The lack of consistency in the judicial practice of the Supreme Court of the Republic of Kazakhstan negatively affects the country's investment climate, resulting in multimillion-dollar losses for businesses.
As is well known, tax authorities are entitled to challenge the legitimacy of certain transactions if they believe these were aimed at avoiding tax obligations. In such cases, tax authorities are generally required to bring claims before the courts to have such transactions declared invalid.
However, tax authorities often circumvent this established procedure. For example, during tax audits, they may unilaterally conclude that certain transactions lack actual supply of goods or provision of services. In essence, the tax authority may disregard the taxpayer’s expenses without seeking invalidation of the transactions through court proceedings or establishing their fictitious or sham nature in the context of criminal investigations. As a result, such unilateral actions lead to the exclusion of taxpayer expenses from the corporate income tax deductions and VAT credits, which in turn results in substantial tax reassessments and penalties.
At the same time, judicial practice in Kazakhstan is often inconsistent, which encourages abusive behaviour by tax authorities. In this article, the author presents examples of contradictory rulings by the Supreme Court of Kazakhstan on this matter. As detailed below, the author calls on the Supreme Court and the judiciary as a whole to develop a unified approach to the assessment of tax disputes. Consistent case law would significantly improve the investment climate in Kazakhstan.
Case Law of the Supreme Court of Kazakhstan
- Supreme Court Civil Panel Ruling dated 13 August 2019 No. 6001-19-00-3gp/402 upheld the decision of the Almaty Specialised Interdistrict Economic Court (SIEC) and the appellate ruling that declared unlawful the notices issued by the Almaty Department of State Revenue (DSR) following a tax audit of LLP "Centre for Kazakhstan Broadcasters".
- The court found that the tax authority, by concluding in its audit report that invoices issued by the taxpayer’s counterparties were fictitious—without having those transactions declared invalid—assessed taxes and penalties, thereby depriving the taxpayer of the right to prove the reality of the transactions and receipt of goods, works, and services.
- Supreme Court Civil Panel Ruling dated 30 October 2020 No. 6001-20-00-3pp/93, rendered following a motion by Chief Justice Zhakip Asanov, upheld the Almaty SIEC decision declaring unlawful the DSR’s audit notice regarding Global Chemicals Company LLP.
- The court stated that the tax authority failed to provide any evidence that the transactions between the taxpayer and its suppliers were invalid or fictitious. No reverse audit results or court decisions invalidating the transactions were submitted. Under Article 157(1) of the Civil Code, the invalidity of a transaction must be established by a court, which was not done in this case.
- Notably, prior to the review initiated by the Chief Justice, the taxpayer’s position in this case was weak: the first-instance ruling in its favour had been overturned by the appellate court and this decision was upheld at the cassation level.
- Supreme Court Civil Panel Ruling dated 3 September 2019 No. 6001-19-00-3gp/456, in the case of LLP Gamma Taldykol, overturned lower court rulings and rendered a new decision granting the taxpayer’s claim against the Pavlodar Region DSR. The court emphasised that the transactions in question had not been challenged or declared invalid.
- Supreme Court Civil Panel Ruling dated 28 September 2021 No. 6001-21-00-3GP/394 upheld the appellate ruling overturning the Atyrau Region SIEC decision and granted the claim of LLP CTCS Logistics against the local DSR. The court held that the taxpayer’s transactions had not been invalidated by law and thus confirmed the existence of genuine business activity between the taxpayer and its counterparties.
The above rulings by the Supreme Court confirm a clear legal position: the tax authority may not disregard expenses arising from transactions that have not been declared invalid by a court. Even the most recent case cited above (28 September 2021) reinforces this approach.
However, inconsistency arises: just one day earlier, on 27 September 2021, a judge from the same civil panel rendered a contradictory decision in a similar case—Supreme Court Ruling No. 6001-21-00-3G/5586, denying the taxpayer’s petition for consideration of the case by the Supreme Court panel.
Comparing the Global Chemicals Company case (which drew the attention of the Chief Justice) and the latter case, the following can be noted:
- In Global Chemicals Company, the taxpayer’s expenses with two counterparties were disregarded because the counterparties’ subcontractors were deemed shell companies or entities deregistered for VAT. Despite this, the Chief Justice emphasised that under the principle of certainty in taxation (Article 6 of the Tax Code) and the exhaustive list of grounds for disallowing corporate income tax deductions and VAT credits (Articles 115 and 257), the law does not allow the disqualification of such expenses unless the immediate counterparty is a sham entity. The legal consequences cannot be extended to downstream purchasers.
- In the other case, the situation was even more straightforward. The taxpayer’s expenses with ten counterparties were excluded, where those counterparties’ own suppliers were merely deregistered VAT payers—not shell companies. No evidence of fictitious activity was presented.
This clearly illustrates the contradictory and inconsistent nature of Supreme Court rulings.
It appears that only when a case draws the attention of the Chief Justice (as with Global Chemicals Company) does the Civil Panel apply the principles of legal certainty and the exhaustive nature of statutory grounds for tax rejections, thereby protecting taxpayers—even when shell entities are present at the second level of the supply chain. Yet, when a taxpayer independently petitions the Supreme Court with an even stronger case (with no shell companies even at the second level), the Civil Panel ignores prior Supreme Court rulings from the past three years and simply denies the claim.
Consistency in judicial practice is a cornerstone of a stable judiciary and fundamental to trust in the courts. If the only way to ensure consistency is to seek intervention from the Chief Justice—as in the Global Chemicals Company case—this undermines confidence not only in regional courts but also in the Supreme Court itself.
The author thanks Almat Daumov, Partner at GRATA International, for his valuable comments on the draft of this article.