Published on June 7, 2022

Kyrgyzstan accelerating its development by improving tax incentives efficiency

Kyrgyzstan's Integrated National Financing Framework is helping the government to accelerate its development plans by optimizing the tax incentives system. The Framework will help Kyrgyzstan unlock new sources of finance and blend public and private resources to fund the country’s development priorities.

For the first time, Kyrgyzstan has introduced a requirement into the new Tax Code for assessing the effectiveness of tax incentives, which establishes a provision of tax incentives for promoting the sustainable development of the country. In particular, it sets a framework for providing tax incentives for attracting investment, financing the priority sectors of the economy, and achieving the priorities of the National Development Strategies and Sustainable Development Goals.

Today, Integrated National Financing Framework (INFF) is one of the most powerful tools for the implementation of the UN Agenda 2030 and the 17 Sustainable Development Goals. In Kyrgyzstan, it supports the government’s efforts to align strategic management and financing with the Sustainable development goals (SDGs) to ensure a more efficient, transparent, and results-oriented use of public and private resources for the national development priorities. To improve the efficiency of public funds, the new Tax Code sets a requirement to annually conduct an assessment of tax incentives to monitor their relevance to the development priorities of the country. This approach will enable the authorities regularly assess the efficiency of each tax incentive and take respective and timely decisions on their continuation or cancellation. This in turn will enable the government to generate more revenues for financing the National Development Strategy priorities and introduce new tax incentives that could attract private investment to the sustainable development priorities of the country.

“One of the key instruments that Kyrgyzstan is using to engage and attract private investment is the tax incentives. They are significant in scale and estimated to cost around 5% of GDP in foregone revenue. In 2020 for instance, it reached 32,3 billion KGS (about $404 mln). The previous Tax Code had no requirement for assessing the efficiency of tax incentives, while the new Tax Code has it and envisages the establishment of a monitoring system to follow the use of tax incentives and their impact on the country’s development priorities. This is where INFF provides expertise” – says the INFF project coordinator from UNDP Zhanybek Ybrayim uulu.

Ministry of Economy and Commerce (MoEC) of the Kyrgyz Republic has conducted an analysis of provided tax incentives against the SDGs for 2016-2020, which showed that 40% of the incentives are focused on SDG 8, decent work and economic growth, 33% on SDG 1 - eliminating poverty. It demonstrates the government’s efforts to ensure economic growth and poverty reduction by providing tax incentives for these SDGs.

Health (SDG 3) and Industry development (SDG 9) received about 9% and 8% incentives respectively. The incentives for Health and well-being (SDG 3) were considerably increased in 2020 due to the COVID-19 outbreak. Other SDGs received less than 11% incentives during this period, whereas the education-related economic activities (SDG 4) received only about 0.2%, which may mean that there is room to utilize the tax incentives instrument to attract private investment into the SDG 4 sector to enable the country to improve the quality of education leading to the more qualified nation and economic growth.

INFF will assist MoEC in updating the methodology for assessing the effectiveness of tax incentives. The methodology will be strengthened by incorporating criteria on sustainable development, aligning it with the NDS/SDG priorities, and improving the tax forms used to collect the necessary data for further assessment.

These activities are carried out under the Integrated National Financing Framework financed by the United Nations Joint Fund for SDGs and jointly implemented by UNDP and UNICEF. This partnership is a continuation of the constant support of the Cabinet of Ministers of the Kyrgyz Republic by the UN in the implementation of the global 2030 Agenda for Sustainable Development.

The complete information on tax incentives including the table with the tax incentives assigned to SDGs in Kyrgyzstan over the past five years can be found in our publication.