Analysis of Risk Factors in Filing Applications for the Refund of Accumulated VAT: Ambiguous Interpretation

The process of refunding accumulated VAT has already gained a reputation as one of the most bureaucratized and rarely successful procedures. This is mainly due to the fact that the tax authorities attempt to avoid VAT refunds, as they result in losses to the state budget. At the same time, the primary task of the tax authorities is to replenish the country’s budget.

However, since the tax legislation of the Kyrgyz Republic provides taxpayers with the right, in certain cases, to claim a refund of accumulated VAT, this issue remains relevant for both lawyers and accountants working in this area.

According to Article 327 of the Tax Code of the Kyrgyz Republic, the refund of VAT excess amounts to a VAT payer is carried out either by offsetting the excess amount against other tax liabilities or by reimbursing the excess amount from the state budget to the taxpayer’s account.
The refund of VAT excess amounts to the taxpayer is made on the basis of the taxpayer’s application and the results of an analysis of the risk factors of unjustified formation of VAT excess amounts.

The risk factors indicating the unjustified formation of VAT excess amounts include:

1. The VAT taxpayer has been operating for less than 24 calendar months as of the date of filing the refund application;
2. The VAT taxpayer has carried out export supplies for less than 12 calendar months as of the date of filing the refund application;
3. Based on the results of the last two tax audits, the amount of additional tax assessments exceeds 10 percent of the total tax liabilities for the audited period;
4. In the case of export supplies to the territories of EAEU member states, the absence in the electronic system of the tax authorities of information on the import of goods and the amounts of indirect tax paid, as provided by the authorized tax authorities of EAEU member states, and/or discrepancies with the VAT taxpayer’s tax reporting;
5. Inconsistencies between the VAT taxpayer’s indicators and those of the supplier of goods, works, or services, identified through the analysis of VAT tax reports and/or the electronic invoicing system;
6. The total amount of taxes paid by the taxpayer over the previous three years is less than the amount of VAT excess claimed for reimbursement and refund.

In this article, we are most interested in the risk factor related to the taxpayer’s engagement in export activities for less than 12 calendar months prior to filing an application for the VAT refund.

When faced with such a case in practice, my colleagues and I began analyzing what exactly this provision implies. Opinions diverged, and collectively the following interpretations emerged:

1. There must be at least some export supplies within the last 12 months before filing the application;
2. Export supplies must have been carried out in each of the last 12 months before filing the application;
3. Export activity, in general, must have lasted for no less than 12 months prior to filing the application;
4. From the date of the last supply in the relevant tax period until the application is filed, 12 months must have elapsed;
5. From the start of business operations, export supplies must have been conducted for at least 12 months (VAT tax periods) by the date of the refund application.

Since each of these interpretations had a certain logic, and it was difficult to reach a definitive conclusion independently, it was decided to seek a written clarification from the Ministry of Economy and Commerce of the Kyrgyz Republic, which is the authorized state body responsible for fiscal policy.

The issue evidently prompted a discussion within the Ministry itself, as after the initial reply to our request, we received a second response correcting the first. Thus, the Ministry of Economy and Commerce of the Kyrgyz Republic clarified that the refund of VAT excess amounts is granted if the VAT taxpayer has carried out export activities for at least 12 tax periods from the beginning of its operations up to the date of filing the refund application. At the same time, the taxpayer’s overall period of operation must amount to at least 24 calendar months as of the date of filing the VAT refund application.

Let us analyze this response in more detail for better understanding.

1. The taxpayer, for example a Limited Liability Company (hereinafter – LLC), must have been operating for at least 24 calendar months (2 years) by the date of submitting the application for VAT refund.
2. The VAT tax period is 1 calendar month.
3. Export supplies must have been carried out in 12 months from the start of the LLC’s activity up to the date of submitting the application. It does not matter whether these months are consecutive or not. It also does not matter if the period for which the LLC is requesting a VAT refund occurred 12 months prior to the application date.

It should be noted that, pursuant to Part 3 of Article 20 of the Tax Code of the Kyrgyz Republic, clarifications issued by the authorized state body on the application of tax legislation are binding on the tax and customs authorities and are regarded by law enforcement and judicial bodies as written evidence in the course of tax disputes and procedural actions.

Therefore, in my opinion, the position of the Ministry of Economy and Commerce of the Kyrgyz Republic, as the authorized state body, carries significant weight in this matter, since tax officials may interpret this provision differently, which could lead to unjustified refusals of VAT refunds.

Andrey Georgievich Li
Managing Partner, LEX Law Firm
Attorney at Law of the Kyrgyz Republic
Arbitrator, International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic

Email: [email protected], [email protected]