Case: Corporate lawyer’s stories. Poultry Farm, Tax Committee and 4 million dollars

Corporate lawyer’s stories.
Poultry Farm, Tax Committee and 4 million dollars

It seems that back in early 2013, we, Synergy Partners Law Firm, gave tax advice to a poultry farm under Article 465 of the Tax Code of the Republic of Kazakhstan. The client liked our understanding of tax legislation in terms of both practice and theory. Next, the client decided to solve his problem. The tax authorities counted about 4 million dollars of all taxes that the poultry farm should pay promptly. The poultry farm was threatened with the arrest of accounts, which could lead to the suspension of its activities, as well as charges of tax evasion.

The client provided many documents and asked for our vision. We made a memorandum with a plan of action. We needed to rectify the desperate situation. On this urgent issue, in January, a meeting was held in Almaty. We were invited to a one-on-one meeting. To our surprise, a local large law firm, as well as a consulting firm on the development of environmental standards, came to the meeting with the client. It seemed that we were "poor relatives," but that was not the case. We are Synergy Partners! Special forces soldiers!

The client drew the answers and approaches of Synergy Partners and a local large law firm on the board. No matter how the client tried to understand the difference and the clues, the opinions of law firms coincided. The situation was hopeless and absurd. The essence of tax claims was as follows: the customer has always paid a fee for placing waste in the environment – bird droppings as agricultural waste. The tax authorities considered that the bird droppings are not agricultural, but industrial waste. In the Tax Code, the rate of payment for 1 ton of industrial waste is 1000 times higher than the same rate for 1 ton of agricultural waste. The tax authorities recalculated the fee for waste disposal for 4 years from 2009 to 2012 based on the results of the tax audit. In total, it turned out that the poultry farm still needs to pay in addition 4 million US dollars to the budget.

The situation was unusually complicated for ordinary lawyers. Bird droppings in the poultry farm’s passport of the waste were registered as agricultural waste. In the draft of waste standards, at the beginning, poultry feces were written as agricultural in 2009 and 2010, and then became industrial in 2011 and 2012. Environmental expertise for issuing permits for the allocation of bird droppings identified them as industrial waste. Permits for waste emissions for poultry feces were in the category of agricultural wastes for 2009-2010, and for 2011 and 2012 were both industrial, while in the Appendix to Permits, the wrong code for industrial waste was listed. Further, according to the Basel Convention, bird droppings are not classified as industrial wastes in accordance with the international waste classification. The Tax Code charges fees for the disposal of waste according to its classification. The circle is closed.

In Synergy Partners, Nurzhan Stamkulov is an excellent tax lawyer. Alzhan Stamkulov is a qualified professional in environmental law in Kazakhstan, he also studied environmental law in the USA, did a lot of publications on EIA, environmental assessment and environmental payments. In addition, Alzhan and Nurzhan were practicing lawyers, that is, went to the courts. They knew what they were dealing with.

At the meeting, the local law firm was represented by only two lawyers – a lawyer in court cases and a lawyer in environmental law. They did not have a specialist in tax legislation. This was the reason why we were invited at the last moment as a backup option. As a rule, at such working meetings, competition began between law firms for the client – who will convince the client of its usefulness.
We were able to explain to the client the legal problems and risks, the second law firm agreed with our vision, that is, the environmental law specialist and the project company were forced to admit our rightness and understanding of the problem with the documents. We were leading lawyers at the meeting.

At the meeting, the local law firm furiously insisted on the trial, almost waving sabers in court, threatening the tax authorities. On their part, there was a proposal to sue until the Supreme Court, because there is no other option. Our firm, Synergy Partners, also offered the same option initially. But, knowing that at every stage of the proceedings there can be setbacks, we decided to postpone this option.

We believed that to win, you must choose the battlefield where a small army can win. The influence of Sun-Tzu in this scenario is undeniable. However, this is another situation, and Alzhan remembered another approach, because in history the best engineer and pragmatist was Emperor Qin Shi Huang, with his unique pragmatic approach. His approach was to take a field where you cannot lose, but you can win, he often bet on a win-win option and did not like gambling. By this principle, Qin Shi Huang’s engineers built roads in ancient China from flooding. If there are floods, then the road is above the ground level over the embankment, and if the road is not visible due to water, then trees are planted along the road, in addition all the vehicles have a special wheelbase and pass along the flooded road. We have just a such case of "flooding". We need trees, as pointers, if you do not see the road under your feet; we need a wagon to get to the destination and not drown.

