VAT refund

We have recently secured a favorable outcome for our client in a dispute against the tax authorities concerning VAT refunds. Alongside common issues such as failure to repatriate proceeds in foreign currency, lack of response to inquiries and counter-inspections, and excessive claim of VAT refund, this case presented an unusual challenge.

The client, as a subsoil user, operates under a contract that ensures stability of its tax regime. The tax authorities have adopted a novel interpretation of what constitutes stability of the tax regime.  At the time the contract was signed, the tax legislation did not include the concept of “turnover taxable at zero rate” for export purposes; as a result, the client's turnover from oil export was classified as “tax-free turnover”.

Later tax legislation introduced the concept of “turnover taxable at zero rate”, including for export purposes. At the same time, the legislation retained the concept of “tax-free turnover”, which, however, no longer applied to export.

The tax authority asserted that the VAT refund procedure fell under procedural matters, thus the stabilized tax regime should not apply to it. Furthermore, in accordance with the current tax legislation, in case of export only turnover subject to zero-rate taxation can be offset. As a result, the client's oil export turnover, which is regarded as tax-free turnover, shall not be offset.

After nearly two years of deliberations on this matter, the Appeal Commission agreed with our arguments. It was determined that the right to VAT refund on export turnovers, whether classified as tax-free turnover or turnover taxable at zero rate, is independent of the VAT refund procedure. Consequently, the Appeal Commission concluded that turnovers from oil exports should be regarded as turnovers taxable at zero rate for VAT refund purposes.

Consequently, the client refunded VAT totaling 1.4 billion tenge.