The Supreme Court of the Republic of Kazakhstan is working on the generalization of judicial practice. Since tax disputes affect the interests of all individual entrepreneurs and legal entities, many will be interested in considering the issues of judicial practice in tax disputes. Your attention is presented to the main points from the generalization of judicial practice in the consideration of civil cases in disputes arising from tax legislation.
Cases on tax disputes, where one of the independent subjects of dispute by the applicant is the act of a tax audit, the decision of a higher tax authority adopted on the results of consideration of the taxpayer’s complaint about the notification of the results of a tax audit, or other requirements that are not subject to resolution in civil proceedings.
Based on the provisions of Article 638 of the Tax Code that the decision based on the results of a tax audit is a notification issued by the tax authority on the results of a tax audit, in case of disagreement of the taxpayer with the assessed amounts of taxes and other mandatory payments to the budget, obligations to accrue, withhold, transfer of mandatory pension contributions, calculation and payment of social contributions and penalties, reduction of losses, non-confirmation for refund of excess VAT and (or) corporate (individual) income tax withheld at the source of payment from income of non-residents, only a notification is subject to judicial appeal. The court verifies the legality of the accrual of the disputed amounts, taking into account the conclusions set out in the tax audit report.
The tax audit act may be appealed if the taxpayer does not agree with its conclusions, which did not entail the above consequences, but affect his rights and obligations, including in future tax periods. An appeal against an inspection act is regarded as an appeal against the actions of officials of tax authorities.
Despite the fact that the legal position of the Supreme Court was clearly set out in the regulatory resolutions of both 2006 and 2013, some courts of first instance continue to accept and consider on the merits applications to challenge a tax audit act that did not entail any other legal consequences than the notice based on it. The courts of appeal and cassation leave the violations committed without attention. Similar facts take place in the practice of the courts of Kostanay and Pavlodar regions.
4. Cases on disputes related to pseudo-entrepreneurship and invalidation of the registration of a legal entity
So far, there has been a significant number of cases related to pseudo-business.
These are mainly cases based on applications by counterparties of pseudo-enterprises to challenge notifications about the elimination of violations identified by the tax authorities based on the results of in-house audits, and notifications about the results of a tax audit containing charges of taxes and penalties.
As the study of cases has shown, in recent years a stable judicial practice has developed in these cases. When considering cases on disputes about contesting notifications based on the results of an in-house audit, the courts limited themselves to clarifying the issue of whether the tax authority had legal grounds for issuing such a notification. In particular, the final decision in the criminal case, which established the fact of committing pseudo-business.
In cases of disputing notifications based on the results of tax audits, the courts proceeded from the prejudicial nature of judicial acts that have entered into legal force in criminal cases and resolved cases regardless of whether transactions with the counterparty of the false enterprise are indicated in the court verdict (the decision to terminate the criminal case on non-rehabilitating grounds) or not . Also guided by paragraph 20 of the normative resolution of the Supreme Court of the Republic of Kazakhstan No. 1 dated January 12, 2009 “On some issues of application of the legislation on pseudo-business”, in accordance with which, in cases on the legality of exclusion from deductions of expenses and from the offset of VAT amounts, evidence of the actual commission transactions cannot be recognized as reliable, since the court verdict that has entered into legal force establishes otherwise.
In the same connection, claims filed with the aim of subsequently resolving the issue of the legality of the exclusion from the deductions of expenses and from the offset of VAT amounts from the counterparty of the pseudo-enterprise (for example, the validity of transactions) are not subject to satisfaction.
At the same time, from January 1 of this year, amendments and additions made to articles 115 and 257 of the Tax Code came into force, which can have a significant impact on the formation of judicial practice in this category of cases. By virtue of these rules, CIT expenses and from the VAT offset cannot be excluded from deductions for transactions with taxpayers that are not specified in the verdict or court order.
However, in the course of this summary, the regional courts did not provide information on this issue, they did not send cases, according to the oral information of some courts, the cases are still at the stage of litigation.
With regard to tax disputes arising from the invalidation of the registration of the taxpayer’s counterparty, it should be noted that, according to paragraph 9 of the regulatory decree, the amounts of VAT on transactions with the above counterparty are subject to deduction if there is a decision of the tax authority to deregister it for VAT from the date of registration for such an account. At the same time, the Tax Code does not provide for a ban on the deduction of costs for such transactions on the grounds that there is a court decision to invalidate the registration of an individual entrepreneur or legal entity.
