Keywords

Introduction

The digital economy in Central Asian countries has steadily grown in recent years. Regionally, Uzbekistan has emerged as a leader in the digital economy, significantly investing in developing its digital infrastructure and promoting digital technologies. For instance, in 2019, the Cabinet of Ministers of the Republic of Uzbekistan (Resolution, 2019) adopted a framework for the implementation of ‘Smart City’ technology in Uzbekistan (Dentons, 2019). This framework included initiatives such as e-government services, digital payment systems, and the integration of technology into various sectors such as healthcare and education. The country also has a vibrant startup ecosystem, and initiatives like IT Park (a technology park) have been launched to support information technology (IT) education, entrepreneurship, and innovation. Several pieces of legislation have also been adopted in Uzbekistan to expedite the process of the digitalisation of the economy, with the goal of achieving a significant transformation of the economy, industry, and society using digital technology (Presidential Decree, 2017, 2020). Key policy initiatives and documents in this respect include the ‘Digital Uzbekistan–2030’ strategy, the ‘Strategy of Action for the Further Development of the Republic of Uzbekistan’, and the ‘New Development Strategy of Uzbekistan for 2022–2026’. Significant results have been achieved following the implementation of the measures outlined in these documents. In particular, the number of information and communications services grew more than 1.5-fold between 2020 and 2022, from 13.9 trillion so’m to 22.9 trillion (Ismailov, 2023). In addition, the share of the digital economy in Uzbekistan’s gross domestic product (GDP) rose from 1.99% in 2020 to 2.77% in 2022. From 2020 to 2022, information and communication technology (ICT) service exports increased from US$169.3 million to US$306 million (Ismailov, 2023). In 2022, the export of computer programming services increased to US$123 million from US$15 million in 2020, indicating the sector’s potential. Currently, 1122 companies operate in IT Park, of which 30% are exporters (Ismailov, 2023). Furthermore, the number of foreign companies registered has increased from 18 in 2020 to 165 in 2022 (Ismailov, 2023). This serves as a sign that business conditions are improving in this sector.

As shown above, in recent years, the digital economy has grown at an unprecedented rate. This primarily stems from the ever-improving digital technologies available, with increasing numbers of businesses and people using them. Such a rise results from a number of conditions, such as the creation of a new digital infrastructure, the availability of digital devices and services, and the growing popularity of online activities. But, for digitalisation to continue growing, it is important to continue putting advanced information technologies into many parts of the economy, further develop digital infrastructure, and expand the national market for digital technologies and services. Most importantly, laws governing information technology (IT) businesses also require updates to meet international standards. Currently, IT businesses and local startups may be at risk of insolvency given the presence of large multinational IT enterprises operating in local markets. Multinational IT enterprises avoid paying local taxes because of the permanent establishment (PE) rule in tax law. After introducing the research aims and questions addressed in this chapter, I then discuss the significance of multinational IT enterprise taxation to provide the reader with essential background information.

Research Aim

This chapter aims to examine to what extent Uzbekistan’s legal and regulatory framework can accommodate taxation of the digital economy. More specifically, I aim to investigate whether Uzbekistan’s legal framework can detect PE in an economy which relies heavily on intangible assets and a business model based on data, network effects, and user-generated content, and which generates enormous quantities of revenue without a physical presence.

Hypothesis

This research hypothesises that Uzbekistan does not have the necessary legislative and regulatory structures in place to regulate taxation of the digital economy.

Research Questions

Given the above research aim and hypothesis, I address the following research questions in this chapter:

  • Is the digital economy taxable in Uzbekistan given the current legal framework?

  • What is the legal framework for taxing the digital economy in Uzbekistan?

  • Can current tax law legislation effectively levy taxes on the digital economy?

  • What practical long-term measures should be implemented to improve the taxation of the digital economy?

Methodology

The research methodology employed in this chapter relies on a systematic approach to examining the effectiveness and suitability of tax laws for their intended purpose. The process begins with a comprehensive review of international tax law and standards, ensuring a solid understanding of the broader context and global practices. This initial phase establishes a foundation for evaluating local tax laws within specific Central Asian countries’ jurisdictions, and specifically within Uzbekistan.

Building upon the international framework, the next stage focuses on an in-depth analysis of Uzbekistan’s tax legislation. This involves a meticulous examination of relevant statutes, regulations, and case law to gain insights into the existing legal landscape and its alignment with international norms and standards.

To further assess the practical implementation and efficacy of local tax laws, I also conducted a qualitative study, consisting of interviews with key informants such as tax scholars, professionals, and officials involved in tax administration. These interviews provided valuable first-hand perspectives and enabled the measurement of how well the existing tax laws fulfil their intended purpose in real-life situations.

By combining a thorough review of international tax law and standards, an in-depth analysis of local tax legislation, and interviews with key informants, this research methodology aims to provide a comprehensive assessment of the compatibility and effectiveness of tax laws in achieving their intended objectives.

