Kazakhstan: Tax Audits as a basic tool for controlling and monitoring activities of the Tax Authorities

published on 30 July 2020 | reading time approx. 10 minutes

Tax audits have the major role in the tax control system, they are carried out only by the tax authorities in order to execute the regulations and standards of the Tax Legislation of the Republic of Kazakhstan (hereinafter referred to as the “RoK”), and other legislation of the Republic of Kazakhstan, except for executing of the tax liabilities on payment of the environmental emissions (except for the tax liabilities on payment of the environmental emissions of pollutants from the mobile sources).

I. Provisions of the Tax Legislation of the Republic of Kazakhstan: Forms and Types of Tax Audits »
II. Procedure of the Tax Audit »
III. Summary »

I. Provisions of the Tax Legislation of the Republic of Kazakhstan: Forms and Types of Tax Audits

a) Forms of Tax Audits

According to the Tax Legislation of Kazakhstan, the tax audits are carried out in the following forms:

comprehensive
thematic
counter
time examination

Comprehensive Tax Audit

Comprehensive tax audit is carried out by the tax authority in relation to the tax-payer (tax agent) in terms of execution of the tax liabilities on all types of taxes, payments to the budget and social transfers.

Tax audit is carried out for the period not exceeding the action limitation period on the tax liabilities and tax assets. Tax audit for the period of five years is carried out in relation to the tax-payers subject to the tax monitoring, and tax-payers operating under the subsoil use contract. In relation to the other tax-payers, tax audit is carried out for the period of three years. Comprehensive tax audit may cover the matters of lawfulness for applying the provisions of the international contracts (agreements), transfer pricing and other matters on compliance with the legislation of the Republic of Kazakhstan which implementation and enforcement control is entrusted to the tax authorities. In addition, the comprehensive audit is carried out during liquidation of the tax-payer.

Thematic Tax Audit

As opposed to the comprehensive tax audit, implementation of the thematic tax audit does not envisage auditing of fulfillment of a liability on all types of taxes and payments to the budget. This type of tax audit is carried out by the tax authority in relation to the tax-payer (tax agent) on the matters of fulfillment of the tax liabilities on specific types of taxes and (or) payments to the budget; it can be carried out on the matters, as follows:

determination of the mutual settlements between the tax-payer and its debtors;
lawfulness for applying the provisions of the international contracts (agreements);
confirmation of consistency (reliability) of the excess amount of the value added tax, including those charged to recovery;
confirmation of the income tax charged to recovery by the non-resident from the budget due to application of provisions of the international agreement which guides and governs the matters of avoidance of double taxation and prevention of fiscal evasion;
matters set forth in the application request of the non-resident on re-examination of a tax application for refund of income tax from the budget due to application of provisions of the international agreement which guides and governs the matters of avoidance of double taxation and prevention of fiscal evasion;
tax-payer’s (tax agent) failure to fulfill the notice of the tax authorities on elimination of violations found based on the results of the in-house audit;
assessment, withholding and transfer of the social payments in full and timely manner;
transfer pricing¹.

Counter Tax Audit

Counter tax audit is an audit held by the tax authority in relation to the entities/persons those effecting transactions with a tax-payer (tax agent) which is subject to the comprehensive or thematic tax audit held by the tax authority. This tax audit is carried out in order to obtain the additional information on such transactions, confirm the fact and subject-matter of transactions, on matters arising in the course of auditing of the said tax-payer (tax agent).

Counter tax audit is an auxiliary audit in relation to the comprehensive or thematic tax audits.

Audit shall also be considered to be the counter tax audit, if it is held:

upon request of the tax or law-enforcement authorities of other states, international organizations according to the international contracts (agreements) on mutual cooperation between the tax or law-enforcement authorities, where the Republic of Kazakhstan is one of the Parties, and contracts signed between the Republic of Kazakhstan and international organizations;
in relation to the entities/persons those effecting transactions with a tax-payer (tax agent) who failed to eliminate the violations on the tax liability related to the value added tax found according to the results of the in-house audit and associated with such transactions, or who provided explanations not confirming the absence of such violations².

