Settlement of Tax Disputes

RusEnergyLaw JOURNAL • 2'2003/Table of Contents • Article

A tax audit frequently causes a lot of questions and indignation as to the inspection rules and results. In this connection we are glad to bring to your notice the information, which may prove useful for you in the nearest future.

1. What should you know about the tax audit

According to the legislation of the Republic of Kazakhstan the notion "tax audit" is an audit carried out by tax authorities to check, whether the tax legislation of the Republic of Kazakhstan is complied with or not. The audit may be carried out exclusively by the taxation authorities, such as:

1) Tax Committee of the RK Finance Ministry;

2) Oblast Tax Committees;

3) Regional Tax Committees;

4) Municipal Tax Committees;

5) District Tax Committees in cities.

Other public authorities of the Republic of Kazakhstan are not entitled to conduct audits as to whether the tax legislation is complied with or not.

Documented audits are the audit type taxpayers more frequently encounter.

To protect entrepreneurs from the permanent interference on the part of tax authorities the legislation of the Republic of Kazakhstan establishes an audits frequency. Overall audits are conducted not often than once a year; subject ones-not often than once in six months for the same tax type and other compulsory payment due to the budget. These restrictions are not applied to the following cases:

1. When the documented audits are conducted in connection with the reorganization and liquidation of legal person;

2. When the documented audits are conducted in connection with the expiry of the Subsoil Usage Contract validity;

3. When counter-audits are conducted;

4. When the subject audits are conducted based on the taxpayer’s statement as to whether amounts of the value added tax claimed for recovery is reliable or not;

5. When additional audits are conducted based on the decision of the authority considering the taxpayer’s complaint about the Tax Audit Report Notification;

6. When extraordinary audits are conducted pursuant to the authorized public authority head’s order in respect of the particular taxpayer.

If none of the listed cases is applicable to your Company, the audits are to be conducted in accordance with the frequency established.

2. Commencement of the tax audit

Any audit carried out by the public authorities starts at the time, when an order is delivered. Auditors upon arrival at your Company to conduct the tax audit are bound to acquaint you with the Audit Assignment Order, which has to include the following:

1) Date and number of the Order Registration at the tax authority;

2) Name of the tax authority, which issued the Order;

3) Full name of the taxpayer;

4) Taxpayer’s Registration Number;

5) Audit type;

6) Positions and full name of the auditors and other persons attracted to conduct the audit;

7) Audit period;

8) Tax period subject to the audit, when the documented audits are conducted.

Apart from the details listed in the Order, the stamp of the local prosecutor office body confirming the audit registration is to be affixed thereupon.

Even if one of the listed details is not available, you are entitled not to allow the auditors to conduct the audit, by reason of improper execution of the Audit Assignment Order.

If the Order is duly executed and a service certificate has been presented to you, you are bound to allow the auditors to enter a territory or premise to conduct the audit.

3. Tax audit

The tax audit period specified in the order should not exceed thirty business days after delivery of the order. However, the legislation provides for exceptions to this rule:

1) Audit period, when transfer prices are applied to, may be up to 180 days;

2) Audit period, when the legal person having a structural unit is audited, may be up to 60 days;

3) When the matters of special complexity are audited, the audit period may be extended by the superior tax authority for the period between 50 and 80 days, depending on whether the taxpayer has the structural unit or not.

Extension of the tax audit periods should be without fail documented by execution, registration and delivery of the additional order specifying the period for that the tax audit has been extended.

The tax audit period may be suspended for the following periods of time:

1) Between the times, when the tax authority request to submit documents has been delivered to the taxpayer and the documents so requested have been submitted by the taxpayer;

2) Between the times, when the requests have been sent by the auditors and the data and documents concerning such requests have been received.

During the audit you are bound to ensure, that the auditor has an access to all the documents relating to the audit subject and allow him/her to enter the sites connected with taxation for examination. You should take into account, that the tax audit should not suspend the taxpayer’s activity or adversely affect the business activity results. If the auditor’s actions result in negative consequences for our Company, you should immediately apply to a lawyer and analyze the auditors’ activities lawfulness.

