Accruals of royalties and taxes on mining Incorrect interpretation of the concepts of "associated components" and "minerals" and their recognition as a single object of taxation

 The accrual of royalties and mineral extraction tax, the incorrect interpretation of the concepts of "associated components" and "minerals" and their recognition as a single object of taxation led to an incorrect resolution of the dispute by the court of cassation, which was the basis for making a submission by the Chairman of the Supreme Court in order to cancel the judicial act of the cassation instance.

Yu LLP (hereinafter referred to as the Partnership) applied to the court to challenge the notification of the State Institution "Tax Administration for Mugalzharsky District" (after the reorganization, the State Institution "State Revenue Administration for Mugalzharsky District of the Department of State Revenue for Aktobe region of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan", hereinafter referred to as – Management, tax authority) dated November 5, 2012 No. 109 regarding the accrual of royalties, mineral extraction tax (MET) in the amount of 123,393,418 tenge and penalties in the amount of 27,370,806 tenge, as well as the recognition of the illegal notification of repayment of tax arrears dated November 12, 2013 regarding the MET. The case has been repeatedly reviewed by judicial authorities. By the decision of the Appellate Judicial Board for Civil and administrative cases of the Aktobe Regional Court dated January 16, 2015, the application was satisfied, the notification of the results of the tax audit dated November 05, 2012 No. 109 regarding the accrual of royalties and mineral extraction tax in the amount of 123,393,418 tenge, penalties in the amount of 27,370,806 tenge was declared illegal and canceled. The state duty in the amount of 1,233,934 tenge was collected from the tax authority in favor of the Partnership. The tax authority is responsible for the elimination of violations. By the decision of the cassation judicial board of the Aktobe Regional Court dated June 26, 2015, the decision of the court of appeal remained unchanged. The operative part of the court's decision is stated in the wording: "To return to the Partnership from the local budget the paid state fee in the amount of 1,233,934 tenge." By the decision of the Judicial Board for Civil Cases of the Supreme Court of the Republic of Kazakhstan dated April 27, 2016, the decision of the Court of Appeal and the decision of the Court of Cassation 3 Bulletin of the Supreme Court of the Republic of Kazakhstan No. 2/2017 were canceled. The new decision refused to satisfy the Partnership's application. The petition of the Office and the protest of the Prosecutor General of the Republic of Kazakhstan have been satisfied.

In the submission, the Chairman of the Supreme Court of the Republic of Kazakhstan requests to consider the Partnership's petition for a review of the decision of the Judicial Board for Civil Cases of the Supreme Court (hereinafter referred to as the judicial board), referring to significant violations of substantive law. The Judicial Board for Civil Cases of the Supreme Court overturned the decision of the Judicial Board for Civil Cases of the Supreme Court of the Republic of Kazakhstan dated April 27, 2016, upholding the decision of the appellate and cassation instance of the regional court by virtue of the following. The case materials established that on December 14, 2001, the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan and JSC "G" signed a contract (hereinafter referred to as the Contract) for the extraction of gold–bearing ores at the Yu deposit. According to the addendum to the contract dated December 24, 2001, the right of subsurface use at the field was transferred to the Partnership. Based on the order No. 109 of September 3, 2012, the tax authority conducted a comprehensive tax audit of the Partnership on the correctness of the calculation and timely payment of taxes and other mandatory payments to the budget for the period from January 1, 2007 to December 31, 2010. Based on the results of the audit, an act was drawn up on November 5, 2012 and a notification was sent on the accrual of taxes in the amount of 236,975,568 tenge and penalties in the amount of 117,312,214 tenge, including royalties and mineral extraction tax – 123,393,418 tenge, penalties – 27,370,806 tenge. On November 12, 2013, the Partnership received a notification on repayment of tax arrears. The basis for the additional MET and royalties was the failure of the Partnership to pay a tax for copper mined along with gold and silver. Satisfying the claims of the Partnership, the courts of first and appellate instances indicated that, according to the terms of the Contract, the Partnership extracted only gold and silver, and the copper extracted along the way was not an object of mining, therefore, the Partnership had no obligations to pay royalties and mineral extraction tax. Canceling the judicial acts of the courts of first instance and appeal and refusing to satisfy the Partnership's application, the judicial board concluded that the copper extracted to the surface is not a "passing component", but a mineral, in addition, the approved mineral reserves are included in the State Balance Sheet, and therefore the Partnership is obliged to pay royalties and mineral extraction tax for the entire volume of extracted (redeemed) reserves. 4 Kazakhstan Republikasy Zhogargy Sotyn Bulletin No. 2/2017 The above conclusions of the judicial board dated April 27, 2016 do not correspond to the circumstances of the case and contradict the norms of substantive law.

