Tax Audits: Practical Considerations on Support and Appeals Against the Tax Audits of Subsoil Users

The performance of operations under subsoil use contracts is currently strictly supervised by the State, in particular the issues concerning the completeness and timeliness of the performance by mining companies of their tax obligations.

As to subsoil users, we can state that in this respect, periodic tax audits are essentially unavoidable. This fact should encourage subsoil users to ensure that both internal and external controls for the accuracy of separate tax accounting for taxation objects and(or) tax-related objects are systematised and that there is proper accounting of all income and expenses, divided into direct, indirect and general classes in light of the specificity of the company.

Given that, upon the results of such audits, the tax authorities often charge additional amounts of taxes, penalties and fines and that the audit files are transferred to the financial police authorities, subsoil users need to know the nuances of all of the tax, administrative and civil procedural laws.    

In this regard, please find below the main recommendations that will facilitate the sufficient minimisation of the risks of adverse consequences, which are possible according to the results of tax audits.

Recommendations for the preparation to a tax audit:

1. The documents submitted for the tax audit should be internally checked in advance

The documents submitted to the tax audit must be prepared on a systematic basis. For these purposes, a company may be subject to a pre-audit by independent auditing companies.

As you are aware, a taxpayer has the right to amend the submitted tax reports within 5 years. In this regard, the differences between the calculated amounts of taxes and other obligatory payments to the budget revealed through the internal audit or pre-audit may be corrected through the submission of additional declarations and calculations.

It should be noted that self-correction by the taxpayer of errors in the tax reporting may be performed without being subjected to administrative penalties. Taking this measure would therefore eliminate the risk of the company being subject to fines by the tax authority.

Under the Tax Code, the tax authorities must send written notice of a tax audit to the taxpayer 30 calendar days prior to the beginning of the planned comprehensive or limited scope audit, and only then the tax authority may initiate the tax audit.

The performance of audits without prior notice is permitted in cases of reorganisation, liquidation, termination of operations in the RK, VAT deregistration of a taxpayer, if the taxpayer is absent from its location, as well as if there is a reasonable risk of concealment or destruction by the taxpayer (tax agent) of the documents required for the audit.

The tax authorities may not send a prior notice of the tax audit to the company, reasoning that there may be a risk of concealment or destruction by the taxpayer of the documents required for the audit. This fact provides an additional ground for preparing and checking the documents on a preliminary basis without relying on the option to correct errors in tax reporting within 30 days after the receipt of the notice.

2. The tax service may be allowed to perform a tax audit only under proper instruction

The basis for a tax audit is an instruction containing the following details:

1)  date and number of registration of the instruction with the tax authority;

2)  name of the tax authority that has issued the instruction;

3)  full name of the tax payer (tax agent);

4)  identification number;

5)  type of audit;

6)  position, full names of auditors, as well as specialists engaged in the tax audit under the tax Code;

7)  date of the tax audit;

8)  tax period subject to the tax audit (in the case of documentary audits).

It is also important to remember that the instruction to appoint a documentary tax audit must be sealed by the Office of the Committee on Legal Statistics and Special Accounts under the Regional Prosecutor's Office, which certifies the registration of the instruction. The absence of the seal of the OCLSSA can justify the non-admission of officials of the tax authority to perform a documentary tax audit.

The tax audit may cover only the preceding five calendar year period. In the case of an additional declaration submitted for the period however, for which the limitation period expires in less than one calendar year, the specified period of limitation shall be extended by one calendar year for the conversion of tax liabilities.

In addition, please be aware that the tax authorities may engage specialists from other government agencies with specialised knowledge in specific sectors for the performance of the audit. The names and positions of these specialists should be reflected in the order of the tax audit appointment. Persons not included in the order are not entitled to participate in the tax audit.

As a general rule, the period of an audit is 30 business days after the delivery of the instruction with an option to be extended for a further 30 business days subject to additional instructions. With regard to legal entities that have non-resident structural subdivisions operating through a permanent establishment with more than one location in the Republic of Kazakhstan, as well as for major tax payers which are subject to monitoring, the period of a tax audit may be extended up to 180 business days.

When the formalities have been adhered to, and you understand clearly who will perform the audit and for what reason it will be performed, you should identify a place for an auditor to work, and show them who may be addressed in respect of different questions. Remember that an auditor should not interfere with your business, especially the work of the chief accountant and director.

