Recent Development
On May 18, 2018, the Law No. 7143 on the Restructuring of Tax and Certain Receivables and Amending Certain Laws (“Law“) was published on the Official Gazette and thus entered into force.
This legal alert lays out the essential provisions the Law introduced regarding the restructuring of tax receivables enforced by the Ministry of Finance.
What Does the Law Say?
The Law covers tax receivables related to the period before March 31, 2018, the delay interest and tax penalties arising from these tax receivables, and other penalties not derived from an original tax.
The Law excludes income tax installments to be paid after March 31, 2018 and advance taxes to be paid in 2018 through offsetting from income/corporate income tax, as well as second installments of the 2018 motor vehicle tax.
1. Finalized tax receivables
Regarding tax receivables not paid on time and tax receivables whose payment period has not yet expired as of May 18, 2018,
• if the taxpayer pays the entire original tax as well as the amount to be calculated based on the Producer Price Index (“PPI“) monthly rates until May 18, 2018 and in accordance with the Law, the entire tax penalty and delay interests will be written off.
• if the taxpayer pays 50% of a penalty not derived from an original tax or arising from participation and the amount to be calculated based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 50% of the penalty and the entire delay interests will be written off.
2. Tax receivables that are not finalized or are in litigation
a) Tax assessments in litigation before first degree courts or whose deadline for filing a lawsuit did not expire as of May 18, 2018
If the taxpayer pays 50% of the original tax as well as the amount to be calculated on 50% of the original tax amount based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 50% of the original tax amount, the entire tax penalty including delay interests and other penalties arising from the original tax as well as delay interests related to these penalties) will be written off.
Taxes under reconciliation, taxes where the reconciliation date is undetermined or taxes where reconciliation cannot be reached and the deadline for filing a lawsuit has not expired fall within the above scope.
b) Tax assessments whose deadline for filing an appeal or objection did not expire, are in appeal, in correction of decision, or the deadline for the correction of mechanism did not expire
In these situations, the amounts written off depend on whether the last court decision rendered before May 18, 2018 relates to cancellation, approval or reversal.
• In cases where the first degree court cancels the tax assessments, if the taxpayer pays 20% of the original tax as well as the amount to be calculated on 20% of the original tax amount based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 80% of the original tax, delay interests and the entire tax penalty (for penalties not derived from an original tax if 10% of the penalty is paid, the remaining 90%) will be written off.
• In cases where the first degree court approves the tax assessments, if the taxpayer pays 20% of the original tax as well as the amount to be calculated on 20% of the original tax amount based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 80% of the original tax, delay interests and the entire tax penalty (for penalties not derived from an original tax if 50% of the penalty is paid, the remaining 50%) will be written off.
• In cases where the Council of State or the Regional Administrative Court reverses the first degree decision, if the taxpayer pays 50% of the original tax as well as the amount to be calculated on 50% of the original tax amount based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 50% of the original tax, delay interests and the entire tax penalty (for penalties not derived from an original tax if 25% of the penalty is paid, the remaining 75%) will be written off.
3. Taxes under tax inspection or assesment
Tax inspections and assessment that were initialized but are incomplete by May 18, 2018 will continue to be carried out. Once these tax assessments are completed, if the taxpayer pays the first 50% of the original tax amount and the amount to be calculated on 50% of the original tax based on the PPI monthly rates until May 18, 2018 and in accordance with the Law, the remaining 50% of the original tax, delay interests and the entire tax penalty (for penalties that do not derive from an original tax if the 25% of the penalty is paid, the remaining 75%) will be written off.
4. Tax/tax base increase mechanism
The Law also introduces tax/tax base increase mechanism for income/corporate income tax, VAT and certain withholding taxes.
a) Corporate income tax base increase
No corporate income tax inspection or corporate income tax assessment will be conducted on taxpayers for the taxation period in which they increased their corporate income tax bases by no less than (i) 35% for 2013; (ii) 30% for 2014; (iii) 25% for 2015; (iv) 20% for 2016; and (v) 15% for 2017 by August 31, 2018.
The increased tax base will be subject to a corporate income tax rate of 20%. This rate is reduced to 15% if the taxpayers (i) filed their corporate income tax return in due time for the fiscal year of which they want to increase the corporate income tax base; (ii) duly paid the taxes due; and (iii) do not benefit from the tax amnesty for tax receivables at the litigation stage or finalized tax receivables provided in the Law.
If the corporate income tax return shows that the company is operating at a loss, no tax base is created due to reductions and exemptions, or no corporate income tax return was filed at all, the increased tax bases cannot be less than (i) TRY 36,190 for 2013; (ii) TRY 38,323 for 2014; (iii) TRY 40,701 for 2015; (iv) TRY 43,260 for 2016; and (v)
TRY 49,037 for 2017.
b) VAT increase
No VAT inspection or VAT assessment will be conducted for VAT taxpayers for the taxation periods in which they increased their VAT calculated in their VAT returns for each taxation period by no less than (i) 3.5% for 2013; (ii) 3% for 2014; (iii) 2.5% for 2015; (iv) 2% for 2016; and (v) 1.5% for 2017 by August 31, 2018.