Alzhan suggested using a pre-trial procedure for resolving a tax dispute. This is provided by administrative law. He explained to the client that we always have time to go to court. Fortunately, the client realized upside. He realized that situation cannot get worse. A poultry farm is at the bottom already. Now the task is to get out of this bottom.

A local large law firm furiously insisted on the trial. The client accepted our offer, but took two firms, our Synergy Partners and a large local law firm to secure it, because we were a black horse in the legal market and did not have any reputation.

After the meeting, we signed a contract with the poultry factory and got down to work. We wrote pre-trial complaints, claims and justifications. The same was done by the second law firm. It is obvious that for the client, in such cases, it is important to hire as many law firms as possible to resolve the situation.

We went to the region to meet with the district office of the Tax Committee. At the meetings there were a district tax inspector, a lawyer of the poultry farm, a lawyer of the competitor and Synergy Partners. All negotiations by default were entrusted to Alzhan. In the first round, we did not win. We only have learned that all the poultry farms in the district received such additional charges, some have already paid. Since we are the largest poultry farm in the region, we are given time to raise money and pay taxes.

We suggested the client that we need to receive a letter from the Ministry of Environmental Protection (MEP) that the poultry litter is an agricultural waste, not an industrial waste. The client applied promptly and received feedback that the MEP would not give it, while we even addressed Nurlan Kapparov himself. As a result of our assignment, the client accidentally learned that their environmental consultant, who always drafted emission standards, on purpose wrote in projects that bird droppings are industrial waste. Therefore, the environmental assessment of submitted emission projects for 2011 and 2012 considered what it was given, that is, it considered the size of industrial emissions in the form of bird droppings. And, as a result, the MEP gave permission for the placement of bird droppings as an industrial waste for 2011 and 2012. As they say, they got what they threat. Further, it turned out that the MEP put pressure on the environmental consultant, blackmailing him and threatening with withdrawing his license from him if he does not put waste projects as "industrial" for his client. The client did not know about this and signed documents for applying for environmental review. The environmental consulting firm confessed to the deed. It was a blow for the client, because they have worked with this company for so many years. We said that an environmental consulting firm will not be able to pay 4 million dollars to the client. They just do not have that kind of money. The MEP planned an attack two years ago, they had to fight back. The actions of the tax authorities under Article 465 of the Tax Code of the Republic of Kazakhstan are simply a consequence of such actions, that is, they can be, at least, neutral to us. Therefore, we need to continue working on the chosen plan.

We decided then to strengthen our justification. The biological and chemical composition of birds’ feces does not change. The documentation for 2009-2010 specifies bird droppings as an agricultural type of waste. Historically, the poultry farm has always paid for placed poultry litter as an agricultural waste.

The client has already arranged a meeting with the regional Tax Committee. The composition of the delegation was the same. By default, Alzhan was again leading in negotiations with the regional tax office. At the meeting, the chief tax inspector of the region was also present, who was in charge of the technical solution. As a result, the tax inspector of the region agreed that they will write off 2 years, but not the remaining two years, since the documents already indicate industrial waste precisely. The client was pleased that he had to pay only 2 million US dollars.

After the meeting with the regional tax office, we proposed a new strategy – to urgently lobby for the amendment of Article 465 of the Tax Code of the Republic of Kazakhstan, as the MEP is an obvious enemy and will make repeated attempts. According to our experience, the judicial authorities usually take the side of the state in order to replenish the budget. If we sue and get to the Supreme Court, then, probably, the dispute will be lost and it will be a negative judicial precedent for the industry as a whole. Instead of suing for a whole year, it is better to spend a whole year on changing Article 465 of the Tax Code. Such advice, of course, deprives us of income, because we could have earned on litigations. But, according to the standards of Synergy Partners, we act in the interests of our clients. We said that the client will be supported by all herders and other poultry farms. The client agreed with the new strategy and paid for our work. We earned good money.

The result. Six months later, Article 465 of the Tax Code of the Republic of Kazakhstan changed retrospectively. Bird droppings and manure have become agricultural, irrespective of waste certificates, emission projects, environmental assessment results or permits for emissions into the environment. Everyone has successfully forgotten everything, as if there were no tax deductions for 4 million US dollars. The industry benefitted from the dispute.