Kazakh oil companies to appeal against tax assessments
Since June 2022, Kazakhstan oil has been sold on international markets under the KEBCO (Kazakhstan Export Blend Crude Oil) brand to distinguish it from Russian Urals crude, which has similar technical characteristics, following Russia's full-scale invasion of Ukraine in February 2022.
Western countries began reducing their purchases of Russian oil by setting a $60 per barrel price cap on Russia’s crude oil. Meanwhile, KEBCO has been trading at a premium, that is, a surcharge, not only to Urals but also to North Sea Brent Crude, the price of which has historically been included in the Kazakhstan budget and the budgets of national companies.
However, as it turned out, the State Revenue Committee under the Ministry of Finance and oil exporters disagree over the taxation of KEBCO exports. As Timur Zhursunov, a partner in PwC Kazakhstan's Tax, Legal, and People practice, told Kursiv, the rebranding of Kazakhstan's oil has impacted the tax burden, pricing, and legal aspects of oil exporters.
“Despite the emergence of Kazakh oil price quotations, in real-world contexts, international traders continue to use Brent crude benchmark adjusted for the KEBCO premium. This is attributable to the inertia of existing market mechanisms and the difficulties in transitioning to a new price benchmark. Meanwhile, tax authorities have held a different stance. Although the official methodology for calculating the market price of oil has not changed, tax authorities have begun unilaterally applying KEBCO quotations as the basis for determining the market price as part of transfer pricing,” he said.
He believes that this has led to significant uncertainty and increased tax risks for companies operating in the oil sector. As a result, many companies have been experiencing significant additional taxes following tax audits.
“Based on the information available, at least ten of them are considering appealing these decisions. Additional challenges are associated with the lack of official clarification or transitional provisions for the implementation of KEBCO. This posed several practical difficulties both in terms of tax compliance and in renegotiating the terms of long-term export contracts,” Zhursunov noted.
Eventually, many taxpayers are confronted with a choice whether to adapt to their contracts, which would lead to potential economic losses, or risk facing tax implications.
“In fact, the companies are challenging the adjustments made by the tax authorities on the grounds that the oil pricing methodology has not formally changed, and the KEBCO quotation remains new and is not applied in their export contracts. In their defense, the companies highlight that in real terms traders continue to use Dated Brent in accordance with previously agreed-upon formulas, and KEBCO is not applied in subsoil user contracts,” he stated.
This situation reflects the lack of a single approach, and there are disputes concerning the legitimacy of unilaterally applying KEBCO without amending the official methodology.
Furthermore, oil companies are casting doubt about the accuracy and transparency of KEBCO's quotes. For instance, in 2023, prices for the western ports of Augusta and Rotterdam were identical, despite differences in market conditions. It also remains unclear whether these quotations are based on actual market transactions or represent estimates, noted Zhursunov.
He believes that all this forms the basis for challenging the results of tax audits. According to him, companies face significant financial consequences: additional tax assessments create unplanned liabilities, while regulatory uncertainty complicates planning, impacts contract stability, and could discourage investment.
In addition, issues arise regarding the relationship between traders and buyers. It is not always clear who ultimately bears the financial burden, which could lead to commercial disputes.
In this situation, Zhursunov encourages companies to analyze potential risks in advance and prepare a defensive position in the event of a tax audit. Contracts and transfer pricing documentation should be consistent with actual commercial terms, and the use of Dated Brent quotes should be clearly justified and documented.
To deal with the current uncertainty, he said, it is important to ensure transparency regarding both past settlement periods and the understanding of the new rules, including the ability to choose a quote when determining the global price.
The new Tax Code, which enters into force in early 2026, gives companies the right to choose between Dated Brent, KEBCO, and Urals for calculating the mineral extraction tax (MET) and rent tax on exports. This decision offers businesses greater flexibility and allows them to take market specifics into account in their tax planning, according to a partner at PwC Kazakhstan.
“We hope that additional clarifications to the crude oil pricing methodology will be introduced shortly, which will help finally resolve remaining issues and strengthen companies' confidence in the stability of the tax environment. From our end, we are closely monitoring the development of the practice and are ready to support companies in adapting to the new conditions,” he noted.
Since the introduction of KEBCO in 2022, Kazakhstan has had the opportunity to clearly position its oil as an independent export product, which has strengthened the trust of Western partners and ensured supply stability.
Transfer pricing has been in force in Kazakhstan since 2001 and covers all cross-border transactions, including the export of oil, gas, and metals. Herewith, Kazakhstan's state revenue authorities strive to prevent undervaluation of exports aiming to collect accurate taxes and duties aligned with global prices.
