General legal newsletter for June 2020

In June 2020, the Uzbek government took a number of important steps aimed at improving the regulatory environment in the oil and gas, mining, and energy sectors. Some other important developments are the adoption of the Concept for Improving the Customs Administration and the adoption of the Strategy for the Development of Information and Communication Systems of the State Tax Committee, that, among others, entail paperless provision of custom and tax services.

With that said, the spread of COVID-19 remains to be a problem that impedes the government’s reformist efforts. Important news in this regard is that starting from 10 July 2020, based on the relevant decision of the Special State Commission for Combatting the Coronavirus, quarantine measures will be tightened across the country till 1 August 2020, owing to rapid deterioration of the epidemiological situation. Some of the relevant consequences include:

• state bodies will switch to remote work to the greatest extent possible;
• restrictions on international and interregional travels will apply;
• international cargo transportations by road will be closely monitored with all drivers being subjected to mandatory laboratory tests;
• it is generally prohibited to drive vehicles from 10 am to 5 pm on weekdays and all day on weekends (a number of exceptions are in place);
• all entities engaged in the provision of the recreational, cafeteria (except for take-aways), educational, and hospitality services will temporarily suspend their activities;
• large shopping malls/centers will temporarily be closed.

 1.  IMPROVEMENT OF THE OPERATION OF THE STATE CUSTOMS COMMITTEE AND THE STATE TAX COMMITTEE

Two legal acts were adopted to improve the operation of the State Customs Committee and the State Tax Committee by, among other things, ensuring wider use of information technologies.

(1) The Concept for Reforming the Customs Administration and Improving the Efficiency of the State Customs Service in 2020 - 2023 and the Action Plan for the implementation of the Concept set the following priorities: (i) improving the customs legislation by, among other things, aligning relevant regulations with standards of the WTO and the Eurasian Union (including the Revised Kyoto Convention and the Agreement on Trade-Related Aspects of Intellectual Property Rights); (ii) improving the performance of fiscal functions by the customs authorities and simplifying the current tariff and non-tariff regulation, (iii) increasing transparency with the use of relevant information technologies, including by improving the “One-Stop Shop” customs system; (iv) improving institutional infrastructure for customs control; (v) combating smuggling and customs infringements; (vi) training customs officers and enhancing their social protection; (vii) developing cooperation with international institutions and customs authorities of other countries (by joining, for example, the E-TIR international system).

(2) The Strategy for the Development of Information and Communication Systems of the State Tax Committee and the relevant Action Plan envisage comprehensive modernization of information systems of the State Tax Committee, including (i) improving electronic communication between the Committee and taxpayers for achieving complete automatization of the relations between them; (ii) improving electronic exchange of information between the tax authorities and other state agencies; (iii) increasing the use of the systems “Online Cash Registers” and “Electronic Invoicing”; (iv) introducing systems of electronic tax audits; (v) increasing transparency and enhancing the ability to identify tax infringements by analyzing and comparing tax data.

According to the Action Plan, relevant tender procedures will be initiated by the State Tax Committee and/or the Ministry for the Development of Information Technologies and Communications with the assistance of the World Bank to attract specialists and consultants to the implementation of the approved Strategy.

Presidential Decree No. UP-6005 of 5 June 2020
Resolution of the Cabinet of Ministers No. 359 of 5 June 2020

 2.  NEW RULES FOR ON-SITE TAX AUDITS

The Regulation on Conducting On-Site Tax Audits was adopted. In accordance with the Regulation, the tax authorities conduct on-site tax audits in the following cases:

• there is a need for studying information and documents based on the results of a desk (off-site) audit;
• there is an application (not anonymous) from an individual, a legal entity, the judicial or law enforcement authorities informing about cases of violations of the tax legislation;
• there is information about a violation of the tax legislation in mass media;
• if a taxpayer has been included in the yellow or red risk groups of taxpayers as a result of applying a “risk-based analysis” program by the tax authorities.

