Kazakhstan: Requirements for allocation of service expenses to tax deductions

published on 11 May 2020 | reading time approx. 4 minutes

Considering the current practice of tax authorities in the Republic of Kazakhstan (the “RK”) regarding the marketing and management services received by local companies, we have prepared this report, which reflects the relevant requirements of the legislation of the RK and the current situation. Taking into account the consequences of the Covid-19 epidemic in relation to economic growth in the RK, an increase in the number of scheduled and unscheduled inspections of large taxpayers can be expected once the quarantine measures are cancelled in the fourth quarter of 2020.

  
  
We hope that the report prepared by us will be useful for you to assess your tax risks and will help in avoiding litigation with Kazakhstan tax authorities in the future.

1. Provisions of the Tax Code and Legislation of the Republic of Kazakhstan

According to the Tax Code of the Republic of Kazakhstan (the “TC”), taxpayer’s expenses related to the implementation of activities for the purposes of income generation are deductible in calculation of the taxable income, with the exception of certain expenses that are not deductible according to the TC. At that, deductions should be made by the taxpayer for his actually incurred expenses on the basis of documents confirming such expenses.

 
Further, the TC stipulates that the accounting records, among other things, include the following:

• accounting documentation - for the taxpayers entrusted with the responsibility for its maintenance;
• primary accounting documents;
• tax forms;
• other documents that can be a basis for determining the objects of taxation, as well as for calculating the tax liability.

It should be noted that tax accounting is based on accounting data. At that, the procedure for maintaining accounting documentation is regulated by the Law of the Republic of Kazakhstan "On Accounting and Financial Reporting" (the "Law").

 
In accordance with the provisions of the Law, accounting documentation also includes primary documents and forms, the requirements for which are regulated by the authorized body of the RK. As such, according to the accounting rules, for the transfer and acceptance of completed works and services rendered the Act of Completed Works (“ACW”) is applied, the form (P-1) of which is approved by the Order of the Minister of Finance of the RK. At that, the requirement to reflect information on the report on scientific research, marketing, consulting and other services, including the date, number, and number of pages, is stipulated in the ACW form.

 
Given the above, taxpayers' expenses incurred for the purposes of generating income, including the purchase of marketing and other services, are deductible for the assessment of corporate income tax (“CIT”), provided that all the necessary documents confirming receipt of such services, including reports, are available.
Please note that there are no separate specific provisions are provided in the Tax Code for deductibility of management services for Kazakh taxpayers.

 
At that, in order to provide practical assistance to tax authorities in conducting tax audits on compliance with tax laws, Methodological recommendations for tax audits were developed and approved (the “Methodology”) by the Kazakh authorities. According to the Methodology, the tax authorities of the RK must check for an agreement on the provision of marketing services, ACW, and a report on marketing research when assessing the assignment of marketing services to deductions.

 
Regarding other services, the Methodology recommends to the tax authorities of the RK to check the availability of a contract for the provision of services, invoices, and acts of ACW. At that, such services, works can be deducted for CIT purposes provided that such services are related to current business activities and sales of products (performance of work, provision of services), that is, these expenses are incurred for the purpose of generating total annual income. For this end, it should also be taken into account that accounting documents must contain and disclose the content of the services rendered and information on their volume and nature of such services.

2. Practice of the Tax Authorities of the Republic of Kazakhstan

Based on our experience and recent court litigation between Kazakh taxpayers and tax authorities, we note that the tax authorities have not yet reached an unequivocal position regarding the documentation requirements for marketing and management services. At that, the analysis of court cases shows that for the purposes of assignment of relevant expenses as deductions for CIT, the completeness of the information proving the fact of the provision of these services, the volume, composition and nature of such services are essential.

a) Requirements for ACW

Judicial practice on the deduction of marketing and management services shows that local tax authorities, as a rule, require meaningful disclosure, the volume and the nature of such services in the relevant ACW. Otherwise, the tax authorities may classify such documents as “not complying with the requirements of the legislation of the RK due to their improper execution”.

b) Requirements for other documents

In relation to other documents, the tax and judicial authorities of the RK are of the opinion that such documents should confirm the content of operations that disclose the specific nature of the services provided and establish a relationship between the expenses incurred and the business activities for income generating purposes.

In the absence of such information, the tax authorities exclude such expenses from deductions for CIT purposes as “not used for income purposes”. At that, the judicial authorities may require an indication in the supporting documents information such as “by whom, when, where the consultation was made and on what topic, who participated in the consultations and who received the consultation”. In the absence of such data, a decision in a court proceeding may be taken in favor of the tax authorities in case of court litigations.

3. Summary

The analysis shows that the Kazakh tax authorities require a reflection of exhaustive data in accounting documents in relation to marketing and/or management services. Moreover, such documents should also confirm the relationship of expenses incurred for acquired services with activities aimed at generating income by such recipient of services.

 
We note that the vast majority of litigations are decided in favor of the tax authorities in case of court litigations.

 
Hence, we recommend our clients to check if their accounting documents comply with the above requirements of the tax legislation of the RK. A timely audit can identify the risks that may arise after the end of the state of emergency by the end of 2020.