The recent trend of tax authorities to sink information – basis of tax assessments

During court proceedings, tax authorities refuse to present documents that confirm tax assessments based on the confidentiality of such documents and commercial secrets.

•\tEvidence in tax disputes does not meet the criteria for confidential information, including the limitation of access to the information, the commercial value of the information, the commercial interest of the owner of the information and its protection measures.

•\tFailure of evidence in court violates the principle of the competitiveness and equality of the parties, the principle of taxation certainty, and the rights and obligations of the parties.

•\tThe submission of a petition on calling evidence is one way to protect the taxpayer’s rights with respect to obtaining access to documents.

The experience of our litigation lawyers

Our litigation lawyers have encountered situations where tax authorities performing audits on transfer pricing have referred to the price quotations of officially recognized sources of information. However, in the course of tax audits and legal proceedings of tax audit appeals, the tax authorities have refused to grant access to such publications based on their confidentiality in view of the fact that the documents are freely available and can be purchased independently.

What rules are violated?

Such non-provision of evidence is unreasonable because it causes material violations of the following principles of law:

•\tPrinciple of the competitiveness and equality of the parties

Procedural legislation establishes that the court shall create all necessary conditions and assist parties in the full and objective investigation of case circumstances.

Without documents, which are considered to be the basis of assessments, the taxpayer becomes unable to appeal the assessments, and, accordingly, there is a breach of the principle of the competitiveness of the parties and equal access to case materials.

•\tPrinciple of taxation certainty

Pursuant to tax legislation, the principle of taxation certainty is that the basis and procedure for tax obligation shall be defined and established by the laws of the Republic of Kazakhstan.

Meanwhile, the use of information inaccessible to the taxpayer violates the principle of taxation certainty as the taxpayer is not aware of the information used by the tax authorities during tax audits and is unable to confirm or dispute it.

•\tParties’ rights

P.1 of Article 47 of the Civil Procedure Code of the Republic of Kazakhstan defines a list of rights of persons participating in court proceedings. The first right is a right to review the case materials, make notes and copy them.

Therefore, if a Party submits a document containing confidential information and bases its claim on it, this evidence or document becomes a part of the case and each Party may receive it.

•\tParties’ obligations

In accordance with Article 65 of the Civil Procedure Code of the Republic of Kazakhstan, each Party shall prove such circumstances to which it refers. Thus, in accordance with p. 11 of Article 66 of the CPC of the RoK, the content of each piece of evidence shall be disclosed within the court proceedings where such evidence is examined. In this context, non-provision of evidence due to its confidentiality is a breach of Chapter 7 of the CPC of the RoK, which deprives the court of the opportunity to conduct a trial effectively and comprehensively.

What falls under confidential information?

In accordance with the civil legislation of the Republic of Kazakhstan, information comprising business or commercial secrets is considered to be information that has actual or potential commercial value by virtue of its being unfamiliar to third parties, the limitation of access to such information on a legal basis and the measures taken by the owner to protect its confidentiality.

In accordance with p. 16 of Article 1 of the Law on private businesses, a commercial secret is information defined and protected by private entrepreneurs, the free access of which is limited to a set of people, and the disclosure, acquisition or usage of such information can cause adverse effects to the interests of entrepreneurs.

Thus, information is recognized as being confidential if it has the following characteristics:

•\tThe limitation of free access to it;

•\tIts disclosure, acquisition and usage can cause damage to its legal owner;

•\tCommercial value;

•\tIts owner takes measures for its protection.

What to do?

In accordance with Articles 66 and 47 of the CPC of the RoK, the Party is entitled to submit a petition on calling evidence.

Given the filing of such a petition, the Party will indicate the breach of procedural rules and the court will be able to request “confidential” documents from tax authorities or recognize the claim as being unreasonable.

The court shall request the documents, indicating the terms for their provision. In case of the refusal of the tax authorities to provide documents, the court will consider the information/data as being against the interests of the tax authorities.

In case of the refusal of the court to satisfy the petition on calling evidence, the Party is entitled to appeal such refusal by bringing a private complaint at the court of appeal instance.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy and its legislation and legal system are in constant development. Should you have any questions or would like to discuss matters addressed in this Client Update, please contact us.