Another New Tax Amnesty in Turkey

Tax amnesties are frequently applied in Turkey; there have been 13 since the year 2000. Although the scope of tax amnesties varies, in general they cover tax penalties and default interest, but sometimes also stock amnesties and provisions to increase the tax base.

Turkey published Law No. 7326 on the Restructuring of Certain Receivables and the Amendment of Some Laws (the Law) in the Official Gazette, No. 31506 on June 9, 2021, and the Law entered into force on the same date. The Law covers provisions regarding restructuring of various statutory debts, including tax debts.

In this article, we intend to summarize the scope of this tax-amnesty related law and to shed some light on its potential benefits.

Background

During the Covid-19 pandemic environment, public expenditure has increased heavily all over the world, while tax revenues have dropped off significantly. This has led states to find short- and long-term solutions. In that respect, we consider that the Turkish tax amnesty in question can be considered a short-term remedy to increase the state’s revenues.

It is generally argued that tax amnesties aim to reduce the collection burden on tax and judicial authorities by accelerating the collection of accumulated public debt, while providing taxpayers with the opportunity to comply with the restructuring of unpaid public debts and mitigating prior years’ taxes. But considering the specific pandemic situation and its effects, the main purpose of this tax amnesty is to increase state revenues.

Basically, the scope of the Law covers taxes, customs duties, social security premiums, taxes collected by municipalities and related charges, penalties, fines, delay interest, penalties without any underlying tax, administrative fines and some other public debts relating to tax periods prior to April 30, 2021.

The Law includes provisions related to the restructuring of debts that are accrued and unpaid, as well as debts which are not accrued/finalized or that are disputed.

While Aug. 31, 2021 is set as the final date for an application for the restructuring of qualifying debts, Sept. 30, 2021 is the start for the first installment to be paid to the collection departments affiliated with the Ministry of Trade

Scope of the Law

Law No. 7326 provides that taxpayers can restructure their unpaid public debts under favorable conditions; terminate ongoing tax litigation in return for a discount on the amount outstanding; receive a full or partial waiver of additional tax, penalties and interest arising from ongoing inspections; and obtain more favorable conditions in the case of voluntary declarations.

In addition, the Law provides a guarantee that the taxpayer will not be subject to future tax inspections or tax assessments in return for voluntarily increasing the tax base (for corporate tax, income tax, value-added tax and certain withholding tax purposes) for the years 2016 to 2020.

Taxpayers can choose specific years and taxes that will benefit from this treatment.

Qualifying Debts Under the Law

The Law covers both finalized and unfinalized tax debts, late payment interest, and tax penalties derived from these tax debts, as well as other penalties not based on the original tax debt, where they are related to periods before April 30, 2021.

Finalized Tax Debts

Although the provisions of the Law generally apply as a partial amnesty, if the entire unpaid tax debt and late payment charges (based on the monthly Domestic Producer Price Index (D-PPI) rates instead of delay interest), that applied until June 9, 2021 are paid under the restructuring provisions of the Law, the entire tax penalty and late payment interest will be written off.

In addition, if 50% of the tax penalties that were not based on the original tax debt, and late payment charges (based on monthly D-PPI rates) that applied until June 9, 2021 is paid, the remaining 50% of the penalty and the entire late payment interest will be written off.

To benefit from these provisions, taxpayers are required to apply to the relevant administration by Aug. 31, 2021.

Unfinalized Tax Receivables or Receivables in Legal Dispute

Disputed Receivables or Receivables in Dispute Before Court

In the case of tax assessments in litigation before first degree courts, or where the statute of limitations has not expired, if a taxpayer pays 50% of the tax debt (increased by late payment charges based on the D-PPI), the remaining balance of the tax debt as well as any penalties related to the tax debt and late payment interest will be waived.

The application of Law No. 7326 on disputed receivables which are before a tax court will depend on the status of the last judicial decision before June 9, 2021.

If the last judicial decision is cancellation of an assessment relating to tax or customs duties, 10% of the outstanding tax/custom duty debt will be increased by late payment charges based on the D-PPI; the remaining 90% of the tax/customs duty, as well as any penalties and late payment interest, will be written off.

Where the last judicial decision is approval of the assessment, if the entire outstanding tax/customs duty debt (as increased by late payment charges based on the D-PPI) is paid, penalties and late payment interest will be written off.

If the last decision is an annulment, and the penalty is not based on the original tax debt, 75% of the penalty will be written off with only 25% of the penalty (as increased by late payment charges based on the D-PPI) payable.

Cases Subject to Tax Inspection or Tax Assessment

For cases currently subject to a tax audit, the Law provides that 50% of the outstanding tax (as increased by late payment charges based on the D-PPI) is subject to collection, with the remainder of the tax, penalties and late payment interest being written off.

