Challenging a Notice Based on the Results of a Desk Audit
Pursuant to subparagraph 4) of paragraph 2 of Article 19 of the Tax Code, tax authorities are required, within the scope of their competence, to provide explanations and comments regarding the arising, 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, taking into account 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 the said 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.
…If 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 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 in the event that a claim for liquidation (recognition as invalid of the registration (re-registration)) of a legal entity is granted falls within the powers of the tax authority. Only upon the tax authority taking the measures prescribed 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 should 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, for a period of one year, the legal entity is absent from its location or actual address, as well as where its founders (participants) and officials, without whom the legal entity cannot operate, are absent.
The absence, taken cumulatively, of the above-mentioned characteristics constitutes grounds for refusing to grant the claimant's request, since tax authorities have other means of response available to them.
…State re-registration of a legal entity constitutes an administrative act of the registering authority. Accordingly, a claim seeking recognition of such re-registration as invalid shall be considered in accordance with the procedure established for administrative proceedings.
…The courts should take into account that, as of January 1, 2020, participants in tax legal relations, when taking 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 under the applicable 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 after the expiry of the limitation period. At the same time, the Tax Code does not restrict 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 matters, the tax authority must comply with the requirements of Article 8 of the Law of the Republic of Kazakhstan dated July 5, 2008 No. 67-IV “On Transfer Pricing”. The limitation period may be suspended upon sending a request that must meet the following requirements:
- be addressed to the competent authority (organization) of the state;
- be personalized and prepared in respect of the taxpayer being audited;
- concern matters falling within the subject matter of the audit.
The courts should take into account that, if a request does not meet the above 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.
It is necessary to distinguish between the right of a tax authority to assess or revise the calculated and assessed amount of taxes and other mandatory payments to the budget and the right of a taxpayer to request the offset 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.
In this regard, with respect to the taxpayer's right to request the offset 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 …
…If the claimant has paid the state duty using an incorrect budget classification code or has not paid the state duty in full, pursuant to part four of Article 138 of the Administrative Procedural and Process-Related Code of the Republic of Kazakhstan (hereinafter referred to as the “APPC”), the judge shall indicate these deficiencies to the claimant and establish a time limit for correcting them.
…The submission by a taxpayer, within the time limit established by the Tax Code, of an explanation concerning the violations identified that are not specified in paragraph 3 of Article 96 of the Tax Code and that meets the requirements of subparagraph 2) of paragraph 2 of Article 96 of the Tax Code shall be deemed compliance with the notice on elimination of violations identified by tax authorities as a result of a desk audit and shall not require verification of the merits of the grounds for such violations.
Pursuant to part two of Article 135 of the APPC (action for recognition), the claimant may also request that an encumbering administrative act that no longer has legal effect be recognized as unlawful. Therefore, claims challenging an executed notice based on the results of a desk audit shall be subject to judicial consideration.
A claim challenging a notice based on the results of a desk audit shall be considered in accordance with the procedure established for administrative proceedings.
When considering claims challenging notices 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 as a result of a desk audit, the court shall assess and examine the evidence submitted by the taxpayer confirming the actual receipt of goods, works and 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, pursuant to paragraph 5 of Article 96 of the Tax Code.
In all other cases, it shall be sufficient for the court to establish whether the tax authority had the statutory grounds for issuing the notice, without verifying the merits of the requirements contained therein. Otherwise, the results of future tax audits would be prejudged, including an unscheduled thematic audit concerning non-compliance with the notice based on the results of a desk audit.
The tax authority shall be entitled to issue a decision recognizing a notice as not complied with, including in the following cases:
- the taxpayer is not required to submit an explanation (paragraph 3 of Article 96 of the Tax Code) and the violations have not been eliminated;
- the time limit established by the Tax Code for submitting an explanation or filing a complaint against the notice based on the results of a desk audit 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 a notice 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 notice as not complied with may be filed by the taxpayer within ten working days from the date of its delivery (receipt) with a higher tax authority and/or the authorized body or with the court.
The right to choose the authority with which the complaint (claim) may be filed belongs to the taxpayer.
…At the same time, it should be borne in mind 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 vehicle tax payable by individuals, arising as a result of the tax authorities' revision of the calculated amounts of taxes after the tax payment deadline for the relevant tax period has expired.
…At all stages of challenging the actions and acts of tax authorities, the court should consider the possibility of reconciliation between the parties and independent resolution of the dispute by the tax authority itself (for example, making amendments to information systems where technical errors exist, changing the status of desk audit notices to “complied with”, and so forth) in cases where administrative discretion exists.
…Pursuant to part six of Article 98 of the APPC, a complaint may not be considered in a manner detrimental to the applicant. Since a thematic audit pursuant to Article 186 of the Tax Code is initiated during consideration of a taxpayer's (tax agent's) complaint, 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 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 be subject to judicial challenge, since it does not entail legal consequences. If the notice on the results of the tax audit is left unchanged, the said notice itself may be challenged in court; if it is cancelled in part, the notice concerning the results of consideration of the complaint against the notice on the results of the tax audit may be challenged.
Pursuant to Article 148 of the Tax Code, a written order constitutes the basis for conducting a tax audit.
As an act ordering an audit, such written order 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 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 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 payments to the budget; obligations to calculate, withhold and transfer mandatory pension contributions and mandatory professional 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 the amounts of excess VAT and/or corporate (individual) income tax withheld at the source of payment from the income of non-residents, only the notice shall be subject to judicial challenge. The court shall verify 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 where the taxpayer disagrees with its findings that did not result in the consequences specified above but nevertheless affect its rights and obligations, including in future tax periods. The audit report shall be challenged in accordance with the procedure established by the legislation of the Republic of Kazakhstan for challenging the actions of officials of tax authorities.
Execution of the notice on the results of a tax audit does not deprive the taxpayer of the right to challenge the executed notice in accordance with the procedure and within the time limits established 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 tax authority's findings concerning violations of tax and other legislation of the Republic of Kazakhstan committed by the taxpayer (tax agent) shall be set out with reference 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 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 shall be certain.
Certainty of taxation means that the legislation of the Republic of Kazakhstan establishes all the grounds and procedures for the arising, 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 shall lie with the tax authority.
…Taking into account the provisions of Article 128 of the APPC, the tax authority shall be responsible for submitting to the court evidence demonstrating the unlawfulness of the taxpayer's acquisition of a tax benefit.
Where a taxpayer challenges a notice on the results of a tax audit or an 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 impact on the legality and validity of the audit results. In particular, the results of an audit conducted without a written order, which, pursuant to Article 148 of the Tax Code, constitutes the basis for conducting a tax audit, or on the basis of a written order subsequently declared unlawful, shall be declared unlawful.
The same consequences shall arise where, in violation of paragraph 1 of Article 146 of the Entrepreneurial Code, the written order 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
CPC – Civil Procedure Code
Tax Code – Code “On Taxes and Other Obligatory Payments to the Budget”
DGD, Department – Department of State Revenues
UGD, Division – Division of State Revenues
CC – Criminal Code
CPC (Criminal Procedure) – 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