Resolution of the State Tax Committee No. 3247 of 18 June 2020

 3.  ABOLISHMENT OF TAX INCENTIVES AND EXEMPTIONS

(a) A number of tax incentives will be abolished starting from 1 October 2020. Hence, available VAT incentives in the following spheres will be canceled:

– import of equipment, materials, and services for the prospecting and exploration of oil and gas wells;
– import of cotton, artificial, and synthetic fiber, wool and other materials by members of the state-run Association “Uztextilprom” (an association unifying a large number of enterprises in the textile industry);
– import of equipment and materials by companies in the electrotechnical industry;
– import of equipment and accessories by members of the state-run Association “Uzcharmsanoat” (an association in the leather industry);
– some activities of official dealers of the state-owned holding company “UzAutoMotors”.
 
Some changes will also affect such spheres as the road construction and reconstruction, transport and logistics services, the wine industry, the fishing and poultry industries, projects implemented in the Free Economic Zone “Navoi”, the Small Industrial Zone “Yangiyor”, and the Technopark “Yashnabad”.
 
(b) Two important rules were introduced:

– the provision of tax incentives does not cover the provision of incentives in respect of the social tax, unless the relevant legal act expressly states otherwise; and
– VAT exemptions for works (services) acquired from tax non-resident legal entities do not apply to works (services) rendered by non-resident legal entities operating in Uzbekistan through permanent establishments.

Presidential Decree No. UP-6011 of 19 June 2020

 4.  DEVELOPMENTS IN THE ENERGY SECTOR

The government took measures on improving gas supply services, aiming to introduce an automated system for monitoring and accounting natural gas supplies nationwide by the end of 2021. According to the adopted Presidential Decree No. UP-6010, the following changes will come into effect:

• by 2022, only large strategic enterprises will remain as consumers of JSC “Uztransgaz” (a state-owned company operating gas transmission pipelines), whereas all other consumers will be switched to gas transmission systems of JSC “Hududgazta’minot” (a state-owned gas distributor);
• starting from 1 July 2020, additional grounds for termination of licenses for conducting activities in the oil and gas sector are introduced, particularly (a) an unauthorized connection to public gas networks or violations of the rules for using them, (b) deliberate damage to natural gas metering devices/their seals, (c) unauthorized access to consumption metering devices for changing their measurements;
• starting from 1 August 2020, some powers of the Enforcement Bureau under the General Prosecutor's Office will be reallocated:

- to the Ministry of Energy – (i) monitoring the introduction of modern automated systems into electricity and natural gas supply systems, including the sector of renewables; (ii) identifying systematic problems in systems of payment for energy resources,

- to regional subsidiaries of JSC “Regional Power Grids” and JSC “Hududgazta’minot”– (i) ensuring timely payment of consumers for supplied energy resources and reducing relevant debts; (ii) identifying and preventing theft and unauthorized connections to power energy and gas distribution networks;

• by 18 July 2020, a mechanism for detecting and registering offenses related to violating the rules for the use of electricity and natural gas will be developed by the General Prosecutor’s Office and other state bodies;
• by the end of 2021, an automated system for accounting and controlling the supply and consumption of natural gas will be introduced country-wide.

Presidential Decree No. UP-6010 of 18 June 2020

 5.  SAFETY AND SECURITY IN THE NUCLEAR ENERGY SECTOR

The government took measures on improving the regulatory framework for safety and security in the nuclear energy sector. Although it was reiterated that the main state agency responsible for monitoring the safe use of nuclear technologies is the State Committee for Industrial Safety, a number of other state agencies were also mandated to check compliance with specific requirements, including the Ministry for Healthcare, the Ministry of Construction, the Ministry of Internal Affairs, and the State Committee of Geology and Mineral Resources.

One of the relevant regulatory acts approved by the government is the Regulation on the State Supervision and Inspections in the Sphere of the Use of Nuclear Energy. The Regulation sets rules for the state supervision over legal entities holding licenses/permits for the right to carry out activities in the nuclear energy sector, including rules for conducting annual state inspections. Hence, state agencies responsible for the safety monitoring in the industry will annually, by the 15^th of December, develop a plan of state inspections through the specialized state e-system for the registration of state inspections in coordination with the country’s business ombudsman, the Commissioner for the Protection of the Rights and Legitimate Interests of Business Entities under the President of Uzbekistan. Scheduled inspections will be carried upon a 30-day advanced written notification.

