Accrual of tax penalties based on the results of tax audits: peculiarities of calculations and current problems

This article is written with the expectation that the reader has an understanding about tax audits, what results can be. Therefore, the basic concepts of tax legal relations will not be disclosed here.

According to the results of a tax audit, a decision may be made to charge additional amounts of any type of tax, penalties for late payment of this tax, as well as tax sanctions, as a type of liability for a tax offense.

In the classic sense, without special knowledge of tax law, tax penalties are understood by many as a fine or punitive sanction for an offense. Many people treat fines as something not very significant. But the picture of such additional charges in the audit of activities, for example, for 2023, in the form of a calculation may look as follows:

1) Income tax:

• Additional charge - 100,000 soms;
• Penalty - 100,000 soms;
• Tax sanction - 50,000 soms.

2) VAT:

• Additional assessment amount - 300,000 soms;
• Penalty - 300,000 soms;
• Tax sanction - 30,000,000 soms.

On profit tax, at first glance, the picture is more or less clear, but as for VAT, a logical question arises: why is the tax penalty 100 times greater than the tax itself?

The first thought arises that there is an incorrect calculation made by the auditing inspector, that it is necessary to prepare for appeal, and also there is indignation at the fact that the penalty in the form of a tax sanction is excessive compared to the violation itself in the form of arrears of the principal amount of tax.

Let us understand this situation in detail.

According to Article 155 of the Tax Code of the Kyrgyz Republic (hereinafter - the TC KR), a violation of the tax legislation of the Kyrgyz Republic or a tax offense is a culpable and perfect unlawful act (action or inaction) of a participant of tax legal relations.

In accordance with Article 160 of the Tax Code of the Kyrgyz Republic, a tax sanction is a measure of responsibility for committing a tax offense. Tax sanction is established and applied in the form of monetary penalties in the amount stipulated by the Tax Code of the Kyrgyz Republic. When one entity commits two or more tax offenses, tax sanctions provided for by the Tax Code of the Kyrgyz Republic are levied for each offense separately, without absorption of a less severe sanction by a more severe one.

Article 163 of the Tax Code of the Kyrgyz Republic establishes the extent of liability for cases of understatement of tax, failure to submit tax returns and unlawful VAT credit. Everything is clear in principle, but the understatement of the tax amount raises questions, and it is this case that we are interested in in this article.

If, as a result of an on-site audit by a tax authority, it is established that the amount of tax specified in tax returns is understated in comparison with the amount of tax which should have been specified in the tax returns:

1) when the amount of tax is understated by up to 10% of the amount of tax that should have been indicated in the tax reporting of the relevant tax period - the tax sanction is not applied to the taxpayer;

2) when the amount of tax is understated by between 10% and 50% of the amount of tax that should have been indicated in the tax reporting of the relevant tax period - the tax sanction is applied to the taxpayer in the amount of 50% of the amount of understated tax;

3) when the amount of tax is understated by more than 50% of the amount of tax that should have been indicated in the tax reporting of the relevant tax period - the tax sanction is applied to the taxpayer; 3) when the amount of tax is understated by more than 50% of the amount of tax that should have been indicated in the tax reporting of the relevant tax period - the tax sanction is applied to the taxpayer.

Let us now return to our example of additional tax liabilities.

To verify the correctness of the calculation of the tax penalty, it is important to break down this norm into the indicators we need, namely:

• type of tax;
• tax period;
• tax reporting for that period;
• the amount of tax that is reported;
• the amount of tax that should be reported;
• the percentage of understatement;
• the amount of the sanction.

Let's start with income tax. The tax period is 1 calendar year, and in our example it is 2023. Tax reporting is provided quarterly according to the preliminary calculation, but in our case the inspecting inspector looks at the Unified Tax Declaration, which reflects the final annual income tax report. The amount of tax is indicated as 669,231 soms, while it should be 769,231 soms, according to the auditing inspector. The amount of understatement is 100,000 soms and the percentage of understatement is 13%.

Thus, according to Article 163(1)(2) of the Tax Code of the Kyrgyz Republic, the amount of the tax sanction is 50% of 100,000 soms, i.e. 50,000 soms.

Here everything is quite simple and clear, and all because the tax period for income tax is a calendar year. It is more complicated with VAT, which has a tax period of 1 calendar month, and the audit is conducted for a year.

Returning to our example, the VAT tax period is 1 calendar month. The auditing inspector finds that the amount of VAT should have been included in the report for July 2023, but actually included in August 2023 and paid. Also in September 2023, the VAT amount of KGS 300,000 was not included. It so happens that the main amount of tax has been calculated, except for the 300,000 soms of September 2023.

As for the tax sanction, it turns out that the VAT reporting for July actually reflected the amount of VAT in the amount of 200,000 soms, but it should have been 30,200,000 soms. The amount of understatement is 30,000,000 soms and the percentage of understatement is 99%.

Thus, according to Article 163(1)(3) of the Tax Code of the Kyrgyz Republic, the tax sanction is 100% of the amount of understatement of tax, i.e. 30,000,000 soms.

In September 2023, VAT was recorded at 5,400,000 soms, while it should have been 6,000,000 soms. The amount of understatement is KGS 300,000 and the percentage of understatement is 5%. Thus, the tax sanction is not applicable.

Thus, the auditing inspector has no errors, the calculations were made within the framework of the tax legislation of the Kyrgyz Republic.

I personally believe that these norms of the Tax Code of the Kyrgyz Republic were adopted on purpose as a loophole for charging large amounts of tax liabilities. When adopting such norms, the public and representatives of business communities could not sufficiently analyze the consequences. Obviously, this situation and example show the disproportionality of liability for tax offenses. After all, the amount of VAT was paid in August 2023, but in violation of the law was not reflected in the July report. The country's budget has not suffered any damage, while the taxpayer is subject to sanctions of enormous size.

In fact, this example is taken from the life of our client, greatly simplified, but the situation with the tax sanction is like this. Importers always pay VAT in large amounts. It is paid to the country's budget, and this is good and right. But the proportionality of violations must be taken into account. Otherwise, it turns out that the tax authorities receive an additional huge amount in the form of a tax sanction, bankrupt the taxpayer's business, and then lose future tax deductions of this taxpayer.

I hope that the state will reconsider its policy on this issue in the future, and entrepreneurs will be more careful and attentive not to receive such additional charges.