CIT assessments of 1.1 billion tenge overturned — audit appointed without specific grounds

← 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

An unscheduled comprehensive tax audit was appointed against the client on all types of taxes for four years. Following the audit a notice was issued with assessments: CIT of 942,590,284 tenge and interest of 202,104,915 tenge — totalling 1,144,695,199 tenge — as well as a loss reduction of 2.5 billion tenge. The basis for the assessments: the tax authority excluded expenses on bank interest on loans raised to acquire an interest in a subsidiary. The tax authority's position — since dividends are excluded from taxable income, expenses on financing such an investment cannot reduce taxable income. A complaint to the Appeals Commission of the Ministry of Finance resulted in only partial reversal — the notice was upheld in the remaining part.

Our actions

We identified two procedural breaches, each an independent ground for reversing all the audit results. First: the State Revenue Committee's order appointing the audit was issued solely on the basis of a request from the lower Department — without specifying any concrete facts of breaches of tax legislation by the client. Under art. 144(4) of the Entrepreneurial Code of Kazakhstan, an unscheduled audit is appointed only on specific facts and circumstances. The Entrepreneurial Code does not provide for the appointment of an audit on the request of a lower body. The position is confirmed by a ruling of the Supreme Court of Kazakhstan. Second: extension of the audit by 105 working days by the higher body was formalised as a reply letter to the Department's request — whereas under sub-clause 2) of art. 146(2) of the НК РК an extension by a higher body must be formalised as a corresponding decision, not as a letter. This position is confirmed by a ruling of the Supreme Court of Kazakhstan.

Result

The СМАС of the Pavlodar region granted the claim in full. The tax authority's notice was declared unlawful and reversed in the part of the CIT assessment of 942,590,284 tenge and interest of 202,104,915 tenge. The state fee was returned to the client in full. The court stated: the procedural breaches in the appointment and extension of the audit cause unconditional reversal of its results — without entering into discussion of the lawfulness of the assessments on the merits.

Project team

Alibayev Yerkebulan

Director

Khassanov Yerbolat

Managing partner

Similar situation?

Tell us about the matter — we'll analyse your situation.

Часто задаваемые вопросы

The question is disputed. The tax authorities' position: since dividends are excluded from taxable income (art. 241 of the НК РК), expenses on financing such an investment are not connected with receiving taxable income and are not deductible. The taxpayer's position: acquiring an interest is an activity aimed at receiving income in a broad sense, and art. 242(1) of the НК РК does not require a direct connection between expenses and a particular type of income. In this case the court reversed the notice on procedural grounds without assessing the merits.

An extension of an audit by a higher body for up to 180 working days must be formalised as a corresponding decision of the higher body — not as a reply letter to a lower body's request. Documenting consent to an extension as a letter rather than a decision breaches sub-clause 2) of art. 146(2) of the НК РК and renders the supplementary order extending the audit unlawful.

No. Partial reversal of the notice by the Appeals Commission means issuance of a new notice in the remaining part. That new notice may be independently challenged in court within the prescribed deadlines.

All cases