Further, only 25% of the penalties not linked to the original tax debt will be collected.

Taxpayers who are subject to tax inspections must have completed their tax assessments by Aug. 2, 2021 in order to benefit from these provisions.

Tax Base Increase and Tax Boost

Law No. 7326 provides immunity from tax audits or assessments for tax years 2016 to 2020 for taxpayers who voluntarily apply specific provisions to increase their taxable base and pay additional tax for these years. This applies to income tax, corporate income tax, value-added tax (VAT) and certain withholding taxes.

Note this does not prevent tax audits or valuation procedures started before June 9, 2021. However, proceedings will not continue in the case of tax audits or valuation procedures which are initiated but not completed by Aug. 2, 2021.

Income or Corporate Tax Base Increase

No corporate income tax audit or other tax assessment will be made regarding the corporate income tax for those taxpayers who increase their corporate income tax base at the rates specified below, as of Aug. 31, 2021.

The increased tax base will be subject to a corporate income tax rate of 20%; this rate will be reduced to 15% for taxpayers who apply and satisfy certain conditions detailed in the Law.

Taxpayers who benefit from the tax base increase cannot deduct the tax payments either from the year in which payments were made or the years of the relevant tax base increase. In addition, taxpayers who benefit from the tax base increase will lose 50% of their tax loss carry forward amounts for the years of the relevant tax base increase. However, the utilized tax loss carry forwards will not be affected.

Base Increase on the Withholding of Income Tax on Salary, Independent Professional Service Fee Payments, Rental Income and Multi-Year Construction Works

The provisions relating to an increased tax base, and immunity from tax investigations or assessments also apply to salary income, independent professional service fee payments, rental income and certain construction works subject to withholding tax.

In this case, the relevant additional withholding tax rates to obtain immunity from tax inspection or tax assessments are detailed below:

VAT Base Increase

VAT taxpayers will be exempt from VAT inspections and VAT assessments, for the relevant years, if they pay additional VAT at the rates specified below by Aug. 31, 2021. This is based on the annual VAT liability declared in the tax returns for the relevant periods.

Correction of Accounting Books

Assets that physically exist (including inventory) but are not recorded in the accounting books can be included in the accounting books under the terms of the tax amnesty.

Unrecorded assets are required to be be declared to the tax office via an inventory list showing their current market values by Aug. 31, 2021 and will not be subject to depreciation. Taxpayers are required to account for VAT via a separate return on the inclusion of the assets under the reverse charge basis, based on a taxable value of 50% of the assets.

Where assets recorded in the accounting books are not physically present in the business, taxpayers may issue an invoice by applying a mark-up rate equal to the current year profit margin for the same type of commodity. The taxpayer shall afterwards fulfil all related tax obligations from the sale by Aug. 31, 2021.

Corporate taxpayers who have cash account balances or receivables from shareholders in the accounting books but which are not available to the business may regularize their status by declaring them to the tax office. A 3% tax on the amounts declared is payable by the declaration deadline of Aug. 31, 2021.

Finally, the Law also provides the option of revaluing immovable property and other depreciable assets held on the balance sheet at June 9, 2021, for taxpayers who keep books. However, sale and leaseback transactions and issuing lease certificates are excluded from the scope of the revaluation. The revaluation increase is recorded in a special account in the balance sheet. A 2% tax is levied on the increase in value.

A key benefit of revaluation is that it enables taxpayers to step up the net value of their assets and use the revised value as their cost base. This then potentially provides for increased depreciation, and reduced profit on disposals of the fixed assets.

Conclusion

The negative effects of the Covid-19 pandemic, including an increase in public expenditure and decline in tax revenue, resulted in the entry into force of Law No. 7326.

As discussed above, a key benefit of the Law is that it can provide a guarantee to taxpayers they will not be subject to future tax inspections or assessments if they opt to increase their tax bases for the years from 2016 to 2020.

The tax amnesty provides benefits for both the state and the taxpayers; however, it should not be forgotten that the tax amnesty is only a short-term solution to fix the damage to the economy caused by the Covid-19 crisis.

Further, any tax amnesty has the potential to create controversy, even though it is a constitutional tool at the disposal of governments. Turkey has introduced more than 30 tax amnesty laws from the 1960s to the 2020s. Frequent application of the tax amnesty makes it predictable and jeopardizes compliance; tax amnesties are seen as a kind of punishment for compliant taxpayers and therefore as unfair.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Abdulkadir Kahraman is Tax Partner with EY; Mahmut Aydemir is Attorney at Law, LL.M. International Taxation.

The authors may be contacted at: abdulkadir.kahraman@tr.ey.com; mahmut.aydemir@ozu.edu.tr