In addition to the aforementioned research methodology, this study drew upon a diverse range of sources to ensure a comprehensive analysis. Academic articles from reputable scholarly journals were reviewed in order to understand key theoretical debates and empirical findings related to international tax law, standards, and their application. In addition, news articles from trusted sources were incorporated into the analysis to provide real-world context and up-to-date information on relevant developments and the practical implications of tax laws. These news articles contributed to a comprehensive understanding of the challenges, debates, and emerging trends within the field of international taxation. By combining academic publications with news articles, I aimed to capture both the theoretical underpinnings and the practical realities of international tax law and its implementation at the local level. This multidimensional approach enhanced the depth and breadth of my findings, providing a well-rounded analysis of the fit and effectiveness of tax laws for their intended purpose.

Literature Review

An extensive scholarly body of literature has focused on taxation issues in the digital economy. However, a preliminary search revealed that the vast majority of the existing literature focuses on taxation in the digital economy in a global (predominantly, Western countries) context, with limited academic literature focusing on Central Asia or Uzbekistan specifically.

Falcao and Michel (2014) argue that a digital service provider can offer services to different jurisdictions without meeting the Organisation for Economic Co-operation and Development’s (OECD’s) substantial presence tests. In doing so, they offer a case study to illustrate how a digital service provider could offer multiple services to different countries without paying taxes in the country where revenue accrues.

Schoen (2017) argues that international organisations, tax scholars, and business experts have been working on future taxation in the digitalised economy. Challenges surround developing a framework for corporate income tax to capture profits derived from cross-border digital transactions. General concepts like ‘economic allegiance’, ‘benefits principle’, and ‘digital presence’ are unhelpful in sharing profits in production and destination countries. Schoen suggests that empowering market countries can follow two trajectories: digital presence rules focusing on market demand or digital investment rules serving as a proxy for productive income. He also states that a quick fix may be distortive and inefficient, and temporary measures may become permanent.

On the one hand, Brauner and Baez Moreno (2015) suggest that the introduction of a withholding tax mechanism anchored on the base erosion principle is the best solution. By contrast, Avi-Yonah (2015) maintains that a destination-based corporate income tax is the best solution, treating multinational enterprises as unitary businesses and taxing them based on where they sell their goods or services. On the other hand, Hongler and Pistone (2015) put forth a new approach to PE status based on digital presence supported by reconstructing benefit theory. Helpfully, the OECD’s (2015) final report for Action Plan 1 summarised broader tax challenges faced by policymakers in the digitalisation era, including the concept of a new nexus, the massive use of data, and characterisations for direct tax purposes.

For Olbert and Spengel (2017), understanding the digital economy and reform proposals is premature. They highlight that the OECD missed opportunities to define the paradigm for value creation and for analysing digital business models accordingly. The key pressure area for taxing digital businesses in the near future lies in transfer pricing. They, therefore, put forth a framework for refining the transfer of pricing guidance, aligning profit taxation with value creation.

Hazpaz (2021) discussed tax challenges arising from digitalisation and the OECD’s Pillar OneFootnote 1 against unilateral tax reforms. This pillar suggests a multilateral approach which avoids global revenue thresholds targeting U.S.-based companies. Hazpaz (2021) recommends applying a new tax nexus through market thresholds, subject to a global de minimis amount. However, the OECD faces a challenge in achieving a consensus-based solution within an inclusive framework of 137 member-states, particularly during the COVID-19 pandemic.

As shown above, the digital economy also creates challenges for value-added tax (VAT) collection, particularly where goods, services, and intangibles are acquired by private consumers from suppliers abroad. Understanding and exploring these challenges are particularly intriguing in the legal contexts of developing countries where the legal infrastructure remains in its infancy, and the prevalence of a weak rule of law further exacerbates the taxation problem. With these considerations in mind, in this chapter using the case of Uzbekistan, I attempt to address gaps in knowledge on the taxation of the digital economy in the context of a developing country—namely, Uzbekistan—through an analysis of its historical background, and the challenges faced by the state in tax administration given an ever-increasing digitalisation of the economy and society.

Central Asia: Digital service tax obligations of non-residents in Central Asia (VAT and DST)

When considering taxation in the digital economy in Uzbekistan, it is crucial to evaluate and compare other Central Asian countries. Central Asian countries share various historical, cultural, and economic similarities. Analysing taxation in the digital economy in Uzbekistan within the broader Central Asian context provides a deeper understanding of the region's overall trends and methods. In addition, this analysis identifies the similarities and differences in Uzbekistan's tax policies compared with those of its neighbours. Moreover, a comparison with other Central Asian countries is better for several other reasons.

First, such comparisons allow us to identify policy convergence or divergence. It is possible to discover similar patterns, best practises, or places where policies deviate by comparing the taxation policies in various Central Asian countries. This comparative analysis can offer insight into the efficacy of various approaches and suggest possible areas for regional policy harmonisation or collaboration.

Second, such an analysis can foster investment and competitiveness. Tax laws in neighbouring countries might impact investment decisions. When determining where to locate their activities in the digital economy, businesses may consider geographic characteristics. Understanding how Uzbekistan's tax policies compare to those in other Central Asian countries can help investors understand the country’s competitiveness and attractiveness as an investment destination.

