Challenging Notices on Repayment of Customs Payment Arrears

According to judicial practice, customs disputes may be divided into several categories:

• challenging notices requiring the rectification of violations identified following desk-based customs audits, and decisions declaring such notices unfulfilled;
• challenging notices concerning the results of audits of customs and other documents;
• challenging decisions on amendments (additions) to information declared in goods declarations;
• challenging notices on repayment of customs payment arrears.

The absence of legal grounds for paying customs fees when customs clearance is carried out in respect of goods included in the relevant list constitutes grounds for declaring unlawful any notices imposing an obligation to pay such customs fees.

LLPs “M”, “A” and “Қ” filed claims with the court against the Republican State Institution “Department of State Revenue for Astana” seeking to have the following notices declared unlawful and annulled: Notice No. 19 dated 23 November 2022, addressed to LLP “M”; Notice No. 21 dated 23 November 2022, addressed to LLP “A”, insofar as it assessed customs fee arrears and penalties in the amount of KZT 11,517,587; and Notice No. 28 dated 4 January 2023, addressed to LLP “Қ”.

By a decision of the Specialized Interdistrict Administrative Court of Astana dated 17 August 2023, the claims were granted. At the same time, a separate judicial ruling was issued and addressed to the State Revenue Committee concerning identified violations of the law (7194-23-00-4/1651 (1665, 1666)).

By a resolution and ruling of the Judicial Chamber for Administrative Cases of the Astana City Court dated 29 November 2023, the first-instance court's decision and separate judicial ruling were upheld without amendments.

By a resolution of the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan dated 19 June 2024, the decision, separate judicial ruling, resolution and ruling of the Judicial Chamber for Administrative Cases of the Astana City Court were upheld.

The case materials established that the Department of State Revenue for Astana had conducted on-site customs audits to verify compliance with the customs legislation of the Eurasian Economic Union and/or the Republic of Kazakhstan in the course of foreign economic activities by former participants of the Astana – Zhana Kala Special Economic Zone (hereinafter referred to as the “SEZ”), namely LLP “A”, LLP “Қ” and LLP “M”. Following the customs audits, Notices Nos. 19, 21 and 28 assessing additional customs fees and penalties were issued against the claimants. In seeking to have these notices declared unlawful, the claimants argued that there were no grounds for requiring them to pay customs fees when clearing goods included in the relevant list.

In granting the claims, the courts concluded that the claimants were not payers of customs duties and taxes and, therefore, had no obligation to pay customs fees. Payment of customs fees was предусмотрено only for customs declaration of goods under goods declarations. The courts also referred to procedural violations committed during the customs audits.

It should be noted that the courts of Astana have considered numerous administrative cases challenging notices issued following customs audits concerning compliance with the customs legislation of the Eurasian Economic Union and/or the Republic of Kazakhstan in the course of foreign economic activities by current and former participants of the Astana – Zhana Kala Special Economic Zone.

A consistent and uniform judicial practice has developed in this category of disputes. This is evidenced by the resolutions of the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan in three administrative cases (Nos. 6001-24-00-6ап/191 (2), 6001-24-00-6ап/85 (2), and 6001-24-00-6ап/77 (2)) concerning the above category of disputes. In these cases, the conclusions of the local courts granting the claims were found to be justified, and the judicial acts were upheld.

In view of the above, and for the purpose of ensuring a uniform approach to the interpretation and application of legal provisions, judicial acts in this category of cases were forwarded to the Ministry of Finance, the State Revenue Committee, the Departments of State Revenue and supervisory authorities in the transport sector for consideration and use in their practical activities, taking into account the legal position of the country's highest judicial authority.

When considering claims challenging decisions and actions (inaction) relating to amendments (additions) to information declared in goods declarations, the courts established that customs authorities had failed to comply with the principles of proportionality and legality governing administrative procedures, as enshrined in Articles 7 and 10 of the Administrative Procedural and Process-Related Code of the Republic of Kazakhstan (hereinafter referred to as the “APPC”).

LLP “T” filed a claim with the court against the Republican State Institution “Department of State Revenue for the Karaganda Region”, seeking to have Notice No. 22 dated 2 June 2022, issued following an audit, and the decision on amendments to information declared in the goods declaration declared unlawful and annulled (No. 3594-22-00-4/1084).

By a decision of the Specialized Interdistrict Administrative Court of the Karaganda Region dated 3 February 2023, the claim was dismissed. By a resolution of the Judicial Chamber for Administrative Cases of the Karaganda Regional Court dated 19 June 2023, the first-instance court's decision was upheld without amendments.

