The previously verified audit

The previously verified audit

We have known that the tax authorities of Kazakhstan will perform audits for transfer pricing. We have considered it as our professional duty to notify you that, as a rule, such audits entail:

1. Adjustment of the tax base and, consequently, additional tax charges (mainly corporate income tax, minerals extraction tax and the tax on excess profits (if any).
2. Accrual of penalties for each type of tax payment in the amount of 2.5-fold official refinancing rate of the National Bank of Kazakhstan for each day of delay.
3. A fine of 50% of additionally charged taxes and other obligatory payments to the budget.

As practice shows, as a result of similar audits, virtually all subsoil users were additionally charged with large amounts of taxes and obligatory payments.

According to the practice of additional charges, in the period 2003-2008, about 150 large subsoil users of Kazakhstan were subject to audits, which resulted to the adjustment of income for more than 3 billion US Dollars, i.e. in average it is 20 billion US Dollars per 1 subsoil user.

Analysis of the audits shows that often the subsoil users could not (or did not know how) confirm the differential (discount) on the export and import transactions. Moreover, the facts, which are not proven by the subsoil user in court, will be considered in subsequent audits as a proved position of tax authorities (indisputable facts).

Why tax audit for transfer pricing are relevant now:

1. Since 2004, there were almost no tax audits for transfer pricing, i.e. over 5 years, the limitation period is 5 years.

2. There was a strong increase in the world market prices for all major commodities. For example, since 2008 as compared to 2004 the oil price was increased by 240%, i.e. until the middle of 2008 the oil prices were high.

3. The new Law on Transfer Pricing was enacted on 1 January 2009, i.e. the audits under the new law will be performed from 2011.

4. In connection with the introduction of monitoring of transactions for transfer pricing, tax authorities are currently analyse export and import transactions for compliance thereof with transfer pricing. According to the results of monitoring of transactions tax audits will be targeted and the audits will point, i.e. with already revealed violations of the transfer pricing application.

In this regard, the timely engagement of an experienced and qualified consultant to the ongoing audit, positions and arguments of the subsoil user proved by the consultant in the course of appeal to a higher tax authority or the court will be a serious argument of the taxpayer in subsequent tax audits.

You may probably know that GRATA Law Firm won a large number of tax disputes on appealing the results of tax audits. Success rate on tax cases in the judiciary, which involved GRATA, in most cases was more than 90% of the appealed additionally charged amount of tax, penalties and fines. We have successfully protected the interests of subsoil users of Kazakhstan on the first and the most complicated cases, including first disputes on transfer pricing, excess profits tax, hedging, costs of management services of the parent company, idle wells depreciation, VAT on royalties, royalties on associated gas, etc. Over the past 10 years we have gained a unique experience in tax disputes, which are ready to use for the most effective protection of interests.

Given the above and taking into account the preserved urgency of the issue, we propose to take preventive measures before the new tax audit.

If you have any questions, we will be happy to discuss at any time of your convenience.

Recent Experience:

• Drafting of amendment agreements to the Crude Oil Sale-and-Purchase Contracts to bring the Contract in compliance with the new Law of the Republic of Kazakhstan ‘On Transfer Pricing’.
• Drafting of the transport contracts between seller and buyer with differential determination of oil and gas companies.
• Performance of pre-control audit and drafting of the opinions for Kazakhstani companies performing:

 - the exportation of oil, oil products and gas condensate, lead, zinc, gold, silver, grain, coal, as well as zinc and lead concentrate;
 - the importation of equipment for oil and gas and metallurgical sectors;
 with regard to compliance thereof with the transfer pricing law. Thereat, the audit was performed according to the methods and forms used by tax agencies.

• Drafting of opinions on possible facts of transfer pricing:

 - for Kazakhstani-Russian gas enterprise when exporting dry gas and gas products;
 - for Kazakhstani-China, Kazakhstani-Russian gas enterprises engaged in the export of oil and oil products;
 - for mining and metallurgical enterprises engaged in the export of oil and oil products, lead, zinc, gold, silver, coal, zinc and lead concentrate;
 - for agricultural enterprises engaged in the export of corn, wheat, barley and cotton.

• Risk assessment for enterprise with regard to operating in the state with preferential taxation (offshore).
• Comparative analysis of prices existed during the period 2004 through 2009 for the main export goods items.
• Representation of interests and protection of the rights of foreign oil companies, Kazakhstani oil companies in disputes on transfer pricing including successful appealing of audit results (over 5 bln Tenge were cancelled).
• Representation of interests and protection of the rights of mining companies in disputes on transfer pricing including successful appealing of audit results (over 12 mln Tenge were cancelled).
• Monitoring of transfer pricing transactions of the companies performing export of cooper, steel, lead, zinc, gold, silver, aluminum oxide, chrome ore, etc. in order to submit the results to the Tax Committee of the Republic of Kazakhstan.
• Drafting of Agreements for Transfer Pricing Application that will be concluded between fiscal agencies and tax payers.

Publications:

• New Legislation on Transfer Pricing. Its Downsides and Advantages in Comparison with the Current Legislation
• Business Proposal for Transfer Pricing Reporting
• Comments on the Amendments to the Law of the Republic of Kazakhstan “On Transfer Pricing”
• Calculation Method for Transfer Pricing in Kazakhstan