Tax deduction. Error in the example of the Methodological Guidelines may lead to tax disputes

Autor: Gaukhar Narbekova MinTax Group Posted: Valeriy Posted: 1 August 2018 09:04 Category: Corporate Income Tax, deductions Views: 511

In this article, the author, Gaukhar Narbekova, Partner of MinTax Group, RoK Auditor, DipIFR (ACCA), CIPA, CAP expresses her professional opinion regarding the error in the example of calculating the sum of deduction of taxes and other obligatory payments (hereinafter - "Taxes") in the Methodological Guidelines for the conduct of tax inspections approved by the Appendix to the Order of the Chairman of the Tax Committee of the RoK Ministry of Finance No. 248 dated 24 June 2011  (hereinafter - the "Methodological Guidelines").

According to the example given in the Methodological Guidelines, the sum of accrued and paid Taxes should be calculated on the basis of data of the taxpayer's personal account (p/a) which is maintained by the tax authority (hereinafter - the "Personal Account"), instead of using the taxpayer's own accounting data.

The specified norm of the Methodological Guidelines contradicts the Tax Code, according to which an obligation to assess and pay the Taxes shall be fulfilled by the taxpayer himself on the basis of his accounting documentation which does not comprise the Personal account.

The Personal account does not assess the Tax, but reflects only the taxpayer's tax reporting data in respect of the accrued Tax amount, taking into account the occurred deadlines for the payment of Taxes, which leads to deviations from the actual data of the taxpayer himself.

Therefore, the use of the Personal account leads to a violation of the procedure for assessing the CIT established by the norms of the Tax Code.

When the tax authorities use the example from the Methodological Guidelines, the taxpayer should point out that the norms of the Tax Code stand above the norms of the Methodological Guidelines and that, according to the provisions of the current Tax Code, all contradictions should be construed in favour of the taxpayer.

Further, let us consider the situation in more detail, giving reasons which confirm existence of the error in the Methodological Guidelines.

The Methodical Guidelines were put into effect on the date of signing and are effective up to now.

Therefore, the Methodological Guidelines are applied by the state revenue authorities when exercising control over the completeness of the assessment of tax liabilities by taxpayers.

Below is an extract from the Methodological Guidelines in respect of the procedure for determining the amount of deduction on taxes and obligatory payments to the budget for the purpose of assessing Corporate income tax (CIT), Form 100.00.

All the norms of tax legislation referred to in the Methodological Guidelines are related to the Code of the Republic of Kazakhstan #99-IV dated 10 December 2008 "On Taxes and Other Obligatory Payments to the Budget (Tax Code)" and, when analysing them, the author assumed that the procedure itself for calculating deductions on taxes for CIT purposes in the current tax legislation has not changed.

Line 100.00.53 "Taxes and other obligatory payments to the Budget"

 In accordance with Article 114 of the Tax Code, Taxes paid (in particular by offsetting) to the budget of the Republic of Kazakhstan or some other state in respect of taxpayer's taxable items, within the assessed and accrued limits shall be subject to deduction, except for:

1)  taxes excluded prior to determining the aggregate annual income;

2)  CIT and income taxes paid in the territory of the Republic of Kazakhstan and other states;

3)  taxes paid in countries with preferential taxation;

4)  tax on excess profits.

 Taxes accrued, assessed for the preceding tax periods and paid (including those paid by offset method) in the current tax period shall be subject to deduction in the current tax period.

It should be noted that, the amount of Taxes assessed (accrued) and paid in excess of the amounts established by regulatory legal acts of the Republic of Kazakhstan, shall not be referred to deductions.

Information on Taxes paid to the budget is generated from data of the personal account, and information on the amount of accrued Taxes - from tax reports on relevant taxes (taking into account the amounts of taxes additionally charged based on the audit report).

The amounts of accrued Taxes are determined by the credit of accounts of subsection 3100 "Tax Liabilities" of the Standard Chart of Accounts.

