Tax Authorities Are Not Entitled to Bring Claims Against a Taxpayer and/or Tax Agent Beyond the Limitation Period

Paragraph 4 of Article 13 of the Law provides that, when applying the MRP method, the market price shall be determined as follows:

for transactions involving goods for which there is documented information on the transportation route to the relevant market, where a price is available in the information source, the market price shall be determined as the price from the information source, taking into account the price range. The transaction price shall be adjusted by means of a differential to comparable economic conditions with the market price;

for transactions involving goods not covered by subparagraph 1) of this paragraph, the market price shall be determined by adjusting the price from the information source in the relevant market by means of a differential to comparable economic conditions with the transaction price, taking into account the price range.

At the same time, pursuant to paragraph 5 of Article 13 of the Law, the differential includes reasonable and documented expenses and/or expenses confirmed by information sources that are necessary for the delivery of goods to the relevant market.

In determining the sale price, the Plaintiff applied subparagraph 2) of paragraph 4 of Article 13 of the Law, i.e. used the differential based on data from an official source (the type and amount of the differential). At the same time, the tax authority partially used data from the official source and partially data from other sources, and required the availability of primary documentation. Table No. 3 sets out the transportation and related expenses applied by the parties when determining the market price of the goods within the framework of the administrative case under consideration.

Thus, the components of the differentials applied by the Company and the Department differ from each other.

The Department's combined approach, whereby the sale price in European markets is taken together with delivery expenses not to Europe but, for example, to Azerbaijan, Russia and Belarus, results in the price not actually being adjusted to comparable economic conditions.

Based on the foregoing and guided by the provisions of subparagraph 2) of paragraph 4 of Article 13 of the Law, the judicial panel considers that a uniform approach should be applied to all of these destinations for determining the fair and market value. Thus, the type and amount of the differential should be determined in accordance with the data of the official source, as if the goods were sold from established markets for trading in identical goods, where the sale price is taken.

Pursuant to subparagraph 4) of paragraph 2 of Article 19 of the Tax Code, tax authorities are obliged, within the scope of their competence, to provide explanations and comments concerning the emergence, performance and termination of tax obligations. Such explanations and comments, as well as methodological recommendations, including those issued by the authorized body, do not constitute regulatory legal acts. They are subject to assessment by the court with due regard to their compliance with the provisions of tax legislation.

Tax policy (a set of measures aimed at establishing new taxes and payments to the budget and abolishing existing ones, changing tax rates, taxable items and items related to taxation, and the tax base for taxes and payments to the budget) is implemented by the authorized body in the field of tax policy…

Where an international treaty ratified by the Republic of Kazakhstan establishes rules other than those contained in the Tax Code, the rules of such treaty shall apply (paragraph 5 of Article 2 of the Tax Code). Pursuant to paragraph 3 of Article 4 of the Constitution, the procedure and conditions for the operation in the territory of the Republic of Kazakhstan of international treaties to which Kazakhstan is a party shall be determined by the legislation of the Republic…

Where a ratified international treaty grants the Government of the Republic of Kazakhstan the right to impose taxation, but such right has not been exercised in national legislation (an exemption is provided), national legislation shall apply…

When interpreting conventions for the avoidance of double taxation, the general rules of interpretation provided for by international treaties and the legislation of the Republic of Kazakhstan shall apply, provided that such rules of interpretation comply with the provisions of the Vienna Convention on the Law of Treaties, to which the Republic of Kazakhstan acceded pursuant to a Resolution of the Supreme Council.

The resolution of the issue of conducting tax control where a claim for the liquidation of a legal entity (or recognition of its registration (re-registration) as invalid) has been granted falls within the competence of the tax authority. Only upon the adoption of measures provided for by tax legislation may the rights and legitimate interests of counterparties be affected, and such counterparties are entitled to protect their rights and legitimate interests by challenging decisions, actions (inaction) of tax authorities…

Courts should be instructed that, pursuant to subparagraph 3) of paragraph 2 of Article 49 of the Civil Code, courts may order the liquidation of a legal entity where the legal entity is absent at its location or actual address, as well as where its founders (participants) and officials, without whom the legal entity cannot operate, have been absent for one year.

The absence, in aggregate, of the above-mentioned criteria constitutes grounds for refusing to grant the Plaintiff's claim, since tax authorities have other means of response…

State re-registration of a legal entity constitutes an administrative act of the registration authority; therefore, a claim seeking recognition of such re-registration as invalid shall be considered in accordance with the procedure for administrative proceedings…

Courts should take into account that, since 1 January 2020, participants in tax legal relations, when taking actions in the current tax period in respect of previous tax periods, are not entitled to apply the repealed provision of the Tax Code concerning a five-year limitation period, since under the current provision of the Tax Code such period is three years, unless otherwise provided by the Tax Code.

Tax authorities are not entitled to bring claims against a taxpayer and/or tax agent beyond the limitation period. At the same time, the Tax Code does not limit the accrual of penalties by the limitation period…

The overall limitation period, taking into account its suspension during a tax audit concerning transfer pricing, may not exceed seven years.

