Tax Reduction for Tax-Compliant Taxpayers In Light of Current Developments
Throughout the world, studies have been carried out to develop ways to increase the timely payment of taxes accrued in Turkey. In this context, a solution for taxpayers who declare and pay their taxes on time was identified, and the “Tax Reduction for Tax-Compliant Taxpayers” application, which is regulated in the repeated Article 121 of the Income Tax Law (“ITL”), was enacted through Article 4 of Law No. 6824 dated 23.02.2017 (“Law No. 6824”). Through the enforcement of this Regulation, 5% of the taxes calculated on tax returns may be deducted from the income or corporate taxes that are required to be paid. This incentive for tax-compliant taxpayers is applicable for annual corporate and income tax returns that are submitted after 1 January 2018.
However, failure to pay within one month will not mean that the legal remedy has not been abandoned. The applications of the related Regulation, many cases and disputes have been brought to the forefront. For this reason, many amendments have been made to the Article in order to achieve the main purpose of the Regulation. The latest amendments have been made through Law No. 7194. In this Article, the tax reduction for tax-compliant taxpayers is evaluated by taking new amendments into consideration.
The Scope of Tax Reduction for Tax-Compliant Taxpayers
The tax reduction for tax-compliant taxpayers has been implemented for annual corporate and income tax returns to be submitted after 1 January 2018. However, this reduction cannot be applied for all taxpayers who declare and pay their taxes on time. In the light of Article 121 of the ITL, benefiting taxpayers are set forth below:
- Income taxpayers who conduct commercial, agricultural and self-employment activities; and
- Corporate taxpayers, excluding those operating in the finance and banking sectors, insurance, and retirement companies, and retirement investment funds.
The discount will be 5% of the corporate or income tax liability declared on the above-mentioned taxpayers’ annual tax returns. However, the amount of discount cannot exceed TRY 1 million 400 thousand[1] (for 2020).
If the reduction is higher than the taxes payable, the remaining amount may be set-off from other taxes arising within one year after the submission of the concerned annual tax return. Amounts that cannot be deducted during this period are disallowed and not refundable[2].
The Conditions of the Tax Reduction
After the promulgation of the repeated Article 121 of the ITL in which the tax reduction for tax-compliant taxpayers was enacted, because of the increasing number of the cases and rulings, many amendments have been made to the benefiting conditions. These conditions are stated below:
a) All tax returns for the year during which the tax discount will be applied, and to the previous two years, must be submitted within the statutory period.
However, tax returns declared for correction or voluntary disclosure purposes are not regarded as a violation of the condition.
In addition, clarification was made through Law No.7194 by explaining the statement “tax returns” to be annual income tax and corporate tax returns, provisional tax returns and withholding tax returns, as well as value added tax returns, and special consumption tax returns to be submitted to the tax offices affiliated with the Ministry of Treasury and Finance. Additionally, the statement of “tax” shall be considered to be the taxes that have accrued upon submission of the abovementioned tax returns.
Additionally, in the first version of the Regulation, it was stated that late payments up to TRY 10 would not be considered as a violation of timely tax payments. However, many lawsuits have been filed due to the late payment of the fixed stamp taxes arising from the submission of tax returns. After these developments, the amount of “TRY 10” in the Article has been replaced with “TRY 250.” Finally, this amount was completely abolished through Law No. 7194, and no monetary limitation is envisaged under the aforementioned Regulation.
These two amendments brought by Law No. 7194 are based entirely on cases filed by the taxpayers who cannot benefit from the tax reduction because of the late payment of the stamp taxes that accrued in relation to the taxpayers’ returns, except for stamp taxes returns. In the court decisions rendered in this subject, it is stated that the stamp taxes arising from the submission of a return cannot be evaluated within this scope, and that prevention of benefiting from the tax reduction by these small numbers is contrary to the intended purpose of the Regulation. With these amendments, the legal gap in the Article reflected in the court decisions has been resolved.
b) The taxpayer is not subject to any additional tax assessment by the Turkish tax authorities in the year the discount is applied and for the two preceding years;
This condition shall not be deemed to have been violated if the assessments have been removed by final judgment, or according to settlement or rectification provisions.
c) The related taxes accrued upon the submission of the above-mentioned tax returns must be paid within the statutory period;
In the latest version of the Article that was amended through Law No.7194, it states that in the case of offsetting payments, payments that are not made up to 10% of the amount required to be paid on the basis of subsequent determinations shall not prevent the benefit of the tax reduction.
Prior to these amendments, although taxpayers met the demands of the Value Added Tax Returns System in full and on time, the late fulfillment of deductions or problems occurring in the Administration"s system prevented the application of tax reductions for tax-compliant taxpayers. With this context, amendments have been made in order to minimize these types of unfairness through Law No. 7194.
d) Taxpayers may not have unpaid tax debts (including penalties and accessory receivables) exceeding TRY 1.000;
e) Moreover, taxpayers who committed tax evasion in the year of the discounted application, and in the four preceding calendar years, are not allowed to benefit from the discount.
Whether or not all of these conditions are met by taxpayers can be controlled with an inquiry from the Interactive Tax Office prior to the relevant tax return being submitted.
However, we would like to emphasize that there may be data indicating that one or more of the above conditions have not been met due to systematic difficulties or delays with the administration. In this instance, by taking these problems into consideration, it is more sensible for the taxpayers to submit their returns, with reservation, and then file a lawsuit.
Unfair Tax Reductions and Their Enforcement
Taxpayers who benefit from tax deductions within the scope of this Article are subject to a reduction in the relevant taxation period if, in the case of later determination, they do not fulfill the prescribed conditions, and the unpaid taxes shall be assessed without applying tax penalties. However, default interest is applied to the unpaid taxes.
In terms of unpaid taxes, because of the tax reduction application, the statute of limitations starts from the beginning of the calendar year following the date upon which the assessment is finalized. In the tax reduction incentive, the finalization means that the taxes accrued, or penalties levied, are not subject to litigation or all the ordinary remedies are exhausted against these taxes and penalties.
Conclusion
The tax reduction for the tax-compliant taxpayer, which has been introduced for the purpose of voluntary tax compliance, is an important Regulation to prevent injustice and equality created by tax amnesties that are frequently applied in our country.
In order to reward tax-compliant taxpayers; in other words, in order to prevent unfair practices subject to criticism because of the amnesty laws, it is provided that tax-compliant taxpayers reduce 5% of their income tax liability declared on the annual tax return not exceeding TRY 1,400,000,00.
During the application of the tax reduction, it is considered that paying attention to the issues covered in this article will minimize the risk of possible criticism.
[1] Revenue Administration, https://www.gib.gov.tr/310-seri-nolu-gelir-vergisi-genel-tebligi (Access date: 20.02.2020).
[2] Apak, Doç. Dr. Sedat: “Vergiye Uyumlu Mükelleflere Vergi İndirimi Uygulaması, Değerlendirilmesi İle Ortaya Çıkan Sorunlar ve Çözüm Önerileri”, Vergi Sorunları Dergisi, No. 375, December 2019.
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