Pre-Trial (Administrative) Appeal Procedure in Tax Disputes

At the beginning of the year, there was a practice whereby the Specialized Interdistrict Administrative Courts (SIACs) returned statements of claim due to non-compliance with the mandatory pre-trial appeal procedure.

In general, the Administrative Procedure and Process Code (APPC) is based on the principle that all disputes should first be reviewed by higher-level (authorized) administrative bodies.

The objective is to ensure that administrative authorities themselves improve and refine their law-enforcement practices, while central government bodies at the national level remain informed about existing problems and the actual state of public service delivery and supervisory activities in the regions. Accordingly, Article 91 of the APPC provides that an administrative act or action must initially be appealed either to the authority that issued it or to a higher administrative body.

There was some misunderstanding among claimants as to why a complaint had to be submitted to the authority that had issued the administrative act. A potential conflict of interest was presumed. Nevertheless, this procedure was intended to enable the administrative authority to promptly correct any errors, should they exist.

At the same time, tax relations are characterized by the fact that many issues are comprehensively regulated by the Code of the Republic of Kazakhstan “On Taxes and Other Mandatory Payments to the Budget” (hereinafter, the “Tax Code”), including matters relating to pre-trial appeals.

Accordingly, pursuant to Article 91(5) of the APPC, where sector-specific legislation contains different provisions, the relevant provisions of the Tax Code shall apply.

During the year under review, however, this issue continued to be tested in practice. From January to July 2022, claims were still being returned by the courts on the grounds described above.

Based on Articles 96 and 178 of the Tax Code, a taxpayer has the right to choose the procedure for resolving a dispute: either through a higher tax authority (the Department of State Revenues, the State Revenue Committee, or the Appeals Commission under the Ministry of Finance) or directly before the SIAC.

At present, judicial practice has become uniform, and a common position has been established recognizing the claimant’s right to choose between administrative and judicial remedies. The time limits for challenging acts and actions of tax authorities before the SIAC are governed by Article 136 of the APPC.

Pursuant to Article 19(2)(4) of the Tax Code, tax authorities are obliged, within the scope of their competence, to provide explanations and comments regarding the creation, fulfillment, and termination of tax obligations. Such explanations, comments, and methodological recommendations, including those issued by the authorized body, do not constitute normative legal acts. Their evidentiary value is assessed by the court in light of their compliance with tax legislation.

Tax policy (a set of measures relating to the introduction of new taxes and budget payments, the abolition of existing taxes and payments, changes to tax rates, taxable objects, objects related to taxation, and the tax base) is implemented by the authorized state body responsible for tax policy.

If an international treaty ratified by the Republic of Kazakhstan establishes rules different from those contained in the Tax Code, the provisions of that treaty shall prevail (Article 2(5) of the Tax Code). Pursuant to Article 4(3) of the Constitution of the Republic of Kazakhstan, the procedure and conditions for the application of international treaties to which Kazakhstan is a party are determined by the legislation of the Republic.

Where 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 domestic legislation (for example, where a tax exemption exists), domestic legislation shall apply.

In interpreting double taxation avoidance conventions, the general rules of interpretation established by international treaties and the legislation of the Republic of Kazakhstan apply, provided that such rules are consistent with the provisions of the Vienna Convention on the Law of Treaties, to which Kazakhstan acceded pursuant to a Resolution of the Supreme Council.

The issue of conducting tax control measures following the satisfaction of a claim for the liquidation of a legal entity (or the invalidation of its registration or re-registration) falls within the competence of the tax authorities. The rights and legitimate interests of counterparties may be affected only after tax authorities have taken measures provided for by tax legislation. Such counterparties are entitled to protect their rights and legitimate interests by challenging decisions, actions, or omissions of the tax authorities.

13. Courts should be advised that, pursuant to Article 49(2)(3) of the Civil Code, they may order the liquidation of a legal entity where the entity has been absent from its registered location or actual address, and where its founders (participants) and officers, without whom the legal entity cannot function, have also been absent for a period of one year.

The absence of the above circumstances in their entirety constitutes grounds for dismissing the claimant’s demand, as tax authorities have other means of responding to such situations.

The state re-registration of a legal entity constitutes an administrative act of the registration authority. Therefore, claims seeking recognition of such re-registration as invalid are subject to consideration under administrative court proceedings.

Courts should also take into account that, as of 1 January 2020, participants in tax relations are not entitled to apply the repealed five-year limitation period of the Tax Code when performing actions in the current tax period relating to previous tax periods. Under the current version of the Tax Code, the limitation period is three years, unless otherwise provided by the Tax Code.