Third, and finally, it is important to examine regional levels of cooperation and integration. Central Asian countries are becoming more involved in regional cooperation and increasing levels of integrated activities. Harmonising regional taxation rules can help to facilitate trade, economic cooperation, and the creation of a regional digital economy. Discussions on taxation in the digital economy in Uzbekistan might explore possible areas for regional collaboration and policy coordination by taking other Central Asian countries into account. Effective taxation in the digital economy is impossible without regional cooperation.

Whilst the focus here lies primarily on Uzbek legislation, background information and comparisons with other Central Asian countries enrich the analysis and provide a more comprehensive understanding. Rather notably, however, the degree and usefulness of these comparisons may differ based on the specific subject discussed as well as the availability of data or information on other nations’ taxation laws.

Nearly all Central Asian countries introduced a value-added tax (VAT) on digital services. The first to do so was Uzbekistan, which levied a 15% VAT on digital services beginning in 2020 (Asquith, 2021b). Tajikistan followed in 2021 with an 18% VAT (Asquith, 2021a), with both Kazakhstan and Kyrgyzstan adopting a 12% VAT (Caragher, 2022) for digital services the following year. The introduction of this new VAT resulted in some competition amongst Central Asian countries. Uzbekistan announced a decrease to its VAT for digital services from 15% to 12%, reaching parity with other Central Asian countries. Tajikistan currently levies the highest VAT for digital services; however, Tajikistan is planning to gradually decrease its VAT from 18% to 13% by 2027. A distinct feature of the VAT legislation in Tajikistan compared with other Central Asia is its threshold of Tajik somoni (TSM) 1 million (approx €76 000 or US$90 000) subject to VAT. With the exception of Turkmenistan, all of the countries in Central Asia have implemented similar legislation, including registration, reporting, and defining what constitutes digital services. Registration occurs through an online portal. Interestingly, there is no threshold requirement to register for VAT, enabling non-residents to immediately apply. In accordance with the new regulation, non-resident service providers and intermediaries for business-to-consumer (B2C) (Baker McKenzie, 2021) digital or electronic services are required to pay VAT. Transactions between businesses (business-to-business, or B2B) are not VAT liable, and instead apply a reverse-charge approach.

Kyrgyzstan was also the first country in Central Asia to place a 2% digital services tax (DST) (Caragher, 2022) on digital service providers with a Kyrgyz IP address, replacing the VAT liability. However, foreign companies that offer digital services in Kyrgyzstan must still pay VAT. A turnover tax applies to both B2B and B2C sales of goods, digital or electronic services, and intellectual property rights. Other Central Asian countries—namely, Kazakhstan, Tajikistan, and Uzbekistan—have chosen to charge VAT instead. Once DST is established, taxpayers must complete and submit quarterly tax returns to report and pay the 2% tax. This must be completed by the twentieth of the month following the end of the quarter.

Several countries began using DSTs two years ago to tax the sales of foreign digital companies that did not pay enough corporate income tax. Most, however, have been put on hold because of the 2021 OECD agreement on the right to tax foreign companies and the global minimum tax rate.

In the next section, I focus on analysing Uzbekistan’s digital taxation legislation in relation to the aims and questions addressed in this chapter. Specifically, I examine the location of digital services and the identification of non-resident businesses subject to VAT. Additionally, I explore the definition of digital services and the challenges associated with their application in the context of Uzbekistan. By delving into these topics, I aim to gain insights into the effectiveness and suitability of Uzbekistan’s tax laws for regulating the digital economy.

Law-in-Books: Uzbekistan’s Digital Taxation Legislation

Location of Digital Services

Companies not resident in the Republic of Uzbekistan are required to collect and remit VAT if Uzbek residents acquire electronic services from them. Under Article 241, Clause 10 of the Tax Code, the territory of the Republic of Uzbekistan is understood as the place where a physical person purchases services in electronic format if one or more of the following conditions are met:

  1. 1.

    The buyer’s place of residence is the Republic of Uzbekistan (permanent resident and address).

  2. 2.

    A bank account or payment service provider used by the buyer to make a payment for the services is opened in a bank located within the territory of the Republic of Uzbekistan (payment via an Uzbek bank account).

  3. 3.

    The network address of the buyer used during the acquisition of the services is registered in the Republic of Uzbekistan (the IP address of the device used to access the services). Or

  4. 4.

    The international code of the country for the telephone number used to acquire or pay for the services is conferred in the Republic of Uzbekistan (Uzbek international telephone code).

Other Central Asian countries use the same destination test procedure to determine whether a consumer is a resident. If the consumer is a resident, the company may be required to pay VAT for providing digital services.

