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Law number 7338, amending various tax laws including the corporate income tax law, the income tax law, the tax procedural law and other tax laws, was approved in the Parliament on 14 October 2021.
Key tax changes introduced by law number 7338 are as follows.
Advance tax returns
Currently, corporate income taxpayers are required to file an advance tax return and pay income tax on a quarterly basis. The new law removes the requirement to file advance tax returns for the fourth quarter. Accordingly, taxpayers will file advance tax returns for three, six and nine month periods only.
This amendment will apply to 2022 and later tax years.
Notional interest deduction (NID) on cash capital increase
According to a provision introduced in 2015, a tax incentive of notional interest deduction is available for capital contributions, allowing companies to deduct from their taxable income a notional interest which is calculated based on capital amounts contributed in cash. The deduction is equal to 50 percent of the notional interest calculated on the qualifying capital increase (net of qualifying decrease). The notional interest rate is determined based on the interest rates the Turkish Central Bank announces annually in relation to commercial bank credits.
With law number 7338, an additional advantage is now provided for cash capital contributions from abroad. With this amendment, the NID rate is increased to 75% for foreign-sourced capital.
The amendment will apply to capital increases made as of the date of the issuance of the new law.
5% discount for compliant taxpayers
Further to a provision which became effective in 2018, a tax deduction of 5% is available for taxpayers that are considered compliant as per the rules set out under Repeated Article 121 of Tax Procedural Law. With law number 7338, the concerned article is now amended to ease the eligibility conditions for the 5% tax deduction.
Previously one of the conditions for benefitting from this tax deduction was that the taxpayer should not be subject to any additional tax assessment by Turkish tax authorities in the year the discount is applied or in the two preceding years. Law number 7338 changes this condition and states that there should not be a finalized tax assessment in the said period, and in the event that the finalized assessments within the said period are less than 1% of the discount amount limit, the taxpayer is still considered compliant for the purposes of claiming the 5% tax deduction.
The new rule will apply to annual income and corporate tax returns to be submitted after 1 January 2022.
Government contribution for qualifying investments
The investment incentive program in Turkey includes the application of a reduced corporate income tax rate for qualifying investments. The benefit provided to the taxpayer in this manner is known as the “government’s contribution” to the investment.
With the new provision under law number 7338 it will be possible for taxpayers to use 10% of the government’s contribution by deducting it from other tax liabilities, excluding special consumption tax and value added tax, provided this is requested by the end of the second month following the month in which the corporate tax return should be submitted. This will help taxpayers to obtain the subsidy more quickly.
The new provision will apply to investment expenditures made after 1 January 2022.
Revaluation for depreciable assets
Repeated Article 298 of the Turkish Procedural Law regulating inflation adjustments and revaluation rates has been modified to provide taxpayers with the opportunity to re-state the value of their depreciable assets in the periods in which they cannot apply inflation accounting because the conditions for implementing inflation accounting did not take place in that period. Revaluation under this regulation is optional.
With this amendment, the practice of revaluing depreciable assets, which was done in the past within the framework of temporary regulations and for which final application is ongoing, will become permanent.
Deduction for bad debt
The term "too small to be worth litigation and enforcement proceedings" in the relevant article has been replaced with "not exceeding 3,000 Turkish liras". Accordingly, the threshold to write off a bad debt on the grounds that the amount is too small for litigation and enforcement proceedings has been set at 3,000 Turkish liras.
Fixed asset replacement fund
The article regulating the fixed asset replacement fund has been amended to clarify the starting point of the three-year period in which capital gains (from sale of fixed assets which will be replaced with similar assets) can be kept in a temporary account without being subject to taxation. According to the clarification, the three-year period starts in the year following the year of the sale, not in the year of the sale.
With the amendments to the Tax Procedural Law:
Taxpayers are provided with the option of calculating depreciation expenses on a daily basis.
A longer useful life may be used as long as it does not exceed two times the useful life and 50 years. However, the calculation method for these fixed assets cannot be changed.
Until 31 December 2023, the useful life periods used in depreciation calculations of new machinery and equipment acquired by taxpayers holding industrial registry certificates for use exclusively in the manufacturing industry, R&D, innovation and design activities can be half the length of periods determined and announced by the Ministry of Finance.
Social media content producers and mobile device application developers
Income earned by individual social media content producers sharing content such as written text, and audio, visual or video content over social networks and income earned by mobile application developers is exempt from income tax, provided that the total income earned in this manner does not exceed the fourth income bracket set out in Article 103 of the Income Tax Law (650,000 TRY for 2021). There will be no obligation to submit an annual income tax return for such income.
To benefit from this exemption, it is mandatory to open an account in a bank established in Turkey and to collect proceeds only through this account. Banks operating in Turkey are required to withhold 15% tax on the revenue transferred to such accounts.
The new rule will apply to earnings derived after 1 January 2022 (inclusive).
Small businesses income tax exemption
With the amendment to the Income Tax Law, the income of tradesmen whose income is determined on a small business taxation basis is exempt from income tax. They will not submit annual tax returns for their exempt income. If they submit a tax return for other income, they will not include the exempt income in their tax returns.
Agricultural support payments
Support payments made by the government to support the agriculture industry and farmers will be exempt from income tax, and there will be no withholding tax on these payments.
Voluntary correction of tax returns
In the past, taxpayers were not allowed to file corrections for any tax returns when they were undergoing tax inspection. With the amendment to Article 371 of the Tax Procedural Code, it is now possible for taxpayers to correct tax returns for the other types of taxes which are not subject to an ongoing tax inspection.
Irregularity/special irregularity fines
Irregularity and special irregularity fines exceeding 5,000 TRY will be included in the scope of "reconciliation".
In determining special irregularity and irregularity penalties that may be subject to reconciliation, the total amount of the fines to be imposed based on the act necessitating the penalty will be taken into account.
For irregularity and special irregularity fines not exceeding 5,000 TRY, the discount will be applied in 50% increments.
Repetition of tax penalty
In the event that an additional penalty is imposed within the periods specified in the article after a finalized penalty is imposed, the amount added to the penalty will be 50% of the penalty imposed and not more than the finalized penalty. If there is more than one finalized penalty, the highest one will be considered.
Discount on irregularity penalties determined as a result of reconciliation
If the taxpayer pays the agreed-upon tax and 75% of the tax penalties (tax loss, irregularity and special irregularity) within the specified payment periods, 25% of the agreed-upon penalty will be deducted.
Article 139 of the Tax Procedural Law has been amended to reflect that inspections are carried out at the workplace of the tax inspector. The inspection can be done at the workplace of the taxpayer if requested.
In addition to the amendment regarding the inspection location, changes have been introduced to inspection procedures as well. Accordingly, the subject of the tax inspection and the fact that the inspection has started will be communicated to the taxpayer in a letter. Previously, notification was made by the tax inspector and the taxpayer jointly signing a notice.
Mutual agreement procedures (MAP) in double tax treaties
Law number 7738 includes provisions regarding mutual agreement procedures to be followed as per double tax treaties. The new provisions mainly relate to:
1. The application procedure for mutual agreement,
2. The finalization procedure,
3. The impact on statutes of limitation,
4. The impact on lawsuits commencing after mutual agreement application,
5. The impact on litigation or negotiation processes that commence before mutual agreement application.
Implementation of accommodation tax is postponed from 1 January 2022 to 1 January 2023.
Tax Services, Director, PwC Turkey
Tel: +90 212 326 6454