LETTER OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF KAZAKHSTAN

of April 6, 2011 No. HK25/5577

The Ministry of Finance of the Republic of Kazakhstan in connection with the arising questions concerning severance tax, reports the following.

According to the subitem 2) Item 1 of article 334 of the Code of the Republic of Kazakhstan of 10.12.2008. "About taxes and other obligatory payments in the budget" (further - the Tax code) by transfer by the subsoil user as raw materials supplied by the customer for conversion on the oil refinery located in the territory of the Republic of Kazakhstan, or realization to the third party for the subsequent transfer as raw materials supplied by the customer for conversion on the oil refinery located in the territory of the Republic of Kazakhstan, and (or) use by the subsoil user for own production needs - as the work of the actual amount transferred by the subsoil user as raw materials supplied by the customer for conversion to the oil refinery located in the territory of the Republic of Kazakhstan, or implemented to the third party for the subsequent transfer as raw materials supplied by the customer on the oil refinery located in the territory of the Republic of Kazakhstan and (or) use by the subsoil user for own production needs of crude oil, gas condensate, and production cost of production of the unit of production determined according to International Financial Reporting Standards and requirements of the legislation of the Republic of Kazakhstan about financial accounting and the financial reporting increased by 20 percent.

According to the subitem 3) of Item 6 of article 338 of the Tax Code in case of total absence of realization of the mineral raw materials which underwent primary conversion (enrichment) and (or) minerals since the beginning of operation of the contract, the cost of the mineral raw materials containing minerals except for of those types of minerals by which in accounting tax period there are official quotations of the prices fixed on London to the metal exchange or the London exchange of precious metals is determined proceeding from the actual production cost of the production and primary conversion (enrichment) falling on such types of minerals, determined according to International Financial Reporting Standards and requirements of the legislation of the Republic of Kazakhstan on financial accounting and the financial reporting increased by 20 percent.

Therefore, in the above-stated cases, for the purpose of calculation of severance tax, the cost is determined proceeding from the actual production cost of the production and primary conversion (enrichment) determined according to International Financial Reporting Standards and requirements of the legislation of the Republic of Kazakhstan about financial accounting and the financial reporting increased by 20 percent.

At the same time, according to Item 9 IFRS (IAS) 2 "Inventories" (further - IFRS 2), inventories shall be measured on the smallest of two sizes: at cost or on net realizable value.

By Item 10 IFRS 2 it is determined that cost of inventories shall include all purchase costs, conversion costs and other costs incurred to provide the current location and inventory condition.

According to Items 11 and 12 IFRS 2 purchase costs of inventories include purchase price, import duties and other taxes (except for those which are compensated subsequently to the company by tax authorities), and also the transport costs, loading unloading and other costs directly attributable to acquisition of finished goods, materials and services.

Inventory conversion costs include costs, such as direct costs of pas compensation which are directly connected with production. They also include systematically distributed constants and variable production overheads arising in case of conversion of raw materials in finished goods. Fixed production overheads are indirect production costs which remain rather invariable irrespective of production volume, for example, depreciation and servicing of factory buildings and the equipment, and also the management and administrative costs connected with production. Variable production overheads are indirect production costs which are in straight line or almost direct dependence on production volume, for example, indirect costs on raw materials or indirect costs on compensation.

Examples of the costs which are not included to cost of inventories and recognized as expenses during origin according to Item 16 IFRS 2, are:

(a) above-standard losses of raw materials, the spent work or other production costs;

(b) storage costs if only they are not required in production process for transition to the following production stage;

(c) administrative overheads which do not promote providing the current location and inventory condition;

(d) costs to sell.

Thus, the costs which are directly connected with stock acquisition (raw materials, materials) (including not placed taxes), production process of finished goods and finishing it to the current location and condition, join in cost of inventories.

In this regard, for the purpose of determination of production cost of mining, we find it possible to determine tax amount on the mining included in the specified cost by the following formula:

where:

x - tax amount on mining;

z - the production cost of production determined according to IFRS 2, without tax amount on mining;

n - tax rate on mining.

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