or from the date of commencing such work, signing of a 
construction site transfer letter or from the date of commencing 
actual work.  Construction sites or assembly locations, and 
warehouses in Turkmenistan used for sale (supply) of goods are 
treated as permanent locations. 
 
¶12. (U) The calculation and payment procedure of the corporate tax 
for non-residents operating through a permanent representation is 
identical to those of residents.  However, there are several 
distinctions.  The gross income and expenses are only related to the 
activities conducted in Turkmenistan.  The newly introduced 
amendments detail what items cannot be counted as expenses.  These 
include overseas headquarters' management and general administrative 
expenditure of legal entities (except if provided for a relevant 
double taxation treaty).  The code states that none of the expenses 
of overseas branches and representative offices of foreign entities 
can be accounted for as deductions in defining the taxable income 
related to its activities in Turkmenistan via permanent 
representation.  Exceptions are expenses, directly related to 
activities in Turkmenistan, that are not accounted for as expenses 
in calculating income of such branches and representative offices 
overseas.  This should be documented appropriately (for example by 
an auditor's report) and on the condition that such expenses are 
accounted for separately.  The code provides for deductions of 
payroll expenses and expenses of temporary duty staff seconded to a 
temporary representation from the taxable amount, provided they are 
 
ASHGABAT 00000377  003 OF 003 
 
 
not included in the administrative or management expenses. 
 
¶13. (U) Permanent representations of non-resident legal entities are 
liable at the source in Turkmenistan to withhold tax on income 
taxable that they pay to a non-resident without a permanent 
representation in Turkmenistan, unless they can furnish a written 
confirmation from the relevant tax division that their provision of 
services leads to establishment of a permanent representation in 
Turkmenistan and paid income from activities in Turkmenistan relate 
to that permanent representation.  Tax withheld by a permanent 
representation is deductible from the representation's total tax 
amount due. 
 
¶14. (SBU) COMMENT:  The newly revised Tax Code, although passed on 
the same day as the new Law on Foreign Investments, will not have a 
significant effect on foreign direct investment in the country, 
since most important amendments concern companies that are not 
resident in the country.  Generally, such companies provide 
petroleum or construction sectors related services.  However, 
taxation of non-residents, including petroleum service companies, 
has been subject to wide interpretation by Turkmenistan's tax 
authorities, and is now made more transparent, although more 
burdensome.  That the new Tax Code considerably eases tax burden on 
foreign assistance and can facilitate the logistics of processing 
assistance funds is also a positive change.  END COMMENT. 
 
HOAGLAND