Tax audit declared unlawful — protected CIT and VAT deductions of 36 million tenge

← All cases 01Tax audit declared unlawful — protected CIT and VAT deductions of 36 million tenge 02Error in VAT taxpayer account — recovered 60.7 million tenge of unlawfully withheld balance 03Unlawful VAT write-off during reorganisation — court reversed 48 million tenge of assessments and interest 04Customs authority's decision on non-execution of notice reversed by court 05Filed objections to the preliminary decision on an unscheduled audit — the tax authority withdrew the audit after our arguments 06Reversal of IIT on sale of inherited apartments — the tax authority incorrectly determined the holding period 07Supreme Court reversed CIT and VAT assessments — tax audit conducted before the court ruling entered into force 08CIT and VAT assessments of 296 million tenge overturned — tax authority breached audit deadlines 09Assessments of 1 billion tenge overturned — audit appointed without an order of the authorised body 10Unscheduled transfer pricing audit cancelled — КГД order issued without specific facts of breaches 11CIT assessments of 1.1 billion tenge overturned — audit appointed without specific grounds 12CIT and VAT assessments of 43 million tenge overturned — audit conducted for a period outside the instruction

Situation

A construction company was carrying out a major contract project — installation of heating, ventilation and air-conditioning systems at an industrial facility. To perform part of the works a subcontractor was engaged; a contract was signed in October 2021 for an amount exceeding 168 million tenge. The subcontractor supplied equipment and performed construction and installation works during 2021–2022. Following a thematic tax audit, the tax authority excluded expenses on transactions with this counterparty from deductions and assessed: CIT — 23,635,870 tenge; VAT — 12,992,332 tenge; and interest on both amounts. Total exposure exceeded 49,272,534 tenge. The basis: criminal proceedings were opened against the counterparty's manager for issuing invoices without actual performance of work. The tax authority also pointed to the counterparty's lack of buildings, transport and labour resources, deregistration from VAT, and the impossibility of conducting a counter-check.

Our actions

We identified the key breach: under sub-clause 4) of art. 264 of the Kazakhstan Tax Code (НК РК) and clause 5 of the Supreme Court's normative ruling, exclusion of deductions is permissible only when a sentence has entered into legal force — not on the fact that criminal proceedings have been opened. This follows directly from art. 19(1) of the Criminal Procedure Code (УПК РК) on the presumption of innocence. We assembled the complete set of primary documents: the contract with annexes, invoices, delivery notes, acts of acceptance of the facility into operation, acts of acceptance and transfer, payment orders, reconciliation acts, debt transfer agreement. Through the court we obtained an official response from the State Revenue Committee (КГД) confirming that in 2021–2022 the counterparty had actually imported equipment into Kazakhstan — fans, heat exchangers, humidifiers, temperature sensors. We engaged the counterparty's bankruptcy administrator — actual tax reporting for 2021–2022 was confirmed, as was the import of equipment from Russia (form 328.00), and the fact that the tax debt had already been included in the creditors' claims register — double taxation of the same operation is impermissible. Under art. 129 of the Administrative Procedure Code (АППК РК) the burden of proof lies on the tax authority — it failed to provide evidence that the transaction was fictitious. The counterparty's absence from its registered address was explained by the bankruptcy administrator taking over.

Result

The СМАС declared the notice on the audit results unlawful in the disputed part. CIT of 23,635,870 tenge and interest — overturned. VAT of 12,992,332 tenge and interest — overturned. State fee of 438,036 tenge returned to the client. The court stated: opening criminal proceedings against the counterparty's manager is not sufficient grounds to exclude expenses from deductions. Without a sentence that has entered into legal force or a ruling terminating the case on non-rehabilitating grounds, the tax authority has no right to recharacterise a real transaction as fictitious.

Project team

Alibayev Yerkebulan

Director

Khassanov Yerbolat

Managing partner

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Часто задаваемые вопросы

To confirm the reality of the transaction the following are required: the contract with annexes, invoices, delivery notes for supplied goods, acts of acceptance and transfer, acts of acceptance of the facility into operation, payment orders and reconciliation acts. The absence of individual documents (for example, transport waybills) is not unconditional grounds to disallow deductions if the reality of the transaction is confirmed by the totality of other evidence.

No. Under sub-clause 4) of art. 264 of the Kazakhstan Tax Code (НК РК) and clause 5 of the Supreme Court's normative ruling, exclusion of expenses from deductions on grounds of fictitiousness is permissible only when a court sentence has entered into legal force, or a ruling has been issued to terminate the pre-trial investigation on non-rehabilitating grounds. The mere fact of opening a criminal case is not such grounds.

The burden of proof in disputes challenging notices on audit results lies on the tax authority (art. 129 of the Administrative Procedure Code, АППК РК). The tax authority must prove the unlawfulness of the transaction — not the taxpayer prove its reality. Where a breach is not proven, the negative consequences are borne by the tax authority.

This is impermissible. Inclusion of the tax debt in the counterparty's creditors' claims register means that the state has already raised a claim on the same tax base against the counterparty itself. Re-collecting the same taxes from a bona fide purchaser on the same operation is double taxation of the same economic operation.

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