The tax authority had conducted a tax audit of “KOR Oil Company” on transfer pricing issues for FY 2013-2015. Based on the results of the audit, a notice was issued on corporate income tax in the amount of 138 515 235 and penalties in the amount 34 807 179. In the decision the tax authorities had based the pricing of the controlled oil transactions on market data provided by Argus China Petroleum, whereas the company had based the pricing on Brent quotation. On appeal, the assessment of additional tax was later canceled by the tax court and the court of appeal. In an appeal to the Supreme Court the tax authorities asked the court to cancel the the decision of tax court and the court of appeal. The tax authorities does not “…agree that the Argus China Petroleum source used by the Department does not contain information about daily quotations for goods, which does not comply with the requirements of paragraph 1 of Article 13 of the Law of the Republic of Kazakhstan “On Transfer Pricing” (hereinafter – the Law).The oil price published by Argus China Petroleum reflects the price on the border of Kazakhstan and China for actually completed transactions, and allows for a comparative analysis of supplies between unrelated parties with transactions involving interrelated parties. Therefore, such a price is appropriate to comparable economic conditions“. Furthermore, according to the tax authorities “…the Agreement between the Government of the Republic of Kazakhstan and the Government of the People’s Republic of China “On Certain Issues of Cooperation in the Development and Operation of the Kazakhstan-China Oil Pipeline” dated December 8, 2012 No. 1559 (hereinafter referred to as the Agreement), referred to by the plaintiff, does not regulate the taxation of subsoil users and the application of legislation on transfer pricing, and also does not establish a specific the formula for determining the price in oil purchase and sale transactions in the direction of China“. Judgement of the Court The Supreme Court ruled in favor of “KOR Oil Company”. Excerpts (Unofficial English Translation) “The plaintiff’s oil supply was carried out in the direction of China, where there is no price from the source of information. The absence of stock quotes in this direction is also confirmed by the defendant. Due to the absence of such quotations, the Company used the Brent quotation (DTD) published in Europe as the basis of the market price. …” “When checking, the Department applied the prices published in Argus China Petroleum, published by Argus Media Limited. However, as the local courts correctly note, the data published in Argus China Petroleum are statistical customs prices that were not calculated from the minimum and maximum values, and also are not an exchange quotation (market price) for oil, are not determined on the basis of exchange trading and are not published in their official documents. Thus, the data published in Argus China Petroleum are average monthly statistical prices, and not daily quotes, as required by Law. In addition, since 2018, the publication of data in this area has been stopped. Accordingly, the judicial board agrees with the conclusions of the local courts that in this case the prices published in Argus China Petroleum cannot be applied for taxation and transfer pricing purposes.” “The price level under oil purchase and sale agreements is determined on the basis of international oil quotations in units of oil volume per barrel and will be the same on the border of Kazakhstan and China for oil of all Kazakhstani shippers, regardless of the region of production. Thus, the Agreement assumes the application of a single price by all Kazakhstani exporters to China, taking into account international quotations. As the representatives of the defendant confirmed, in general, eight companies shipped crude oil to China via this pipeline during the period under review to one buyer. Everyone uses a single pricing approach. The resolution of the specialized judicial Board of the Supreme Court of the Republic of Kazakhstan dated October 26, 2020 established the illegality of the use by the state revenue authorities of the Argus China Petroleum information source for the export of oil from Kazakhstan to the PRC, the inconsistency of this approach with the requirements of the Agreement. ” “Thus, this resolution established the legality of the pricing approach of one of the eight exporting companies. In view of the fact that, according to the Agreement, a single pricing approach must be observed, the same pricing approach must be maintained with respect to the plaintiff.” “Having heard the participants of the court session, having examined the circumstances and materials of the case, the judicial board comes to the conclusion that the arguments of the cassation appeal were studied in detail in the court of appeal and they were given a proper legal assessment. In such circumstances, the defendant’s cassation complaint is subject to dismissal.” Click here for English Translation Click here for other translation ...