Some Taxation Issues In The Oil And Gas Industry

The Republic of Kazakhstan possesses significant reserves of oil and gas, which means the oil and gas industry holds the leading position in the structure of the national economy. Therefore the tax system in this sector needs to provide stability, transparency and progressivity,, take into account the general global situation and encourage investment.

International practice has shown that the creation of an effective tax system for the natural resources sector is a complicated task. As a rule, it is conceptually different from the tax system in other sectors of the economy, since it incorporates a significant rental income and higher investment risks.

Pursuant to the Law 'On Subsoil and Subsoil Use' ('Subsoil Law'), the concept of 'oil' also includes crude oil, gas condensate, natural gas and associated gas, as well as hydrocarbons derived from the treatment of crude oil, natural gas and processing of shale coal or resinous sands.

The State decided in the Tax Code effective from 1 January 2009 to re-distribute the tax burden, increasing it in the mining sector and decreasing it for small and medium business.

The taxation of subsoil users is covered by Section 11 of the Tax Code, under which they pay all taxes and other obligatory payments to the budget established by the Code. In addition, there are special payments (subscription bonus, commercial discovery bonus, reimbursement of historical costs) and taxes (tax on mineral extraction and excess profits tax).

There is a general rule that under the subsoil use contract, tax liabilities are calculated in accordance with tax laws applicable at the time those liabilities arise. In addition, there are specific features with regard to the taxation of income of nonresident subsoil users (Articles 198-200 of the Tax Code).

Stability for tax regimes is reserved for production sharing agreements (contracts) entered into before 1 January 2009, provided that they have been subject to obligatory tax review, as well as subsoil use contracts approved by the President of the Republic of Kazakhstan. However, any tax regime envisaged in such contracts may be changed by mutual agreement of the parties.

The Tax Code requires the subsoil user to conduct separate tax accounting for calculating the tax liability for the activities performed under each subsoil use contract, as well as when developing low-margin, high-viscosity, wet, marginal and exhausted fields, if taxes and other obligatory payments to the budget thereon are calculated in the procedure and at rates different from those specified by the Tax Code.

Tax and Payment of Subsoil User

The subscription bonus and commercial discovery bonus are fixed payments for a subsoil user.

A subscription bonus is a lump sum payment for the acquisition of the right of subsoil use in the contract territory, as well as in the event that contract territory is expanded. The size of the subscription bonus depends on the type of contract and minerals/raw materials. Moreover, the presence or absence of established mineral reserves is also taken into account.

A commercial discovery bonus is a payment under the contract for mineral production and/or combined exploration and production for each commercial discovery of minerals within the contract territory, including discoveries in the course of additional exploration.

It should be noted that certain provisions of the Tax Code are a little unclear in terms of how the 'object' of a commercial discovery bonus is defined, which has lead various ambiguous interpretations. Thus, according to a particular contract for combined exploration and production with a stable tax regime entered into in 2004, the obligation of a subsoil user to make this payment only arises in the event that a new field is discovered in the contract territory. Given the fact that a new field was not discovered, therefore, the bonus was not paid. However, in 2005 the competent state authority established that there had been an increase in mineral reserves. Since 2009, a subsoil user calculates its tax liability in accordance with the law applicable at the time. In 2013, as a result of additional exploration of a field, the amount of mineral reserves was increased again. The tax authority considers that pursuant to Article 319.5 of the Tax Code, the commercial discovery bonus should be calculated from the total volume of reserves, because this payment was not made on...