Defining Digital Services

According to Article 282 of the Tax Code of the Republic of Uzbekistan, services provided automatically via the Internet are subject to VAT, with 14 different types of activities fall under VAT liability. These include the following:

  1. 1.

    granting rights to use software (including games delivered via the Internet), as well as databases, their updates, and additional functionalities available via the Internet, including remote access to them;

  2. 2.

    the provision through the Internet of rights to use electronic books (publications) and other electronic publications, informational and educational materials, graphic images, musical works with or without text, and audiovisual works, including remote access to such items for viewing or listening through the Internet;

  3. 3.

    the provision of advertising services on the Internet, including the use of programs for electronic computers and databases operating on the Internet, as well as the provision of an advertising platform (realm) and time for advertising on the Internet;

  4. 4.

    the provision of services for the placement of proposals for the acquisition (sale) of goods (services) and property rights on the Internet;

  5. 5.

    the provision through the Internet of services related to technical, organisational, informational, and other opportunities, carried out using IT and systems, to establish contacts and enter into transactions between sellers and buyers. In particular, such services include the provision of a trading platform operating on the Internet in real-time, upon which potential buyers offer their price through an automated procedure, and parties are notified of the sale by automatically creating a message;

  6. 6.

    ensuring and (or) maintaining the presence on the Internet for personal purposes or for economic activities, supporting electronic resources for users (sites and [or] pages of sites on the Internet), providing access for other Internet users to them, and providing users the opportunity to modify them;

  7. 7.

    the automatic maintenance of programs at a distance and online; the provision of services for the administration of information systems, sites, and (or) pages of websites;

  8. 8.

    the storage and processing of information provided that the person who submitted this information has access to it via the Internet;

  9. 9.

    the provision in real-time of computing power for placing information in a system;

  10. 10.

    the provision of domain names and hosting services;

  11. 11.

    the supply of information generated automatically when the buyer enters data through the Internet, the provision of automated services for finding data, their selection and sorting by request, and the provision of these data to users through information and telecommunications networks. In particular, such information deliveries include stock exchanges in real-time, and the real-time automated translation of texts;

  12. 12.

    the provision of services for searching and (or) providing the customer with information about potential buyers;

  13. 13.

    providing access to search engines on the Internet; and

  14. 14.

    collecting statistics on sites on the Internet.

Uzbekistan’s list is more extensive than other Central Asian countries, which are limited to seven or eight areas.

Collecting VAT Through Digital Services

Taxing digital services with VAT is a smart move for Central Asian countries. The collection of VAT may not be straightforward, but it is currently a more realistic objective than the collection of other taxes. At the moment, no international community or nation has devised an efficient method for taxing the income of non-resident corporations. The situation in developing nations may be even more difficult.

Central Asian countries appear to follow the OECD’s recommendations for collecting VAT. According to the OECD, the ideal way to collect VAT on digital products and services is through a simplified registration and collection framework. To make it easier for non-resident companies that do not have representation in market nations, VAT registration, collection, and reporting should be completed online (OECD, 2017). As a result, using technology in these processes is essential. Furthermore, the government must lay out a clear and simple process. Implementing this process and regime is likely to boost non-resident companies’ compliance through a simplified administration and with low compliance costs.

All Central Asia countries considered the above recommendations and created online platforms with a simple registration process explaining each step (Tax.uz, 2023). Whilst websites for tax registration are simple to use, it is sometimes challenging to find these websites via search engines. In most search engines, the correct page does not appear as the first option or the website’s name might not be similar to other analogical websites.

Given the preceding discussion, the next section examines the practical implementation of tax collection for digital services in Uzbekistan, as well as the challenges involved in identifying taxpayers and determining VAT liabilities. This analysis provides a deeper understanding of the discrepancy between written tax law and its actual implementation. In addition, I cast light on the efficacy of existing mechanisms and potential areas for improvement in the taxation of digital businesses in Uzbekistan.

Law-in-Action: Regulation of Digital Businesses and Taxation in Uzbekistan

Identification of Non-resident Businesses Subject to VAT

Identifying taxpayers is one of the first and most crucial steps to ensuring businesses pay taxes. The current Tax code of the Republic of Uzbekistan stipulates who is liable to pay tax in fairly vague terms. Business entities must pay VAT if residents of the Republic of Uzbekistan acquire electronic services from them. Under Article 241, Clause 10 of the Tax Code, the territory of the Republic of Uzbekistan is understood as the place where a physical person purchases services in an electronic format. Thus, tax authorities must prove that a digital service is provided and that the digital service is provided to residents of Uzbekistan when they are physically in Uzbekistan.

During interviews with Uzbekistan’s Tax Committee representatives, informants voiced concerns that Uzbekistan does not have the technical capacity to establish and prove the two nexuses mentioned above:

We do not have the technical capacity or expertise to identify who pays taxes. We received the list of companies registered in Russia from Russian authorities who are paying. We decided to send them all a letter to pay VAT in Uzbekistan. The list included more than 300 companies. We sent them a [letter a] couple of times with instructions on how to register for VAT.

Did it work?

Yes, in particular, big companies registered for VAT. Amazon decided not to register.

What can you do if Amazon decides not to pay VAT?

Legally? Nothing. Most companies do register from more moral, social, and reputation standpoints.

Currently, forty-one international companies are registered as VAT taxpayers for digital services. They agree that there is no one good method for identifying companies subjected to VAT. Moreover, there is no technical method to calculate how much VAT a company should pay because Uzbekistan does not have access to companies’ financial data. In addition, there is no means to verify the accuracy of the financial information submitted by a registered company; reports are accepted based on mutual trust.

