On recognition of illegal and cancellation of notification of State Revenue

No. 6001-23-00-6ap/1270 dated 12/12/2023

Plaintiff: JSC "BF" (hereinafter - the Company)

Respondent: RSU (hereinafter referred to as the Department) "Department of State Revenue"

The subject of the dispute: on the recognition as illegal and cancellation of Notification No. 458 dated December 31, 2021 in part

Review of the plaintiff's cassation complaint: Based on Order No. 458 dated September 03, 2021, the Department conducted a comprehensive tax audit of the Company on the correctness of the calculation and timely payment of taxes and other mandatory payments to the budget. Based on the results of the audit, an act was issued and notification No. 4 dated December 31, 2021 was issued, which accrued to the Company: -KPI in the amount of 177,778,915 tenge and penalties of 33,795,960 tenge; -VAT for non-residents is 1,848,132 tenge and penalties in the amount of 14,160 tenge. A total of 213,437,167 tenge was accrued. On February 10, 2022, the plaintiff filed a complaint with the Ministry of Finance of the Republic of Kazakhstan, whose decision of July 18, 2022 denied its satisfaction.

Judicial acts:

1st instance: the claim is partially satisfied. The notification regarding the calculation of the CPN in the amount of 2,594,005 tenge and the corresponding penalty amount was declared illegal and canceled. The rest of the claim was denied.

Appeal: the court's decision remains unchanged.

Cassation: the decision of the judicial board was overturned with the referral of the case for a new hearing to the court of appeal in a different composition of the court.

Conclusions: By resolving the dispute and rejecting the claim, the local courts concluded that the notice was lawful on the following grounds. Thus, the courts, with reference to paragraphs 1 and 3 of Article 128 of the Tax Code, considered the defendant's actions to exclude the Company's expenses from deductions under SWAP agreement No. 398 dated October 17, 2014 in the amount of KZT 709,309.9 thousand legitimate, recognizing them as expenses from the revaluation of obligations actually unpaid to the National Bank of the Republic of Kazakhstan. At the same time, the board did not give a legal assessment to the plaintiff's arguments about the need to apply the provisions of paragraph 2 of Article 126, Article 130 of the Tax Code to the disputed legal relations with a study of the declaration for 2015, in which the Bank recognized the amount of 5032,090.4 thousand tenge as income under the SWAP agreement.

Due to the fall in the exchange rate for the period from December 31, 2015 to October 17, 2016 (as of the end date of the transaction), he recognized an expense in the amount of KZT 709,309,919. Accordingly, the total amount of income should be recognized as the difference between the previously recognized income for 2015 and the recognized expense correcting the previously recognized income, which amounts to 4,485,300.0 thousand tenge. The relevant declarations for 2015 were not requested by the courts, and there are no documents in the case file. Recognizing that it is correct to exclude remuneration expenses in the amount of 116,112.9 thousand from the CIT deductions. The courts assumed that the remuneration was paid under the SWAP agreement at a rate of 3% in the amount of 1,800,000 US dollars at a fixed exchange rate of 181.5 as of October 17, 2014 and October 18, 2015.

However, there are no supporting payment documents in the case file. The plaintiff's arguments about the accrual of remuneration expenses using the current market exchange rate on the payment date in accordance with IFRS and Article 103 of the Tax Code, as well as the actual allocation of expenses in the amount of KZT 116,112.9 thousand to another SWAP agreement have not been verified by the courts. Considering the dispute on the issue of deduction of expenses on provisions, the courts concluded that the plaintiff's actions to reflect these expenses in accounting on account 3580 "Retained net profit (uncovered) loss of previous years were unlawful.

At the same time, there are explanatory letters from the National Bank and the Agency for Regulation and Development of the Financial Market on this issue in the case file, which have not been legally assessed by the courts, and experts in the field of IFRS have not been invited to clarify the legality of attributing these expenses to accounting account 3580.

Regarding the exclusion of VAT amounts in the amount of 65,745.9 thousand tenge from the CIT deductions, which are not subject to offset, rejecting the claim, the courts concluded that the plaintiff had not submitted documents confirming VAT-exempt turnover and VAT amounts on goods, works, and services that are offset when applying the proportional method in the context of tax periods. However, the case file contains primary documents (payment orders for the payment of VAT for non-residents, registers of VAT invoices), which have not been legally assessed by the courts.

It follows from the explanations of the plaintiff's representatives at the cassation instance meeting that all the primary documentation is available and was submitted to the court of first instance, but was not attached to the case file. Regarding the illegality of the application of exemption from taxation of income from the provision of technical support services, the conclusions of the courts are not based on the case materials.

In particular, the courts did not attach to the case contracts for the supply and implementation of an automated banking system and contracts for the provision of technical support services for licensed software, relevant requests for services and acts of completed work, payment documents, which precludes the possibility of giving a legal assessment to the arguments of the plaintiff's cassation complaint.

Also, when considering the dispute, the courts did not verify the plaintiff's arguments that the technical support services were provided as a result of active activity, which excludes the possibility of attributing such expenses to royalties.

Taking into account the failure of the courts to ensure the completeness and objectivity of the consideration of the case, the fundamental principles of administrative proceedings established by Articles 7 and 16 of the CPC, the contested judicial acts in this case are subject to cancellation and referral for a new hearing to the court of appeal in a different composition of the court. 

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