Adnan Nas		Recep Biyik

A statement on the official website of the Constitutional Court announced that four important tax regulations were cancelled at a meeting dated October 15 2009, as they were deemed to contradict the Constitution.

In addition to being material enough to potentially affect macroeconomic factors, the cancelled tax arrangements will also change the tax amounts due from a number of taxpayers.

Restriction of vested investment allowance rights

Investment allowance has been implemented as an incentive in the Turkish tax system for 45 years, allowing deduction from the tax base in proportion to investment expenditure. Upon enactment of a regulation in April 2006, the implementation of the long-standing incentive ceased and the exercise of rights acquired through realised investment expenditures was restricted as of year-end 2008.

The regulation terminating the vested rights was adjudicated within the scope of a cancellation lawsuit. As we argued at every occasion, the regulation contradicts the Constitution; the court hearing the case ruled accordingly, quashing the ruling.

According to data from the Revenue Administration Office, the number of institutions losing the acquired rights equalled 3,081 and the allowance amount corresponded to TL78.5 billion ($53 billion), which again became deductible upon this decision. Within this framework, the decision will lead to a significant decrease in 2009 tax income.

It is believed that the regulation removing the acquired rights was cancelled because it contradicted the constitutional article governing legal assurance.

Withholding rates for returns on capital markets instruments

As per regulations that became effective in 2006, it was stipulated that withholding tax be levied on revenues generated from capital markets instruments. The withholding rate for foreign-resident individuals was set as zero.

The regulation determining withholding rate as zero was cancelled by the Constitutional Court based on the grounds that it violated the principle of equity.

The decision will come into force nine months after the publication of the reasoned decision. At that point, it is expected that a single withholding tax rate will be determined for investments, regardless of whether those making them are resident or non-resident in Turkey.

The new rate is unlikely to be zero, as this would trigger huge revenue loss and chaos in the system, nor is it likely to be as high a rate as 15%, which would increase the cost of debt, given the government borrowing requirement.

Tax tariff applied to wages

Another regulation cancelled by the Constitutional Court relates to the rate applied to the highest band of the tax tariff, which is to be applicable only on income from wages. The cancellation will come into force six months after the publication of the reasoned decision in the Official Gazette.

In the event that no new regulation is drawn up prior to such publication, the tax rate for wages in the highest income band of the tax tariff will be 27% instead of 35%. However, it is more likely that a new rate between 27% and 35% will be determined by that time.

Adnan Nas (adnan.nas@tr.pwc.com) & Recep Biyik (recep.biyik@tr.pwc.com), Turkey