One method that was used by the Uzbek Tax Committee but highly criticised was accessing bank transfer reports through the Central Bank. The senior officer of the international department of the Tax Committee stated:

In Uzbekistan, banks must submit a report of their activities to the Central Bank, and international transfers are included in this report. The Tax Committee analysed these international transfer reports to determine where residents of Uzbekistan are transferring money. The Tax Committee was able to make a list of websites where payments were made. We wrote a letter to the owners of a website, asking them to register and pay VAT. However, this method was later criticised on the grounds that it infringed upon the bank secrecy rule and misused the Tax Committee’s power. We (the Tax Committee) have been informed that banks should not provide all transfers, but only those that might be subject to the tax authority, only in selected situations.

Currently, the Tax Committee is looking for other means to identify those liable for VAT on digital services. It became clear from the interviews that even though a law was introduced, there is no system in place for how to implement it. The current methods are not sustainable and do not rely upon the proper methods. Uzbekistan is also examining the practices in developed countries regarding how to implement digital taxation, but developed countries’ systems may not be suitable because they may require substantial investment.

Identification of Digital Services Subject to VAT

The definition of ‘digital services’ is the second issue related to the tax law. Uzbekistan identified fourteen activities that may be subjected to VAT, twice the number of those in other Central Asian countries. One of the reasons Uzbekistan identified those fourteen activities is that they borrowed the definition from Russia’s tax law.

During an interview with a Tax Committee expert, he explained why such a broad definition is applied:

We wanted to cover as many activities as possible, to allow for the opportunity for a bigger pool of companies to pay VAT if they wish to pay. In addition, the IT industry is consistently changing, and broad definitions make the law relevant, and it will not require frequent amendments.

Will broad definitions decrease the legal certainty?

In the digital industry, ‘what is a digital service’ is always under question because of the variety of business models and services they provide. Currently, we are dealing with Wildberries, a Russian online retail company that is refusing to pay VAT. ‘Wildberries Uzbekistan’ claims they have registered as warehouse providers in Uzbekistan and are not a shop, and the shop is located in Russia and registered in Russia. Another issue is ‘Telegram shop groups’. Many individuals establish Telegram groups where they sell almost everything from cosmetics to clothing to and vitamins, including pharmaceutical drugs, some of which require a prescription. This is not only causing breaches to tax regulations, but many other laws as well. Currently, we are working on developing strategies to address these issues.

Broad definitions might be good in some sense and provide more expansive coverage. However, such an expansive, broad definition might result in some social issues. For example, consider the case of charging VAT for software use licenses. Software used for hospital medical equipment, state banks, and public education institutions are owned by non-resident companies that might become subject to VAT; such companies might stop operating in Uzbekistan, and the software might not work properly without updates. Furthermore, even if the company decides to work in Uzbekistan, VAT might financially affect these public institutions (Baker McKenzie, 2021).

Whilst the meaning of ‘digital services’ remains broad, it only applies to a certain kind of digital business. The way ‘big tech’ companies work and make money is not limited to the traditional methods encompassed in this definition. In this definition, we find four different kinds of digital services (Kennedy, 2019):

  1. 1.

    showing ads to users of a digital interface based on their data profiles;

  2. 2.

    providing a multisided digital platform that allows users on one side of a transaction interact with users on the other side, including for the purchase of goods and services;

  3. 3.

    selling users’ data; and

  4. 4.

    information search engines.

VAT cannot be charged for the value created on a platform by users. Users can add value to a site by creating content, such as in the case of youtube.com. If a new singer posts a video on YouTube, they might make money based on how many people watch it, and they might have to pay taxes on that money. But, even if all users are from Uzbekistan, as an example, that video cannot be subject to VAT. One thing is clear when applying the Tax Code as created by the Tax Committee: they will try to fit the business model of entities to reflect the current definition of digital services. Considering the rather diverse business models of IT companies, such a process is not a simple task.

Another issue related to determining how to apply VAT revolves around the sharing economy, which provides products and services through a digital platform. Tourism, transportation, professional services, and financial services are all impacted by the sharing economy. These platforms can be divided into two categories (Mullins, 2022, p. 22):

  1. 1.

    an electronic marketplace, in which goods or services are ordered and supplied through an electronic intermediary that plays a direct role in the transaction (e.g., Amazon, Alibaba, etc.); and

  2. 2.

    an electronic platform that connects buyers and sellers, but is not directly involved in the supply of goods or services (e.g., Airbnb, Yandex Taxi, etc.).

For the first category, VAT may be levied on an electronic marketplace’s supply of products, which could be the actual marketplace or the original supplier. For the latter, VAT may be levied on the supplier as well as any fees paid to the platform in the event of an electronic platform. However, Mullins (2022) states that the second category is simpler if the platform imposes VAT, which ensures VAT collection from transactions and less of an administrative burden to tax authorities.

Is VAT the Best Way to Tax Digital Services in Uzbekistan?

