The Cassation Court for Administrative Affairs of the Republic of Kazakhstan has issued a ruling on a landmark tax dispute between the Department of State Revenue for the Abai region and a major taxpayer for the extraction and processing of precious metals, JSC.

The Supreme Court fully supported the position of the state revenue authorities, annulling the previously issued acts of the lower courts in the satisfied part and making a new decision to dismiss the claim of the Joint-Stock Company. 

The background of the dispute and the position of the first instance

In 2024, the Department of State Revenue for the Abai region conducted a comprehensive unscheduled tax audit of the JSC's activities for 2021-2022. According to the results of the audit, the company accrued additional taxes and penalties, as well as reduced the amount of VAT, confirmed for refund from the budget, totaling more than 4.8 billion tenge. 

The basis for the charges were two key blocks of violations:

- Gold shortage: unjustified deduction of expenses for a large shortage of gold identified in 2021 without reflecting the results of the inventory in the tax statements. 

- Consulting services from a non-resident: unlawful deduction of expenses for consulting services provided by a Russian interconnected company, LLC, for CPN and VAT deduction.

The Specialized Interdistrict Administrative Court (SMAS) of the Abai region, and then the appeals board, recognized the requirements of the fiscal authority regarding accounting for the shortage of gold as legitimate. However, in terms of additional charges for consulting services, the courts sided with the taxpayer, considering that in order to exclude expenses from deductions, the tax authorities should have previously challenged the transactions in court.

Having considered the cassation appeal of the Department of State Revenue for the Abai region, the Court of Cassation for Administrative Cases concluded that the conclusions of the lower courts regarding the cancellation of additional fees for consulting services were erroneous. 

The Court of Cassation recorded important legal positions that are crucial for the administration of large taxpayers:

• Powers of the tax authorities without invalidating transactions: The Court explicitly stated that the absence of a separate judicial act on invalidating the transaction does not prevent the tax authority from excluding costs from deductions and offsets. The fiscal authority evaluates the compliance of the submitted documents with the requirements of the legislation within the framework of its direct duties on tax control. 
• Fictitious and framework-based nature of documentation: The analysis of contracts with LLC has shown their exceptionally general and framework-based nature. The acts of completed works and invoices submitted by JSC contained only the template wording "Consulting services" without detailing the types of work, volumes, time spent, tariffs and specific performers. The taxpayer could not prove the real connection of these multimillion-dollar expenses with income-generating activities. 
• Hidden distribution of dividends: The Court of Cassation agreed with the qualification of the tax authority, which recognized these payments to a foreign company as a material benefit of an interconnected party. Since the reality of the services has not been confirmed, the transfer of 2.5 billion tenge was actually a hidden distribution of profits (dividends) in favor of the parent company with the resulting obligation to pay CPI at the source of payment. 

Regarding the shortage of gold, the cassation instance once again confirmed the correctness of the Department's actions: the fact of the loss of goods should be reflected in the period when the inventory is completed (2021), regardless of the progress of the criminal investigation and the identification of the perpetrators. 

The results of the review:

The Court of Cassation fully satisfied the complaint of the Department of State Revenue in the Abai region, restoring the legality of budget charges in full. 

The Department of State Revenue for the Abai region reminds that the tax accounting of large taxpayers should be strictly based on the principles of transparency, reliability and impeccable documentary evidence of the reality of each business transaction.

Source : https://www.gov.kz/memleket/entities/kgd-abay/press/news/details/1224226?lang=ru