3. It is important to know what auditors are entitled to do and what they are not. The most important thing is to be clear that an auditing state agency has the right to deal only with the matters within its competence and indicated in the instruction. The documents should be submitted to the audit within the list of documents specified in the documents’ request, which corresponds with the audit issues.

Please note that the tax authority may request documents for an audit on the basis of a notice containing a preliminary list of required documents, as well as on the documents’ request. If the notice contains a preliminary list, that request must therefore contain a complete list of the documents requested for the audit by the tax authority.

It is important to remember that the submission of documents for the audit not listed in the written request and not referred to in the issues of the ongoing audit is unacceptable.

4. The document requested should be submitted against the signature of the auditing tax authority

The implementation of this recommendation is required for confirmation in the future, for example, in case of a tax dispute relating to the submission of certain documents for the audit by the tax authority. In other words, the submission of documentation against the signature will allow you to avoid claims from the tax authority stating that the documents were not submitted during the tax audit.

With reference to our practice, please note that in several cases, the tax authorities stated in court that certain documents were not submitted by a taxpayer during the tax audit and as a consequence, such documents were not considered by the tax authority for additional tax charges.

In this regard, avoiding such cases is only possible by providing the documentation requested against the signature of the auditor.

5. In the course of the tax audit, it is necessary to cooperate in respect of a timely request and the opportunity to review a preliminary tax audit act

As provided by the Tax Code, at the very beginning of a tax audit, the tax authority, if necessary, sends the relevant requests to the competent authorities and territorial tax authorities to obtain confirmation and to perform counter-audits. In practice however, the tax authorities do not always send such requests in a timely manner and, in some cases, get answers to the requests only after the completion of the tax audit.

In this regard, the company at the beginning of the audit may forward the petition letter to the tax authorities, with an indication of the information, such as the customs authorities through which a customs clearance was performed, banks which made banking transactions, etc., with a request to sending requests in advance, as well as providing the draft tax audit act for review.

It should be noted that in practice, the tax authorities often make concessions and give taxpayers the opportunity to review the draft tax audit act before it is signed.

A preliminary review of the draft tax audit act will provide an opportunity to eliminate possible additional erroneous charges of taxes and other obligatory payments, to reduce the amount of the state duty charged in an appeal against the amounts of additional charges, etc. As a result of the review of the draft tax audit act, a taxpayer may send an auditor a written explanation setting out the arguments and facts confirming the illegality of one or another finding made by the auditor that will increase the responsibility of the tax auditor for the correctness of the tax audit act prepared thereby.

6. Upon completion of the tax audit, a taxpayer has to obtain not only the tax audit act, but also all annexes and attachments thereto

Upon completion of a tax audit, the taxpayer shall be provided with the Audit certificate and the notice of the audit results. The tax audit certificate shall be accompanied by the necessary copies of the calculations made by the auditors of the tax service, and other materials received in the course of the tax audit. A taxpayer is thus entitled to require all calculations made by the auditors to be attached to the audit certificate, as well as materials, which formed the basis for the auditors charging additional amounts of taxes and other obligatory payments to the budget. In this regard, obtaining all calculations made by the auditors together with the audit certificate will facilitate the subsequent appeal procedure against the results of the tax audit, if you disagree with them.

Please note that the act of a documentary tax audit:

1)  is prepared by the auditor, who performed the audit, in two copies, one of which is given to the representative of the Company;

2)  must be delivered to the representative of the Company no later than the end of the audit, specified in the instruction on the appointment of the audit;

3)  the day of delivering the act to the representative of the Company is considered to be the day of completion of the audit;

4)  includes information that the representative of the Company has reviewed or refused to review the act;

5)  includes the objections of the representative of the Company to the content of the act or a mark that the objections are set out separately and attached to the act;

6)  must contain the signatures of all persons involved in the audit.

Upon receiving the tax audit act for signing, a taxpayer is entitled to make a note indicating its disagreement with the results of the audit.

In the case of additional charges, the tax service authority, within five days following the day of the completion of the tax audit, shall also deliver the notice of the audit results. Tax liabilities reflected in the notice of the tax audit results shall be subject to performance within thirty working days after the day following the date of the notice being delivered to the taxpayer.

