Accrual of Penalties on VAT (Value Added Tax) Amounts Refunded After the Prescribed Deadline

Since VAT refundable to taxpayers is, in fact, the companies’ own funds, a late refund gives rise to a penalty payable to the taxpayers.

This position was reflected in the rulings of the Judicial Collegium for Administrative Cases of the Supreme Court of the Republic of Kazakhstan (JCAC of the Supreme Court) No. 600122006ап/2350 dated 5 January 2023 and No. 600122006ап/1535 dated 20 December 2022, issued in claims brought by AMC against the Department seeking an obligation to accrue and pay a penalty for the late refund of VAT.

Thus, Ruling No. 600122006ап/2350 of the JCAC of the Supreme Court states that the notice on the results of the tax audit and the act of the documentary tax audit confirmed the amounts of excess VAT subject to refund for the first quarter of 2021. The refund was made only on 25 November 2021, whereas it should have been made no later than 3 September 2021, inclusive. By the decision of the Specialized Interdistrict Administrative Court (SIAC) dated 21 June 2022, the ruling of the court of appeal dated 15 September 2022, and the ruling of the JCAC of the Supreme Court, the claim was satisfied.

It follows from the case materials that the tax authority refunded the excess VAT amount with a delay of 80 days.

Without disputing the late refund of the excess VAT confirmed as refundable, the Department argued that the delay amounted not to 80 days, as claimed by the claimant, but to 78 days, i.e. from 8 September to 25 November 2021. The defendant also stated that the violation of the refund deadline had occurred due to insufficient funds in the relevant control accounts.

The Judicial Collegium agrees with the conclusions of the lower courts that a violation of the VAT refund period established by Articles 431, 432 and 434 of the Tax Code gives rise to an obligation of the tax authority to accrue a penalty pursuant to paragraph 4 of Article 104 of the Tax Code, the provisions of which are mandatory.

Treasury authorities are equated to an organization carrying out certain types of banking operations; they execute payment orders of tax authorities for the refund of excess VAT and are not empowered, on behalf of the state, to independently decide whether to refund or not to refund the excess VAT amount from the budget to a taxpayer.

The Tax Code does not provide for any grounds for exemption from the accrual of a penalty, including on the grounds of insufficient funds in the relevant accounts of Treasury subdivisions.

The lower courts correctly assessed that the number of days of delay must be calculated in accordance with paragraph 2 of Article 431 of the Tax Code, i.e. based on 55 working days following the expiration of 30 calendar days from the deadline established for filing the tax return.

The argument that the delay should be calculated from the date of submission of the application pursuant to the Rules for the Refund of Excess Value Added Tax, approved by Order No. 391 of the Minister of Finance of the Republic of Kazakhstan dated 19 March 2018 (hereinafter, the “Rules”), since the Department cannot know in advance and with certainty that a company intends to offset or refund taxes, is also unfounded.

Pursuant to paragraph 2 of Article 10 of the Law “On Legal Acts” (hereinafter, the “Law”), the Tax Code, in the hierarchy of regulatory legal acts, has a higher legal force than regulatory orders of the Ministers of the Republic of Kazakhstan. The Tax Code clearly establishes the deadlines for VAT refunds. Accordingly, paragraph 4 of Article 104 of the Tax Code is directly applicable.

At the same time, when calculating 55 working days following the expiration of 30 calendar days from the deadline established for filing the tax return, paragraph 3 of Article 14 of the Law must be applied. Thus, the period of time is calculated beginning on the day following the calendar date or the occurrence of the event determining its commencement, except for constitutional time limits, which commence on the day of the occurrence of the event specified in the Constitution of the Republic of Kazakhstan. Under such calculation, the delay amounts to 80 days.

The argument that payment of the penalty would pose a threat to national security was likewise not substantiated. On the contrary, the representative of the Department stated that there were only three complaints of this nature throughout the region, due to the emergency situation (the pandemic).

Pursuant to subparagraph 4) of paragraph 2 of Article 19 of the Tax Code, tax authorities are required, within 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 concerning the introduction of new taxes and budget payments and the abolition of existing ones, changes in tax rates, taxable items and items related to taxation, and the tax base for taxes and budget payments) is implemented by the authorized body in the field of tax policy.

If 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 within the territory of the Republic of Kazakhstan of international treaties to which Kazakhstan is a party shall be determined by legislation of the Republic.

Where a ratified international treaty grants the Government of the Republic of Kazakhstan the right to tax, but such right has not been implemented in national legislation (a tax exemption is provided), national legislation shall apply.

