Objectives of Administrative Proceedings in Tax Disputes under the Administrative Procedural and Process-Related Code

When the Administrative Procedural and Process-Related Code (APPC) was introduced in 2021, administrative courts were tasked with rendering decisions in accordance with the objectives and principles of the APPC (the active role of the court, reasonableness, proportionality, and interpretation of doubts in favour of the claimant), which are new to the civil-law and administrative-law framework of the Republic of Kazakhstan.

The objective of administrative proceedings is the fair, impartial and timely resolution of administrative cases for the purpose of effectively protecting and restoring the violated or disputed rights, freedoms and legitimate interests of individuals and legal entities in public-law relations. Thus, judicial practice was expected to develop on the basis of the presumption of fault of the administrative body.

This objective fully applies to tax legal relations, where disputes are subject to resolution concerning the timely registration of a taxpayer for certain types of taxes, the deadlines and amounts of tax assessments, issues of desk (cameral) control, tax audits and appeals against their results, as well as the collection of tax arrears.

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 occurrence, 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, as well as the tax base for taxes and payments to the budget) 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 are determined by the legislation of the Republic of Kazakhstan.

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

The interpretation of conventions for the avoidance of double taxation is governed by the general rules of interpretation provided for by international treaties and the legislation of the Republic of Kazakhstan, insofar as 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 an action for the liquidation of a legal entity or for invalidation of its registration (re-registration) has been satisfied 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 or omissions of tax authorities.

Courts shall be instructed that, pursuant to subparagraph 3) of paragraph 2 of Article 49 of the Civil Code (CC), 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 characteristics constitutes grounds for dismissing the claimant's request, since tax authorities have other means of response.

State re-registration of a legal entity constitutes an administrative act of the registering authority. Accordingly, an action seeking to declare such re-registration invalid is subject to consideration under the procedure of administrative proceedings.

Courts should take into account that, from 1 January 2020, participants in tax legal relations, when performing actions during the current tax period in respect of previous tax periods, are not entitled to apply the repealed provision of the Tax Code establishing a five-year limitation period, since the limitation period under the applicable provision of the Tax Code 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 after the expiry of the limitation period. At the same time, the Tax Code does not limit the calculation of penalties by the limitation period.

The general 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 grounds, 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:

• it must be addressed to the competent authority (organisation) of a foreign state;
• it must be personalised and prepared in respect of the taxpayer being audited;
• it must concern matters falling within the scope of the audit.

Courts should take into account that, if a request fails to meet the above-mentioned requirements, such request shall not be deemed to have been duly sent.

With respect to tax claims for the 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 period, the expiry of the limitation period does not terminate the tax obligation that has arisen and does not release the taxpayer from its performance.

A distinction must be made between the right of a tax authority to assess or revise the calculated or assessed amount of taxes and other mandatory payments to the budget and the taxpayer's right to request a set-off and/or refund of taxes and payments to the budget and 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.

Accordingly, with regard to the taxpayer's right to request a set-off and/or refund of taxes and payments to the budget and penalties, when calculating the limitation period, the date of receipt (registration) by the tax authority of the tax application provided for by subparagraph 1) of paragraph 4 of Article 101 of the Tax Code, or the claim for the refund of the amount of excess 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 claimant under an incorrect budget classification code or in an insufficient amount, 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 indicate such deficiencies to the claimant and establish a time limit for their correction.

The submission by a taxpayer, within the period established by the Tax Code, of explanations regarding the identified violations not specified in paragraph 3 of Article 96 of the Tax Code and complying with the requirements of subparagraph 2) of paragraph 2 of Article 96 of the Tax Code shall be recognised as performance of the notification to remedy violations identified by the tax authorities as a result of cameral control and shall not require an examination of the merits of the violations.

Pursuant to part two of Article 135 of the APPC (action for recognition), the claimant may also seek recognition of an encumbering administrative act that no longer has legal effect as unlawful. Therefore, actions challenging a notification based on the results of cameral control that has already been performed are subject to judicial consideration.

An action challenging a notification based on the results of cameral control shall be considered under the procedure of administrative proceedings.