By a resolution of the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan dated 11 March 2024, the decision of the Specialized Interdistrict Administrative Court of the Karaganda Region dated 3 February 2023 and the resolution of the Judicial Chamber for Administrative Cases of the Karaganda Regional Court dated 19 June 2023 were set aside, and a new decision granting the claim was issued (6001-23-00-6ап/2298).

In resolving the dispute and dismissing LLP's claim challenging the above-mentioned notice and decision of the Department of State Revenue, the local courts proceeded from the premise that the contested administrative acts were lawful. Their conclusions were based on Articles 427 and 428 of the Tax Code, Article 43 of the Law of the Republic of Kazakhstan “On Legal Acts”, and Order No. 67 of the Acting Minister of National Economy dated 21 February 2018 “On Approval of the List of Imported Goods in Respect of Which Value Added Tax Is Paid Using the Offset Method and the Rules for Its Formation”. Amendments were subsequently made to this Order by Orders of the Minister of National Economy No. 31 dated 31 March 2022 and No. 74 dated 21 October 2022, which excluded the claimant's right to pay VAT using the offset method in respect of the imported goods (Canaan AvalonMiner computing servers — computing machines intended for digital mining).

These conclusions of the local courts are inconsistent with the provisions of tax legislation and the principles of administrative justice.

In particular, pursuant to Article 427 of the Tax Code, VAT is paid using the offset method in accordance with the procedure established by that Article by VAT payers specified in subparagraph 1) of paragraph 1 of Article 367 of the Code in respect of the following goods placed under the customs procedure of release for domestic consumption:

1) equipment;2) agricultural machinery;3) freight rolling stock of road transport;4) helicopters and aircraft;5) railway locomotives and wagons;6) sea vessels;7) spare parts.

In the case under consideration, it was established that the LLP had imported equipment into the territory of the Republic of Kazakhstan, purchased from the People's Republic of China.

According to the goods declaration, the equipment was imported under HS Code 8471 50 000 0.

Accordingly, in January–February 2022, at the time of importation and declaration of the equipment into the territory of the Republic of Kazakhstan, the list as amended pursuant to Order No. 31 was in force.

Consequently, the claimant applied the VAT offset method at the time of importation and declaration of the goods in accordance with the legislation then in force.

However, taking into account the amendments introduced, the Department issued a notice against the claimant, stating that the total amount of the violation was KZT 1,251,884,678, including VAT in the amount of KZT 1,182,232,681 and penalties in the amount of KZT 69,651,997.

The notice was issued on the grounds that the HS Code had been excluded from the list pursuant to Order No. 31.

However, the notice and the decision issued are unlawful, since Order No. 67 was in force at the time of customs clearance of the goods, under which the claimant was entitled to pay VAT using the offset method.

In the present case, the claimant's position was worsened by imposing an obligation to pay VAT pursuant to Order No. 74, whereas the legislation in force at the time of importation and declaration of the equipment provided for VAT payment using the offset method. The equipment was purchased abroad due to the absence of domestic production in Kazakhstan, which is also consistent with the subsequent amendments introduced.

The respondent's actions in assessing penalties are disproportionate and unlawful, since, pursuant to Article 124 of the Customs Code, penalties are subject to accrual in the event of failure to pay tax within the prescribed period, whereas the claimant's obligation to pay the tax arose in accordance with Order No. 74.

The cassation court noted that the principal purpose of introducing the VAT offset method was to provide state support to priority sectors of the economy in which auxiliary equipment, machinery and components thereof are not manufactured. In other words, the offset method is regarded as a medium-term support measure.

Another example concerns a case in which the competent authority complied with the applicable requirements.

The note to Article 463 of the Tax Code stipulates that the classification of goods is determined by the code of the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union and/or the name of the goods.

Part Two of Article 76 of the Civil Procedure Code of the Republic of Kazakhstan provides that circumstances established by a court decision or ruling that has entered into legal force in a previously considered civil case are binding on the court. Such circumstances shall not be subject to re-proof in other civil cases involving the same persons.

A similar provision is contained in Article 119 of the APPC, which establishes the principle of issue preclusion (prejudicial effect) in administrative cases.

Meanwhile, failure to comply with the above provisions when considering the administrative claim filed by an LLP against the Republican State Institution “Department of State Revenue for the Karaganda Region”, seeking to have the notice issued following an audit and the decision on amendments and/or additions to information specified in the goods declaration declared unlawful and annulled, resulted in the setting aside of the judicial acts of the local courts of the Karaganda Region upon review by the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan.