The auditors are entitled to seize the documents, constituting an offense. Seizure of the documents is carried out by officials with two witnesses being present. Seizure of the documents should be documented as a Minutes of Seizure, a copy of which is issued to the taxpayer. The Minutes of the documents and things seizure (Administrative Offense Record) should contain information of the seized documents type and details. The Minutes is signed by the auditor, who has executed it, the taxpayer, from whom the appropriate documents and things have been seized and witnesses. In case of refusal to sign the Minutes, there should be an appropriate record therein. After the case is considered in accordance with the decision adopted, the seized documents are returned or confiscated.

4. Completion of the tax audit

Upon completion of the tax audit the auditor executes the Tax Audit Report, which should without fail specify the following:

1) Place of the tax audit and date of the Report;

2) Audit type;

3) Taxpayer’s full name;

4) Taxpayer’s location, banking details and registration numbers;

5) Full name of the taxpayer’s head and officials responsible for tax accounts and accounting and tax payments;

6) Data of the previous audit;

7) Audited period and general data of the documents submitted by the taxpayer;

8) Detailed description of the tax offense with a reference to the appropriate norm of the tax legislation being made;

9) Tax audit results.

The audit is considered completed upon delivery of the Tax Audit Report to the taxpayer.

Further the tax authorities based on the results reflected in the Tax Audit Report issue a Notification of the charged tax amounts and other compulsory payments to the budget, fines and penalties and send it to the taxpayer. If in the course of audit there appeared no violations of the tax legislation, the Notification on the audit results is not issued.

The Notification is the final decision of the tax authority based on the results of tax audit. The Notification must be executed in writing and contain the following details and information:

1) Notification and tax audit report registration date and number;

2) Taxpayer’s full name;

3) Taxpayer’s registration number;

4) Amount of charged taxes and other compulsory payments to budget, penalties and fines;

5) Essential elements of appropriate taxes and other compulsory payments to budget, penalties and fines;

6) Period and time of appeal.

The Notification must be fulfilled or appealed within 10 workdays as from the receipt. By results of the audit the following issues shall be solved as well:

1. On imposition of administrative discipline upon a taxpayer under the grounds provided for by Administrative Offence Code;

2. On transfer of tax audit materials to financial police authorities for a decision to be made on institution of proceedings.

The administrative discipline shall be imposed by way of a fine in case of a taxpayer failing to pay amounts of taxes and other compulsory payments to budget. In case of finding of violations the tax authority shall prepare a report and pass a Resolution on imposition of administrative discipline. These actions shall be performed if offence was committed after January 30, 2001. Tax authorities shall send tax audit materials to financial police authorities if the amount of unpaid taxes is 2000 monthly design rates or above.

We draw your attention to the matter that when signing each document submitted to you during audit period and after its completion it is necessary to indicate full name and title of the signatory.

5. Appeal of tax audit results

Tax Code of the Republic of Kazakhstan entitles a taxpayer to appeal tax audit results in accordance with the established procedure.

Upon completion of tax audit the tax authorities shall present a Notification of the charged amount of taxes to a taxpayer. This document may be fully or partially contested with a higher tax authority or court.

For the avoidance of unreasonable legal costs we recommend to primarily address your complaint to tax authorities.

Appeal of tax audit results with tax authorities

As said above, in case of finding of facts of failure to pay taxes the tax authorities shall serve to a taxpayer a Notification of the charged amount of taxes and other compulsory payments to budget (hereinafter "Notification").

Period for appeal to a higher tax authority is 10 (ten) workdays. Failure to comply with this requirement shall result in refuse to consider the appeal.

The following must be annexed to an appeal:

3. Audit Assignment Order;

4. Tax Audit Report;

5. Notification;

6. Documents confirming arguments set forth in the appeal;

7. A document confirming powers of a signatory to the appeal.

When addressing an appeal to a higher tax authority a copy of appeal shall obligatorily be sent to the tax authority, which conducted the audit. It is necessary for the following:

1. Filing of an appeal for Notification shall suspend its execution. That is, the lower tax authority shall not have the right to arrest your bank accounts and recover the charged amount of taxes until a decision is made on the appeal;

2. Appeal by a taxpayer of tax audit results with higher tax authorities shall suspend transfer of materials to financial police authorities until an appropriate decision is made by a higher tax authority.

