Recognition as illegal and cancellation of notification of the results of the tax audit

"S" LLP filed an application to the State State Revenue Agency for Almaty for the recognition of illegal and cancellation of the notification of the results of the tax audit dated March 18, 2016 No. 1534/1 by the decision of the Astana city Court dated August 19, 2016, the application was partially satisfied and it was decided to recognize illegal and cancel the notification regarding: - adjustments for losses on CPN for 2010 in the amount of KZT 1,936,195,302; - accrual of a commercial discovery bonus in the amount of KZT 190,586,843 and the corresponding penalty amount; - penalties in the amount of KZT 391,119,696.39 for the payment of historical expenses; - accrual of penalties for the period from December 23 to December 29, 2015. To oblige the State Revenue Agency "Department of State Revenue for the city of Almaty" to adjust losses taking into account the start of mining on August 27, 2010, to recalculate the penalty accrued on notification of payments for reimbursement of historical costs. By the resolution of the specialized judicial board dated November 3, 2016, the decision was changed. It was cancelled in the satisfied part with the issuance of a new decision on the refusal to satisfy the application. The dispute between the applicant and the Department arose on the issue of determining the moment of the beginning of mining, which, by virtue of the requirements of Articles 111 and 111-1 of the Tax Code, is the basis for switching to calculating the CPI in a generally established manner, reflecting income in total annual income and expenses according to their classification in accounting. In accordance with Article 111 of the Tax Code, expenses actually incurred by the subsurface user prior to the start of production after commercial discovery, for geological exploration, exploration, preparatory work for mining, including assessment, development, general administrative expenses, amounts of the subscription bonus and commercial discovery bonus paid, acquisition and (or) creation costs fixed assets and intangible assets and other expenses deductible under this Code form a separate group of depreciable assets. For the purposes of this Article and Article 111-1 of this Code, mining after commercial discovery means, under exploration contracts, as well as for combined exploration and production with unapproved mineral reserves, the beginning of mining after the reserves are approved by the authorized state body of the Republic of Kazakhstan.

Recognition as illegal and cancellation of notification of the results of the tax audit

According to the contested notification, the start of production after commercial discovery is determined from the date of the issuance of the protocol of the State Commission on Mineral Reserves of the Republic of Kazakhstan (hereinafter – GKZ) dated April 10, 2007, which adopted the increase in initial oil and gas reserves of the Vostochny Makat field within the additional productivity areas determined as a result of geological work carried out by the partnership. The Partnership also determined the time of the start of mining after commercial discovery from the date of the issuance of the GKZ protocol dated October 29, 2010 on the approval of oil and gas reserves at the Zhana Makat field. Partially satisfying the applicant's claims, the court of first instance concluded that the mineral reserves in the applicant's contract territory had been approved by the GKZ Protocol No. 959-10-U dated August 27, 2010. Therefore, the loss adjustment must be made from the specified date. The Board did not agree with the conclusions of the court of first instance. In accordance with paragraph 2 of Article 57 and paragraph 3 of Article 58 of the Law "On Subsoil and Subsoil Use" as amended on January 27, 1996, paragraphs 3 and 5 of the Rules for the inclusion of mineral reserves in the State Balance Sheet and their write-off from the State balance sheet, approved by the Decree of the Government of the Republic of Kazakhstan dated August 14, 2006.  No. 762, mineral reserves of explored deposits are subject to state expertise, and mining is possible only after conducting a state examination and giving an opinion, which is the basis for their registration with the state Register, issued in the form of a GKZ protocol. The Board found that the GKZ protocol dated February 18, 2005 approved the initial geological and recoverable oil and gas reserves of the Vostochny Makat field, with their inclusion in the State Balance Sheet in quantities and categories. The GKZ Protocol of April 10, 2007 increased the volume of oil and gas reserves of the field as a whole for the Vostochny Makat field (including the Zhana Makat site) for two contract territories PF "E" and LLP "S", previously approved by the GKZ protocol of February 18, 2005, as a result of exploration work carried out by the partnership. The GKZ protocol dated August 27, 2010 recalculated reserves for the entire Vostochny Makat field, due to the fact that 18 additional wells were drilled in the contract territory of PF "E", and 2 wells in the contract territory of LLP "C". At the same time, there is no indication in the statement part of the protocol on making changes to the State Balance of Reserves. The GKZ Protocol dated October 29, 2010 divided the approved hydrocarbon reserves of the Vostochny Makat field between two subsurface users - PF "E" and LLP "S". Consequently, the GKZ protocols of August 27, 2010 and October 29, 2010 cannot be used as a basis for determining the start date of production after commercial discovery.

The case materials confirmed the facts of the partnership's production of oil reserves approved for PF JSC "E" since 2007, as well as oil production in 2008 and 2009 in volumes identical after the start of the commercial operation phase (in 2012-2013). In this regard, the board recognized as legitimate the notification of the determination of the moment of commencement of production after commercial discovery - from the date of the issuance of the GKZ protocol dated April 10, 2007 No. 585-07-P. 2) JSC "SNPS-A" applied to the Russian State Institution "Department of State Revenue for Aktobe region" for recognition as illegal and cancellation of the notification dated January 28, 2016 on the results of the tax audit. By the decision of the Astana city Court dated August 1, 2016, the investor's application was partially satisfied. The notification regarding the accrual of a bonus from oil sector organizations (hereinafter referred to as BKO) in the amount of 1,657,775 tenge and penalties in the amount of 378,450 tenge was considered illegal. By the resolution of the specialized judicial board dated November 2, 2016, the decision was changed. In the satisfied part, it was canceled with the issuance of a new decision to reject the application. By canceling the notification, the court of first instance took as a basis the explanations of an independent expert from GKZ about the illegality of accruing the commercial discovery bonus, since standard work on geophysical research, laboratory tests of oil and gas samples from an already discovered field do not relate to exploration work. The court's decision stated that the tax authority did not prove the increase in the reserves of the deposit as a result of additional exploration. The board considered the conclusions of the court of first instance erroneous, contradicting the factual circumstances of the case. The minutes of the meeting of the GKZ dated September 25, 2012 additionally approved the increase in dissolved gas in the amount of 30 million cubic meters. m. The Board, guided by subparagraph 1) part 1 of Article 317, Articles 318 and 319 of the Tax Code, subparagraph 54) of Article 1, part 1 of Article 83, Article 121 of the Law "On Subsoil and Subsoil Use", concluded that the approval of the GKZ to increase the initially established recoverable gas reserves by 30 million cubic meters. together with the information about the Company's geophysical research, which corresponds to the concept of additional exploration, they are the basis for additional BKO charges for the physical volume of the increase in reserves.

The decrease in reserves of another type of mineral, recoverable oil, established by paragraph 2.11 of the 2012 GKZ Protocol does not negate the fact of an increase in gas reserves compared to the approved GKZ protocol of February 20, 2003. Therefore, the accrual by the authorized body of the BKO is legitimate. Conclusions: changes and cancellations were made by the court of first instance in various categories of cases, which have difficulty assessing both the circumstances relevant to the case and the evidence presented by the parties. There were no gross violations of the law. Summarizing individual categories of cases is not possible due to the insufficient number of cases. In this regard, it is proposed to conduct an analysis of judicial practice on the consideration of cases on the procedure for taxation of subsurface users, in the field of transfer pricing and on the fulfillment of contractual obligations jointly with the judicial board for civil cases. 

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