VAT adjustments, retroactive rebates and deductibility of expenses
Almaty retailer Altyn Kala LLP is VAT-registered and has a 31 December year end. In 2025 sales were KZT 1.2 billion excluding VAT. In December 2025 it granted a key customer a retrospective volume rebate of KZT 60 million excluding VAT on purchases made between January and November 2025; the credit note was issued in January 2026. The company also has KZT 18 million of receivables overdue by more than 12 months, of which KZT 5 million are being pursued in court. The CFO wants to create a tax-deductible provision for the full KZT 18 million. During 2025 the company paid KZT 3 million of fines for late customs declarations and KZT 7 million to sponsor a local sports club, receiving advertising exposure under a written agreement. In December 2025 it received a KZT 20 million advance excluding VAT from a customer for goods delivered in February 2026; the accountant did not include the advance in VAT output.
1. Calculate the VAT adjustments arising from the rebate and the advance and state the period in which they should be recognised. State any assumptions.
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The rebate reduces the consideration for a taxable supply. Assuming the original sales were standard-rated at 12%, the output VAT reduction is KZT 60 million x 12% = KZT 7.2 million. The credit note was issued in January 2026, so the adjustment is normally made in the January 2026 VAT return, when the credit note is issued and the customer's VAT account can be corrected. If the tax authority requires correction of the original period, an amended return may be needed; the treatment should be consistent and supported by the credit note and the rebate agreement.
The advance is consideration for goods to be delivered in February 2026. Under the VAT rules, VAT is generally due when the advance is received for a taxable supply, unless a specific exception applies. Output VAT of KZT 20 million x 12% = KZT 2.4 million should have been recognised in December 2025. When the goods are delivered, the advance is not taxed again; the output VAT is matched against the final invoice. If the KZT 20 million had been VAT-inclusive, the VAT would be 20 x 12/112 = KZT 2.14 million, so the assumption must be stated.
The main risk is understated output VAT in December 2025 and an unsupported reduction in January 2026.
2. Advise on the deductibility of the KZT 3 million fines, the KZT 7 million sponsorship and the KZT 18 million receivable provision. Distinguish accounting recognition from tax deduction.
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Accounting recognition and tax deductibility are separate. A fine is recognised as an expense when the obligation arises, but fines and penalties for breaches of customs or tax rules are generally non-deductible for corporate income tax. The KZT 3 million should be added back in the tax computation. Paying it does not create a deductible expense merely because it is a business cost.
The KZT 7 million sponsorship depends on its substance. If it is genuine advertising under a written agreement, with evidence of exposure and a business purpose, it may be deductible as an advertising expense. If it is a donation or charitable payment, special limits and conditions may apply. The company should retain the agreement, evidence of the advertising service and an analysis of the benefit received. The label 'sponsorship' is not conclusive.
The KZT 18 million provision is an accounting estimate under IFRS 9. For tax, a general provision based on ageing is normally not deductible. A deduction usually requires a specific bad debt that meets the tax code's conditions, such as legal action, insolvency or a court decision. The KZT 5 million in court may support a specific write-off if the tests are met; the remaining KZT 13 million should not be treated as deductible solely because it is overdue. Documentation of collection efforts is essential.
3. Identify the main tax risk in this scenario and recommend two controls to prevent recurrence.
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The main risk is understated VAT and overstated tax deductions, leading to additional tax, penalties and interest. The advance was omitted from output VAT, and the rebate credit note could be misdated or not reflected at all. The company also appears willing to deduct fines and a general provision without testing the legal conditions. A secondary risk is inconsistent treatment between the accounting records and the tax return, which can be difficult to defend in an audit.
Two controls: first, implement a monthly VAT reconciliation that ties sales, credit notes, advances and output VAT to the general ledger, with a separate advance register reviewed by the tax manager. Second, introduce a tax technical review before any credit note, rebate or provision is posted, and require written support for non-deductible items such as fines. A year-end tax pack should list all adjustments and the evidence for each. These controls address both the calculation and the documentation risk.