Law No. 7440 on Restructuring of Certain Receivables and Amending Certain Laws (“Law No. 7440“), which includes provisions regarding the restructuring of various public receivables, including tax receivables, tax base increase and business records correction and imposes additional tax on certain corporate taxpayers, has come into effect by being published in the Official Gazette dated 12 March 2023.
Recent development
The long-awaited Law No. 7440, which includes regulations on the restructuring of some receivables, tax base increase and correction of business records, and as a surprising development, imposes additional tax on certain corporate taxpayers, has come into effect by being published in the Official Gazette dated 12 March 2023.
Law No. 7440 covers tax receivables related to the periods before 31 December 2022, the delay interest and tax penalties derived from these tax receivables, and other penalties not derived from a tax principal.
Although in the draft law the tax/tax base increase mechanism was introduced for income/corporate income tax and other certain taxes exclusively for FY 2018-2021 through the provisional article added in the General Assembly of the Turkish Grand National Assembly, the corporate tax base increase and the VAT and withholding tax increase for FY 2022 has been included in the scope.
You may find the details of the new additional tax for certain corporate taxpayers introduced by Law No. 7440 in our bulletin here. In this bulletin, only important issues regarding the restructuring of public receivables, tax base increase and correction of business records are summarized.
What does the law introduce?
- Finalized tax receivables
For tax receivables not paid on time and tax receivables whose payment period has not yet expired as of 12 March 2023, which is the promulgation date of Law No. 7440:
- 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 12 March 2023 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 12 March 2023 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 12 March 2023
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 12 March 2023 and in accordance with the law, the remaining 50% of the original tax amount and 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 the last court decision rendered before 12 March 2023 with regard to the cancellation, approval or reversal.
- If the last decision cancels the tax assessments: If 10% of the tax principal and the amount to be calculated, instead of delay interest, over 10% of the tax principal based on monthly D-PPI rates applied until 12 March 2023 are paid within the periods and procedures stipulated in the Law, the remaining 90% of the tax principal and entire tax penalties (as well as the remaining 90% of the penalties that are not derived from a tax principal if the remaining 10% thereof is paid) will be written off.
- If the last decision approves the tax assessments or approves them with amendment: If the entire approved tax principal, 10% of the reversed tax principal and the amount to be calculated, instead of delay interest, based on monthly D-PPI rates applied until 12 March 2023 are paid within the periods and procedures stipulated in the Law, the remaining 90% of the tax principal and entire tax penalties (as well as the remaining part of the penalties that are not derived from a tax principal if 50% thereof is paid) will be written off.
- If the last decision reverses the decision: If 50% of the tax principal and the amount to be calculated, instead of delay interest, over 50% of the tax principal based on monthly D-PPI rates applied until 12 March 2023 are paid within the periods and procedures stipulated in the Law, the remaining 50% of the tax principal and entire tax penalties (as well as the remaining 75% of the penalties that are not derived from a tax principal if 25% thereof is paid) will be written off.
- If the last decision is on a partial approval and partial reversal:
- For the approved part: If the entire approved tax principal, 10% of the reversed tax principal and the amount to be calculated, instead of delay interest, based on monthly D-PPI rates applied until 12 March 2023 is paid within the periods and procedures stipulated in the Law, the remaining 90% of the tax principal and entire tax penalties (as well as 50% of the penalties that are not derived from a tax principal if the remaining part thereof is paid) will be written off.
- For the reversed part: If 50% of the tax principal and the amount to be calculated, instead of delay interest, over 50% of the tax principal based on monthly D-PPI rates applied until 12 March 2023 is paid within the periods and procedures stipulated in the Law, remaining 50% of the tax principal and the entire tax penalties (as well as 75% of the penalties that are not derived from a tax principal if the 25% thereof is paid) will be written off.
As a final note, to benefit from the opportunity to restructure the tax receivables that are not finalized or are in litigation, it is required not to file a lawsuit against the in-scope receivables, to waive the lawsuits filed and not to apply for legal remedies.