When suspending an audit on the above-mentioned matters, the tax authority must comply with the requirements of Article 8 of the Law of the Republic of Kazakhstan dated 5 July 2008 No. 67-IV “On Transfer Pricing”. The limitation period may be suspended upon the sending of a request, which must meet the following requirements:

• be addressed to the competent authority (organization) of the relevant state;

• be individualized and drawn up in respect of the taxpayer being audited;

• concern matters falling within the scope of the audit.

Courts should take into account that, if a request does not comply with the above requirements, such request shall not be deemed to have been duly sent…

With respect to tax demands for payment of taxes and other payments to the budget calculated and assessed by the state revenue authorities and presented to taxpayers for payment within the limitation periods, the expiration of the limitation period does not terminate the tax obligation that has arisen and does not release the taxpayer from its performance…

The right of a tax authority to assess or revise the calculated and assessed amount of taxes and other mandatory payments to the budget should be distinguished from the taxpayer’s right to request a credit and/or refund of taxes and payments to the budget, as well as penalties. Thus, when a taxpayer exercises the right to obtain a refund of taxes from the budget, the tax authority does not assess or revise the calculated amount of taxes; rather, it confirms or refuses to confirm the refund of taxes from the budget.

In this regard, with respect to the taxpayer’s right to request a credit and/or refund of taxes and payments to the budget, as well as penalties, when calculating the limitation period, the date on which the tax authority receives (registers) the tax application provided for by subparagraph 1) of paragraph 4 of Article 101 of the Tax Code, or the claim for a refund of the excess amount of VAT provided for by subparagraph 2) of paragraph 1 of Article 431 of the Tax Code, should be taken into account, rather than the date of issuance of the decision based on the results of a tax audit, including the notification of the results of the tax audit…

If the state duty has been paid by the Plaintiff under an incorrect budget classification code or not in full, then, pursuant to part four of Article 138 of the Administrative Procedural and Process-Related Code of the Republic of Kazakhstan (hereinafter, the “APPC”), the judge shall point out these deficiencies to the Plaintiff and set a time limit for their correction…

The submission by a taxpayer, within the period established by the Tax Code, of an explanation concerning the identified violations not specified in paragraph 3 of Article 96 of the Tax Code and meeting the requirements of subparagraph 2) of paragraph 2 of Article 96 of the Tax Code shall be deemed compliance with the notification on elimination of violations identified by tax authorities based on the results of desk control and shall not require an examination of the merits of the justification thereof.

Pursuant to part two of Article 135 of the APPC (claim for recognition), the Plaintiff may also request that an onerous administrative act that no longer has legal force be recognized as unlawful; therefore, claims challenging an executed notification based on the results of desk control shall be subject to judicial consideration.

A claim challenging a notification based on the results of desk control shall be considered in accordance with the procedure for administrative proceedings.

When considering claims challenging notifications on the elimination of violations provided for by subparagraphs 2) and 3) of paragraph 3 of Article 96 of the Tax Code and identified by tax authorities based on the results of desk control, the court is obliged to assess and examine the evidence submitted by the taxpayer confirming the actual receipt of goods, works, or services specifically from the legal entity and/or individual entrepreneur whose registration (re-registration) was declared invalid by a court decision that has entered into legal force, in accordance with paragraph 5 of Article 96 of the Tax Code.

In all other cases, it is sufficient for the court to establish whether the tax authority had the statutory grounds for issuing the notification, without examining the merits of the justification of its requirements. Otherwise, the results of future tax audits would be prejudged, including an unscheduled thematic audit concerning non-compliance with the notification based on the results of desk control.

A tax authority may issue a decision recognizing a notification as not complied with, including in the following cases:

• the explanation is not required to be submitted by the taxpayer (paragraph 3 of Article 96 of the Tax Code) and the violations have not been eliminated;

• the deadline established by the Tax Code for submitting an explanation or filing a complaint against the notification based on the results of desk control has expired, and the violations have not been eliminated;

• a court decision that has entered into legal force has denied the taxpayer’s claim seeking recognition as unlawful of the notification issued pursuant to paragraph 3 of Article 96 of the Tax Code, and the violations have not been eliminated.

A complaint (claim) against a decision recognizing a notification as not complied with may be filed by the taxpayer within ten working days from the date of its delivery (receipt) with the higher tax authority and/or the authorized body or with the court.

The taxpayer has the right to choose the authority with which the complaint (claim) may be filed.

At the same time, it should be borne in mind that, pursuant to paragraph 3 of Article 117 of the Tax Code, no penalty is charged on the amount of tax arrears in respect of property tax, land tax, and vehicle tax payable by individuals that arose as a result of the tax authorities’ revision of the calculated tax amounts after the payment deadline for taxes for the relevant tax period had expired…

At all stages of challenging actions and acts of tax authorities, the court should consider the possibility of reconciliation between the parties and resolution of the dispute by the tax authority itself (for example, making amendments to information systems where technical errors exist, indicating the status “complied with” for desk-control notifications, and so forth) in cases where administrative discretion is available…

Pursuant to part six of Article 98 of the APPC, consideration of a complaint to the detriment of the applicant is not permitted. Since a thematic audit under Article 186 of the Tax Code is ordered in the course of consideration of a complaint by a taxpayer (tax agent), the authorized body may not, based on the results of such audit, issue a decision assessing additional amounts of taxes, other mandatory payments to the budget, or penalties that were not assessed in the contested notification.