Example of the calculation of Social tax deduction for 2008-2009

Description

2008

2009

Balance at the beginning of period on p/a (+,-)

+100,000

- 200,000

Charged on tax reporting form

1,000,000

1,000,000

Additionally charged on the audit report

500,000

0

Paid on p/a

1,200,000

1,500,000

Tax deduction

1,300,000

1,200,000

The author believes that in the above example "Balance at the beginning" one should use information from the taxpayer's accounting data rather than data of the Personal account.
That is, the correct example should be as follows:

Description

2008

2009

Balance at the beginning of period as per accounting records (+,-)

+100,000

- 200,000

Charged on tax reporting form

1,000,000

1,000,000

Additionally charged on the audit report

500,000

0

Paid on p/a

1,200,000

1,500,000

Tax deduction

1,300,000

1,200,000

The grounds for expressing an opinion are stated below:
In accordance with the rules of tax accounting provided for by Article 192 of the current Tax Code effective from 1 January 2018, the taxpayer (tax agent) shall maintain tax accounting in Tenge using the accruals method in the manner and on the terms established by this Code. In the meantime, the "accruals method" is a method of accounting whereby the results of transactions and other events shall be recognized as they occur, in particular, from the date when work is performed, services are provided and goods are shipped and transferred to a buyer or his agent for the purpose of realization or booking of assets, rather than from the date of receipt or payment of cash or cash equivalents. The taxpayer (tax agent) on the basis of the tax accounting based upon the results of the tax period, shall determine taxable items and (or) items relating to taxation, and assess Taxes to the budget.

The assessment and accrual of Taxes shall be made in accordance with the tax legislation of the Republic of Kazakhstan or another state (for taxes and other obligatory payments paid to the budget of the other state).

The procedure for the assessment of Social tax is stipulated in Article 359 of the Tax Code, Social tax is assessed by applying the rate established in paragraph 1 of Article 358 of the Tax Code to the taxable item determined in accordance with paragraphs 2 and 3 of Article 357 of the Tax Code for the tax period.

Please note that Social tax assessed for the 4th quarter is not shown in the Personal Account, but as per Tax code requirements it should be accounted for when calculating deductions according to Article 114 of Tax code.

That is, the shift in tax periods due to the difference between the payment deadline and the end of tax period contradicts the accrual principle, which stipulates that the taxpayer (tax agent) shall maintain tax accounting in KZT by accruals method in the manner and under the conditions established by the Tax Code.

According to paragraph 3 of Article 190 of the current Tax code, tax accounting shall be based on accounting records. The procedure for the maintenance of accounting documentation shall be established by the Republic of Kazakhstan legislation concerning accounting and financial reporting.

According to paragraph 3 of Article 100 of the Tax code, deductions shall be made by a taxpayer in the presence of documents supporting the expenses related to its activities aimed at earning income. These costs shall be subject to deduction in that tax period in which they were actually incurred, except for the costs of future periods, to be determined in accordance with the international standards of the financial reporting and requirements of the legislation of the Republic of Kazakhstan on accounting and financial reporting.

Thus, the Personal account is not deemed to be an accounting document of the taxpayer intended for bookkeeping, in accordance with the RoK Law "On Accounting and Financial Reporting", but is a document intended for accounting and monitoring transfers of taxes and obligatory payments to the budget . At the same time, the Personal account is maintained by the tax authority rather than the taxpayer.

Thus, with the exception of cases where accounting records are not maintained or the documents are lost, taxable items by default should be assessed and determined with the use of the taxpayer's accounting documents on the basis of accounting and tax records.    

The author hopes that this article will help taxpayers in disputes that often arise in case of different interpretations of the tax law and will serve as the grounds for cancelling the example contained in the Methodological Guidelines for carrying out documentary inspections of the completeness of assessment of tax liabilities by officials of state revenue authorities or for replacing the phrase "Balance at the beginning of the period on p/a (+, -) " with "Balance at the beginning of the period as per accounting records (+, -)".

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