- Tax receivables under tax inspection or assessment
Tax inspections and assessments that were initialized but are incomplete by 12 March 2023 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 12 March 2023 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
Law No. 7440 also introduces a tax/tax base increase mechanism for income/corporate income tax, VAT and certain withholding taxes. Although FY 2022 was out of scope of the tax base increase at the stage of the draft law, through the provisional article added in the General Assembly of the Turkish Grand National Assembly, the corporate tax base increase for FY 2022 and the VAT and withholding tax increase for the relevant taxation periods of FY 2022 have been also included in the scope.
The tax base or tax increase does not constitute an obstacle to the tax audits and assessments that were started before 12 March 2023. However, if the tax audits initiated for the taxpayers who applied for the tax base and tax increase cannot be concluded within seven business days following the promulgation of the law, these audits and assessments will not be continued.
a. Corporate income tax base increase
- FYs 2018, 2019, 2020 and 2021
If taxpayers increase their corporate income tax base by no less than: (i) 35% for 2018; (ii) 30% for 2019; (iii) 25% for 2020; and (iv) 20% for 2021 as of 31 May 2023, no corporate income tax audit will be conducted and no other corporate tax assessment will be made regarding the corporate income tax for those taxpayers.
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 and stamp taxes accrued upon the related tax returns; and (iii) do not benefit, for these taxes, from the provisions provided for tax receivables at the litigation stage or finalized tax receivables provided for in the law.
If the taxpayers declared in their corporate income tax returns of the years they wished to increase the tax base that they are operating at a loss or no tax base is incurred due to reductions and exemptions, or if they did not file any corporate income tax return at all, the tax bases to be considered for the taxation and the increased tax bases cannot be less than: (i) TRY 200,000 for 2018; (ii) TRY 215,000 for 2019; (iii) TRY 230,000 for 2020; and (iv) TRY 260,000 for 2021.
- FY 2022
To benefit from the corporate tax base increase for FY 2022, corporate taxpayers are required to increase their corporate tax base by no less than 25% until 31 May 2023. The increased tax base will be subject to a corporate income tax rate of 20%.
If there is no tax base in the tax return submitted by the corporate taxpayers for FY 2022 or no tax return has been submitted, the amount of the tax base to be increased cannot be less than TRY 500,000.
In addition, in order to benefit from the tax base increase for FY 2022, the corporate tax return for this year must be submitted and the tax base declared in this tax return must not be less than the higher of the amount found by increasing the tax base declared in FY 2021 by 122.93% and the amount found by increasing the tax base declared in the third provisional taxation period of FY 2022 by 40%.
If the income or corporate tax return for the third provisional taxation period has not been submitted, the amount found by increasing the tax base declared in the second provisional taxation period tax return by 100%, and if only tax return for the first provisional taxation period has been submitted, the amount found by increasing the tax base declared in this tax return by 300% is taken into consideration in the comparison to be made. However, if a loss is declared in the corporate tax return for the third provisional taxation period of 2021 and 2022, or if there is no tax base due to deductions and exemptions or no tax return is submitted, this condition is not required for the corporate tax declaration of 2022. In this case, 25% of the amount determined to be not less than TRY 500,000 is taken into consideration in determining the amount based on the corporate tax base increase for FY 2022.
If the tax base increase is utilized, all losses pertaining to FY 2022 shall not be deducted from the profits of the following year starting from 2023. For FY 2022, advance taxes that cannot be deducted from the taxes calculated in the annual tax returns of corporate taxpayers who have increased their tax base for this year are not refundable.
Finally, benefitting from the tax base increase for FY 2022 does not constitute an obstacle to the tax audit and assessment in terms of the additional tax imposed on certain corporate taxpayers.
b. VAT increase
If taxpayers declare the VAT, which is determined by no less than: (i) 3% for 2018; (ii) 3% for 2019; (iii) 2.5% for 2020; (iv) 2% for 2021; and (v) 2% for 2022 over the sum of the calculated VAT amounts in the tax returns that the taxpayers filed for each of the taxation periods, as a tax increase until 31 May 2023, no VAT audit or VAT assessment will be conducted for those taxation periods.