When considering actions challenging notifications to remedy violations provided for by subparagraphs 2) and 3) of paragraph 3 of Article 96 of the Tax Code and identified by tax authorities as a result of cameral control, the court must 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) has been declared invalid by a court judgment that has entered into legal force, pursuant to 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 statutory grounds for issuing the notification, without examining the merits of the requirements set out therein. Otherwise, the results of future tax audits, including an unscheduled thematic audit concerning non-compliance with the notification based on the results of cameral control, would be predetermined.

A Tax Authority is Entitled to Issue a Decision Declaring a Notification Unfulfilled, Including in the Following Cases:

• an 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 remedied;
• the time limit established by the Tax Code for submitting an explanation or filing a complaint against a notification based on the results of cameral control has expired and the violations have not been remedied;
• a court judgment that has entered into legal force has dismissed the taxpayer's claim seeking recognition of a notification issued pursuant to paragraph 3 of Article 96 of the Tax Code as unlawful, and the violations have not been remedied.

A complaint (claim) against a decision declaring a notification unfulfilled may be filed by the taxpayer within ten working days from the date of its delivery (receipt) with a higher-level tax authority and/or the authorised 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 taken into account that, pursuant to paragraph 3 of Article 117 of the Tax Code, no penalty shall be charged on the amount of tax arrears in respect of property tax, land tax and transport tax payable by individuals, where such arrears arose as a result of the tax authorities' revision of the calculated tax amounts after the payment deadline for the 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 the possibility of resolving the dispute independently by the tax authority (for example, making amendments to information systems where technical errors have occurred, changing the status of cameral-control notifications to “fulfilled”, and so forth) where administrative discretion exists.

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

A decision of a higher-level authority (authorised body) adopted following consideration of a complaint against a notification based on the results of a tax audit may not be subject to judicial challenge, since it does not entail legal consequences. If the notification based on the results of the tax audit is upheld without amendment, the said notification may be challenged in court; if it is cancelled in part, the notification concerning the outcome of consideration of the complaint against the notification based on the results of the tax audit 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, the 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 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, while the acts ordering them shall be recognised as 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 based on the results of a tax audit is the notification issued by the tax authority concerning the results of the tax audit, where the taxpayer (tax agent) disagrees with the assessed amounts of taxes and other mandatory payments to the budget, obligations to calculate, withhold and remit mandatory pension contributions and mandatory occupational pension contributions, the calculation and payment of social contributions and/or contributions to mandatory social health insurance, penalties, the reduction of losses, the refusal to confirm for refund 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 shall be 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 did not result in the consequences specified above but nevertheless affect the taxpayer's rights and obligations, including in future tax periods. A challenge against a tax audit report shall be conducted in accordance with the procedure established by the legislation of the Republic of Kazakhstan for challenging actions of officials of tax authorities.

Performance of a notification based on the results of a tax audit does not deprive the taxpayer of the right to challenge the notification that has already been performed 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 by a taxpayer (tax agent) of tax and other legislation of the Republic of Kazakhstan must be set out with references to the relevant provisions of legislation, together 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 an action challenging the results of a tax audit, the tax authority may refer only to the findings and substantiation 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 payments to the budget of the Republic of Kazakhstan must be certain.

Certainty of taxation means that the tax legislation of the Republic of Kazakhstan establishes all grounds and procedures for the occurrence, performance and termination of a 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 adoption of the contested act by the tax authority 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 that the taxpayer's receipt of a tax benefit was unlawful.

Where a taxpayer challenges a notification based 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 effect 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 recognised as unlawful.

The same consequences shall arise where, in violation of paragraph 1 of Article 146 of the Entrepreneurial Code, a precept for conducting a tax audit, with the exception of a cross-check, was not registered with the authorised body in the field of legal statistics and special records.

Abbreviations

APPC – Administrative Procedural and Process-Related Code

CPC – Civil Procedure Code

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

DGD, Department – Department of State Revenues

UGD, Administration – Administration of State Revenues

CC – Criminal Code

CPC (Criminal) – Criminal Procedure Code

CIT – Corporate Income Tax

VAT – Value Added Tax

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