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 KAZAKHSTAN International Business Magazine №4, 2010
 Incompatibility of the Legislation on the Payment of Export Customs Duties. Application Practice
Incompatibility of the Legislation on the Payment of Export Customs Duties. Application Practice
Assel Ilyassova, Partner, Head of the Tax Department of GRATA Law Firm.
It is the duty of a good shepherd to shear his sheep, not to skin them.
Tiberius, Roman Emperor

As one of the main topics of the past summer, the restoration by the Government of Kazakhstan of the export customs duty on crude oil (hereinafter – the ‘ECD’) should be noted.

You may recall that the export customs duty was first introduced in May 2008 and was valid until January 2009. Its size ranged from $109.91 to $203.8 per ton. The cancellation of the export customs duty in January 2009, in particular its reduction down to ‘0’, was associated with a sharp drop in world oil prices.

Now, since August 2010, as voiced by the Government of Kazakhstan, in connection with the ‘stabilisation of oil prices’, the rate of the ECD is $20 per ton. Together with the changing rate, the list of companies falling under the ECD regime was significantly expanded. In other words, the category of exporters, which were exempt from the ECD, has been reduced. Only companies that operate under a Production Sharing Agreement (hereinafter – a ‘PSA’) and subsoil use contracts, which explicitly provide for an exemption from export customs duties, are now released from paying the ECD.

Unlike the previous edition of the Resolution No. 10361, payers of rent tax on exports are now required to pay the ECD, although, this category of taxpayers was previously exempted from the ECD.

1. The Resolution of the Government of the Republic of Kazakhstan ‘On Export Customs Duties to Crude Oil and Oil Products’ No. 1036, dated 15 October 2005;

Having thoroughly analysed the adopted amendments however, we can conclude that the introduction of some rules was targeted. As a result, the ECD payers will also be the payers of royalties or, more precisely, subsoil users that operate under contracts approved by the President of the Republic of Kazakhstan.

ECD versus Rent Tax

In light of these changes, the issue of inclusion in the list of ECD payers the companies, which are already paying rent tax on exported crude oil, is fairly controversial. Having discounted the form specified in the legislation, it is known that the customs duty according to its economic nature is an indirect tax that is included in the price of exported goods. At the moment, the object of taxation and the basis for calculating the rent tax and the ECD duplicate each other which, in fact, leads to double taxation. Such taxation is not only a violation of the principle of fair taxation embodied in the Tax Code2, but also leads to an increase in the value of the exported goods, which ultimately adversely affects the economy of the country as a whole.

2. The Code of the Republic of Kazakhstan ‘On Taxes and Other Obligatory Payments to the Budget’, dated 10 December 2008;

The only difference between these two payments is where they go, rent tax – to the National Fund, and the ECD – to the budget. We are of the opinion that this explains that the ECD has been introduced in order to implement the fiscal functions, i.e. the need to introduce the ECD is due primarily to the fact that the budget needed additional revenues to fund ongoing government projects, but not for a regulatory purpose, such as an increase in the volume of deliveries to the Kazakhstani oil refineries and provision of internal market with oil products.   

You may recall that prior to the introduction of the new Tax Code, the Government promised to replace the rent tax with the ECD due to the similarity of these two payments. We are now seeing the opposite however. Moreover, as follows from reports in the mass media, the rate of the ECD will be doubled in 2011.

In general, the situation with the ECD, in our opinion, testifies to the apparent contradiction in the fiscal system of the country.  


As a consequence, the imperfection of the laws have forced many oil producers to seek a remedy in the courts. The main issue, which has required judicial approval, has been whether a company is a payer of the ECD. An analysis of judicial practice shows that most disputes have not been settled in favour of subsoil users-taxpayers.

The main argument and, perhaps the only one that is provided by the government agencies in supporting their position, is that the concepts of customs and tax regimes differ, as a customs regime is not covered by the concept of a tax regime. Consequently, the stability provided to the tax regime in the PSA or the contract may not apply to the customs fees paid by subsoil users. According to the customs authorities and supporting courts, subsoil users operating under a PSA and contracts pay customs duties according to the laws existing at the time of the export, that is, according to the current legislation

The only exception to this rule is perhaps if the subsoil use contract or PSA contain provisions for exemption from export customs duties on oil. An analysis of judicial practice however shows that such exemption should be expressly provided by the subsoil use contract or PSA.

