COMMENT TO ARTICLE 8. PAYMENT FOR SUBSURFACE USE TO THE CODE OF THE REPUBLIC OF KAZAKHSTAN "ON SUBSURFACE AND SUBSURFACE USE"

Subsurface use is paid (paid). Payment for the use of mineral resources is carried out by paying taxes and other mandatory payments to the budget in accordance with the tax legislation of the Republic of Kazakhstan.

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(M.B.Telemtaev, M.A. Ibragimov)

1. The subsoil, which is the property of the state, is the most important asset in the national wealth of Kazakhstan. Their effective use is of crucial importance in the development of the economy and the well-being of society and citizens, which is largely reflected in the budget-forming role played by revenues contributed to the benefit of the state by persons engaged in various subsurface use operations. That is why the payment for subsurface use, which is fixed by the commented article, along with other principles of the legislation on subsurface, formulated in art.4 of the Code on Subsurface, is one of the basic principles of legal regulation of relations in the field of subsurface use.

2. This principle has been consistently formulated in previous legislation. Thus, payment as a principle of using mineral resources, and then the principle of legislation on mineral resources, was formulated, among other things, in the Code on Mineral Resources and Processing of 1992 (Articles 6 and 32), as well as in the Law on Mineral Resources of 1996 (Article 3). There was a similar provision in the 2010 Law on Subsoil (art.5), and art.9 of this legislative act stated that "relations in the field of subsoil use are based on a paid basis, except in cases established by this Law." One of these exceptions was, for example, the gratuitous extraction of common minerals and groundwater for their own needs within certain volumes.

3. In contrast, the Subsoil Code does not establish any exceptions of this kind. Now, all operations that are subsurface use operations in accordance with the Code on Subsoil are carried out on a fee basis, which is the result of consistent implementation of payment as a principle of the legislation on subsoil. Such implementation means not only a simple replenishment of the state budget, but also pursues the goals of economically stimulating the effective use of mineral resources, protecting the subsoil and the environment, regulating the economic and financial conditions of subsurface users, as well as solving socio-economic problems of the republic as a whole and its administrative-territorial units on whose territory the deposits are located. mineral resources and man-made mineral formations.

4. It should be emphasized that the commented article speaks specifically about the payment for subsurface use, i.e. about the payment for the use of subsurface resources, and not about the taxation of subsurface users. The fact is that subsurface users, as business entities, are required to pay all taxes and payments to the budget established by tax legislation in respect of any business entity. However, the same legislation establishes the procedure for fulfilling special tax obligations for special payments and taxes that are subject to execution by relevant entities specifically in connection with their subsurface use operations, including the specifics of fulfilling tax obligations for activities carried out under production sharing agreements (contracts) (art.720 of the Tax Code of the Republic of Kazakhstan). The importance of such taxes and payments may be evidenced by the fact that the amount of the mining tax alone

The amount of mineral resources collected from organizations outside the oil sector of the economy amounts annually from 3.5 to 4 percent of the annual budget of the republic, and the amount of all taxes and mandatory payments paid by subsurface users averages up to 50 percent or more of annual tax revenues to the budget of Kazakhstan.

5. The special consolidation of the Code on the Subsoil of payment as a principle of legal regulation in the field of subsoil use is no exception among the legislative acts of Kazakhstan regulating relations on environmental management. Due to its crucial importance, a similar principle is also formulated in the Forest Code of the Republic of Kazakhstan dated July 8, 2003, where the payment for the use of forest resources and beneficial properties of forests is defined not only as a principle of forest legislation (art.3), but also as an economic principle and method of protection, protection, use of forest resources, forest reproduction and afforestation (V.104). The issue has been resolved in the same way within the framework of water legislation. Thus, the Water Code of the Republic of Kazakhstan dated July 9, 2003. It also contains a special provision stating that the water legislation of the Republic of Kazakhstan is based, inter alia, on the principle of payment for special water use (art.9) and that special water use is carried out on a fee basis in accordance with the tax legislation of the Republic of Kazakhstan (art.133).

