The tax legislation of the Republic of Kazakhstan provides for the taxpayers’ right, subject to compliance with the statutory requirements, to (a) deduct the taxpayers’ expenses associated with their activities aimed at generating income, when determining taxable income for purposes of corporate income tax (“CIT”); (b) offset an amount of value added tax (“VAT”) payable on goods, work or services received, if such goods, work or services are used or will be used for purposes of taxable turnover (“Deductions and Offsets”).

The legislator expressly provides the taxpayer with the right, when determining the objects of taxation, to consider the possibility of Deductions and Offsets, subject to compliance with tax laws and rules of tax accounting.

To regulate the tax benefit margins, the legislator prohibits taxpayers from obtaining tax benefits resulting from illegal actions. The law provides that taxpayers have no right to apply respective Deductions and Offsets under fictitious transactions, such as issuing non-deliverable tax invoices; transactions effected without the actual performance of work (provision of services, shipment of goods) with a taxpayer whose registration (re-registration) is invalidated; activities under invalid transactions (“Fictitious Transactions”).

Bad faith taxpayers’ resistance to observe their constitutional obligation to pay taxes and their intention to obtain unjustified tax benefits contribute to the increasing number of Fictitious Transactions. The tax authorities, in turn, attempt to counter such schemes. Unfortunately, the methods used by the tax authorities for these purposes do not always meet the requirements of the law.

This study is devoted to the analysis of legal relations arising in the above cases and their legal regulation in order to identify the real interests and intentions of all participants in the relevant legal relations, as well as to develop recommendations for improving tax laws and their application in full compliance with the basic tax law principles established by the Tax Code of the Republic of Kazakhstan.

The campaign against Fictitious Transactions has been going on for a long time now. However, the drive to identify and punish bad faith taxpayers results in good faith taxpayers becoming the least protected participants involved in such “arms races”, and ultimately their Deductions and Offsets amounts are unreasonably excluded. The fight against bad faith taxpayers leads to overreach in law enforcement practice, in which the problems of the tax administration in combating dishonest “schemers” and “cashiers” are “hung” on good faith taxpayers, entailing unjustified costs for bona fide participants, a decrease in business activities and the deterioration in the investment attractiveness of Kazakhstan.

The topic of this paper is devoted to the regulation of countering Fictitious Transactions by the tax legislation of the Republic of Kazakhstan and includes discussions on the following aspects of the topic under consideration:

1. In the first section, we will give examples of the most common problematic situations arising from the acts of the tax authorities in adjusting CIT and VAT for transactions that, in the opinion of the tax authorities, are fictitious.
2. Thereafter, we will review the rules of the tax legislation that determine the legal grounds for adjusting CIT and VAT for Fictitious Transactions.
3. In Sections 5, 6 and 7, we will discuss each of the grounds for adjusting CIT and VAT for Fictitious Transactions. In particular, we will analyze what gives rise to such legal grounds and how they are applied by the tax authorities and courts. At the same time, we will cite and analyze the prevailing judicial practice.
4. In the section devoted to the desk audit issues, we examine the most urgent problem, which is that desk audits are transformed into a scheme aimed at depriving taxpayers of the right to judicial protection.
5. Taking into account the importance of the topic under consideration, we present our description of the problematic issues in legislative regulation and practice and give our proposals for their resolution.

As part of this work, for the purpose of analyzing the principle of good faith of taxpayers, we have also reviewed the taxpayer’s “prudent behaviour” standard, which, if observed, should serve as a basis and guaranteed protection against charges of tax authorities of committing Fictitious Transactions.

The full text of the article (in Russian) can be found here.