The procedure for determining taxable income
The norms of the Law on Transfer Pricing do not provide for the procedure for determining taxable income, but rather regulate the mechanism for adjusting applicable prices in international business transactions. In this regard, when exercising state control over the use of transfer prices, the provisions of the subsoil use contract are not subject to application. This conclusion was reached by the specialized judicial board of the Supreme Court when considering the case at the request of the Company "M". According to the Company's statement, when calculating adjusted income, the Department took into account all revenue from oil sales without taking into account the provisions of the Dong's DRP, the Joint Venture Agreement dated August 9, 2001, and the Operational Agreement on Marketing, Transportation, and Sales of Oil and Gas dated January 1, 2017. The Company's total income from oil sales is 87.2% of the total volume of oil sold, of which: 52.32% belongs to the Company, 17.44% belongs to the company "P" and 17.44% belongs to the company "O". 12.8% of the total volume of oil sold belongs to the Kazakh side. Accordingly, the Company's taxable income includes only the income received from the sale of its share of oil. The sale of the share of oil from the Kazakh side is carried out on the basis of letters of instructions from JSC "K" and the Ministry of Oil and Gas of the Republic of Kazakhstan, and ownership of this share does not transfer, all proceeds from the sale of shares are transferred to the income of the Republic of Kazakhstan.
In satisfying the Company's application in this part, the court of first instance proceeded from the fact that the applicant had not acquired ownership of the shares of the Kazakh side and partners, and was not required to pay taxes on the proceeds from the sale of these shares. Accordingly, the amounts received from the sale of these shares should not be included in the Company's taxable income. The Court of Appeal found these conclusions to be contrary to the requirements of the law and inconsistent with the circumstances of the case. By virtue of Article 392 of the Civil Code, when interpreting the terms of a contract, the court takes into account the literal meaning of the words and expressions contained therein. The literal meaning of a contract clause, in case of ambiguity, is established by comparing it with other terms and the meaning of the contract as a whole. In accordance with Section 9.1 of the DRP of the Donga as amended by the 2015 Agreement, the payment of the share due to the Kazakh side is made by the Contractor (Company) in cash to the appropriate budget classification code. By virtue of paragraph 10.5.2 of the Dunga Tax Code as amended in the 2015 Agreement, the Contractor agrees that section 10.5.1 (regarding the provision of tax forms, tax audits, payment of taxes, fines and penalties) also applies to the share of the Kazakh side calculated in accordance with Article IX of the Tax Code. Such a share of the Kazakh side is not a tax, but represents an exclusively contractual obligation. In accordance with the provisions of article IX of the Dunga DRP, the Contractor has the exclusive right to receive at its disposal in each quarter such an amount of oil and gas net production for each calendar year. The Kazakh side has the right to receive its share as a percentage of the remaining net production.
According to paragraph 1.24, "Net production" means the amount of oil and gas produced in the subcontracted territory under the DRP. By virtue of Article XI of the DRP of the Donga, the Contractor maintains financial records related to oil and gas operations under the DRP. Thus, when oil is sold, the entire amount earned is attributed to the Company's income. And only subsequently does the Contractor have a contractual obligation to pay a percentage share to the Kazakh side. Section 12.4 of the DRP of Dunga, as amended by the Agreement dated May 24, 2002, stipulates that the partners have the right to establish their own internal procedure for the distribution of income and expenses, regardless of the share of participation. That is, all costs incurred in connection with any activity will be distributed in accordance with internal agreements. In accordance with paragraph 6 of Article 10 of the Law, on the basis of adjustments to taxable items and (or) tax-related items, taxes and other mandatory payments to the budget are calculated in such a way as if the income or expenses from these transactions and other taxable items for the reporting period were determined based on the market price with taking into account the price range, with the application of fines and penalties in accordance with the legislation of the Republic of Kazakhstan. The provisions of the Law do not provide for the procedure for determining taxable income, but rather regulate the mechanism for adjusting applicable prices in international business transactions.
In this regard, when exercising state control over the application of transfer prices, the provisions of the subsurface use contract are not subject to application. A participant in international oil export transactions is a Contractor who submits reports on the export of goods (works and services) to the authorized body. Under such circumstances, the Department legitimately accounted for the entire amount from oil sales as the Company's total annual income and taxable income. In this regard, the court of appeal overturned the decision of the court of first instance in this part with a new decision rejecting the Company's application.
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