6. It is necessary to distinguish between payment for subsurface use as a principle of legislation, which is the basis and finds its development in the form of a tax institution regulating the collection of special taxes and other payments from subsurface users, and payment as a real system of tax relations, which has as its economic result the receipt (withdrawal) of appropriate natural rent by the state from persons to whom it has granted the right to use the mineral resources belonging to it. In the first case, we are talking about a purely legal phenomenon, fixed by the commented article and further developed in the specific requirements of current tax legislation, whereas in the second case, we are talking about the practical implementation of these requirements and a certain equivalent compensation, compensation actually received by the state in exchange for the granted right of subsurface use in the form of withdrawal from subsurface users not related to their direct entrepreneurial activity is the regular income received from subsurface use

7. Payment, as one of the principles of legal regulation of relations in the field of subsoil use in Kazakhstan, underlies the formation of a special

a tax institute in the form of a set of special legislative rules on taxation of subsurface use operations carried out in the form of tax, lease and other payments to the budget. The commented article of the Subsoil Code contains a form instruction, according to which payment for the use of mineral resources is carried out by paying taxes and other mandatory payments to the budget in accordance with the Republic of Kazakhstan.

8. The system of taxes and other mandatory payments of subsurface users formulated in the tax legislation is largely aimed not only at solving purely fiscal tasks, but also at activating and improving the efficiency of subsurface use operations, ensuring the growth of the resource base in the form of identified mineral reserves, preserving and strengthening the strategic importance of the oil and gas and mining and metallurgical complexes for sustainable economic growth in Kazakhstan. Thus, the tax legislation provides for a number of measures to improve the investment climate in the field of subsoil use. Such measures include, for example, the cancellation of the commercial discovery bonus, the abolition of the excess profit tax for the mining sector, the cancellation of payments to reimburse historical costs for subsurface users who have received licenses in accordance with the Subsoil Code, the reduction of tax rates on tin and groundwater extraction, etc.

9. Taxation in the field of subsurface use has its own peculiarities in comparison with the usual procedure. Therefore, it is no coincidence that the taxation of various subsurface use operations in the Tax Code of the Republic of Kazakhstan is devoted to a special Section 23 "Taxation of subsurface users", which includes more than fifty articles establishing special taxes and other mandatory payments to the budget, regulating various issues of tax obligations of persons engaged in conducting subsurface use operations, and defining the procedure for fulfilling such obligations.

Thus, Article 720 of the Tax Code of the Republic of Kazakhstan provides for special payments and taxes for subsurface users, including those operating under production sharing agreements, which include:

1) Subscription bonus;

2) payment for reimbursement of historical expenses;

3) alternative tax on subsurface use;

4) royalties;

5) the share of the Republic of Kazakhstan in the production division;

6) the tax on the extraction of minerals; and

7) the tax on excess profits.

Subscription bonus. This is a one-time fixed payment for the acquisition of the right of subsurface use in the contract territory (subsurface area), as well as for the expansion of the contract territory (subsurface area) in accordance with the procedure established by the legislation of the Republic of Kazakhstan (see Articles 724-730 of the Tax Code of the Republic of Kazakhstan).

In accordance with Articles 725 and paragraph 22, paragraph 1, Article 1 of the Tax Code of the Republic of Kazakhstan, subscription bonus payers are individuals or legal entities that have won a tender for the right to subsurface use or have obtained the right to subsurface use based on direct negotiations on granting the right to subsurface use, as well as those who have concluded (received) one of the following subsurface use title documents in accordance with the established procedure:

1) exploration contract (license);

2) the contract (license) for mining;

3) combined exploration and production contract;

4) a license for geological exploration;

5) a license for the use of subsurface space; and

6) a prospecting license.

The initial amount of the subscription bonus is set separately for each concluded contract and for each issued license for subsurface use in accordance with the procedure and amounts established by the Tax Code of the Republic of Kazakhstan. Depending on the nature of the subsurface use operation, the type and total value of the mineral, as well as the grounds for obtaining a document in the form of an auction granting the right to conduct subsurface use operations, the amount of the subscription bonus is calculated as a multiple of the monthly calculation index or based on the rate expressed in the monthly calculation index established by the law on the republican budget and valid on the date of payment of the subscription bonus.

Payment for reimbursement of historical expenses. This payment is a fixed payment to reimburse the total costs incurred by the state for the geological study of the contract territory (subsurface area) and exploration of deposits prior to the conclusion of a subsurface use contract (art.731 of the Tax Code of the Republic of Kazakhstan).

