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The EPT Calculation ProblemsThe EPT Calculation ProblemsOne of the brightest examples of tax policy changes relating to Kazakhstan subsoil users is a situation with the excess profit tax (EPT) calculation. The Kazakhstan tax authorities under supervision of the Tax Committee of the Ministry of Finance of the Republic of Kazakhstan performed thematic audits on EPT liabilities of large Kazakhstan subsoil users in 2005. The tax audits related to the EPT calculation were performed for the first time after Kazakhstan’s independence. Kazakhstan subsoil users puzzled and surprised by the huge amounts of additionally assessed EPT, penalty and fine. The EPT was introduced in the provisions of the tax law in the beginning of 1995. All subsoil users carrying out extraction of mineral resources and recycle of tehcnogenic formations and receiving additional income from the activities in relatively good natural conditions, as well as selling the produced production in a relatively better market conditions. The tax law contained general provisions about payers of the EPT, the form of payment. Later editions of the law determined the EPT rates. Subsoil users have not seen the document for a long time however, which provided for the method of EPT calculation and payment of the EPT. This can probably be explained by the early stage of the oil industry development. Oil fields were still at the exploration stage, and consequently, there was no profit at all. The Instruction No. 41 ‘On Taxation of Subsoil Users” was approved by the Order of the Chairman of the Tax Committee of the Ministry of Finance of the Republic of Kazakhstan on 29 December 1997. For the first time a detailed method of EPT calculation was reflected in the Instruction No. 41 and the provisions of the Instruction gave examples of the EPT calculation and applicable formulas. With the adoption of the Instruction No. 41 it has become the main document that subsoil users used for the EPT calculation. Kazakhstani subsoil users started to receive excess profits in the late 1999s and early 2000’s. There was a necessity therefore to calculate and pay the EPT from the moment of receiving the excess profit. It is worth mentioning that the rules on tax reporting were approved and subsoil users held a number of negotiations with the representatives of the tax authorities for the purposes of obtaining consultations on the method of calculation and payment of the EPT. Accuracy, correctness and legality of the procedure for calculation and payment of the EPT by subsoil users were confirmed by complex tax audit results in 2000-2004. The results of the tax audits performed in the second half of 2005 however, showed that the subsoil users calculated the EPT incorrectly. Moreover, conclusions of the tax authorities were contradictory, in particular the results of the previously performed comprehensive audits on the EPT significantly differed from the thematic tax audit on the EPT performed in 2005: the EPT calculation formulas, established on an annual basis (since 2000) by the rules of the tax authorities were also different from the formulas applied during the thematic tax audits. The tax authorities used the new method of the EPT calculation, which was new to many subsoil users. In accordance with the provisions of the tax legislation effective at the moment of signing subsoil use contracts and established practice, the EPT was calculated as follows. Income after a payment of the corporate income tax (CIT) – the dividend withholding tax – the EPT paid for the previous year = net income x tax rate = amount of the EPT The formula above was applied based on the provisions of the Instruction No. 41 and the Rules on filling EPT declarations. The tax authorities adopted an internal act that established different procedure for and method of the EPT calculation taking procedure for determining the net income as the basis in mid 2005. The tax authorities referring to the Article 5.30 of the Law on Taxes, which stated that the net income shall be income tax deducted from the taxable income, calculate the tax in the following way: Income after a payment of the CIT = net income x tax rate = amount of the EPT In the opinion of the tax authorities therefore subsoil users should not have subtracted the dividend withholding tax and the EPT paid for the previous tax period from the income after paying the EPT. The tax authorities argued that the formula above is in compliance with Article 5.30 of the Law on Taxes, stipulating that the net income is a positive difference between the taxable income and the CIT payable to the budget. It can be seen that the tax authorities use the ‘form over substance’ principle despite the provisions of the subsoil use contracts, which clearly set the EPT calculation method; the tax authorities outlined a new method of the EPT calculation, which significantly changed the economic balance between the interests of the State and subsoil users. According to Article 94 of the Law on Taxes the requirements on payment of taxes and other obligatory payments to the budget (the tax regime) should have been determined by the provisions of the subsoil use contracts between subsoil users and the competent bodies authorized by the Government of the Republic of Kazakhstan. In accordance with Article 94-3 of the Law on Taxes, the tax regime under subsoil use contracts concluded in accordance with the procedure and undergone a tax expertise should not change until the contracts expire. This provision guarantees stability of the tax regime. The provisions of a subsoil use contract with respect to the tax regime prevail over the provisions of the Law on Taxes and a subsoil user is obliged to pay taxes and other obligatory payments to the budget under the tax regime stipulated in the subsoil use contracts. Notwithstanding the above, the courts agree with the opinion of the tax authorities. This matter has not been resolved yet. The first subsoil users faced with this problem had a right to appeal the tax audit results. It should be noted that each subsoil use contract is unique. According to the amendments to the Tax Code, the stability of the tax regime stipulated in the subsoil use contracts was abolished for all Kazakhstan subsoil users retrospectively, except for:
Under the new method of the EPT calculation, the EPT payers are required to apply a sliding scale of rates ranging from 0% to 60% depending on the ratio of the net income to deductions, which exceeds 1.25. The EPT is payable by all Kazakhstani subsoil users except for those operating under: a) the Product Sharing Agreements; b) the Agreements on the extraction of common commercial minerals, underground waters and therapeutic mud; c) the Agreements on construction and operation of underground installations unrelated to exploration and extraction. The EPT base is a portion of the net income for subsoil use contracts in which the ratio of the net income to deductions, which exceeds 1.25 for the reporting tax period. Based on the provisions of the Tax Code effective from 2009 the main principle of the EPT calculation did not change significantly from the method used in 2005. There are some changes in determination of the taxable income however, i.e. the income before payment of the CIT. The income before payment of the CIT is determined as a positive difference between the aggregate annual income for the CIT purposes, including adjustments and deductions for the EPT purposes, which include deductions for the CIT purposes and the following expenses:
Further, we should determine the ratio of the net income to the deductions for the EPT purposes. In the event the ration exceeds the coefficient of 1.25, then the excess will act as the basis for the EPT calculation. Income after paying the CIT = net income Net income exceeding 1.25 coefficient x tax rate based on a sliding scale = amount of the EPT In summary, it should be noted that despite the changes to the Tax Code that simplify the EPT calculation in some sense, the EPT payers are still faced with practical difficulties in applying the method of the EPT calculation. Before abolishing the stability of the tax regime clause tax disputes on the EPT mainly arose due to different understanding of the stability of tax regime by the taxpayers and the State. Subsoil users interpret all of the discrepancies in their favour whilst the tax authorities interpret certain provisions of the applicable tax laws, disregarding the provisions of the subsoil use contracts. All these questions however, are still open and have been relevant to subsoil users for the last 15 years. A systematic and, most importantly, fair approach in terms of the balance of economic interests of the parties is crucial in solving such problems. Best Regards, Tax Law Department Tel.: +7 (727) 2445-777 |
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