The Regulation on the Procedure for Conducting the Expert Assessment of Justifications of Safety for Nuclear Facilities and (or) Activities (Works) in the Sphere of the Use of Nuclear Energy was also adopted. According to the Regulation, a justification of safety must be prepared for each nuclear energy facility. Such a justification of safety shall include project design documentation, environmental assessment, plans for addressing emergencies, stuff training guidelines, etc.. It will be subject to the state expert assessment, being, in turn, a prerequisite for obtaining the license for the right to conduct activities in the sector.


Resolution of the Cabinet of Ministers No. 368 of 10 June 2020
Resolution of the Cabinet of Ministers No. 390 of 17 June 2020

 6.  LICENSES FOR THE USE OF SUBSOILS

The government revised the procedure for issuing subsoils use licenses. The updated Regulation on Licenses for the Right to Use Subsoils was adopted on 23 June 2020. The State Committee for Geology and Mineral Resources is defined as the main licensing authority for all the relevant activities, except for the construction and use of underground structures for the waste usage and disposal (the license for that is issued by the State Committee for Ecology and Environmental Protection).

According to the Regulation, the licenses for (a) geological prospecting; (b) mining; (c) the use of technogenic mineral formations are issued through:

1. e-auctions (“E-IJRO AUKSION”) or,  
2. competitive bidding with the participation of the State Commission for Developing Terms for the Use of Subsoils, if a project (i) is implemented under a production sharing, concession, or investment agreement, or (ii) relates to a subsoil plot having “considerable commercial potential”,

with direct negotiations being allowed in certain cases listed below.

To participate in an e-auction, a potential bidder must pay a deposit equal to 5% of the cost of sold rights. The deposit is returned if the bidder is unsuccessful.

The licenses may be issued through direct negotiations in the following cases:

• based on relevant decisions of the President or the Cabinet of Ministers or “road maps” (action plans) approved by them;
• if e-auctions in respect of a particular subsoil plot were unsuccessful for 1 year;
• where the exclusive rights to extract resources from a prospected subsoil plot are assigned in full or in part by an entity who financed the relevant prospection works to another entity, as agreed with the State Committee of Geology and Mineral Resources;
• in the cases of (iii) type of license issued to the users of subsoil plots that do not longer possess rights over technogenic mineral formations resulted from their mining activities.

Resolution of the Cabinet of Ministers No. 403 of 23 June 2020

 7.  THE ESTABLISHMENT OF THE ASSET MANAGEMENT COMPANY “UZASSETS”

By 15 July 2020, the government will establish the asset management company JSC “UzAssets”, which will to be mandated to prepare state-owned enterprises (SOEs) entrusted to it for privatization. Preparations will be made with the assistance of foreign experts by, among other things, conducting due diligence on managed SOEs, analyzing their performance based on internationally used indicators (IRR, NPV, EBITDA, etc.), forming a short-list of potential purchasers and communicating with them, disseminating information about privatized SOEs. The founder of the company will be the Agency for Managing State Assets. The supervisory board of the company will include the Director of the Agency and highly qualified specialists with international experience. SOEs (state shares) managed by the company will be privatized based on relevant decisions of the Cabinet of Ministers.

For now, state shares in 10 companies have been transferred to JSC “UzAssets”. It is planned that in 2021, the company will manage state shares in about 50 companies.

Resolution of the Cabinet of Ministers No. 381 of 15 June 2020

 8.  RESOLUTION OF DISPUTES WITH STATE BODIES

The government initiated a legal experiment to develop mechanisms for alternative dispute resolution between individuals or legal entities and state bodies. Starting from August 2020, Appeal Boards for Pre-Trial Settlement of Disputes between Individuals and Legal Entities and State Bodies will be established within the State Customs Committee, the State Cadaster Committee, and some local municipalities (of the Namangan, Bukhara, and Tashkent region). The Appeal Boards will consider cases where rights of legal entities/individuals have been infringed by omissions/illegal actions of state authorities. The decision of the Appeal Boards will be of a recommendatory nature. The experiment will last till 1 July 2021 and it will then be decided whether such Appeal Boards will be created in other state authorities.

