Unlawful VAT Deregistration

Kazakhstan is a developing country currently requiring foreign investments more than ever. Accession to the WTO, which leads to a large influx of foreign companies, products and services, ambition to join the 50 highly developed countries, adoption of the program of 100 concrete steps to implement five institutional reforms, along with legal and regulatory developments aimed at creating favorable conditions for business in Kazakhstan; all these clearly demonstrate aspiration of Kazakhstan to improve business and investment climate in the country. However, as practice shows, the reality may be slightly different.

In this piece, we would like to share a case from our practice when a foreign investor (our client – hereinafter “company”) was unlawfully removed from the value added tax (VAT) register and was forced to suspend all its operations until the VAT number is restored. It took us over 4 months to seek and achieve justice against the tax authorities.

VAT deregistration procedure is outlined in the Tax Code of the Republic of Kazakhstan. The procedure entitles the tax authority to remove a taxpayer from the VAT register subject to due process. In the company’s case, a tax inspector undertook an inspection to verify that the taxpayer is located at the registered address by paying a visit at the client legal address. However, the tax inspector failed to locate the address of our client. On the day of inspection, the client has actually been physically located at the registered address for a year since its initial statutory registration. The tax inspector issued a tax inspection act on the “absence” of a taxpayer at the legal registered address. The tax inspector then was required to notify the taxpayer in writing on the issued tax inspection act via post mail to give the tax payer a chance to explain and justify its absence or otherwise at the registered address. Failure by the taxpayer to provide such explanation within a statutory timeline would result in the following:

• Suspension of bank account operations;

• Subsequent removal of the tax payer from the VAT register.

In this case, the tax authority sent the notification to a wrong addressee, which as a result did not reach the company. Notwithstanding that the company has never received the notification and missed a chance to respond to the tax authority, the tax authority went on de-registering the company for VAT purposes. VAT deregistration implied full suspension of operations of the client – no payments to counter-parties could be made as the client could not use its VAT number, no installation and further use of the drilling rig as contemplated by the company for the same reason.

Contestation of unlawful VAT deregistration

In accordance with tax laws of the Republic of Kazakhstan the company filed a complaint with the district and the city tax committees respectively. Both committees acknowledged unlawfulness of actions of the tax inspector and approached the higher tax authority – the State Revenue Committee – with recommendation to restore the company’s VAT number. Also the tax authority initiated disciplinary proceedings against the tax inspector.

However, the State Revenue Committee dismissed the recommendation of the district and the city tax committees and upheld the prior decision on deregistration with no justification whatsoever. The company then lodged a complaint against this decision with the Head of the State Revenue Committee. The complaint has been reviewed and processed for almost 2 months. All this time the company was completely incapacitated and could not fully carry out its operations. The company was ultimately forced to file a statement of claim with the court and a complaint with the National Anti-Corruption Bureau at the Ministry of Civil Service Affairs of the Republic of Kazakhstan.

The company argued that it was subject to unlawful and illegal treatment due to the following:

  1. The tax inspector never entered the building where the company’s office was located. This fact was confirmed by the entry register kept by the concierge.
  2. The tax notification was sent to a wrong addressee.
  3. The Director of the company was present at the workplace during working hours.
  4. The district tax committee admitted unlawful actions of the tax inspector.
  5. Following deregistration the VAT amount earlier paid by the company was at risk of “seizure” by the state. The company had previously paid VAT of around 24 mln tenge, however, the company was not be able to use this amount for VAT offset purposes without a VAT number.

After more than four months of persistent “fight” with the tax authorities the company’s VAT number has finally been restored.

Our client, the good faith foreign investor, who invested more than 400 mln tenge in Kazakhstan, created new jobs and attracted primarily local companies, faced an absolutely absurd situation. Unlawful actions of the tax authorities resulted in suspension of operations of the company and its continuous legal incapacity due to delayed VAT number restoration. This not only contravened the laws, but also jeopardized the government investment policy in general.

In this article, we wanted to share a practical case whereby unlawful and uncoordinated actions of government authorities may eventually force a good faith investor to withdraw its investments from Kazakhstan. Such actions beyond any doubt could undermine all the efforts and endeavors made by government agencies and officials to attract more investments into Kazakhstan, expand domestic production, and set up a favorable investment climate for business. Regulatory and legal framework, as well as the way the government agencies deal with investors must be revisited for more sustainable economic development, for retention of investments made so far and attraction of new investors.