A decision of a higher authority (authorized body) adopted following consideration of a complaint against a notification of the results of a tax audit cannot be the subject of judicial challenge, since it does not entail legal consequences. If the notification of the results of the tax audit is left unchanged, the said notification may be challenged in court; if it is annulled in part, the notification concerning the outcome of consideration of the complaint against the notification of the audit results may be challenged.

Pursuant to Article 148 of the Tax Code, a prescription constitutes grounds for conducting a tax audit.

As an act ordering an audit, a prescription may be subject to judicial challenge, since it is issued in the exercise of the tax authority’s public powers and entails legal consequences for the taxpayer (tax agent)…

Unscheduled audits may not be ordered or conducted in the absence of the grounds listed in paragraph 3 of Article 145 of the Tax Code and paragraph 3 of Article 144 of the Entrepreneurial Code. Such audits shall be declared invalid, and the acts ordering them shall be declared unlawful and annulled pursuant to paragraph 1 and subparagraph 1) of paragraph 2 of Article 156 of the Entrepreneurial Code, as having been issued in the absence of grounds for conducting the audit.

Based on the provisions of Article 159 of the Tax Code, under which a notification of the results of a tax audit issued by a tax authority constitutes the decision based on the results of the tax audit, where a taxpayer (tax agent) disagrees with the assessed amounts of taxes and other mandatory payments to the budget, obligations to calculate, withhold and transfer mandatory pension contributions and mandatory occupational pension contributions, the calculation and payment of social contributions and/or contributions to compulsory social health insurance, penalties, reduction of losses, or the non-confirmation for refund of amounts of excess VAT and/or corporate (individual) income tax withheld at the source of payment from the income of non-residents, only the notification is subject to judicial challenge.

The court shall examine the legality of the assessment of the contested amounts, taking into account the findings set out in the tax audit report.

A tax audit report may be challenged if the taxpayer disagrees with its findings that have not resulted in the consequences described above but nevertheless affect the taxpayer’s rights and obligations, including in future tax periods. The tax audit report shall be challenged in accordance with the procedure established by the legislation of the Republic of Kazakhstan for challenging actions of officials of tax authorities.

Compliance with the notification of the results of a tax audit does not deprive the taxpayer of the right to challenge the complied-with notification in accordance with the procedure and within the time limits provided for by the Tax Code.

The content of the tax audit report must comply with the requirements of paragraph 1 of Article 158 of the Tax Code. The conclusions of the tax authority concerning violations of tax and other legislation of the Republic of Kazakhstan committed by the taxpayer (tax agent) shall be set out with references to the relevant provisions of legislation, with substantiation of the arguments and disclosure of the circumstances evidencing the violations.

Pursuant to part three of Article 129 of the APPC, when considering a claim challenging the results of a tax audit, the tax authority may refer only to the findings and reasoning evidencing a violation by the taxpayer of tax and other legislation that is reflected in the tax audit report…

Pursuant to the principle of certainty of taxation established by Article 6 of the Tax Code, taxes and payments to the budget of the Republic of Kazakhstan must be certain.

Certainty of taxation means establishing in the tax legislation of the Republic of Kazakhstan all grounds for and procedures governing the emergence, performance and termination of the taxpayer’s tax obligation, as well as the tax agent’s obligation to calculate, withhold and remit taxes…

The burden of proving the circumstances that served as the basis for the tax authority’s adoption of the contested act rests with the tax authority.

Taking into account the provisions of Article 128 of the APPC, the tax authority bears the obligation to submit to the court evidence demonstrating the unlawfulness of the taxpayer’s receipt of a tax benefit.

Where a taxpayer challenges a notification of the results of a tax audit or a tax audit report on the grounds that the tax authority violated the procedure and time limits for conducting tax audits established by Paragraph 2 of Chapter 18 of the Tax Code, the court should proceed from an assessment of the nature of the violations committed and their effect on the legality and validity of the audit results. In particular, the results of an audit conducted without a prescription, which, pursuant to Article 148 of the Tax Code, constitutes grounds for conducting a tax audit, or on the basis of a prescription subsequently declared unlawful, shall be declared unlawful.

The same consequences shall apply where, in violation of paragraph 1 of Article 146 of the Entrepreneurial Code, a prescription to conduct a tax audit, except for a cross-audit, was not registered with the authorized body in the field of legal statistics and special records.

Abbreviations

APPC – Administrative Procedural and Process-Related Code

GPC – Civil Procedure Code

Tax Code – Code “On Taxes and Other Obligatory Payments to the Budget”

DGD, Department – Department of State Revenues

UGD, Administration – State Revenue Administration

CC – Criminal Code

CPC – Criminal Procedure Code

CIT – Corporate Income Tax

VAT – Value Added Tax

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