PSAS: Taxation of Operator and Sub-Surface Users

Dear Sirs,

Herewith SIGNUM would like to draw your attention to some issues of the subsurface users’ taxation.

Some clarifying provisions were introduced into the Code of the Republic of Kazakhstan «On Taxes and Other Mandatory Payments to the Budget» («Tax Code»). They mainly concerned the taxation of operator and subsurface users upon carrying out the activity as a member of copartnership under production sharing agreement («PSA»)[1] as well as establishing peculiarities of fulfillment of tax obligations related to activity performed under PSA.

Taxation of the Operator

Notion “Operator” was introduced to the Tax Code. Operator is a legal entity established or determined in accordance with legislative acts of the Republic of Kazakhstan by subsurface users carrying out subsurface use operations in the form of copartnership (consortium) under PSA».

Tax Code was amended by the following clarifying provisions:

•\tActs (failures to act) of operator, committed on behalf and (or) under instructions of subsurface users involved in relations regulated by tax legislation of the RK shall be acts (failures to act) of such subsurface users and operator acting on their behalf and (or) under their instructions (Article 17-1 of the Tax Code);

•\tUpon performance of subsurface use activity in the form of copartnership (consortium) under PSA, tax accounting policy should contain a selected method of tax obligation performance imposed on the participant of copartnership and (or) operator by each tax type and other mandatory payments to the budget specified by tax legislation of the RK (paragraph 2-1, Article 60 of the Tax Code);

•\tIn case CIT payer is a subsurface user performing its activity in the form of copartnership (consortium) under PSA and performance of tax obligations on VAT is imposed on operator, then VAT not to be taken as offset shall be attributed to deductions in the amount attributable to the specified subsurface users in accordance with the data specified in operator’s VAT declaration (paragraph12, Article 100 of the Tax Code);

•\tUpon sale (procurement) of goods, works and services by operator, invoice shall be issued with specification of operator’s requisites as supplier (buyer) (Article 263 of the Tax Code);

•\tOperator shall present consolidated VAT declaration on its activity under contract with regard to all participants of copartnership (consortium) (Article 270 of the Tax Code).

Tax Code was amended by new Article 271-1 regulating peculiarities of performance of tax obligations on VAT by subsurface users performing activity under PSA in the form of copartnership (consortium).

For example, tax obligation on preparation and submission of VAT tax forms within the framework of activity under PSA should be fulfilled:

•\tBy each participant of copartnership with regard to share of VAT due to the specified participant;

•\tBy operator cumulatively with regard to activity performed under PSA, if operator is authorized for fulfillment of such tax obligation in accordance with terms of PSA.

Selected method of tax obligation fulfillment on preparation and submission of VAT tax forms should be reflected in the tax accounting policy and remain unchanged until the expiry of PSA validity.

Article 308 of the Tax Code specifies that if subsurface use right is owned by several individual persons and (or) legal entities in the form of copartnership (consortium):

•\tEach participant of copartnership shall be a taxpayer with regard to taxes and other mandatory payments to the budget established by tax legislation of the RK;

•\tParticipants of copartnership (consortium) shall be obliged to specify authorized representative of participant of copartnership (consortium) responsible for consolidated tax accounting under the activity performed in accordance with such subsurface use contract;

•\tAuthorized representative of participants of copartnership (consortium) shall be obliged to maintain consolidated tax accounting under activity performed under subsurface use contract;

•\tIn cases of performance of subsurface use operations under production sharing agreement (contract) operator shall act as such authorized representative;

•\tPowers of authorized representative of participants of copartnership (consortium), including operator, should be confirmed in accordance with requirements of Article 17 or 17-1 of the Tax Code.

Article 614 of the Tax Code establishes that upon collection of debts for tax of taxpayer performing activity under PSA in the form of copartnership (consortium) in cases when performance of tax obligations is imposed on operator, enforcement measures shall be applied to taxpayer and (or) operator.

Tax Obligations of Individual Subsurface Users

Article 307 of the Tax Code also specifies that Section «Taxation of Subsurface Users» establishes some peculiarities of tax obligations fulfillment in connection with activity performed under PSA.

Further, Article 308 of the Tax Code clarifies that calculation of tax obligations with regard to taxes and other mandatory payments to the budget in connection with activity performed under subsurface use contract shall be made in accordance with tax legislation of the Republic of Kazakhstan in force for the time of creation of obligations on their payment, except for cases specified in paragraph 1, Article 308-1 of the Tax Code.

Tax Code is also amended by new Article 308-1 clarifying procedure of performance of tax obligation by subsurface users performing their activity under stabilized PSA.

For example, it is established that if definition of operator is specified by provisions of stabilized PSA, and performance of tax obligation under such agreement shall be made by operator, such operator shall fulfill tax obligation under such agreement in accordance with the tax regime effective for parties of such agreement.

Tax obligation of participant of copartnership (consortium) under PSA may be fulfilled by one of the following methods:

1) tax obligation is fulfilled by participant of copartnership (consortium) independently or by operator on its behalf only with regard to obligations due to the specified participant. In this case requisites of the participant of copartnership (consortium) as taxpayer and requisites of operator as authorized representative shall be specified in the tax form;

2) tax obligation of participant of copartnership (consortium) is fulfilled cumulatively by operator with regard to activity performed under PSA, if it is specified by provisions of PSA. In this case preparation and submission (revocation) of tax forms shall be made by operator in accordance with procedure established by Chapter 8 of the Tax Code with specification of requisites of operator as taxpayer.

If in the course of performance of subsurface use operations, tax obligations will arise for operator as taxpayer (tax agent) in accordance with the requirements of tax legislation, such tax obligations shall be fulfilled by operator independently.

We hope that presented information will be useful for you. Should you have any additional questions, please do not hesitate to contact Talgat Saryev (tbs@signumlaw.com) and Togzhan Ibrayeva (tki@signumlaw.com).

[1] Law of the RK dated 30 June 2010 № 297-IV «On Amendments to Some Legislative Acts of the RK on Issues of Customs Regulation and Taxation».

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please seek for a specific advice in relation to any questions. Please note that Kazakhstan and Turkmenistan are emerging economies and their legislation and legal systems are in constant development. Should you have any questions or would like to discuss subjects addressed in this Client Update please contact us.