Natural gas extracted from one field and pumped back into the bowels of the same field in order to increase the oil recovery coefficient (hereinafter referred to as KIN) cannot be considered used for its own production needs.
As an example, we can cite the case of the application of JSC "P" to the State Revenue Agency "Department of State Revenue for the Kyzylorda region of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan" on challenging the notification of the audit results dated April 15, 2014 No. 263 regarding the accrual of KPI in the amount of 2,675,751,007 tenge and penalties in the amount of 856,700,846 tenge, VAT in the amount of 4,774 365,958 tenge and penalties in the amount of 1,659 229 321 tenge. The Company motivated its demands by the illegality of the conclusions of the tax authority on the need to classify natural gas used for its own production needs as natural gas pumped back into the subsurface to maintain reservoir pressure in order to increase KIN. By the decision of the specialized interdistrict economic court of the Kyzylorda region dated January 27, 2015, left unchanged by higher authorities. the judicial authorities have satisfied the application in the specified part. The Court found that the Company operates in the Republic of Kazakhstan on the basis of several contracts for conducting subsurface use operations. In accordance with the design documents approved in accordance with the legislation on subsoil and subsurface use at the Aryskum and Kumkol fields, it re-pumps natural gas into the reservoir of these fields to maintain reservoir pressure in order to increase KIN.
At the same time, the Company does not determine income for such transactions, which is recognized by the tax authority as a violation of the requirements of paragraph 10 of Article 310 of the Tax Code. In article 332 of the Tax Code, the legislator has given a uniform definition of natural gas used for its own production needs for the entire 11th section of the code governing the taxation of subsurface users. Thus, in accordance with subparagraph 5) of paragraph 2 of Article 332 of the Tax Code, unless otherwise established by this subparagraph, for the purposes of this section, natural gas used for its own production needs is natural gas extracted by a subsurface user under a subsurface use contract and used under this contract in accordance with approved by the authorized body in the field of oil and gas documents, including for reverse injection into the subsurface in the amount provided for by approved design documents, except in cases of reverse injection into the subsurface, provided for in paragraph 4 of this Article. Paragraph 4 of Article 332 of the Tax Code stipulates that the mineral extraction tax is not paid on natural gas in the amount pumped back into the subsurface in order to increase the oil recovery rate provided for in the approved project documents. Referring to these norms, the tax authority indicated that the legislator imposed a ban only on the mining tax, but it does not apply to the object of taxation of the CIT provided for in paragraph 10 of Article 310 of the Tax Code. However, the conclusions of the tax authority are based on a misinterpretation of the above norms. The norms of legislation should be interpreted in accordance with the literal meaning of their verbal expression. By virtue of these norms, for the purposes of Section 11 of the Tax Code, natural gas used for its own production needs is natural gas extracted and used under the same subsurface use contract for re-injection into the subsurface, with the exception of the cases provided for in paragraph 4 of Article 332 of the Tax Code. The legislator attributed to such cases the reverse injection of natural gas into the subsurface in order to increase the KIN.
Consequently, natural gas extracted from one field and pumped back into the bowels of the same field in order to increase its efficiency cannot be considered used for its own production needs. Therefore, income should not be determined by it in order to determine the object of taxation of the CPN and, accordingly, adjustments should be made for the object of taxation of the NSP. The court of first instance investigated and properly evaluated the arguments of the tax authority that the reverse injection of gas into the reservoir in order to increase the KIN was not provided for in the design documents. The court, based on the totality of the evidence presented, established that gas injection at the Aryskum and Kumkol fields is carried out in accordance with approved design documents in order to maintain reservoir pressure to increase KIN.
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