5. Business records correction
The Law allows taxpayers to correct their business records without triggering any tax penalty or delay interests.
a) Inventory, machinery, equipment and fixed assets not recorded in the company’s books but are physically held in the enterprise
In order to benefit from this provision, income and corporate income taxpayers should declare these assets to their tax office through an inventory list that details the assets and their fair market values by August 31, 2018. If those assets are normally subject to an 18% general VAT rate, they should declare a 10% VAT through a reverse charge mechanism and paid over the declared value of the assets within the declaration period. If the assets are subject to a reduced VAT rate, the half rate of the reduced VAT rate should be used while calculating the VAT to be declared and paid
b) Recorded assets that are not physically present in the enterprise
Income and corporate income taxpayers will be able to correct their business records for their recorded assets that are not physically present in the enterprise by (i) issuing an invoice including the gross profit rate determined according to the current year’s figures for the same type of commodity; and (ii) fulfilling the related tax liabilities by August 31, 2018.
c) Recorded cash balance and receivables from shareholders that are not present in the enterprise
Corporate taxpayers can correct their business records regarding the cash balance and receivables from shareholders recorded in their balance sheet as of December 31, 2017, but which are not present in the enterprise by declaring them to their registered tax office by August 31, 2018. These amounts will be taxed at a rate of 3%.
6. Payment methods
In order to benefit from the Law’s provisions, taxpayers must apply to their tax office by July 31, 2018. In conjunction with their application, they must pay the required amounts stipulated, either at once or in a maximum of 18 equal installments (in which the installments will be paid on a bi-monthly basis) starting from September 2018.
If taxpayers prefer to pay the required amount in installments, they must do so in 6, 9, 12, or 18 installments. In this case, the required amount will be multiplied by (i) 1.045 for the 6 equal installments option; (ii) 1.083 for the 9 equal installments option; (iii) 1.105 for the 12 equal installments option; and (iv) 1.15 for the 18 equal installments option.
If taxpayers pay the whole required amount within the scope of the Law at once and in due time by September, the above ratios will not be calculated and 90% of the amount to be calculated based on the PPI monthly rates until May 18, 2018 will be written off.
7. Asset peace incentive
“Asset peace” refers to the repatriation of undeclared assets without certain tax repercussions. It covers (i) money, gold, foreign exchange, securities and other capital market instruments held abroad; (ii) money, gold, foreign exchange, securities, other capital market instruments and immovables held in Turkey but not recorded in the legal books of income and corporate income taxpayers; and (iii) foreign income generated by resident individual and entities.
a) Assets held abroad
• Individuals and legal entities can freely dispose of their money, gold, foreign exchange, securities and other capital market instruments held abroad if they duly notify these assets to Turkish banks or intermediary institutions by November 30, 2018. No tax audit or tax assessment will be conducted on these assets.
• Banks and intermediary institutions will levy a 2% tax on these assets. The banks and intermediary institutions
are responsible for declaring and paying the tax to their tax office through a tax return by December 31, 2018.
• This tax cannot be recorded as an expense or be offset from other taxes. Losses arising from the disposal of assets brought into Turkey cannot be considered an expense or deduction for income and corporate income tax purposes.
• The 2% tax is inapplicable if the assets are brought into Turkey by July 31, 2018.
• Individuals and legal entities can utilize the abovementioned assets until November 30, 2018 to close loans by banks and financial institutions abroad and which are recorded in taxpayers’ legal books as of May 18, 2018. Assets used to repay loans can benefit from this provision without being brought into Turkey if they are removed from the legal book entries.
• If the capital advances recorded in taxpayers’ legal books as of May 18, 2018 are compensated by bringing money, gold, foreign exchange, securities and other capital market instruments held abroad to Turkey before May 18, 2018, taxpayers can still benefit from the provision if the capital advances are removed from the legal book entries.
• Taxpayers who keep legal books in accordance with the Tax Procedure Law can include the assets brought into Turkey in their enterprise without including them in the determination of their current income and can withdraw these assets from their enterprise without including them in the determination of their taxable income or distributable income.
• In order to benefit from this provision, (i) taxpayers must pay the taxes imposed on the newly declared assets should by the due date; and (ii) taxpayers must bring the assets into Turkey or transfer them into a Turkish bank/intermediary institution account within three months from the notification date.
b) Assets in Turkey not recorded in legal books
• Income and corporate income taxpayers can declare to the tax authorities their money, gold, foreign exchange, securities, other capital market instruments and immovables held in Turkey but not recorded in their legal books by November 30, 2018. No tax audit or tax assessment will be conducted on these assets.
• These assets can be recorded into taxpayers’ legal books without being taken into consideration when determining their current income by November 30, 2018. These assets can also be withdrawn from the enterprises without including them in the determination of their taxable income or distributable income.
• The assets declared to the tax authorities will be subject to a 2% tax on the asset value, which must be paid by December 31, 2018.
• This tax cannot be recorded as an expense or be offset from other taxes. Losses arising from the disposal of assets recorded in legal books cannot be considered an expense or deduction for income and corporate income tax purposes.
• The 2% tax is inapplicable if the assets are recorded in the legal books by July 31, 2018.
• In order to benefit from this provision, taxpayers must pay the taxes imposed on the newly declared assets should by the due date.
c) Exemption for foreign income
• The following incomes derived by Turkish resident individuals and entities, including those derived until October 31, 2018, are exempt from income and corporate income tax if transferred to Turkey by December 31, 2018.
1. Income derived from the sale of participation shares of entities whose legal and business center is located outside of Turkey;
2. Participation income derived from entities whose legal and business center is located outside of Turkey; and
3. Commercial income derived through a place of business or permanent representative abroad.
• Income derived by Turkish resident individuals and entities from the liquidation of entities whose legal and business center is located outside of Turkey is exempt from income and corporate income tax if these are transferred to Turkey by December 31, 2018.
