Understanding Tax Amnesty

A new tax amnesty program has been launched with the Law No. 7440 on 12 March 2023. Similar to prior amnesty regimes, the latest regime provides the following opportunities for taxpayers:

ü  rearranging of outstanding tax debts,

ü  clearing pending tax disputes,

ü  voluntarily tax base increase with non-audit guarantee

ü  correction of company accounts without any tax penalty or late interest

How It Works?

I-                    Tax Debts

Taxes (taxes, duties and taxes within the scope of Tax Procedure Law) and tax penalties, customs taxes and administrative fines, insurance premiums (including community insurance premiums, pension deductions, unemployment insurance premiums and social security support premiums), various administrative fines and all interests, delay charges and similar payments related to the above-mentioned debts will be subject to restructure.

For abovementioned tax debts which are not paid on time and whose payment period has not yet expired as of 12 March 2023:

ü  The entire tax penalty and delay interests will be written off when the taxpayer pays the entire original tax in addition to the amount to be calculated based on the Producer Price Index (PPI) monthly rates until 12 March 2023.

ü  50% of the penalty and the entire delay interests will be written off when the taxpayer pays 50% of a penalty not derived from an original tax or arising from participation and the amount to be calculated based on the PPI monthly rates until 12 March 2023.

II-                  Tax Disputes

At any point during the legal process, taxpayers are given the chance to resolve any outstanding tax disputes. According to the date the amnesty law was published, the settlement amount in this instance would rely on the progress and result of the legal process.

a.       Receivables for which a Lawsuit Has Been Filed or the Filing Date Has Not Yet Passed

50% of the tax and the delay interest/penalties will be waived in case 50 % of the principal tax amount is paid with the additional delayed payment charge calculated with the D-PPI.

b.      Receivables Accrued by the Court Decisions

c.       Receivables Under Tax Inspection or Assessment

Incomplete inspections and assessments as of 12 March 2023 will continue to be carried out. Once these tax assessments are completed, if the taxpayer pays the first 50% of the original tax amount and the amount to be calculated on 50% of the original tax based on the D-PPI in 30 days after notification, the remaining 50% of the original tax, delay interests and the entire tax penalty (for penalties that do not derive from an original tax if the 25% of the penalty is paid, the remaining 75%) will be written off.

III-                Tax Base Increase

Taxpayers who intentionally increase their tax base utilizing the particular rates decided within the act and pay extra tax on the updated base will not be subject to any tax inspection related to the period and sorts of taxes for which the tax base has been expanded.

a.       Corporate Tax

Corporate taxpayers can increase tax bases regarding FY18, 19, 20, 21 and 22 with the following rates:

To benefit from the tax base increase for FY22, the corporate tax return must be submitted, and the tax base declared in this tax return must not be less than the higher of the amount determined by increasing the tax base

·         declared in FY 2021 by 122,93%

·         in the third provisional taxation period of FY22 by 40%

Some Additional Notes:

v  Tax to be paid over increased base will be considered a non-deductible expense.

v  Half of the previous year losses for the years for which tax base has been increased cannot be benefitted in the following years (Special for FY22, all of the losses cannot be carried forward as an offset in the future years, not half).

v  Potential corporate tax base increase for FY22 is not a non-inspection guarantee only for the newly established supplementary tax (i.e., earthquake tax).

b.      VAT

In the event that the taxpayers declare additional VAT amounts for FY18, 19, 20, 21 and 22 at the rates specified below, they will not undergo any tax inspection, nor will they be subject to any tax assessment from the perspective of the VAT legislation for the concerning periods.

If there is at least one period that the calculated VAT is “0” in the related calendar year, taxpayers may only benefit from the VAT increase, provided that they have increased their corporate tax base for the relevant year. The tax to be paid by these taxpayers within the scope of the VAT increase is calculated by applying the rate of 18% to the increased bases in terms of corporate tax.

c.       Dividend Withholding Tax

Payments within the scope of the amnesty also contain salary payments, professional service payments, progress payments for multi-year construction works, rent payments, payments made to farmers and payments made to those who benefit from the tradesman exemption.

The tax bases for the payments within the scope shall be increased by the following ratios:

Unlike previous tax amnesties, this time, Tax Amnesty Act (Law No. 7440) provides the opportunity to benefit from the tax increase mechanism for withholding tax on dividend distributions too.

If a withholding tax return is submitted but the type of payment requested to be increased is not included in the tax return, taxpayers may benefit from the tax increase, if only corporate taxpayer pay 15% tax over the amounts determined to be no less than 80% of the increased corporate tax base for the relevant years. The companies carrying tax risks in terms of transfer pricing and/or thin capitalization should evaluate this amnesty option.

The last but not the least, if a taxpayer increases its tax base for dividend withholding tax, it is a must to increase its tax base for corporate tax.

IV-                Correction of Accounts

a.       Recording of inventory, machinery, equipment, and fixed assets that physically exist but are not booked in the statutory accounts

Taxpayers may declare abovementioned assets to the tax office with a list including fair market values. Those assets should be declared with half VAT rate through a separate return within the reverse charge mechanism and paid in due time. The VAT paid by taxpayers can be deducted according to general principles but cannot be refunded.

b.      Adjusting the books for inventory, machinery, equipment, and fixed assets which are physically non-existent

Taxpayers may correct their accounting entries for their recorded assets which are not physically existent by issuing an invoice including the gross profit rate determined according to the current year's figures for the same type of commodity; and performing other tax-related obligations.

c.       Adjusting the cash and receivables from the shareholders' balances which do not actually exist although being booked in the statutory accounts

Taxpayers may adjust the cash balances and receivables from shareholders in their balance sheet as of 31 December 2022 which are not present by declaring them with a tax rate of 3%.

Application Time and Payment Period-Options

The deadline for application is 31 May 2023, and the payment for the first installment must be executed by 30 June 2023. Participants applying for the amnesty are entitled to installments up to 48 months with only 9% interest per year. There will be no extra charge if you pay the outstanding balance till 30.06.2023.

For only tax base increases, there is maximum 12 instalments but please also be aware that 10% discount is valid for all of the taxes accrued as a result of the tax base increase are paid in advance till 30 June 2023.

Under the Perspective of Responsible Taxation

The tax amnesty is somehow like getting forgiven for your sins. Of course, you may well be innocent but please remember, even the best driver has violated a red light at least once in life.  

In order to decide whether to benefit from tax amnesty, cost-benefit analysis should be done first. If the tax penalties that are likely to be encountered as a result of the possible tax inspection in high-risk matters are higher than the amount to be paid in tax amnesty, then it will be the most rational solution to benefit from amnesty. However, if your risk is low and the tax amount you have to pay is very high due to the high tax base, then of course you should think again to benefit.