Under international rules, the state cannot apply preferential tax to domestic goods. Specifically, states refrain from levying preferential taxation to domestic goods since this would discourage foreign investment and provoke retaliatory measures amongst trading partners. Thus, VAT should apply to all similar goods whether domestic or not. That means the higher the levy, the higher the burden will be for domestic producers as well. Domestic startup companies may be particularly impacted, rendering competition with giant tech companies even more difficult. It is possible to place a threshold on such taxation, similar to Tajikistan’s practice (Asquith, 2021a). A threshold system for VAT might help startups or small companies develop and ease the tax burden placed on them; however, some states may argue that this threshold was deliberately set to impose a discriminatory VAT on foreign businesses. Thus, such a threshold might create inter-state conflict, similar to that which occurred between Turkey and the USA. Specifically, the US claimed that Turkey set a threshold so high that only US tech giants and not local tech companies were tax liable (Agencies, 2021).

Moreover, VAT is not a good method to use to tax non-resident tech companies simply because most of the tax burden will be placed on resident consumers. How much of the burden will be placed on the consumer depends on the type of company as well as on the demand and supply curve. It is possible that for some tech services no alternative exists on the market. Even if a tech company places the full VAT burden on consumers, consumers do not have any choice. In other words, the VAT system will tax consumers, but not companies.

Currently, Uzbekistan is considering taxing the income of non-resident companies. The biggest challenges for the Tax Committee revolve around the operation of companies without permanent establishment (PE). The Yandex Taxi company serves as one intriguing example, whereby Uzbekistan faces challenges to taxing and establishing anti-competition laws (Gazeta.uz, 2023b). Furthermore, Yandex Taxi is under an anti-monopoly committee investigation in Kazakhstan as well (Tengrinews.kz, 2023). Yandex’s representative in Uzbekistan, whom I interviewed, stated the following:

Yandex Go is an online information service. We provide services remotely, giving partners access to the platform. Within the territory of Uzbekistan, these services are provided by the legal entity Ridetech International B.V., registered in the Netherlands. This is not contrary to the laws of the country.

Comments from the prominent Uzbek blogger Bakiroo (2023) on Yandex Taxi are illuminating:

Since the Republic of Uzbekistan and the Kingdom of the Netherlands have signed a convention to avoid double taxation, Yandex Go pays taxes in country in which the company is registered. Our local partners, in turn, are fully responsible for paying their taxes for transportation services in accordance with the tax legislation of Uzbekistan. Other international online services work in the same way: Google, Instagram, and AliExpress.

On 27 March 2023, the Minister of the Economy and Finance Mr Kutbidinov stated:

Uzbekistan has signed agreements with fifty-four countries to prevent double taxation. And we must abide by these agreements. Now, are these in our best interest or not? In this regard, the Ministry of the Economy and Finance is developing its position, policy, and proposals. I think that soon, within a month, we will submit our proposals to the government (Gazeta.uz, 2023a)

According to Mr Kutbidinov, Uzbekistan must create a legal base on tax ‘from the point of view of observing the interests of entrepreneurs and creating equal opportunities for everyone in the market’. According to a 2021–2022 report, the annual income of Ridetech International in Uzbekistan was 116.5 billion so’m, which paid 15% VAT or 17.5 billion so’ms. Furthermore, Ridetech International claims its remaining tax, such as income tax, is paid in the Netherlands. Tax and anti-monopoly agencies stated several times that, with this unfair environment, it will be difficult for local companies to compete with giants like Yandex.

The current tax system does not fully address this issue, although Uzbekistan has begun tackling it. There may be few VAT-registered companies, but for eleven months in 2022, forty foreign companies paid 44.8 billion so’ms in taxes (US$1 = 11,300 som’s [Cbu.uz, 2023], or around US$4 million), which is twice that paid in 2021. At the same time, 98% of the taxes paid stem from ten foreign companies providing electronic services(Kun.uz, 2022), as illustrated in Table 9.1.

Table 9.1 Taxes paid by top ten foreign companies providing electronic services in Uzbekistan, 2021
Full size table

However, if we consider the tax income of Uzbekistan and Kazakhstan, Kazakhstan collected six times that of Uzbekistan. According to the head of the Digital Assets Department of the State Revenue Committee of Kazakhstan, for the beginning of year, non-resident companies paid about US$6.3 million in taxes in 2022 (Bulatkulova, 2022). In 2022, the total tax paid by non-resident companies reached almost US$36 million (16 billion tenge) (State revenue committee of the Ministry of Finance of the Republic of Kazakhstan, 2023). Currently in Kazakhstan, forty-five non-resident companies are registered for VAT, with comparable company names and numbers to those in Uzbekistan. Similar to Uzbekistan, the top five companies pay the majority of taxes. The highest taxpayer in Kazakhstan is Meta, which pays US$6.4 million (2.9 billion tenge), followed by iHerb which pays US$4.9 million (2.2 billion tenge), Google which pays about US$4.9 million (2.24 billion tenge), and Apple which pays US$3.7 million (1.72 billion tenge) (QazMonitor, 2023).