As you can see, by sending an appeal to a higher tax authority and a copy to the auditing tax authority you will make yourself secure against arrest of bank accounts and intervention by financial police authorities.

A higher tax authority is obliged to consider your appeal within 30 workdays. For especially complicated tax issues the period for appeal consideration may be extended. Tax authorities may demand to submit additional documents or call for explanations on arising issues.

After considering an appeal a tax authority shall make one of the following decisions:

1. to leave the appealed Notification unchanged, and appeal unsatisfied;

2. to revoke the appealed Notification in full or in part;

3. to send an order to a lower tax committee to conduct additional audit on differences.

In case your appeal is left unsatisfied you will retain a right to address your appeal to the Tax Committee of the Ministry of Finance of the Republic of Kazakhstan. We request you to note the following. When tax audit is conducted by the Tax Committee of the Ministry of Finance appeal shall be filed with the same tax committee, and its decision on appeal may be further appealed only with judicial authorities.

Term for addressing an appeal to the Tax Committee of the Ministry of Finance shall be 5 (five) workdays. Delay in appealing within this period shall result in refuse to consider an appeal.

The following must be annexed to an appeal:

1. Audit Assignment Order;

2. Tax Audit Report;

3. Notification;

4. A copy of appeal addressed to a lower tax committee;

5. Response to appeal from lower tax committee;

6. Documents confirming arguments set forth in the appeal;

7. A document confirming powers of a signatory to the appeal.

The Tax Committee of the Ministry of Finance shall consider an appeal within 15 (fifteen) workdays and shall make one of the following decisions:

1. to leave the appealed Notification unchanged, and the appeal unsatisfied;"

4. to revoke the appealed Notification in full or in part;

5. to send an order to a lower tax committee to conduct additional audit on differences.

In case your appeal is unsatisfied you may refer to judicial authorities requesting to annul the Notification and decisions of tax authorities in full or in part.

Judicial consideration of taxpayer’s appeal

Legislation of the Republic of Kazakhstan establishes a five-year term for appeal of tax audit results judicially. However, we recommend to refer to the court prior to expiry of ten working days as from making a decision on appeal by a tax authority. Otherwise tax authorities may arrest your accounts and recover the charged amount of taxes and other compulsory payments.

To initiate a judicial procedure by location of auditing tax authority a statement of claim is filed.

The following must be annexed to a statement of claim:

1. Copy of statement of claim for appellee (tax authority);

2. Audit Assignment Order;

3. Tax Audit Report;

4. Notification;

5. Copy of appeal addressed to a lower tax committee;

6. Response to appeal from lower tax committee;

7. Documents confirming arguments set forth in the appeal;

8. A document confirming powers of a signatory to the appeal;

9. A document confirming the payment of state duty at the rate of 1 (one) per cent of the appealed amount. The appealed amount shall also include fines (imposed for a period until January 30, 2001) and penalties.

The court shall consider taxpayer’s statement of claim within two months as from the receipt of statement.

By results of case consideration the Court shall pass one of the following judgments:

1. to leave the appealed Notification (decision of tax authority on appeal) unchanged, and statement of claim unsatisfied;

2. to declare the appealed Notification (decision of tax authority on appeal) illegal in full or in part.

This judgment may be appealed by a taxpayer, tax authority or attorney by appeal proceedings.

We request you to note that in accordance with internal deeds tax authorities are obliged to appeal each decision made not in favor of them to the last decree of jurisdiction. Due to this judicial consideration of tax disputes takes a lot of time and requires significant efforts from a taxpayer.

Appeal of a resolution imposing administrative discipline

We already mentioned administrative discipline imposed in case of improper fulfillment of tax obligations.

Before adoption of the new Administrative Offence Code (Administrative Code) on January 30, 2003 fines for untimely and incomplete discharge of taxes and other compulsory payments to budget were charged under a Notification. After giving effect to Administrative Code fines started to be charged under a separate Resolution.

This resolution may be appealed with a higher tax authority or court.

Term for appeal of the Resolution is 10 calendar days. Please note that calendar days are used for dating of period.

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