International Taxation and Transfer Pricing: From Checking Payments to Assessing the Whole Structure

The focus of control is shifting from isolated issues to a system of risks

Advisers noted that the closest attention from the tax authorities is directed at cross-border transactions, passive income and transfer pricing: related-party transactions, intra-group services, dividends and royalties. In practice, deductions for services are sometimes denied where the economic rationale and the actual provision of the services are not evidenced convincingly enough.

Particular emphasis was placed on the fact that Kazakhstan has no exhaustive official criteria setting out which body of evidence will reliably demonstrate compliance with international tax tests. On one hand, this allows a taxpayer to draw on a wide range of sources and arguments. On the other, it creates uncertainty.

The practical approach therefore comes down to building the broadest possible evidence base: documents on the counterparty's activity, personnel and governing bodies, the business purpose, the history of how the structure was created, the actual performance of obligations, and the economic reason for choosing a particular jurisdiction.

A representative of the tax authorities confirmed this broader approach. The task today is not to run successive campaigns on royalties, services or ultimate beneficiaries, but to identify anomalies within the risk management system. Where indicators of elevated risk are present, the authority may examine several aspects at once: the nature of the income, the characterisation of the payment, the presence of a beneficial owner, the services involved, related parties and other elements of the transaction.

Business was advised to obtain documents from foreign counterparties in advance and to build the fullest possible evidence base — particularly on questions of beneficial ownership and the application of tax treaties. The tax authority must equally substantiate its own position, but the more facts and documents a taxpayer holds, the stronger its ability to defend its own characterisation of a transaction.

What follows from this. Requesting documents from a foreign party cannot be left until an audit begins. Where a tax defence depends on information held only by an overseas counterparty, collecting it a year or two after the transaction may be too late or considerably harder. Documentation must be created at the same time as the transaction is concluded and performed.

Economic substance matters more than formal wrapping

A business representative articulated one of the session's sharpest ideas: a strong structure is easy to document properly, but no amount of perfect paperwork will save a weak one. Real economic logic must sit at the foundation.

This is particularly difficult to demonstrate in technology and venture businesses, where the value of intellectual property, a software product or a fast-growing start-up cannot always be measured against conventional tangible assets.

He proposed three practical elements: internal confirmation and a clear assessment of the transaction at board level; meticulous collection of evidence as to why the business actually needs a particular technology, service or structure; and documentation at the moment of the transaction rather than after the fact. The transparency the state requires is at the same time an element of sound corporate governance.

Other participants supported this position. Discussing the principal purpose test and economic substance, they agreed that no universal formal checklist exists. The presence of employees, a functioning board, an office, genuine activity in the relevant country, independent functions and a comprehensible commercial reason for establishing the company are all assessed together. This is precisely why "paper" structures are becoming steadily less robust.

What follows from this. A company must be able to explain a transaction in plain business language before any analysis of a tax benefit begins. Why this counterparty? Why this country? What does it actually do? Who takes the decisions? What functions and risks does it carry? How is the price arrived at? If the answers exist only in the legal wording of the contract, tax risk increases.

Transfer pricing extends beyond obvious cross-border transactions

Transfer pricing control may reach beyond transactions in which one party is directly a non-resident. In certain cases it can capture transactions carried out within Kazakhstan where these are directly connected to a subsequent international operation — the export or import of the relevant goods, for example.

The representative of the tax authority explained why Kazakhstan has relatively few advance pricing agreements: it is business itself that must initiate such an agreement, whereas in practice industry-specific methodologies have become the more common instrument.

On monitoring reporting, further expansion was noted in the volume of information available to the tax authorities, including on financial transactions. The logic is to increase transparency and broaden the comparable base for assessing whether terms are at arm's length. In parallel, control relies increasingly on risk-based selection of companies and transactions.

What follows from this. Transfer pricing is no longer a task that can be closed with a single filing at year-end. Pricing must be explicable through functions, assets, risks and economic logic at the moment the transaction takes place. Companies with cross-border supply chains should separately check whether their related domestic transactions fall within the perimeter of control.

International information exchange turns scattered data into a control tool

The representative of the tax authorities explained that international information exchange operates both automatically and through targeted requests under tax treaties. Kazakhstan receives and transmits data on income, ownership and financial information; this data is gradually integrated into the risk management system and matched against tax reporting. Exchange takes place with a wide range of jurisdictions, including the UAE, and cooperation with some countries now operates at a prompt working level.

For business this is a fundamental change. Where a company could once assume that the tax authority saw mainly Kazakhstani reporting and the documents the taxpayer itself submitted, control is now built on cross-referencing several independent sources. A discrepancy between the declared structure of a transaction and the data held by the foreign party can itself trigger further scrutiny.

The EAEU Court as a protective mechanism for Kazakhstani business

The representative of the Court of the Eurasian Economic Union drew attention to an instrument that Kazakhstani business uses considerably less often than companies from some other member states.

Legal entities and individual entrepreneurs may defend their interests on matters of EAEU law, including where decisions of the Eurasian Economic Commission affect their rights. There is also a mechanism for obtaining clarification and interpretation of Union law through authorised bodies.

The speaker stressed an important limitation: tax sovereignty largely remains the competence of member states. The supranational level is most significant in customs regulation, indirect taxation and those areas where powers have genuinely been transferred to the Union. The EAEU Court does not replace national tax appeals, but in appropriate cases it can deliver a legal position on Union rules that will then bear on the subsequent defence.

Key takeaways

First. International taxation is becoming a systematic area of control. Risks are analysed not in isolation but as parts of a single structure.

Second. Economic substance is the central criterion of durability. Genuine activity, functions, personnel, governing bodies and business purpose must exist beyond paper.

Third. Documents must be gathered at the time of the transaction — especially evidence held by a foreign counterparty that may be needed to apply a treaty or defend deductions.

Fourth. The tax authorities hold an ever-growing volume of external data. International information exchange and automated matching of reporting reduce the scope for building a defence on a formally prepared set of documents alone.

Fifth. Transfer pricing should be analysed across the whole chain. Even a purely domestic Kazakhstani transaction may fall within the scope of control if it is directly connected to a cross-border one.