Despite this clarification, the tax authorities, based on the results of inspections of transactions with such a counterparty, exclude not only from the VAT offset, but also from the deductions the expenses when calculating CIT.
The jurisprudence in this category of cases is also ambiguous. In some cases, the courts are guided by the provisions of the regulatory resolution, and in other cases, they recognize the correct position of the tax authorities and refuse to satisfy the taxpayers’ applications in full. At the same time, it is assumed that the grounds for declaring the registration of a legal entity invalid are fatal violations committed during the registration of a legal entity. And the consequence of the recognition of the illegal registration of a legal entity is the invalidation of all transactions concluded with its participation as an incompetent person. Accordingly, all counterparties of such transactions may experience all the adverse consequences of their exclusion from CIT deductions and from the VAT offset of expenses on settlements with an illegally registered person from the moment of its registration.
5. Cases on claims of tax authorities for the recognition of transactions as invalid
In accordance with subparagraph 12) of paragraph 1 of Article 19 of the Tax Code, from January 1, 2014, the tax authorities have been empowered to bring claims to the courts to declare transactions invalid.
Along with this, amendments and additions were also made to Articles 115 and 257 of the Tax Code. According to subparagraph 4-1) of Article 115 and subparagraph 3) of paragraph 3 of Article 257 for a transaction declared invalid on the basis of a court decision that has entered into legal force, when calculating CIT, expenses are not deductible and the amount of VAT is not subject to offset.
Giving tax authorities the power to challenge taxpayers’ transactions creates a potential threat of violating the principle of unreasonable non-interference in the activities of individuals and the stability of civil circulation. In this regard, when filing such claims, the courts face an important task of verifying the existence of all conditions (prerequisites) to satisfy the stated requirements.
The right of the tax authority to file a claim for the recognition of the transaction as invalid can only be exercised insofar as the satisfaction of the relevant requirement is aimed at fulfilling the tasks of the tax authorities defined by Article 18 of the Tax Code. Namely, to ensure revenues to the budget of taxes and fees.
The filing by the tax authority of the said claim in court must be preceded by the establishment of the following facts: 1) violation by the taxpayer of the tax obligation, expressed in the payment of a smaller amount of cash payments to the budget; 2) committing a tax violation as a result of participation in a civil liability; 3) the presence of a causal relationship between the private law action and the negative public law consequence that has occurred from the first two facts.
The practice of considering cases of this category indicates that the courts, as a rule, satisfy these claims if the transactions entail negative tax consequences and violate the interests of the state, and one of the consequences of their invalidity will be an increase in budget revenue.
Local courts have questions about the statute of limitations for claims for the recognition of transactions as invalid, their relationship with tax terms.
In accordance with paragraph 1 of Article 178 of the Civil Code, the general limitation period is set at three years.
As a general rule, the running of the limitation period begins from the day when the person knew or should have known about the violation of the right.
Clause 2 of Article 162 of the Civil Code determines the limitation period for disputes related to the invalidity of a transaction on the grounds provided for in clauses 9 and 10 of Article 159 of the Civil Code. It is a year from the date of termination of violence or threat, under the influence of which the transaction was made, or from the day when the plaintiff learned or should have known about the circumstances that are the basis for declaring the transaction invalid.
At the same time, Article 46 of the Tax Code establishes the limitation period for a tax liability and claim. Unless otherwise provided by this article, such period shall be 5 years.
Naturally, in each specific case, the limitation period may not coincide with the tax deadlines. In such cases, one should be guided by the civil law limitation period.
In a number of cases, when tax authorities challenged transactions concluded before January 1, 2014, the defendants pointed to the unlawfulness of filing claims due to the absence of such a right by the tax authorities at the time the transaction was concluded.
However, this position is not based on the law, since the tax authority, as well as another person, can challenge the transaction within the limitation period established by civil law.
The analysis of cases showed that they can conditionally be divided into the following: 1) when there is a concluded written contract; 2) there is no such agreement, but there are invoices issued in accordance with Article 263 of the Tax Code.
Ambiguous practice of consideration of cases of this category has been established.
Often, the tax authorities go to court with a claim to invalidate the transaction concluded between the defendants on the basis of invoices.
At the same time, the study of cases considered in 2014 showed that the tax authorities, with reference to paragraph 3 of Article 152 of the Civil Code, equated the issuance of invoices by suppliers to the conclusion of a transaction in writing.