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

The resolution of the issue of conducting tax control where a claim for liquidation of a legal entity (or invalidation of its registration (re-registration)) is 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. Such counterparties are entitled to protect their rights and legitimate interests by challenging decisions, actions (inaction) of tax authorities.

The courts are to be clarified 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 registered location or actual address, as well as where its founders (participants) and officials, without whom the legal entity cannot function, have been absent for one year.

Если хотите, я могу также сделать более строгую судебно-юридическую английскую версию, адаптированную под стиль Supreme Court / Administrative Court case law, с унификацией терминов tax authority, tax audit, excess VAT, penalty, ruling, judgment, claimant, defendant по всему документу.

Ниже — перевод с сохранением юридического стиля, терминологии и сокращений. Я также исправил очевидные технические ошибки в исходнике (например, пропущенные буквы в словах «процессуальный», «платежах», «доходов»).

Pursuant to part six of Article 98 of the APPC, a complaint may not be decided to the detriment of the applicant. Since a thematic audit under Article 186 of the Tax Code is ordered in the course of consideration of a complaint filed 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 or other mandatory budget payments, or penalties that were not assessed in the contested notice.

A decision of a higher authority (authorized body) adopted following consideration of a complaint against a notice on the results of a tax audit may not constitute the subject matter of judicial challenge, since it does not entail legal consequences. Where the notice on the results of the tax audit is upheld without amendment, the said notice may be challenged in court; where the notice is cancelled in part, the notice reflecting the outcome of consideration of the complaint against the tax audit results may be challenged.

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

As an act ordering a tax audit, a precept 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 specified in paragraph 3 of Article 145 of the Tax Code and paragraph 3 of Article 144 of the Entrepreneurial Code. Such audits are subject to being declared invalid, while the acts ordering them are subject to being declared unlawful and cancelled 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 the decision following the results of a tax audit is the notice on the results of the tax audit issued by the tax authority, where a taxpayer (tax agent) disagrees with the assessed amounts of taxes and other mandatory budget payments, obligations to calculate, withhold and remit mandatory pension contributions, mandatory occupational pension contributions, the calculation and payment of social contributions and/or contributions to compulsory social health insurance, penalties, reduction of losses, or failure to confirm for refund amounts of excess VAT and/or corporate (individual) income tax withheld at source from the income of non-residents, only the notice is subject to judicial challenge.

The court examines 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 did not give rise to the consequences specified above but nevertheless affect the taxpayer’s rights and obligations, including in future tax periods. A 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.

Execution of a notice on the results of a tax audit does not deprive the taxpayer of the right to challenge an executed notice in accordance with the procedure and within the time limits established by the Tax Code.

The content of a tax audit report must comply with the requirements of paragraph 1 of Article 158 of the Tax Code. Findings of a tax authority concerning a violation of tax and other legislation of the Republic of Kazakhstan committed by a taxpayer (tax agent) must be set out with references to the relevant provisions of legislation, supported by reasoning and accompanied by 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 the taxpayer’s violation of tax and other legislation, as reflected in the tax audit report.

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

Certainty of taxation means the establishment in the tax legislation of the Republic of Kazakhstan of all grounds and procedures for the arising, performance and termination of a taxpayer’s tax obligation, as well as a tax agent’s obligation to calculate, withhold and remit taxes.

The burden of proving the circumstances that served as the grounds 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 burden of submitting to the court evidence demonstrating the unlawful nature of the taxpayer’s receipt of a tax benefit.

Where a taxpayer challenges a notice on 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 assess the nature of the violations committed and their impact on the legality and validity of the audit results.

In particular, the results of an audit conducted without a precept, which, pursuant to Article 148 of the Tax Code, constitutes the basis for conducting a tax audit, or on the basis of a precept subsequently declared unlawful, shall be declared unlawful.

The same consequences arise where, in violation of paragraph 1 of Article 146 of the Entrepreneurial Code, a precept for conducting a tax audit, except for a counter-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

GPK – Civil Procedure Code

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

DGD, Department – Department of State Revenues

UGD, Directorate – Directorate of State Revenues

Criminal Code – Criminal Code

CPC – Criminal Procedure Code

CIT – Corporate Income Tax

VAT – Value Added Tax

Attention!   

       Law and Law Law Law draws your attention to the fact that this document is basic and does not always meet the requirements of a particular situation. Our lawyers are ready to assist you in legal advice, drawing up any legal document suitable for your situation.  

 For more information,  please contact a Lawyer / Attorney by phone: +7 (708) 971-78-58; +7 (700) 978 5755, +7 (700) 978 5085. 

Attorney at Law Almaty Lawyer Legal Services Legal Advice Civil Criminal Administrative Cases Disputes Protection Arbitration Law Firm Kazakhstan Law Office  Court Cases