In granting the claim, the local courts proceeded from the following circumstances:

1) The Partnership had reasonably declared the alcoholic product “Divin” with excise duty paid at the rate of KZT 250 per litre of pure (100%) alcohol;

2) The Department had failed to provide evidence that the above-mentioned product had previously been subject to excise duty at the rate of KZT 2,550 per litre of pure (100%) alcohol;

3) The respondent had failed to prove that, following the Republic of Moldova's accession to the European Association Agreement and the change of the beverage's name to “Divin”, its production technology had changed. In fact, the technology remained the same as that used for the production of cognac: alcohol is obtained by distilling wine material made from grape raw materials, after which it is aged in oak barrels or barrels containing oak staves.

At the same time, by a resolution of the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan dated 22 February 2022, which entered into legal force, it was established that the decision of the Board of the Eurasian Economic Commission No. 140 dated 3 November 2020 “On the Classification of the Alcoholic Beverage ‘Divin’ in Accordance with the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union” (hereinafter referred to as the “EAEU Board Decision”), which entered into legal force on 6 December 2020, had been adopted pursuant to the first paragraph of paragraph 1 of Article 22 of the EAEU Customs Code.

The Board resolved as follows:

The alcoholic beverage “Divin”, manufactured in the Republic of Moldova, with an ethyl alcohol content by volume of at least 40%, produced by blending distillates aged in oak barrels and obtained through double distillation of wine material manufactured from grape raw materials, with the addition of sugar syrup, softened water and sugar colouring, in containers with a capacity of 2 litres or less, shall be classified under subheading 2208 20 290 0 of the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union (EAEU CN FEA), in accordance with General Rules for the Interpretation of the Nomenclature 1 and 6.

This means that the alcoholic beverage “Divin” was classified as another alcoholic beverage under commodity heading 2208 20 290 0 of the EAEU CN FEA.

At the time the audit report, notice and decision of the tax authority were issued, the EAEU Board Decision was in force.

In light of the foregoing, the Judicial Chamber concluded that the contested order issued by the Department of State Revenue complied with the requirements of legality and substantiation applicable to administrative acts under Article 79 of the APPC.

Accordingly, the judicial acts were set aside and a new decision dismissing the claim was issued (6001-23-00-6ап/1187 (2)).

Regulatory Framework

1. Constitution of the Republic of Kazakhstan dated 30 August 1995;
2. Administrative Procedural and Process-Related Code of the Republic of Kazakhstan (hereinafter referred to as the “APPC”);
3. Code of the Republic of Kazakhstan “On Customs Regulation in the Republic of Kazakhstan” (hereinafter referred to as the “Customs Code”);
4. Customs Code of the Eurasian Economic Union, ratified by the Law of the Republic of Kazakhstan dated 13 December 2017 No. 115-VI (hereinafter referred to as the “EAEU Customs Code”);
5. Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan dated 29 November 2019 No. 7 “On Certain Issues of Application of Customs Legislation by Courts”;
6. Code of the Republic of Kazakhstan “On Taxes and Other Mandatory Payments to the Budget” (Tax Code);
7. Entrepreneurial Code of the Republic of Kazakhstan (hereinafter referred to as the “Entrepreneurial Code”);
8. Code of the Republic of Kazakhstan on Administrative Offences (hereinafter referred to as the “Code of Administrative Offences”);
9. Civil Procedure Code of the Republic of Kazakhstan (hereinafter referred to as the “CPC”);
10. Treaty on the Eurasian Economic Union dated 29 May 2014 (hereinafter referred to as the “EAEU Treaty”);
11. Acts constituting the law of the EAEU (hereinafter referred to as the “international treaties and acts in the field of customs regulation”);
12. Decision of the Board of the Eurasian Economic Commission dated 27 March 2018 No. 42 “On the Specifics of Customs Control of the Customs Value of Goods Imported into the Customs Territory of the Eurasian Economic Union”.

Abbreviations Used

JCAA SC – Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan;

JCAA – Judicial Chambers for Administrative Cases of regional and equivalent courts;

SIAC – Specialized Interdistrict Administrative Courts of the regions of the country;

SI – State Institution;

RSI – Republican State Institution;

SRC – State Revenue Committee;

DSR – Department of State Revenue;

USR – Administration of State Revenue;

LLP – Limited Liability Partnership;

IE – Individual Entrepreneur.

Translator's note: The English legal terminology has been standardized for professional use. Before submitting this translation to a court or public authority, the official English titles of Kazakhstan's legislation and judicial bodies, as well as the cited case references, should be verified.

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