No single explanation exists for why such a large gap exists between Kazakhstan and Uzbekistan. One reason may lie in the gap between the two states’ purchasing power and GDP. How much VAT accumulates is linked to how many goods or services are purchased by residents of a country. Importantly here, Kazakhstan is more economically wealthy than its neighbours.

Another reason could be that many Uzbeks work abroad. Current estimates place the official number of Uzbeks working abroad at 1.7 million individuals, although the real number may be twice as high (Kun.uz, 2021). According to VAT regulations, for a non-resident company to be subject to VAT, the consumer or user must be physically present in Uzbekistan.

The gap may also be explained by the use of proxy servers or virtual private networks (VPNs) given poor internet connections in Uzbekistan. Currently, companies use IP addresses to identify a user’s location. Using a proxy server or VPN creates challenges in identifying a user’s true physical location. In some instances, international online retailers offer discounts based on the user’s physical location. However, goods can be shipped anywhere. At times, Uzbek users use a VPN to take advantage of such discounts, although they list Uzbekistan as their shipping address. One prime example might be Amazon, for which the only evidence the Uzbek government has includes goods registered via customs. Amazon refused to pay any tax or consider itself virtually present in Uzbekistan. Uzbekistan currently imposes a limit on citizens that any good with a value that exceeds US$1000 during an annual quarter is subject to tax (Uznews.uz, 2022). This represents a paradox in some sense since the final consumption of the goods occurs in Uzbekistan, and according to tax practice, should be subject to VAT. But, because identifying the physical location of the user is challenging due to the use of a proxy server or VPN, a non-resident company might not include them in their tax calculations.

The above examples suggest that Central Asian countries can adopt a system for determining residence, such as the recipient’s billing address or home address and the location of the purchaser’s bank or credit card account. Non-resident companies are located outside the country, and collecting data on transactions is not easily possible. Ultimately, the government should ensure that it can assess supplier compliance.

Going Forward Under the Ever-expanding Digitalisation of the Economy and Society

Whilst developing solutions to address digital taxation issues, it is vital to keep reform objectives in mind. Increasing revenue is an obvious goal, but other objectives should also be considered. Tax reforms should attempt to render the tax system more equitable and level the playing field so that non-resident businesses do not obtain a competitive advantage over domestic entities. This fairness should improve tax morale and attitudes towards paying taxes. Furthermore, any reform should aim to provide tax certainty for taxpayers and the tax administration, and should be cost-effective, efficient, and achievable.

Instead of pursuing income or turnover tax measures, Central Asian countries prioritised the VAT strategy to raise tax revenue from the digital sector. Central Asian countries have unchallenged VAT taxation rights on cross-border supplies under the destination principle, and VAT is a simpler measure than withholding taxes. In Central Asia’s taxation experiences, tax collection problems were partially solved by making it easier for non-resident companies to register for VAT and to pay their taxes. Compliance and administrative costs have been significantly cut through the online filing process, which might also encourage non-resident companies to work with the tax authority. This method has been shown to work well in terms of compliance and bringing in additional tax income. Currently, forty to forty-five companies are registered in Kazakhstan and Uzbekistan, and the current measure depends upon the voluntary compliance of the non-residence company. One recommendation might be for Central Asian countries to formulate an enforcement mechanism. Current implementation relies on voluntary compliance because most registered companies are large, high-profile companies; for them, their reputation remains a priority. Voluntary compliance might not work with other types of companies (e.g., medium-sized companies or companies that do not experience moral pressure). In Central Asian countries, strict enforcement mechanisms may not currently work because the digital economy market share is insignificant compared with other Asian countries. Furthermore, the non-tax impact of reforms should be considered. Some non-resident companies might be the only companies that provide unique services in the country. If taxation discourages their trade in the country, they might decide to cease providing services in that country, thereby negatively impacting all aspects of that country.

The second recommendation is that the government should assist non-resident companies in receiving information about users in order to calculate and fulfil their VAT obligation. For example, due to proxy servers and VPNs, it is not easy for non-resident companies to collect all of the necessary information. Information about users should also be provided to unregistered non-resident companies. This information might be an important factor for non-resident companies’ decisions to register. Thus, the government should establish a system to exchange information with non-resident companies, and information should be available from both sides, thereby benefiting both parties.

The third recommendation is that tax authorities should utilise technology to implement tax reform. Technology might ease the administrative burden on the tax authorities. Tax authorities have a limited capacity. If the collection of taxes becomes costly, it will not work in the long term. Thus, technology can be used for collecting taxes, improving services, and effectively using existing data. Technology is the primary medium connecting all parties.

The fourth recommendation centres on thresholds. None of the Central Asian countries except Tajikistan placed a threshold for VAT liability. That threshold was placed in order to allow all companies to be treated the same and allow them all the opportunity to pay VAT. The threshold might be a legitimate mechanism to protect startups and small businesses, easing the administrative burden on tax authorities. However, the threshold should not be discriminatory against foreign businesses versus domestic businesses. This goes against fair tax rules and might result in conflicts between states.