Time Examination

Pursuant to the Article 144.1 of the Tax Code of the Republic of Kazakhstan, Time Examination is carried out by the tax authority in order to determine the actual income of a tax-payer and actual expenses related to the profit-oriented activities for the period when such examination (audit) is carried out. The Presidential Decree No. 229 dated 26 December 2019 “On Introduction of Moratorium on In-house Audits, Routine Inspections and Supervision in the Republic of Kazakhstan” established the moratorium to auditing from 1 January 2020 to 1 January 2023 in relation to the small business entities, including the self-employment entities, except for the customs inspections, counter tax audits and thematic tax audits on the matters of determining the mutual settlements between the tax-payer and its debtors, registration with the tax authorities, execution of orders for suspending the debit transactions on cash issued by the tax authority.

b) Types of Tax Audits

There are two types of tax audits distinguished in the Tax Legislation of the Republic of Kazakhstan, as follows: unscheduled tax audits and tax audits carried out according to the special procedure based on the risk degree assessment.

Unscheduled audit

Unscheduled tax audits are carried out against the tax application or individual complaint of a tax-payer (tax agent), including those related to:

reorganization through the demerger or liquidation of a resident legal entity, business subdivision of a non-resident legal entity;
termination of the business activities in the Republic of Kazakhstan by the non-resident legal entity carried out through the permanent establishment;
termination of the business activities of an individual entrepreneur;
value added tax deregistration;
complaint by a tax-payer (tax agent) related to the notice of audit results³.

Audit Based on the Risk Assessment

Tax audits carried out based on the risk degree assessment shall be appointed by the tax authorities in relation to the tax-payers (tax agents) after reviewing the analysis results of the tax reporting, information obtained from the competent governmental authorities, as well as other documents and information on the activities of the tax-payers (tax agents).

Based on such analysis results, the tax authorities categorize the tax-payers (tax agents) by classifying their activities as low, medium, or high risk categories.

Risk management system is based on the risk assessment, it includes the measures developed and (or) applied by the tax authorities in order to identify and prevent the risk to be determined by the probability of non-fulfillment and (or) incomplete fulfillment of the tax liability by a tax-payer (tax agent) who might and (or) may inflict harm to the state. Information on a risk degree the tax-payer is classified to according to the results of the risk management system is available on the official website of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan⁴ (hereinafter referred to as the “website”) and the web-based application “Taxpayer’s Web-room”.

Tax-payer shall be informed not later than the first day of the first month of the half-year period for which the tax-payers are categorized: from 1 January 2019 through the web-based application “Taxpayer’s Web-room”, and 1 July 2019 through online processing application request at website⁵.

Application request shall be processed online within a period not exceeding one business day.

Criteria of the risk degree are the combination of indicators used to assess the tax-payers (tax agents) and their subsequent categorization by the risk degrees. Criteria of the risk degree which are not the confidential information are, as follows:

tax burden;
average monthly wage per one employee;
amounts of expenses and incomes reflected in the tax reporting;
transactions with the tax-payers those having the mutual settlements with entities deregistered for value added tax, including those liquidated, non-operating, bankrupts;
reflection of losses in the tax reporting over several tax periods;
multiple modifications and additions to the previously submitted tax reporting;
violations detected according to the results of in-house audit;
repeated approximation to the limit values of the indicators established by this Code which enable to apply the special tax treatment⁶.

II. Procedure of the Tax Audit

According to the Tax Legislation of the Republic of Kazakhstan, the tax authorities shall notify the tax-payer (company) about the start date of a tax audit according to the special procedure based on the risk degree assessment not less than 30 calendar days prior to start of the audit by forwarding a notice.

a) Notice of Tax Audit

Notice shall specify the following data:

form of tax audit (thematic, comprehensive);
list of matters and issues to be audited;
preliminary list of the documents required for audit;
rights and obligations of a tax-payer (tax agent) during the tax audit⁷.

Order delivered to the tax-payer and approved by the competent authority is a basis for the tax audit.

b) Requirements to the Order

Order must include the following information:

date of Order;
name of the tax authority that issued the Order;
name and BIN of a tax-payer (tax agent);
form of tax audit (thematic, comprehensive, counter);
type of tax audit (unscheduled, scheduled);
term of the tax audit and the audited tax period, except for time examination;
full name of the auditors (employees of the tax authority).