The legitimacy of such judgments, in our view, remains ambiguous. Based on the analysis of the court decisions on the ECD, the argument given by exporters on the guarantees provided in the subsoil use contracts (PSA), and by the laws on the stability of the law in the case of the deterioration of the investors remains without a proper judicial assessment. The motivation of any judicial decision is based on the rule of the tax and customs legislation of previous years, whereas the provisions of the legislation on investment are not taken into account. You may recall that the Foreign Investment Law3, the subsoil legislation of previous years, guaranteed investors the stability of the law in the event of the deterioration of the position caused by changes in the legislation.

3. The Law of the Republic of Kazakhstan ‘On Foreign Investments’, dated 27 December 1994;

In fact, the Tax Law4, the Customs Law5, and the Foreign Investments Law are acts of the same level, i.e. they have equal legal force and have no contradictions between each other.

4. The Law of the Republic of Kazakhstan ‘On Taxes and of the Obligatory Payments to the Budget’, dated 24 April 1995;

5. The Law of the Republic of Kazakhstan ‘On Customs Affairs in the Republic of Kazakhstan’, dated 20 July 1995;

The courts therefore have no right to ignore the provisions of this Law because of its level of validity in relation to the other two laws. In addition, we are of the opinion that litigation on the ECD, in essence, does not refer to customs disputes, i.e. disputes on the correctness of execution by an exporter of imposed customs obligations, but rather to disputes about the rights and guarantees on the stability of legislation provided by the State to investors. When considering such issues, it is clear that the provisions of the investment laws should be applied by the courts as a priority.

Moreover, it should be noted that in general, the majority of disputes are settled on formal grounds, ignoring the essence of the dispute. Unfortunately, such practice occurs not only in respect of ECD disputes. We think this fact is one of the negative attributes of the investment climate in Kazakhstan.

Pacta Sunt Servanda6

6. The International law principle specified by the United Nations’ Charter and the Vienna Convention on the Law of Treaties, dated 23 May 1969;

Based on judicial decisions, particularly the decisions of higher courts, it is obvious that in Kazakhstan the role of international treaties when considering disputes has increased, as evidenced by the relatively recent adoption of the Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan ‘On the Application of International Treaties of the Republic of Kazakhstan’7.

7. The Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan ‘On the Application of International Treaties of the Republic of Kazakhstan’ No. 1, dated 10 July 2008.

The Supreme Court in this decision indicated that international treaties have an important role to play in the judicial protection of the rights, freedoms and lawful interests of citizens and organisations, so the courts are obliged to rely on the provisions of international law in the cases within the jurisdiction of the Republic of Kazakhstan. The fact that ratified international treaties underlie national laws was previously provided in the Constitution of Kazakhstan and further duplicated in the tax and customs laws. In our view however, this provision was more of a declarative nature and was not actually applied. Recently, the Supreme Court focused the courts’ attention on the binding nature of international law provisions.

Please note that the regulatory resolutions of the Supreme Court are part of the legislation of Kazakhstan and are beyond the hierarchy of legal acts, as such acts contains references to the courts on the application of the legislation.

As you know, Kazakhstan is a member of over 40 bilateral and some multilateral treaties on the protection and promotion of investments. The condition of the establishment by the host State is a stable, equitable and conducive environment for investors, as well as enforcement of state obligations under investment contracts being an integral part of any of these treaties. Pursuant to these provisions, the host State is obliged to comply with all obligations, and assurances undertaken thereby in respect of an investor.

The guarantee on the stability of the law in its deterioration is represented in many subsoil use contracts and PSA’s, and this guarantee, as has been said, is enshrined in the national legislation of Kazakhstan. We therefore believe that the guarantee of the stability of law in terms of the ECD payment is to be performed by the Government, not only due to the requirements of the domestic legislation of Kazakhstan, but also because of the obligations undertaken under international treaties on the protection of investments. In other words, the Government is obliged to execute everything agreed both at the State level and under contracts with individual investors, that is, ‘pacta sunt servanda’. 

This regulatory resolution of the Supreme Court gives hope that the direction of the practice of investment, tax and customs issues will change, thus the decisions of state authorities to impose one or another obligation on subsoil users will be accepted, subject to the provisions of international treaties.

To summarise, it should be mentioned that the introduction of the ECD on crude oil is controversial, because, in our view, it contradicts not only the principles of local Kazakhstan law, but also – the principles of international law. Moreover, this payment is one of the obstacles preventing Kazakhstan from entering the World Trade Organisation.


Table of contents
Oil property redistribution  Sergey Smirnov 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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