Tax authorities may not assert claims against taxpayers and/or tax agents after the expiration of the limitation period. At the same time, the Tax Code does not restrict the accrual of penalties by limitation periods.

The overall limitation period, including periods of suspension during a tax audit on transfer pricing matters, may not exceed seven years.

When suspending an audit on transfer pricing matters, the tax authority must comply with Article 8 of the Law of the Republic of Kazakhstan No. 67-IV dated 5 July 2008 “On Transfer Pricing.” The limitation period may be suspended if a request is sent that meets the following requirements:

• it is addressed to the competent authority (or organization) of a foreign state;
• it is individualized and relates to the taxpayer being audited;
• it concerns matters falling within the scope of the audit.

Courts should take into account that if a request does not meet the above requirements, it shall not be deemed to have been properly sent.

With respect to tax claims for the payment of taxes and other mandatory budget payments assessed and charged by state revenue authorities and presented to taxpayers within the applicable limitation period, the expiration of that period does not terminate the tax obligation and does not release the taxpayer from its fulfillment.

It is necessary to distinguish between the tax authority’s right to assess or revise assessed taxes and other mandatory payments to the budget and the taxpayer’s right to claim an offset and/or refund of taxes, payments, and penalties. When exercising the right to a tax refund, the tax authority does not assess or revise the tax amount; rather, it confirms or refuses to confirm the taxpayer’s entitlement to the refund.

Accordingly, when determining the limitation period applicable to claims for the offset and/or refund of taxes, budget payments, and penalties, consideration should be given to the date on which the tax authority received (registered) the taxpayer’s application under Article 101(4)(1) of the Tax Code, or a claim for the refund of excess VAT under Article 431(1)(2) of the Tax Code, rather than the date of the decision issued following a tax audit, including a notice of tax audit results.

If the claimant has paid the state duty using an incorrect budget classification code or in an insufficient amount, the judge shall, pursuant to Article 138(4) of the Administrative Procedure and Process Code of the Republic of Kazakhstan, indicate these deficiencies and establish a period for their correction.

The submission by a taxpayer, within the period established by the Tax Code, of explanations regarding identified violations not specified in Article 96(3) of the Tax Code, and meeting the requirements of Article 96(2)(2), shall be regarded as compliance with the notice to remedy violations identified through desk audit procedures and shall not require a substantive review of the validity of those violations.

23.

Pursuant to Article 135(2) of the Administrative Procedure and Process Code (APPC) (action for recognition), a claimant may also seek recognition as unlawful of a burdensome administrative act that is no longer legally effective. Therefore, claims challenging a fulfilled notice issued as a result of a desk audit are subject to judicial review.

A claim challenging a notice issued as a result of a desk audit shall be considered under administrative court proceedings.

When considering claims challenging notices requiring the elimination of violations provided for by Article 96(3)(2) and (3) of the Tax Code and identified by tax authorities as a result of a desk audit, the court must assess and examine the evidence submitted by the taxpayer confirming the actual receipt of goods, works, or services from a legal entity and/or an individual entrepreneur whose registration (re-registration) has been declared invalid by a final court decision pursuant to Article 96(5) of the Tax Code.

In all other cases, it is sufficient for the court to determine whether the tax authority had statutory grounds for issuing the notice, without examining the substantive merits of its claims. Otherwise, the outcome of future tax audits, including unscheduled thematic audits concerning non-compliance with a desk audit notice, would be prejudged.

The tax authority is entitled to issue a decision declaring a notice unfulfilled, including in cases where:

• the taxpayer is not required to provide explanations under Article 96(3) of the Tax Code and the violations have not been remedied;
• the taxpayer has missed the deadline established by the Tax Code for submitting explanations or filing a complaint against the desk audit notice, and the violations have not been remedied;
• a final court decision has denied the taxpayer’s claim seeking recognition as unlawful of a notice issued pursuant to Article 96(3) of the Tax Code, and the violations have not been remedied.

A complaint (or claim) against a decision declaring a notice unfulfilled may be filed by the taxpayer within ten working days from the date of its delivery (receipt) with a higher tax authority, the authorized body, and/or the court.

The right to choose the authority before which the complaint (or claim) is filed belongs to the taxpayer.

Furthermore, it should be borne in mind that, pursuant to Article 117(3) of the Tax Code, penalties are not accrued on arrears relating to property tax, land tax, and vehicle tax payable by individuals when such arrears arise as a result of the tax authorities’ reassessment of tax amounts after the statutory tax payment deadline for the relevant tax period.

28.

At all stages of challenging actions and acts of tax authorities, courts should consider the possibility of reconciliation between the parties and the resolution of the dispute by the tax authority itself (for example, correcting technical errors in information systems, assigning the status “fulfilled” to desk audit notices, etc.) where the tax authority possesses administrative discretion.