Therefore, when the tax authority filed a demand to invalidate invoices, they reasonably issued rulings to terminate the proceedings on the basis of subparagraph 1) of Article 247 of the Code of Civil Procedure.
According to paragraph 2 of Article 263 of the Tax Code, the payer of value added tax is obliged, when making turnovers for the sale of goods, works, services, to issue an invoice to the recipient of these goods, works, services, unless otherwise provided by this article.
That is, the invoice is issued by the supplier and, accordingly, signed by his authorized person. Thus, the invoice can be one of the proofs of the transaction, but not the transaction itself.
At the same time, in practice there are situations when there are only invoices and they are taken into account by the taxpayer when fulfilling their tax obligations. In such cases, the subject of dispute should be a transaction, confirmed by the presence of invoices. Therefore, if the tax authorities correctly state their requirements and there is a sufficient set of evidence of the invalidity of the transaction, it is subject to recognition as such with all the ensuing consequences.
It should be noted that the commission by a private business entity of actions to issue an invoice without actually performing work, rendering services, shipping goods in order to extract property benefits, which caused large damage to a citizen, organization or state, entails criminal liability under Article 216 of the Criminal Code of the Republic of Kazakhstan.
Issuance by the taxpayer of a fictitious invoice, namely, issued by a payer who is not registered for value added tax, as well as by persons who actually did not perform work, provide services, ship goods, and include the amount of value added tax, entails administrative responsibility under Article 280 of the Code of Administrative Offenses.
In this connection, the local courts have a question whether, before filing a lawsuit in civil proceedings, the tax authorities are obliged, in the manner prescribed by the Criminal Code and the Code of Administrative Offenses, to establish the elements of a crime or offense, or directly in civil proceedings it is possible to establish the fictitiousness of such invoices , as well as whether a court verdict on criminal liability, for example, on the fact of false business or issuing fictitious invoices, or tax evasion, is a prerequisite for satisfying such claims.
It is desirable that these facts be established in a criminal or administrative procedure. At the same time, situations are not excluded when the person who issued the fictitious invoice cannot be held liable for various reasons. Therefore, it is possible for the tax authorities to directly apply to the court in civil proceedings.
The courts of the East Kazakhstan region raise the question of whether the tax authorities can only demand that transactions be recognized as invalid, without requiring the collection of everything received from such transactions to the state revenue.
It should be noted that the tax authorities, within the framework of the tasks assigned to them by the tax legislation to ensure the completeness and timeliness of receipt of taxes and other obligatory payments to the budget, independently determine their requirements. In addition, when a transaction is declared invalid, the consequences provided for in subparagraph 4-1) of Article 115 and subparagraph 3) of paragraph 3 of Article 257 of the Tax Code occur. That is, a corresponding adjustment is made for CIT and VAT.
When resolving disputes in cases of contesting transactions concluded in writing, local courts reasonably proceed from the fact that at the time of the conclusion of the transaction, a tax liability must exist and the taxpayer must be notified about it. Evidence must also be provided showing that the other party to the transaction knew or should have known about the intention of the counterparty to evade the tax obligation.
The conducted generalization showed that in local courts there is an ambiguous practice of considering cases where one of the defendants is liquidated, including, either in connection with bankruptcy or in connection with the invalidation of its registration.
The courts of the Almaty region consider that in such cases the proceedings are subject to termination on the basis of subparagraph 6) of Article 247 of the Code of Civil Procedure. According to this rule, the court terminates the proceedings if the organization acting as a party to the case is liquidated with the termination of its activities and the absence of legal successors.
The practice of the courts of the East Kazakhstan region deserves a positive assessment, which provide a complete study of all the circumstances of the case, up to the involvement in the case of the former heads of a liquidated legal entity, a bankruptcy manager, etc.
The following category of cases is among the most common. Based on the results of an in-house audit, in connection with the identification of transactions by a taxpayer with a person recognized as a pseudo-enterprise on the basis of a verdict or court decision that has entered into force, a tax authority issues a notification based on the results of an in-house audit, which raises the question of independently eliminating the identified violations.
The taxpayer eliminates the violation by submitting additional tax reporting and invoices issued by another legal entity, that is, the supplier is replaced. Often, such suppliers at the time of submission of additional tax reporting have already been liquidated for various reasons.