The Partnership operates on the basis of the Contract dated December 14, 2001 No. 830 for the extraction of gold-bearing ores at the Yu deposit in the Aktobe region, concluded with the competent authority of the Republic of Kazakhstan (the Competent Authority). At the same time, the mineral reserves of the Yu deposit were approved by the protocol of the State Commission of the Republic of Kazakhstan dated July 22, 1996 No. 44, according to which copper in the composition of gold-bearing ores is classified as other associated components. The conclusion of the Contract with the Partnership was preceded by the results of the tax examination No. 2 dated June 14, 2001, according to which gold and silver were identified as objects of taxation for royalty payments. At the same time, copper has not been identified as a subject of royalty taxation. Clause 4.3.3.2 of Addendum No. 2 to the Contract stipulates the royalty rates for gold and silver mining. The work program for the Contract, agreed with the Competent Authority, stipulates that gold and silver are the objects of mining, and copper is classified as associated components that are not subject to royalties. Tax audit acts No. 177 dated March 1, 2005 and No. 347 dated December 31, 2010 confirmed every five years the correctness of paying royalties only on gold and silver (i.e., the correctness of non-payment of royalties for copper). The above-mentioned tax examinations and acts of tax audits have not been recognized as illegal and have not been canceled. By notification dated November 5, 2012, the Partnership was awarded royalties and mineral extraction tax for copper extracted along with gold and silver for the period from January 1, 2007 to December 31, 2010.

The Judicial Board of the Supreme Court recognized as legitimate the accrual of royalties and mineral extraction tax on the component of the extracted ore – copper, based on the letter of the Committee of Geology and Subsoil Use of the Ministry of Industry and New Technologies of the Republic of Kazakhstan dated April 2, 2014 No. 22-06/998-KGN, which states that the copper extracted to the surface is not an "associated component", but "minerals". At the same time, the arguments of the Partnership that the concepts of "associated component" and "associated mineral" are distinguished at the level of regulatory legal acts deserve attention. According to the Resolution of the Government of the Republic of Kazakhstan dated October 18, 1996 No. 1287, both minerals and reserves of associated components (recoverable and non-recoverable) are to be included in the State Balance Sheet. Such accounting is necessary for calculating subsurface reserves. At the same time, the objects of taxation are determined by the Tax Code by distinguishing minerals from associated components. From the tax audit act of August 15, 2014 No. 33, it follows that during the smelting of copper, the technological ore is completely melted and its components (with the exception of gold and partly silver) turn into slag - non-recyclable waste from copper production (copper remains in the slag). These circumstances are consistent with the conclusions of the Interregional 4 Department of Zapkaznedra of the Committee of Geology and Subsoil Use and JSC U (the acquirer of gold-bearing ore) that only gold and silver are the object of extraction, copper is not extracted from the ore concentrate due to unprofitability.  By virtue of Article 337 of the Tax Code (as amended before 2015), the taxable amount of redeemed reserves is the amount of redeemed mineral reserves contained in mineral raw materials, the extraction, use (sale) of which are provided for by the terms of the subsoil use contract, minus the amount of normalized losses, for the tax period. According to the provisions of these norms, MET taxation was provided for only those objects, the extraction and use of which is directly stipulated by the terms of the contracts. This Contract does not provide for the extraction and use of copper. The Law of the Republic of Kazakhstan dated December 29, 2014 No. 271-V "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on subsoil use" amended Article 337 of the Tax Code by excluding reservations to the terms of the Contract.

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