7. The illegal actions of the tax authorities to assemble a protocol on administrative violations and resolutions to impose administrative penalties should be prevented

In practice, the tax authorities, in most cases, deliver all of the documents together to the taxpayer at one time: the documentary tax audit act, the notice of the audit results, the protocol on administrative violations, and the decision to impose an administrative penalty.

This  expedited procedure for processing materials on administrative proceedings is however incorrect and is due to the desire of the tax auditors to save time on paperwork in a strict procedure, as well due to the compulsion of a quick payment of taxes and fines.

Please note that after completing the protocol on administrative violations, the tax authority may decide to impose an administrative penalty within 15 days.

This decision may be appealed to a higher tax authority or the court within 10 days after the receipt thereof. Due to the fact that at that moment, the results of the tax audit, on which basis the administrative proceedings are initiated, have not yet been appealed (because of having more time provided for the appeal) or rescinded, to appeal the decisions at this stage is not reasonable. In other words, until the results of the tax audit are rescinded, there are almost no chances of cancelling the administrative sanctions.

In this regard, upon the receipt of the protocol on administrative violations, it would be much better to refer to the tax authorities with a request to suspend the administrative proceedings for the period of appeal of the audit results to a higher tax authority or the court.

In future, the decision on administrative violations should be made, subject to the results of appealing the tax audit results.

Please note that if the tax authorities still dismiss a petition to suspend the administrative proceedings and make a decision on imposing an administrative penalty, then given the option to appeal decisions within only a 10-day period, during this period a taxpayer may complain against the decision to impose an administrative penalty to a higher tax authority or an administrative court.

In this case, given that in the case of the results of a tax audit not being cancelled, there are no chances to cancel the decision to impose an administrative penalty, it is really desirable to make a request to suspend the administrative proceedings for the period of the appeal of the results of the tax audit.

This strategy may ‘freeze’ the administrative proceedings for a period to appeal the results of the tax audit and avoid collection of the disputed amounts of an administrative fine until the decision on the appeal of the results of the tax audit.

Appeal of the tax audit results

It should be particularly noted that, in accordance with Article 667 of the Tax Code, the notice of the tax audit results may be appealed to a higher tax service authority within thirty working days after the day following the date of the notice being delivered to the taxpayer. The failure to appeal and to execute the notice entails the forced collection of taxes and other obligatory payments and penalties from the taxpayer.

Moreover, a tax payer is entitled to appeal the notice of the tax audit results directly to the court. According to Article 280 of the Civil Procedural Code of the RK, the period of limitation for applying to court shall be three months from the date of the receipt of the notice. In the case of appealing the notice to a higher authority of the tax service, and then in the case of a dismissal to the court, the limitation period shall be calculated from the date of the receipt of the decision from a higher authority of the tax service.   

Consequently, a taxpayer may appeal the audit results to a higher body or directly to the courts. Appealing a notice within the specified period to a higher tax authority or the court suspends the execution of the notice and, if additional tax charges exceed 2,000 MCI (for 2010 it is 2,826,000 Tenge), the transfer of audit files to the financial police authorities.

On the contrary, appealing the tax audit results upon the expiry of a deadline does not cause the suspension of the above actions.

Please note that a taxpayer may appeal the notice of the tax audit results, as well as:

• findings of the tax service contained in the Audit certificate, which violate and infringe upon the legitimate rights of the taxpayer;
• administrative acts of the tax authorities: acts of administrative penalties made according to the tax audit results;
• actions or omissions of the tax authorities that violate and infringe upon the legitimate rights of the taxpayer.

Prior to filing a claim to a higher authority and/or the court, you should thoroughly review the regulations, consult with lawyers, who have procedural experience, and weigh up your prospects. Confusion in applying regulatory legal acts, backdating thereof, and the contradictions between them can cause problems in the validity of certain regulations. You should therefore bear in mind that the regulations that establish the basis and procedure for collecting fines to the budget may be applied, provided that they were valid both at the time of the violation, and during the period when it was identified and subject to appropriate sanctions.

In conclusion, please remember that success in appealing the tax audit results depends on a proper and reasoned justification for the illegality of the additional charges and findings made by the tax authority, as well as on the completeness and quality of the evidence provided.

Best Regards,

Tax Law Department

Tel.: +7 (727) 2445-777
Fax: +7 (727) 2445-776
info@gratanet.com
tax@gratanet.com