Additional Tax Assessment Following Transfer Pricing Control Audit

Our lawyers have successfully defended interests of a client (subsoil user) in litigation on tax dispute. According to the results of tax audit on application of transfer pricing, taxes in the amount of 800 mln. tenge were charged by the State Revenue Department (SRD). According to the SRD, the subsoil user during the oil export (1) wrongfully included some types of expenses into the differential, and (2) overcharged the amount of some types of expenses, included into the differential. According to results of the court proceedings, the court recognized that additional taxes were charged illegally and obliged the SRD to re-calculate the taxes taking into account supporting documents and data from the official source of information.

Dear colleagues, in this newsletter we would like to share an interesting experience that occurred in our recent litigation practice. Our lawyers have represented interests of a taxpayer in a dispute re additional tax assessment following the application of transfer pricing during oil export. During the court proceedings there were some curious issues from practical standpoint. For example, obligation of the SRD to disclose evidence in the court, application of data from supporting documents by the SRD; application of official sources of information, containing differing data.

The acceptance of documents supporting components of a differential

The SRD has consistently held the position that despite availability of the documents supporting components of a differential, the amount of components is determined according to the official sources of information. At that, the SRD reasoned its position as follows: in accordance with Article 18-1 of the Law "On transfer pricing", officially recognized information sources on market prices shall be used in order of priority for determining market prices of goods and another data necessary for methods of determination of market prices.

The taxpayer in turn reasonably specified that in accordance with Article 13-6 of the Law "On transfer pricing" a differential shall be confirmed by documents or by information sources. At that, in accordance with Article 18-1 of the Law "On transfer pricing" supporting documents shall are not included in sources of information. Consequently, priority rules of the sources of information do not cover supporting documents, but supporting documents themselves shall be considered as an equal alternative for purposes of supporting a differential.

Unfortunately, the court did not make unambiguous judgment for this issue. Despite the fact, that elimination of certain expenses from the differential and reduction of the...

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