VAT reforms: a primer

Turkey was one of the first countries to apply a VAT as a modern form of taxation. Over the 33 years since, the tax has, for the most part, proven positive in terms of its neutrality, quality of its bookkeeping and auditing and overall effects on accounting.

On April 6, amendments to the VAT Law came into force intended to solve some common problems widely accepted by taxpayers and practitioners. Below we provide our comments on the law as it has been published.

I- Changes related to l ab l ty, tax object, tax base and taxat on procedure

• Flat-for-land construction projects: The law clarifies an existing conceptual and practical issue by stating that, in flat-forland construction projects, the landowner delivers the residence and the contractor delivers the workplace or the residence. In flat-for-land projects, the VAT base will be calculated by taking into account the actual cost of the residences being delivered, rather than the estimated cost of equivalent residences.

• Changes related to the definition of “taxpayer”: In sales performed at auction houses, the taxpayer will be the person performing the sale.

II- Regulat ons concern ng VAT exempt ons:

• Storage and terminal services provided at bonded areas, which were granted full VAT exemption in the draft law, have been granted partial exemption in the final version.

• A VAT exemption applies to de- liveries made to and services performed for those who make donations to schools, healthcare facilities and care centers, sanctuaries and student hostels. • Deliveries of textile scraps that cannot be used in their existing form or after being repaired are exempt from tax.

• A VAT exemption applies for healthcare services provided in Turkey to Turkish citizens who live abroad.

• Exemptions also cover new machinery and equipment to be delivered for use in technology development areas, R&D and design centers and research laboratories.

III- Changes related to deduct ons and refunds:

• In the original law, deduction was possible only if the relevant documents were entered into the books during the calendar year in which the taxable event took place. According to the new provision, deduction is now also possible for VAT that is related to documents entered into the books during the year that

follows. This is a major amendment in terms of invoices that arrive late or transactions and invoices whose value becomes final at a later point in time. • VAT related to bad debt can be deducted during the fiscal year in which the debt in question was transferred to the bad debts account.

• VAT paid for a depreciable economic asset that was lost at the end of its useful life or was delivered within the context of an exemption shall be fully deductible, while VAT paid for a depreciable economic asset that was lost before the end of its useful life or was delivered within the context of an exemption shall be deductible in proportion to the time period in which it was used.

• Another deductible item is the VAT paid on domestic transactions aimed at profit shifting through transfer pricing.

• The new deadline for applying for a refund in tax-exempt transactions is “the end of the second calendar year following the period in which the transaction was performed.” Such refund procedures must be started during the year that follows. • In export transactions by manufacturers, the Ministry of Finance has been authorized to determine the amount of VAT to be refunded as a percentage of the amount exported (varying by industry), instead of refunding the VAT that was paid. • Wide-ranging powers have been granted to the Ministry of Finance in relation to VAT refunds, allowing it to determine a variety of methods, principles and procedures depending on tax compliance levels, which will be calculated by taking into account such variables as the duration of taxpayer status, size of assets and equity capital, amount of taxes paid, etc.

Other prov s ons n the amendments:

• Completion of VAT refunds

within 3 months; • Establishment of a separate unit at the Tax Audit Board for reviewing VAT refunds; • Authorization of the Ministry of Finance to introduce regulations allowing certified public accountants (in addition to chartered accountants) to issue reports related to VAT refunds (provided that this is limited to those taxpayers for whom they sign tax returns and to the periods in which they signed such tax returns);

• VAT exemption (in addition to Special Consumption Tax exemption) for deliveries to duty-free stores and their warehouses.