LETTER OF THE TAX COMMITTEE OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF KAZAKHSTAN

of April 18, 2005 No. NK-UM-5-16/3471

The Tax Committee of the Ministry of Finance of the Republic of Kazakhstan, having considered your letter reports the following.

According to Item 1 of article 64 of the Law of the Republic of Kazakhstan "About taxes and other obligatory payments in the budget" (further - the Law), acting till 01.01.2002, VAT amount carried in offsetting the tax amount, subject to payment by taxpayers to suppliers, according to the exposed invoices on actually arrived goods, including fixed assets (except for buildings and cars), to the performed works or the rendered services during the accounting period which are used is or will be used for the purposes of leviable turnover, including turnover on zero rate.

Therefore, if goods purchased, the performed works, the rendered services are not used or will not be used for the purposes of leviable turnover, the VAT amount which is earlier carried in offsetting on acquisition of the specified goods (works, services) is subject to exception of offsetting.

According to Item 1 of article 56 of the Law the size of leviable turnover is determined on the basis of the cost of implementable goods (works, services), proceeding from the applied prices and rates without inclusion in them of the value added tax, but not low prices of their acquisition for torgovoposrednichesky activities.

The subitem 2) of article 15-1 of the Law "About Natural Monopolies" in case of approval of rate (the price, rate of charge) or its limit the authorized body applies special procedure for forming of costs.

So, according to Item 11 of the Instruction "About special procedure for forming of the costs considered when calculating the prices (rates) for production and provision of services (goods, works) by subjects of natural monopoly", the Republic of Kazakhstan approved by the order of Committee on regulation of natural monopolies and protection of the competition against 15.08.1998 No. 03-2 ODES (further - the Instruction) the prices (rates) join the costs connected with normative technical losses. Normative technical losses affirm competent authority.

According to Item 20 of the Instruction during the forming and the change in price (rates) of subjects of natural monopoly above-standard technical and commercial losses, spoil and shortages of inventory items and inventories in warehouses, other non-productive costs and losses are not considered

Therefore, expenses on the above-standard losses suffered by natural monopolists are not considered during the forming and the change in price (rate).

Thus, as the above-standard losses suffered by natural monopolists in case of provision of services on transfer and (or) electricity distribution are not included in realization value, and also considering that the size of leviable turnover is determined on the basis of realization value, respectively, these losses also do not join in leviable turnover on rendering of services on electricity distribution.

Considering stated, till 01.01.2002 VAT amount which is earlier carried in offsetting in case of acquisition of the electric power is subject to exception of offsetting according to Item 1 of article 64 of the Law on expenses on above-standard losses as used not for the purposes of leviable turnover.

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