Conclusions

Taxation of the digital economy holds significant importance, particularly for developing countries like those in Central Asia. However, the current tax system is struggling to effectively tax the digital economy, leading each country to attempt to devise its own solutions. In the Central Asian countries, similar tax laws have been enacted to address these challenges, but they often lack adequate implementation mechanisms. Thus, it appears that certain parts of the legislation have been directly borrowed from Russian tax law without considering the specific needs and capabilities of the region.

My research findings indicate that the current legal framework is unable to accurately determine who is subject to taxation and what digital services should be taxed. This limitation arises due to a lack of expertise and IT capacity within specific countries. Insufficient technical knowledge and resources hinder the effective identification and classification of digital transactions for tax purposes.

Furthermore, a notable shortcoming identified in this research is the absence of an enforcement mechanism for digital economy taxation. Even if suitable legislation is in place, without proper enforcement, it becomes challenging to ensure compliance and collect the appropriate taxes from digital service providers.

To address these issues, it is crucial for policymakers in the Central Asian countries to not only tailor legislation to their specific contexts, but to also invest in building the necessary expertise and IT infrastructure. By strengthening their capacity, these countries can enhance their ability to identify taxable entities, classify digital services, and establish effective enforcement mechanisms.

Overall, this research highlights the limitations to the current taxation of the digital economy in the Central Asian countries, emphasising the need for comprehensive reforms that encompass both legal and implementation issues.

However, it would be incorrect to characterise Uzbek tax law as a complete failure. With over forty companies currently registered and paying VAT, we find a positive trend. Moreover, the increasing income from VAT suggests that the tax system is generating revenue and gaining traction over time. It is commendable that companies are voluntarily registering and fulfilling their tax obligations from a moral and reputation perspective.

However, it is essential to recognise that, in order to sustain growth in registrations, Uzbekistan should strive for a system that provides mutual benefits beyond moral and reputation considerations. My four recommendations aimed at improving registrations highlight a proactive approach to enhancing the effectiveness of the tax system. By implementing these recommendations, Uzbekistan can potentially incentivise additional companies to register for tax purposes. This could foster a mutually beneficial environment, where businesses see tangible advantages to registering. Such measures can encourage greater participation and ensure the long-term success and growth of the tax system in the country.

Moreover, the rapid digitalisation of the economy has far-reaching implications for the legal systems in Central Asia. As the digital landscape continues to evolve, it significantly impacts the legal environment, business and investment climate, as well as social change and governance in the region.

Digitalisation poses new challenges to the legal environment in Central Asia. Traditional legal frameworks are often ill-equipped to address the complex issues arising from the digital economy. The lack of specific regulations and clear guidelines hinders the effective regulation of digital businesses and taxation. This gap creates uncertainty for businesses, consumers, and tax authorities, undermining trust and impeding the development of a robust digital ecosystem. To foster innovation and protect the rights of all stakeholders, the Central Asian countries must adapt their legal frameworks to accommodate the unique features of the digital economy.

Central Asia’s business and investment climate is profoundly impacted by digitalisation, presenting new opportunities for entrepreneurship and economic development on the one hand. The digital economy enables businesses to access global markets, interact with consumers on digital platforms, and employ cutting-edge technologies. This could entice foreign direct investment and stimulate job creation. On the other hand, the rapidly changing digital landscape challenges traditional industries and small businesses by requiring them to adapt quickly. In order for businesses to flourish in the digital age, Central Asian nations must nurture digital innovation, encourage entrepreneurship, and provide the necessary infrastructure and resources.

Significant societal change is occurring through digitalisation in Central Asia, changing the manner in which individuals communicate, access information, and engage in economic activities. The digital revolution has the potential to reduce socioeconomic disparities, empower individuals, and promote social inclusion. Access to additional digital technologies can enhance education, healthcare, and public services, thereby promoting human development and well-being. However, it also contributes to existing inequalities by leaving behind those who lack access to digital tools and abilities. To prevent the marginalisation of certain segments of society, Central Asian governments must prioritise digital literacy programmes, expand internet connectivity, and guarantee equal access to digital services.

Finally, digitalisation poses governance challenges in Central Asia. The borderless nature of the digital economy requires international cooperation and coordination to effectively address cross-border issues. Combating cyber security threats, data protection, intellectual property rights, and online fraud necessitate robust legal frameworks and international cooperation. Thus, the Central Asian countries must collaborate with international organisations, neighbouring states, and the private sector to establish effective governance mechanisms that protect digital rights, ensure privacy, and maintain cyber resilience. Enhancing digital governance will ultimately strengthen trust in digital systems and promote a safe and secure digital environment.

In conclusion, digitalisation carries far-reaching effects on the Central Asian legal systems. Adapting legal frameworks to the digital economy, nurturing a business- and investment-friendly climate, addressing societal change, and enhancing governance mechanisms are essential for maximising the benefits of digitalisation whilst mitigating its challenges. Central Asian nations can position themselves as dynamic and competitive participants in the global digital economy whilst protecting the interests of their citizens and businesses by embracing digital transformation and implementing the appropriate legal and regulatory measures.