If there is no calculated VAT in all periods of the calendar year because all of the transactions during the year are within the scope of the exemptions or consist of export registered sales or other reasons, taxpayers may benefit from the VAT increase, provided that they have increased their income or corporate tax base for the relevant year. The tax to be paid by these taxpayers within the scope of the VAT increase is calculated by applying the rate of 18% to the increased bases in terms of income or corporate tax.
c. Dividend withholding tax
In previous tax amnesty laws, dividend withholding tax, which is an integral part of income tax and corporate income tax, was not covered by the tax increase. Indeed, this created a major contradiction in practice.
However, this time, Law No. 7440 provides the opportunity to benefit from the tax increase mechanism for withholding tax on dividend distributions.
Those who are obliged to withhold tax on the aforementioned payment can make a tax increase at the rate of 6% for 2018, 5% for 2019, 4% for 2020, 3% for 2021 and 2% for 2022 over the annual total of the gross amounts related to the aforementioned payments included in the withholding tax declarations submitted in the relevant year (including those submitted with reservation).
If there is no withholding tax return submitted in the relevant year in which the tax increase is made, or a withholding tax return is submitted but the type of payment requested to be increased is not included in the tax return, taxpayers may benefit from the tax increase, provided that corporate taxpayers pay the tax calculated at the rate of 15% over the amounts determined to be no less than 80% of the increased corporate tax base for the relevant years.
As a final note, if a taxpayer increases its tax base for dividend withholding tax, it is also required to increase its tax base for corporate tax.
5. Business records correction
Law No. 7440 allows taxpayers to correct their business records without triggering any tax penalty or delay interests.
a. Commodity, machinery, equipment and fixed assets not recorded in the company’s books but physically held in the enterprise
Income and corporate income taxpayers may declare these assets to their tax office through an inventory list that details the assets and their fair market values, determined by themselves or the professional organizations they are associated with, by 31 May 2023. The assets included in the declaration will not be subject to depreciation.
The VAT to be calculated based on half of the price of the commodity, machinery, equipment and fixed assets should be declared with a separate return within the reverse charge mechanism and paid in due time. The VAT paid by taxpayers on the commodity can be deducted according to general principles but cannot be refunded.
b. Recorded assets that are not physically present in the enterprise
Income and corporate income taxpayers may 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 until 31 May 2023.
c. Recorded cash balance and receivables from shareholders that are not present in the enterprise
Corporate income taxpayers may correct their business records regarding the cash balance and receivables from shareholders recorded in their balance sheet as of 31 December 2022 that are not present in the enterprise by declaring them to their registered tax office by 31 May 2023. A tax at the rate of 3% will be calculated over the declared amounts and paid within the period for filing the tax return.
6. Payment methods
To benefit from the restructuring opportunity, taxpayers should apply to their tax office by 31 May 2023. Taxpayers may pay the amounts calculated under the Law either in cash at once or in installments.
If taxpayers prefer to pay in installments, they should make the payment in a maximum of 48 equal installments on a monthly basis, with the first installment to be paid by the end of June. In that case, taxpayers should choose 12, 18, 24, 36 or 48 equal installments during the application. The amount to be paid will be multiplied by: (i) 1.09 for the 12 equal installments option; (ii) 1.135 for the 18 equal installments option; (iii) 1.18 for the 24 equal installments option; (iv) 1.27 for the 36 equal installments option; and (v) 1.36 for the 48 equal installments option.
If the entire calculated amount is paid in cash at once within due time for the first installment, the above ratios will not be applied, and 90% of the amount calculated instead of delay interest based on monthly D-PPI rates applied until 12 March 2023, will be written off.
Conclusion
The tax amnesty, which entered into force with Law No. 7440, not only provides great financial advantage to taxpayers, but it also aims to provide the financial resources needed due to the earthquake disaster covering 10 provinces centered in Kahramanmaraş and Hatay. We recommend that taxpayers falling within the scope of the law take action by considering their current positions