Term of the tax audit (duration) specified in the Order shall not exceed 30 (thirty) business days upon the date of Order delivery, however this period may be extended. Term for extending the tax audit depends on the activities performance by the tax-payer – from 45 to 180 business days. Term extension shall be executed in the form of additional order.

Audit term may be suspended by the tax authorities.

c) Conduction of the Tax Audits During Quarantine
According to the Governmental Decree of the Republic of Kazakhstan No. 141 dated March 27, 2020 “On Measures for Executing the Presidential Decree of the Republic of Kazakhstan No. 287 dated March 16, 2020 “On Further Measures of the Economical Stabilization” Concerning the Tax Policy”, terms of the audits held by the State Revenue Authorities has been suspended for the period of State of Emergency.

For the purposes of this Decree, the terms for executing notices for elimination of violations detected by the tax authorities according to the results of in-house audit (which enforcement period was during the period of State of Emergency, from March 15, 2020 to April 15, 2020) have been extended until June 01, 2020; except for the high risk tax-payers.

According to the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan, the terms for conducting tax audits, customs inspections and enforcement of notices of in-house audits have been renewed from June 01, 2020 due to completion of period of the State of Emergency.

Moreover, forwarding notifications to the tax-payers about payment of the taxes payable and arrears of the social payments (transfers) has been resumed in the automatic mode which will be used as a basis to apply further methods and coercive recovery measures.

Notices of in-house audits may be executed by submitting the tax declarations or explanations in electronic form via the web-based application “Taxpayer’s Web-room”.

If the company-taxpayer is under quarantine, then the tax audits and customs inspections may be suspended until resumption of the business activities by the delivery of request for submitting documents. The tax-payer must provide an appropriate explanation, if this is impossible to submit the documents due to being under quarantine.

Remote working mode of employees of the company-taxpayer is not a reason for refusal from receiving an order. Since during the quarantine regime, officials of the company-taxpayer may work from home ensuring the self-isolation regime, an audit order may be delivered to the specified location of the tax-payer.

III. Summary

For the purpose of business support, the State Revenue Committee refused from developing the schedule of tax audits for the second half-year period of 2020; however unscheduled audits will be carried out in relation to the specific violations.

In order to avoid the situation of entering the schedule of tax audits at the end of 2020, the companies are recommended to minimize the tax risks and prevent the possibility of being assigned the high-risk assessment.
To do this, first of all, it is recommended to verify the outstanding tax liabilities, and existence of the taxes payable. It is also relevant to check, if the primary accounting documentation complies with the requirements of the Tax Legislation of the Republic of Kazakhstan and the Law of the Republic of Kazakhstan “On Accounting and Financial Reporting”. Moreover, it is recommended to exclude closure of transactions and making of the mutual settlements with the non-operating tax-payers and bankrupts. It is advised to check the existence of any outstanding notices of the tax authorities. If the notices have been issued, then such notices of the tax authorities must be executed in a timely manner. Avoiding of multiple modifications in the tax reporting will also help to avoid negative impact on the indicator of the risk assessment system.

These measures will minimize the risk of detecting violations by the tax authorities, additional charges of taxes, and eliminate the risk of bringing the tax-payer to responsibility. In case of tax evasion and a failure to pay to the budget, the tax-payer’s management can be brought both to the administrative and criminal liability⁸.

¹Paragraphs 1 and 2 of the Article 142 of the Tax Code of the Republic of Kazakhstan

²Article 143 of the Tax Code of the Republic of Kazakhstan

³Article 145.3 of the Tax Code of the Republic of Kazakhstan

⁴Website of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan

⁵Chapter 2 of the Order issued by the Minister of Finance of the Republic of Kazakhstan No. 252 dated 20 February 2018 “On Approval of the Rules for Applying the Risk Management System by Criteria which are not the Confidential Information”

⁶Article 137.1 of the Tax Code of the Republic of Kazakhstan

⁷Article 147 of the Tax Code of the Republic of Kazakhstan

⁸Article 245.1 of the Criminal Code of the Republic of Kazakhstan