International Tax Review: What advice would you give to multinationals about how to reduce the risk of becoming involved in a dispute with the Turkish tax authorities?
Firat Yalçin (pictured): Multinationals operating in Turkey should be aware of the current interpretation of tax law of the tax authorities and the Council of State.
It is also advisable to consult tax advisers regarding the trends in recent tax inspections. Knowing the tax risks involved in transactions in advance will provide companies with enough time to decide on the actions to be taken to reduce those risks.
Taxpayers may also apply for an advance ruling from the tax authority before undertaking a transaction where they are uncertain about its tax consequences.
An advance ruling will avoid tax loss penalties but will not avoid the assessment regarding the tax principal. It is not possible to apply for an advance ruling on litigated issues, issues related to other taxpayers and issues related to current tax inspections and theoretical issues.
ITR: What options do taxpayers in Turkey have to resolve disputes with the authorities other than litigation?
FY: There are several alternatives to resolve tax disputes before the litigation stage, some of which are always available and one that is provided by the government enacting a temporary law.
Correction of error
Taxpayers can apply to the tax authority for the correction of errors for:
· Calculation errors:
o Tax base error;
o Error in tax amount; and
o Repeated tax.
· Taxation errors:
o Errors in the taxpayer’s identification;
o Error in the taxpayer’s status;
o Error in the subject; and
o Error in the taxation or exemption period.
Taxpayer and tax authority reach a settlement by reducing the taxes and tax penalties assessed by the tax authority additionally, ex-officio, or by administration.
This alternative may be preferred by taxpayers if the possibility of successfully challenging the issue before the tax court is deemed as low.
However, if the issue arises only once for the taxpayer and it will not be in such a position again in future, solving the issue in the reconciliation stage could be more practical and safer, considering the time that would be spent in the court process – approximately three years – and costs to be incurred.
Under this option, taxpayers have the right to apply to the tax authority by confessing that they have not complied with the tax law, providing that there is no ongoing tax inspection and there is no denouncement regarding the issue and certain other formal requirements.
Reduction in penalties
If taxpayers pay the taxes and penalties assessed by the tax authority within 30 days, one half of the tax loss penalty and one third of the irregularity fines will be reduced from the payment.
Tax amnesty is an option to resolve cases before litigation provided by parliament enacting an amnesty law. This option is not always available to the taxpayers due to its nature. Once such law is enacted, taxpayers will be able to benefit from this alternative for a defined period of time.
ITR: Are you seeing any trends in the types of dispute cases the Turkish tax authorities are taking up, and those where they are succeeding in the courts?
FY: The tax authority is developing a more aggressive approach in tax inspections. We have experienced lots of different tax disputes within the last decade but the authority has focused on certain cases:
· Transfer pricing. In these cases, tax inspectors use hidden precedent in their inspections which prevent taxpayers from freely challenging their rights before tax courts;
· Royalty payments made by resident companies to non-resident companies;
· Fund transfer from non-resident companies to resident companies within the scope of concealed capital, advance capital and capital replenishment funds;
· Application of stamp tax. Whether the upper stamp tax limit will be applied for a document or each copy of the document separately. Also, the definition of the stated amountwithin the scope of stamp tax;
· Application of VAT within the scope of non-used goods due to its nature, such as chemicals and cosmetic products; and
· Special Consumption Tax inspections are gaining impetus. A tax inspection with respect to the offsetting procedure of one of the biggest taxpayers in Turkey has been criticised and an approximately €45 million tax principal and tax loss penalty assessed. Approximately €450 million in tax and tax loss penalties has recently been assessed on special consumption taxpayers with regards to fraud on special consumption tax refunds on sea fuel.
What do you think multinationals can expect from Turkey‘s tax authorities in future?
FY: Due to the current trend in tax inspections based on the rapid growth of the Turkish economy and the capital flow from all over the world, we expect that tax inspections will focus on payments made by foreign investors into Turkey.
To avoid any tax dispute, we strongly advise that foreign investors, if they do not know this jurisdiction and if it is their first time investing in Turkey, should consult with a tax attorney to understand the tax outcomes of their investment.
Moreover, it is vital taxpayers comply with Turkey’s transfer pricing regulations and documentation obligations.
Following the reorganisation of the tax revenue administration, a Presidency of Transfer Pricing has been founded and all transfer pricing inspections have begun to be carried out by tax inspectors focusing solely on transfer pricing issues. This step also shows that the tax authority will increasingly inspect transfer pricing issues in future.
We expect that stamp tax inspections will remain steady but there are many parties in the economic market who take a counter position to stamp tax and strongly propose that stamp tax law should be abolished. The Ministry of Finance could consider such demand in the near future.
There is a draft law being prepared by the Ministry of Finance which will merge two income tax codes: the income tax code for individuals and the corporate income tax code.
It is also proposed that succession tax will be merged into this draft law and will be taxed as income tax. Therefore, such regulatory change could trigger new conflict areas between taxpayers and the tax authority.
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