This article was prepared by Gaukhar Narbekova in order to draw attention of subsurface users who are entitled, with effect from 1 January 2018, to apply the alternative tax on subsurface use, to essential provisions of tax legislation standrds of the RK[1] in respect of the timeframe for making management strategic decisions related to assessing the effect from replacement certain tax obligations of subsurface users with a single alternative tax on subsurface use.
With the enactment from 1 January 2018 of the RK Code “On Taxes and Other Obligatory Payments to the Budget” #120-VI dated 25 December 2017 (the Tax Code) the norms which are provided for by Chapter 87 “Alternative Tax on Subsurface Use” of Tax Code become effective.
The special features and procedure for applying the mentioned tax are considered below.
Please note that not all subsurface users are granted the right to apply the alternative tax on subsurface use, but only those whose subsurface contracts meet certain requirements.
In particular, according to Article 766 of the Tax code, the alternative tax on subsurface use can be applied instead of the payment for reimbursement of historical costs, minerals extraction tax and excess profit tax by those legal entities that are subsoil users who have concluded in accordance with the legislation of the RK on subsurface and subsurface use:
1) a contract for the extraction and (or) combined exploration and extraction of hydrocarbons on the continental shelf of the RK;
2) a contract for the extraction and/or exploration and extraction of hydrocarbons on deposits with the depth of the upper point of hydrocarbon occurrence specified in the mining allotment or in the contract for the extraction or exploration and extraction of hydrocarbons in the absence of a mining allotment, not higher than 4,500 meters and the lowest point of hydrocarbon occurrence indicated in the mining allotment or in a contract for the extraction or exploration and extraction of hydrocarbons in the absence of a mining allotment, 5,000 meters and lower.
The alternative tax on subsurface use shall be determined for the tax period of contractual activity for each individual subsurface use contract.
The taxable item is determined as a difference between AAI[2] for the purpose of alternative tax assessment and deductions for alternative tax purposes, subject to adjustments provided for by Article 287 of Tax code. At the same time, AAI is determined in accordance with the procedure stipulated by the Tax Code for the purposes of assessing CIT[3], except for the excess of the amount of positive exchange difference over the amount of negative exchange difference that should not be included in the AAI when assessing the alternative tax on subsoil use and without the AAI adjustment provided for by Article 241 of Tax Code.
Deductions for the purposes of assessing the Alternative tax are determined in accordance with the procedure set by the Tax Code for the purposes of assessing CIT, taking into account the following:
– interests, including those recognized as deductions according to Article 246 of Tax Code or those to be accounted for as capital costs shall not be subject to deduction;
– excess amounts of negative exchange difference over amounts of positive exchange difference shall not be subject to deduction;
– amount of the assessed (accrued) CIT shall not be subject to deduction.
In the meantime, for the alternative tax, similarly to CIT, if the same expenses (costs) are represented in several groups of expenses (costs) established by clause 4 of Article 766 of the Tax code, then when assessing the alternative subsurface use tax, these expenses (costs) shall be deducted only once.
The alternative tax on subsurface use is calculated as the product of the item subject to such subsurface use tax and the following tax rates established by Article 768 of the Tax Code:
| No |
World Price |
Rate, % |
|
1 |
2 |
3 |
| 1 | up to 50 US dollars for barrel, inclusive | 0 |
| 2 | up to 60 US dollars for barrel, inclusive | 6 |
| 3 | up to 70 US dollars for barrel, inclusive | 12 |
| 4 | up to 80 US dollars for barrel, inclusive | 18 |
| 5 | up to 90 US dollars for barrel, inclusive | 24 |
| 6 | over 90 US dollars for barrel | 30 |
With a view to making an economically grounded decision with respect to applying the alternative tax on subsurface use, each contract should be analysed in terms of efficiency of its application.
Generally, the alternative tax was introduced to relieve a tax burden and to support the development of minerals extraction on the continental shelf (offshore extraction) and extraction of hydrocarbons on deposits with the depth of the upper point of hydrocarbon occurrence not higher than 4,500 meters and the lowest point of hydrocarbon occurrence or in the absence of a mining allotment, 5,000 meters or lower.
The right to apply, from 1 January 2018, an alternative procedure for the fulfilment of tax liabilities on special payments and taxes of subsoil users in respect of contracts specified in paragraph 1 Article766 of Tax code, concluded before 1 January 2018 shall be exercised for the entire remaining effective period of the subsurface contract and shall not be subject to any changes, and the taxpayer shall send a notice to that effect to a local tax authority not later than 1 March 2018.
For contracts concluded after 1 January 2018, the notice on applying this right shall be sent by the taxpayer to a local tax authority not later than thirty calendar days from signing the contract for extraction or the commencement of the extraction period under the contract for combined exploration and extraction. However, in the absence of such notice, the tax liability for the payment of reimbursement of historical costs, mineral extraction tax and excess profits tax shall be fulfilled by the generally established procedure prescribed by Chapters 84, 85 and 86 of the Tax Code.
It should be kept in mind that the alternative tax on subsurface use can be applied instead of the payment for reimbursement of historical costs, minerals extraction tax and excess profit tax by those legal entities subsoil users who have concluded in accordance with the legislation of the RK on subsurface and subsurface use only contracts for extraction and (or) combined exploration and extraction.
At that, this right shall be applied during the period from signing an extraction contract or commencement of the extraction period under a combined exploration and extraction contract until the expiry of the corresponding subsoil use contract and is not subject to any changes.
That is, the right is available only for extraction and combined contracts:
– for extraction contracts, the right shall be applicable from the date of signing the contract;
– for combined contracts from the date of commencement of the extraction period.
Thus, subsurface users who have contracts for the extraction and (or) combined exploration and extraction of hydrocarbons that meet the requirements of paragraph 1 of Article 766 of the Tax Code and concluded before 1 January 2018will have to make a decision to apply the alternative tax and submit a relevant notice to the state revenue agency on such contracts until 1 March 2018 and then such an opportunity will never be available again; so, the subsurface user has to act very quickly to assess the effectiveness of potential application of the alternative tax on subsurface use in respect of these contracts.
In turn, for contracts that meet the requirements of paragraph 1 of Article 766 of the Tax Code and concluded after 1 January 2018, if a taxpayer decides to apply the alternative tax on subsurface use, then he shall be obliged to submit a notice about such decision to the local tax authority within thirty calendar days from the date of conclusion of the extraction contract or the commencement of the extraction period under the contract for combined exploration and extraction, which also forces to act very quickly and make an assessment of the effect from applying the alternative tax upon the occurrence of the production stage under combined contracts and the date of concluding the extraction contract.
At the same time, if a decision has been made to apply the alternative tax on such contracts and the tax authority was notified in due time, the previously made decision cannot be changed until the expiry date of the contracts.
Below we provide information regarding the application of the alternative tax on subsurface use for taxpayers, should they apply this right:
| Tax Period | Calendar year |
| Tax is paid to | Budget at the taxpayer’s location |
| Payment deadlines | Not later than ten calendar days after the submission deadline. |
| Time and place for submission of declaration | To a local tax authority not later than the 31st March of the year following the reporting tax period. |
[1] Republic of Kazakhstan.
[2] Aggregate Annual Income.
[3] Corporate Income Tax.