The payers of this payment are subsurface users operating under a subsurface use contract for mineral deposits for which, prior to the conclusion of the subsurface use contract, the state incurred geological expenses.

the study of the contract territory or the exploration of the relevant deposits, the sites of which are transferred to the use of the subsurface user.

Subsurface users operating under a license for exploration or extraction of solid minerals are exempt from the obligation to pay a payment for reimbursement of historical costs, provided that the license was issued after December 31, 2017 and the licensed territory is the territory to which the right of subsurface use was already granted under subsurface use contracts before January 1, 2018. In addition, the payment for reimbursement of historical expenses is not paid under contracts for exploration of mineral deposits that do not provide for their subsequent extraction (Clause 3 of Article 734 of the Tax Code of the Republic of Kazakhstan).

The amount of historical expenses incurred by the state for the geological study of the contract territory (subsurface area) and exploration of deposits to be paid is calculated by the authorized state body for the study of subsurface resources. Currently, such body is a special department of the Ministry of Ecology, Geology and Natural Resources represented by the Republican State Institution "Committee of Geology of the Ministry of Ecology, Geology and Natural Resources of the Republic of Kazakhstan". The amount of historical expenses may be set by the specified government agency in a foreign currency, but must be paid in tenge at the market exchange rate.

Alternative tax on subsurface use. This payment is a new type of tax introduced for subsurface users who carry out operations with respect to hydrocarbons. An alternative subsurface use tax can be used instead of a payment to reimburse historical expenses, a tax on excess profits, and a tax on mining. Subsurface users who carry out operations under a contract for the extraction and (or) combined exploration and production of hydrocarbons on the continental shelf of the Republic of Kazakhstan, as well as under a contract for the extraction and (or) exploration and production of hydrocarbons from deposits with the depth of the upper point of hydrocarbon deposits specified in the mining allotment or in the contract for subsurface use, not higher than 4,500 meters and the lowest point of hydrocarbon deposits of 5,000 meters and below.

The object of the alternative tax on subsurface use is the difference between the total annual income for the purposes of calculation

alternative tax on subsurface use and deductions for the purposes of alternative tax on subsurface use. The alternative subsurface use tax is calculated as the product of the object of such a subsurface use tax and the rate established by the Tax Code of the Republic of Kazakhstan, which, depending on the level of the world oil price, ranges from zero (at a price of up to 50 US dollars per barrel inclusive) to thirty percent (at a price of over 90 US dollars per barrel).

It should be emphasized that the alternative tax on subsurface use is not an additional tax burden on subsurface users. It only provides them with an alternative way to fulfill their tax obligations for a number of special payments in such a way that, as a result, the tax burden is transferred to the time of income generation. This measure is certainly beneficial for subsurface users and, by freeing up certain financial resources, encourages them to increase their investments in ongoing subsurface use operations.

Royalties. Royalties are payments for the right to use mineral resources in the process of mining and processing man-made formations. This payment is paid by the subsurface user performing mining operations separately for each type of minerals extracted in the territory of the Republic of Kazakhstan. The tax base for calculating the royalties to be paid is the value of the extracted minerals. In some cases, such payment is made in kind in accordance with the procedure provided for by tax legislation.

The share of the Republic of Kazakhstan in the production division. As you know, Kazakhstan has signed a number of production-sharing agreements with well-known international companies that have acted as investors in the development of large hydrocarbon deposits. One of the essential conditions of these agreements is that the subsurface user, in return for paying a number of taxes and other mandatory payments to the budget (excess profit tax; land tax; property tax, rental tax on exported crude oil and gas condensate; royalties, etc.) transfers to the state a certain share of the extracted hydrocarbon raw materials in kind or in cash. Just as with the payment of royalties, the tax base for calculating this payment is the physical volume of minerals extracted by the subsurface user during the tax period.

The tax on mining. The mineral extraction tax is paid by subsurface users separately for each type of mineral raw materials, hydrocarbons, groundwater and therapeutic mud extracted in the territory of the Republic of Kazakhstan. Regardless of the type of extraction carried out, this tax is paid for all types of extracted mineral raw materials, hydrocarbons, groundwater and therapeutic mud at the rates and in accordance with the procedure established by the Tax Code of the Republic of Kazakhstan.