Pursuant to Article 98(6) of the APPC, a complaint may not result in a less favorable outcome for the complainant (reformatio in peius is prohibited). Since a thematic audit under Article 186 of the Tax Code may be initiated during the consideration of a taxpayer’s (or tax agent’s) complaint, the authorized body may not, as a result of such audit, assess additional taxes, other mandatory budget payments, or penalties that were not included in the challenged notice.

A decision of a higher authority (authorized body) adopted following consideration of a complaint against a tax audit results notice cannot itself be challenged in court, as it does not produce independent legal consequences. If the notice of tax audit results is upheld without amendment, the taxpayer may challenge the notice itself. If the notice is partially revoked, the taxpayer may challenge the notice reflecting the results of the complaint review.

30.

Pursuant to Article 148 of the Tax Code, an audit order serves as the legal basis for conducting a tax audit.

As an act initiating an audit, such an order may be challenged in court because it is issued in the exercise of the tax authority’s public powers and produces legal consequences for the taxpayer (or tax agent).

Unscheduled audits may not be initiated or conducted in the absence of the grounds specified in Article 145(3) of the Tax Code and Article 144(3) of the Entrepreneurial Code. Such audits must be declared invalid, and the orders initiating them must be recognized as unlawful and revoked pursuant to Article 156(1) and Article 156(2)(1) of the Entrepreneurial Code, as they were issued without lawful grounds for conducting the audit.

31.

According to Article 159 of the Tax Code, the decision resulting from a tax audit is the notice of tax audit results issued by the tax authority.

Accordingly, where a taxpayer (or tax agent) disagrees with assessed taxes and other mandatory budget payments, obligations relating to the calculation, withholding, and remittance of mandatory pension contributions, mandatory occupational pension contributions, social contributions and/or mandatory social health insurance contributions, penalties, reductions of losses, refusal to confirm VAT refunds, and/or corporate (individual) income tax withheld at source from non-residents’ income, only the notice itself is subject to judicial review.

The court reviews the legality of the disputed assessments taking into account the conclusions set out in the tax audit report.

A tax audit report may be challenged separately where the taxpayer disagrees with conclusions that do not produce the consequences described above but nevertheless affect the taxpayer’s rights and obligations, including in future tax periods. Challenges to a tax audit report shall be brought in accordance with the procedure established by the legislation of the Republic of Kazakhstan for challenging actions of tax officials.

Compliance with a tax audit results notice does not deprive the taxpayer of the right to challenge that notice within the procedure and time limits established by the Tax Code.

The content of a tax audit report must comply with the requirements of Article 158(1) of the Tax Code. Conclusions of the tax authority regarding violations of tax and other legislation of the Republic of Kazakhstan committed by a taxpayer (or tax agent) must include references to the relevant legal provisions, substantiation of the authority’s arguments, and disclosure of the circumstances evidencing such violations.

Pursuant to Article 129(3) of the APPC, when considering a claim challenging tax audit results, the tax authority may rely only on those findings and justifications evidencing violations of tax or other legislation by the taxpayer that are reflected in the tax audit report.

32.

Under the principle of certainty of taxation established by Article 6 of the Tax Code, taxes and budget payments in the Republic of Kazakhstan must be clearly defined.

Certainty of taxation means that tax legislation must establish all grounds and procedures for the creation, fulfillment, and termination of tax obligations, as well as the duties of tax agents to calculate, withhold, and remit taxes.

The burden of proving the circumstances that served as the basis for adopting the challenged act rests with the tax authority.

Taking into account Article 128 of the APPC, the tax authority bears the burden of presenting evidence to the court demonstrating that the taxpayer unlawfully obtained a tax benefit.

35.

When a taxpayer challenges a tax audit results notice or a tax audit report on the grounds that the tax authority violated the procedures and time limits for conducting tax audits established by Chapter 18, Paragraph 2 of the Tax Code, the court must assess the nature of the violations and their impact on the legality and validity of the audit results.

In particular, audit results must be declared unlawful if the audit was conducted without an audit order, which under Article 148 of the Tax Code constitutes the legal basis for conducting a tax audit, or on the basis of an order that was subsequently declared unlawful.

The same consequences apply where, in violation of Article 146(1) of the Entrepreneurial Code, an order authorizing a tax audit (except for a cross-audit) was not registered with the authorized body responsible for legal statistics and special records.

Abbreviations:

APPC – Administrative Procedural and Processual 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 – Office of State Revenues

CC – Criminal Code

CPCr – Criminal Procedure Code

CIT – Corporate Income Tax

VAT – Value Added Tax

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