The tax authorities, pointing out the fictitiousness of the submitted invoices, dispute the transactions by filing claims to declare them invalid.
The study of specific civil cases, as well as judicial practice, indicates that the courts make decisions both on the satisfaction of such claims and on their refusal. The analysis showed that the validity of the claim and the compliance with the law of the disputed transactions are subject to establishment by the courts in each individual case. If a set of evidence is established that confirms the reality of the conclusion and execution of the transaction, then the claim is subject to dismissal. And, conversely, in the absence of evidence or their insufficiency, a decision is made to satisfy the claim. Consequently, in each specific case, the courts must ensure a thorough and complete study of all the circumstances of the case and, depending on the established, resolve the dispute on the basis of the law.
6. Cases on claims of tax authorities to invalidate the registration of a legal entity
In accordance with subparagraph 12) of paragraph 1 of Article 19 of the Tax Code, the tax authorities have the right to bring claims to the courts for the liquidation of a legal entity on the grounds provided for in subparagraphs 1) and 2) of paragraph 2 of Article 49 of the Civil Code: in cases of bankruptcy and invalidation of the registration of a legal entity due to with violations of the law committed during its creation, which are irreparable.
According to civil law, the liquidation of business entities is the termination of a legal entity and. accordingly, the termination of his rights and obligations without succession. Thus, civil legal relations with the participation of such legal entities and, consequently, the rights and obligations of their counterparties are terminated. In this regard, the liquidation of absent legal entities is important not only for themselves, but also for all participants in civil legal relations associated with them. The general grounds and procedure for the liquidation of a legal entity are established by Articles 49-57 of the Civil Code.
As a generalization has shown, the cases of these claims can be divided into two categories:
1) – this is due to the presence of sentences recognizing taxpayers as false enterprises. Based on the prejudicial nature of the sentences that have entered into legal force, the requirements of the tax authorities are satisfied, the courts do not have problems and questions when considering such cases;
2) – these are cases in which tax authorities bring claims for invalidation of registration (re-registration) of a legal entity, registration of changes made to the constituent documents of a legal entity, indicating the absence of a legal entity at the place of registration, which indicates the provision of false information about the location , formal registration in order to avoid tax control at the former place of registration in the tax office, without the intention to carry out production activities.
The grounds for the liquidation of a legal entity are provided for in paragraph 2 of Article 49 of the Civil Code. At the same time, the legislator provided as independent grounds for the liquidation of a legal entity: in subparagraph 2) of paragraph 2 – the recognition of the registration of a legal entity as invalid due to violations of the law committed during its creation, which are irreparable, and in subparagraph 3) of paragraph 2 – the absence of a legal entity at the location or actual address, as well as founders and officials, without whom a legal entity cannot function for one year.
In practice, the tax authorities bring claims to invalidate the registration (re-registration) of a legal entity on the basis of the absence of a legal entity at the place of registration and the impossibility of exercising tax control in this regard.
The generalization showed the presence of ambiguous judicial practice in the consideration of such cases.
Some courts satisfy the claims of the tax authorities, justifying that the absence of the taxpayer at the address specified in the constituent documents, the impossibility of establishing the actual location does not allow taking measures against the taxpayer in accordance with the tax legislation, and is also one of the schemes for evading tax obligations .
Other courts refuse to satisfy the claim with reference to paragraph 5 of the regulatory decree, according to which the absence of a legal entity at the location indicated in the registration data cannot be attributed to a violation of the law specified in subparagraph 2) of paragraph 2 of Article 49 of the Civil Code. These violations are violations committed by a legal entity in the course of its activities.
In addition, different positions of the courts have been identified on the issue of whether the tax authority has the right to challenge state registration due to the absence of a legal entity at its location or at its actual address.
So, in the certificate of the Kostanay regional court it is noted that in such cases, the courts leave the claims of the tax authorities without satisfaction. Due to the absence of a legal entity at the place of registration, a claim can be filed on the basis of subparagraph 3) of paragraph 2 of Article 49 of the Civil Code, however, the tax authorities do not have the authority to bring such claims by virtue of subparagraph 12) of paragraph 1 of Article 19 of the Tax Code.
In other regions, the courts recognize that the tax authority has the authority to bring such claims and consider them on the merits.
Meanwhile, the legislator restricts the right of tax authorities to file claims by indicating the possibility of filing them in accordance with the legislation of the Republic of Kazakhstan. Consequently, these claims must be filed by prosecutors.