Taxpayers of the mineral extraction tax are subsurface users engaged in the extraction of hydrocarbons, mineral raw materials, groundwater and therapeutic mud, including the extraction of minerals from man-made mineral formations for which the mineral extraction tax and (or) royalties have not been paid, within the framework of each individual concluded contract or issued license for subsurface use, with the exception of subsurface users who operate exclusively under a mining license.

The object of taxation on mining is the physical volume of hydrocarbons extracted by a subsurface user during the tax period, mineral reserves contained in mineral raw materials (the taxable volume of redeemed reserves), common minerals, groundwater and therapeutic mud.

The tax base for calculating the mineral extraction tax is the value of the volume of the corresponding minerals extracted during the tax period.

When calculating the amount of mineral extraction tax payable to the budget, it is determined based on the object of taxation, the tax base and the rate, which, depending on the type of mineral, is set as a percentage of the price of the corresponding mineral or in monthly calculation indices established by laws on the republican budget, per unit volume of extracted minerals.

The tax on excess profits. Taxpayers of the excess profit tax are subsurface users for activities carried out under each individual subsurface use contract. The obligation to pay excess profit tax does not apply to persons who carry out subsurface use operations on the basis of: a) production sharing agreements (contracts) concluded before January 1, 2009, and subsurface use contracts approved by the President of the Republic of Kazakhstan; b) exploration and

(or) extraction of solid minerals, groundwater and (or) therapeutic mud, provided that these contracts do not provide for the extraction of other groups of minerals, and (c) contracts for the construction and operation of underground structures not related to exploration and production.

The payment is calculated for the tax period for each individual subsurface use contract under which the subsurface user is the payer. For the purposes of calculating the tax, the subsurface user determines the object of taxation, as well as such tax-related objects as net income, taxable income, gross annual income, deductions, corporate income tax, etc. At the same time, the object of taxation on excess profits is a part of the net income of a subsurface user determined for the purposes of calculating excess profit tax, exceeding the amount equal to 25 percent of the amount of deductions of the subsurface user established for the purposes of calculating excess profit tax.

10. The article under review mentions that in addition to paying taxes, payment for the use of mineral resources is also made through the payment of other mandatory payments to the budget, which are provided for by the tax legislation of the Republic of Kazakhstan. Among such important payments are the newly introduced rental payments into the tax legislation, which are referred to in the Tax Code of the Republic of Kazakhstan as payment for the use of land.

This fee is charged for the provision of a subsoil plot by the state on the basis of a license for exploration or extraction of solid minerals. The procedure for the provision of land and subsoil plots is established both by the Code on Subsoil and the CC RK.

The payers of the fee are persons who have received a subsoil plot on the basis of a license, and the object of taxation is, respectively, a subsoil plot granted to a person under a license for exploration or extraction of solid minerals. This circumstance should be emphasized in particular: the amount of this fee depends on the area of the subsurface area, and not on the size of the land plot as such, especially considering that, for example, when conducting exploration operations, the holder of the appropriate license is not provided with a land plot at all, and in the case of mining, the allocated land plot can often does not correspond to the territory of the corresponding subsurface area provided for mining. Thus, the payment in question is purely of a subsurface use nature and is not related to a payment in the form of a land tax provided for by

Section 14 "Land tax" (Articles 497-516) of the Tax Code of the Republic of Kazakhstan and levied in prescribed cases.

For a subsurface area granted on the basis of a license for exploration or extraction of solid minerals, the fee rates are determined based on the size of the monthly calculation index (MCI) established by the law on the republican budget and effective on the 1st of the tax period. These rates for exploration licenses for one block range from 15 to 60 MCI, depending on the period of validity of the exploration license. So, in the period from the 1st to the 36th months of the license validity, the subsurface user is obliged to pay a fee of 15 MCI per block to the budget, whereas from the 85th month of the license validity and further the rate will increase to 60 MCI per block. It is easy to see that the establishment of such an increasing scale of payment rates for the use of land plots seriously encourages the subsurface user to fully intensify exploration operations in occupied subsurface areas (blocks) and return the territories allocated for exploration to the state as quickly as possible. Under mining licenses, the fee rate is fixed and amounts to 450 MCI per square kilometer of the territory where operations for the extraction of solid minerals are carried out.

