Ersin Nazali, a founder and Managing Partner at NAZALI Tax and Legal has been listed as one of the leading tax advisors and attorneys in Turkey by Legal 500 (in the years between 2013 to 2018) and International Tax Review (in the years between 2014 to 2018). In his interview with EEL Events, Mr Nazali gave an insight into changes to Turkish tax regulations in 2019.
Could you please provide a general outlook for changes in tax legislation during 2019? Was there any specific target?
One of the main targets of the changes in tax legislation was to ensure that income from digital services is taxed in line with the principle of “user-centred value creation”. Turkey not only imposed withholding tax on digital advertising services in the beginning of 2019 at the rate of 15% but also enacted Digital Services Tax Law in December for the purpose of levying 7,5% tax over the revenues of giant technology companies which do not have tax presence in Turkey.
Another important target of the tax legislations enacted in 2019 is to support innovative, R&D intensive and high value added investments on the project basis to meet the critical needs of the country that may arise in the present or future, to ensure security of supply, to reduce foreign dependency and to perform digital transformation. For this purpose, The Communiqué on the Implementation of the Decision on State Aid Provided to Project-Based Investments has been published.
In this context, the government aids to be obtained are as follows:
• Qualified personnel support;
• Energy support;
• Interest and dividend support;
• Government grant support;
• Employer’s national insurance contribution support.
Value added tax was one of the main focus of the legislations. One fundamental development which is in favour of taxpayers is that from January, 2019 onwards, it will be possible to deduct the value added tax till the end of the calendar year which follows the year when the taxable event takes place. There are, nonetheless, changes which are compelling to be applied in practice such as subjecting the foreign exchange difference deriving from commodity sales or provision of services to value added tax.
There had been regulations that enhance capital inflow into Turkey. The most primary example of this is asset peace. Individuals and legal entities can freely utilize their money, gold, foreign exchange, securities and other capital market instruments located abroad if they duly notify them to Turkish banks by the end of June, 2020 and pay 1% tax.
Are there any incentive mechanisms provided by Turkish tax regulations to the compliant taxpayers?
Tax authority aims to reward the compliant taxpayers who consistently satisfy their liabilities. Within this scope, I can give following examples:
• Discount of 5% over the corporate tax amount declared on the annual tax return,
• 50% discount over the tax penalty assessed in transfer pricing investigations,
• Accelerated VAT refund for 50% of the total amount in 10 days and value added tax refund without provision of guarantee letter.
Which industries do Turkish Tax Regulations incentivize? What were the industry specific tax regulations which came into force in 2019?
There are incentives for the investments in manufacturing, research and development, design and technology industries. There are also significant incentives for the coordination services rendered in Regional Management Centre or for the services in the nature of architecture, engineering, design, software, medical reporting, bookkeeping, call center and data storage directly targeting abroad.
Reduced corporate tax, allocation of free investment site, compensating employers’ share of social security premium, interest support, customs and value added tax exemption are some of the incentives provided to manufacturers who engage in general, strategic, regional and project-based investments.
Research and development and design expenditures can benefit from additional corporate tax base deduction other than their amortization at the rate of 100%. Additional deduction can also be granted contingent upon changes in defined indicators. Furthermore, there are remarkable income tax, social security contribution, stamp duty and customs duty reliefs. If the technologic operations take place within the technology development zones, there is full corporate tax exemption for the income generated therein.
There is also highly advantageous tax environment for those who invest through securities investment funds. The most significant advantages enjoyed by securities investment funds and their participants are corporate tax exemption as well as 0% dividend withholding tax application for stock certificate intensive funds.
Developments taken place in 2019 that support above-mentioned investments can be listed as follows:
• Period of additional incentives granted to investment expenditures of manufacturing industry has been extended,
• The period of value added tax exemption was extended until the end of 2020 for the deliveries of machinery equipment to manufacturers with industrial registration certificates and to those who engaged in research and development activities,
• Stamp duty exemption were introduced for the contracts regarding manufacture of high-technology or medium high-technology segment products,
• Banking and insurance transaction tax rate was reduced to zero for foreign exchange sales to the exporters who are members of the exporters’ associations and the foreign exchange sales to the enterprises with the industrial registry certificate.
What do you think will be the focus of tax authority in the upcoming regulations and investigations?
The primary objective of the Turkish tax authority in the upcoming period would be to harmonize with BEPS Action Plans and the approaches adopted and implemented in the world. Within this context, one of the significant steps was taken at the beginning of 2020 with the introduction of three-tiered reporting obligations in terms of transfer pricing documentation as mentioned in BEPS Action Plans. In this regard, multilateral competent authority agreement on the exchange of country-by-country reports would be one of the most important agendas.
Furthermore, the digital services tax will be practiced first time in 2020 and new regulations and rulings regarding to digital services tax application are envisaged. The giant technology companies that generate remarkable worldwide incomes are targeted with the digital services tax application.
Concordantly, we predict that tax investigations will now focus on cross border transactions and digital services. We believe that large tax base differences could be achieved by tax inspectors especially with the new reporting obligations. Therefore, Turkish tax authority will be inclined to collaborate with other tax authorities around the world and to take necessary actions to expand information exchange.
In the event that the health crisis emerged in China in December, 2019 spreads to other countries including Turkey, both general and sectoral incentives should be expected to ensure economic recovery as country borders are likely to be closed and economic activities will come to a standstill.
What are the mechanisms to resolve the conflicts before going to litigation process? Were there any facilitative developments in 2019 with this regard?
We can mention four different mechanisms namely:
• Reduction in Tax Penalties,
• Waiving legal remedies,
• Invitation to explanation.
Taxpayers may apply to settlement within 30 days following the notification of the tax penalty assessment. In general, approximately, 80% of the penalty is cancelled. Our tax laws also provide 50% discount from accrued penalties as long as they are paid in 30 days following the notification.
Invitation to explanations is a mechanism whereby taxpayers make explanations to tax inspectors who pinpoints some findings from taxpayers’ submitted returns before the commencement of a tax investigation. This process aims to avert a possible tax investigation and thus saves time and money both for the taxpayer and for the tax administration. In case, the taxpayer accepts its failure and voluntarily corrects its tax returns, penalty rate will be applied as 20% of the principal amount which is much lower than the standard rate.
A new scheme of dispute resolution has been introduced in 2019 called “Waiving Legal Remedies”. This regulation allows taxpayers to give up from litigation process and reach a settlement with the administration upon the decision of court of first instance. Tax principle and tax penalty to be cancelled as a result of application is contingent upon the decision favourable or unfavourable of the first instance court. For example, if a taxpayer loses the case in the first instance and waives its legal remedies, 25% of the tax penalty is cancelled. Besides, provided that the amounts accrued as a result of application is paid within 1 month 20% additional discount applies.
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