The relevant Regulation on the Appeal Bodies was also adopted. According to the Resolution, to bring a case to Appeal Bodies, a written application should be submitted to a relevant abovementioned state body. The term of consideration of the application by an Appeal Body must not exceed 1 month. The ultimate decision is taken by the relevant state body (within 3 calendar days), which has the right either to agree with or to dismiss the decision of the Appeal Board.

Presidential Decree No. 4754 of 17 June 2020

 9.  RATES OF THE VEHICLE RECYCLINGS FEE

Starting from February 2020, individuals and business entities engaged in the import and/or manufacturing of particular categories of vehicles for local markets are obliged to pay a vehicle recycling fee. In June 2020, the Cabinet of Ministers set the relevant rates of the recycling fee, which will apply starting from August 2020. The rates vary from 30 times the baseline calculation value (BCV) (≈USD 660) to 1,500 times BCV (≈USD 33,000) depending on the characteristics of a particular vehicle. In the case of the import, the fee is charged by the State Customs Committee, whereas in the case of the manufacturing – by the State Tax Committee. Detailed procedural rules for charging the fee have not yet been adopted.

In 2021, the government also intends to implement a mechanism for encouraging individuals and legal entities to voluntarily recycle used vehicles.

Resolution of the Cabinet of Ministers No. 347 of 2 June 2020

  10.  INVESTMENT PROJECTS IN THE KHOREZM REGION

The Program for the Socio-Economic Development of the Hazorasp district of the Khorezm Region for 2020 - 2022 was adopted. A large number of the projects to be implemented in the region are listed in the Program. Some of the most notable projects include:

1. The Malaysian company “Serba Dinamik” intends to build a caustic soda plant in the territory of the Hazorasp free economic zone. The project cost is USD 250 mln. The funds will be provided by Malaysian investors. The enterprise will produce 33 thousand tons of caustic soda and 30 thousand tons of chlorine. As a local media report, equipment for the plant will be supplied by Thyssenkrupp AG (Germany). Industrial residues from the production of caustic soda and liquid chlorine will be exported to North African countries.
2. The state-owned holding company JSC “Uzkimyosanoat” will implement a project for the construction of a plant for manufacturing citric acid. The project cost is USD 24.2 mln. Chemical enterprises owned by the holding company will assist in implementing the project.
3. JSC ”UzAvtomotors” will implement a project for the construction of a pressing plant for USD 36.7 mln.

Resolution of the Cabinet of Ministers No. 377 of 15 June 2020

 11.  NATIONAL WATER RESOURCES MANAGEMENT PROJECT

The Uzbek government and the government of Switzerland represented by the Swiss Agency for Development and Cooperation signed a cooperation agreement for the implementation of the second stage of the project for improving water resources management in rural areas of Uzbekistan.  The project is financed by the Swiss government contributing USD 4.6 mln and is going to be implemented throughout 2020 - 2023.

Uzbekistan exempts goods imported under the project from customs duties. Goods, works, and services, obtained in Uzbekistan for the implementation of the project will be exempted from VAT and mandatory payments to state funds.

Agreement for Development and Cooperation of 16 June 2020

 12.  INVESTMENT PROJECT IN OIL AND GAS

JSC “Uzbekneftegaz” revealed its plans to commence the investment project “The Replacement of Sulphur Extraction Capacities at the Muborak Gas Processing Plant” worth USD 135,836 mln in October –December 2022. The Ministry of Energy and JCS “Uzbeknegtegaz” are responsible for implementing the project.

Basic technical and economic parameters of the project are provided in the attachment to the relevant Resolution of the Cabinet of Ministers. Financiers of the project are yet to be determined.

Resolution of the Cabinet of Ministers No. 356 of 4 June 2020

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Kosta Legal Law Firm