11. An important feature of tax obligations related to the conduct of subsurface use operations is that, as a general rule, the amount of such obligations for activities carried out under a contract or license for subsurface use is calculated in accordance with the tax legislation of the Republic of Kazakhstan in force at the time of the obligations to pay them. This means that the so-called "tax stability" does not apply to such taxes and mandatory payments and they are payable in the form and amount provided for by the tax legislation in force at the time of their payment.

The exception to this general rule is when the tax regime providing for the payment of taxes and payments to the budget for activities carried out under a subsurface use contract is defined in a production sharing agreement (contract) concluded between the Government of the Republic of Kazakhstan or the competent authority and the subsurface user before January 1, 2009 and passed the mandatory tax examination, and also in the subsoil use contract approved by the President of the Republic of Kazakhstan. In these cases, such a tax regime, regardless of changes in tax legislation, remains unchanged, provided that in relation to

The provisions of such an agreement (contract) explicitly provide for the stability of the tax regime (art. 722 of the Tax Code of the Republic of Kazakhstan).

12. Violations of the procedure and deadlines for the payment of the above taxes and other mandatory payments entail a number of negative consequences for the taxpayer in the form of applying various liability measures to the violator. One of such measures provided for by the tax legislation is, first of all, the accrual and subsequent collection of penalties for unpaid taxes and payments to the budget. There may also be other legal liability measures applied to violators of tax legislation. If, for example, tax evasion can lead to administrative penalties in the form of fines provided for by the legislation on administrative offenses, then failure to pay a subscription bonus or a fee for the use of land (lease payments) on time may result in the revocation of a license for subsurface use, and the auction winner who has not paid the subscription bonus on time, may be deprived of the right to conclude a subsurface use contract.

Thus, the commented article of the Subsoil Code, consolidating the principle of payment for subsurface use, used by the state in regulating this sector of the economy, serves as the legal basis for building a very extensive taxation system that regulates relations between subsurface users and the budget, both in the interests of the subsoil users themselves and in the interests of the state as the owner of the subsoil.

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  Kazakh Association of Organizations of the Oil and Gas and Energy Complex KAZENERGY

Nur Sultan 2022

The Kazenergy Association expresses its sincere gratitude for the support in preparing the commentary to the following companies: North Caspian Operating Company NV, NC KazMunayGas JSC, Mangistaumunaygas JSC, Karachaganak Petroleum Operating BV, White & Case Kazakhstan LLP, Haller Lomax LLP)", "Erlicon CG" LLP, "Signum Law Firm" LLP. © Kazenergy Association, 2022 © team of authors, 2022 © authors, 2022

Dear readers!

We offer you a scientific and practical commentary prepared by a group of Russian specialists with extensive practical experience in legislation on subsoil and subsoil use and who participated in the preparation of the Code on Subsoil and Subsoil Use.

Subsurface use is a very complex and specific area of public relations, the regulation of which has its own historical background and takes into account the technological specifics of the process of subsurface development, as well as environmental, commercial, legal and other features of exploration and development of deposits.

Kazakhstan's legislation on subsoil and subsurface use has passed through several stages in its development, and has always been based on a balance of interests between the state and subsurface users, transparency, striving for the maximum possible degree of protection of the rights and legitimate interests of investors, ensuring sustainable social, economic and environmental development of the country.

The Code "On Subsoil and Subsoil Use", adopted at the end of 2017, was developed taking into account many years of accumulated experience and law enforcement practice, as well as the results of extensive discussions with experts working in the industry.

It reflects specific, important measures on the part of the state to increase the investment attractiveness of exploration and further reduce administrative barriers.

Nevertheless, practice and legislation do not stand still, constantly evolving, taking into account new challenges facing both the subsurface use industry and the economy as a whole.

In this regard, this commentary is intended to serve as an aid for a wide range of interested persons – specialists working in the industry, in

understanding the meaning of the norms, their historical context, the interrelationship and mutual influence of the various provisions of the Code.

We also hope that studying the commentary will serve as an incentive for new generations of young domestic specialists to work scientifically and practically in this important industry, for the benefit of the development of our country, current and future generations of Kazakhstanis.

Sincerely, U. Karabalin, Deputy Chairman of the Kazenergy Association, Hero of Labor of Kazakhstan