On 27 January 2023, the Draft Law on the Restructuring of Certain Receivables and Amending Certain Laws (“Draft Law“), referred to as the “tax amnesty of the century,” was submitted to the Turkish Parliament. It includes provisions regarding the restructuring of various public receivables, including tax receivables, tax base increase and business records correction. Considering the election calendar, the Draft Law is expected to be enacted by mid-February.
Recent development
On 27 January 2023, the Draft Law, which includes provisions regarding the restructuring of various public receivables, including tax receivables and tax base increase, was submitted to the Turkish Parliament.
The Draft Law 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. However, the Draft Law excludes advance taxes to be paid in 2022 through offsetting from income/corporate income tax.
Besides, the Draft Law also introduces a tax/tax base increase mechanism for income/corporate income tax, and other certain taxes for only FY 2018-2021; 2022 is out of scope.
This alert lays out the main regulations regarding the tax amnesty envisaged by the Draft Law. It should be considered that the Draft Law may be amended prior to its enforcement.
What does the Draft Law introduce?
1. Finalized tax receivables
Regarding tax receivables not paid on time and tax receivables whose payment period has not yet expired as of the promulgation date of the Law:
- 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 the promulgation of the Law 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 the promulgation of the Law 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 the promulgation of the Law
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 the promulgation of the Law 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 the last court decision rendered before the promulgation date of the Law as to the cancellation, approval or reversal. In this regard:
- In the case that 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 the promulgation date of the Law 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.
- In the case that 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 the promulgation date of the Law 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.
- In the case that 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 the promulgation date of the Law 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 the promulgation date of the Law 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 the promulgation date of the Law 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.
3. Tax receivables under tax inspection or assessment
Tax inspections and assessments that were initialized but are incomplete by the promulgation date of the Law 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 the promulgation of the Law 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 Draft Law also introduces a tax/tax base increase mechanism for income/corporate income tax, VAT and certain withholding taxes.
The tax base or tax increase does not constitute an obstacle to the tax audits and assessments that were started before the Law was published. 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
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 30 April 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 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.
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 and (v) 2% for 2021 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 30 April 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, the Draft Law provides the opportunity to benefit from the tax increase mechanism for withholding tax on dividend distributions and withholding tax on payments related to the amounts remitted to the nonresident entities.
To benefit from the tax increase, corporate taxpayers are required to 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
The Draft Law 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 30 April 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 30 April 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, which are not present in the enterprise, by declaring them to their registered tax office by 30 April 2023. 3% withholding tax 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 30 April 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 May. 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 the promulgation date of the Law will be written off.
Conclusion
In the statements made by the president and the Ministry of Treasury and Finance regarding the Draft Law, the Draft Law was referred to as the “amnesty of the century” and introduced as the most comprehensive tax amnesty in the history of the republic. However, when the regulations envisaged in the Draft Law are considered, it is seen that they are quite similar to previous ones.
As the Turkish Parliament will have to remain closed for a certain period (in March-April) due to presidential and parliamentary elections, which are anticipated to be held on 14 May 2023, we expect that the Draft Law will be passed by mid-February.
