Tax on foreigners
We are experiencing a period in which not only global capital mobility has increased but, accompanying it, human mobility as well. What we will call “international assignments”, where employees fulfil their duties in the countries where capital is flowing, is on the rise. As a result, taxation of incomes for a mobile workforce has become increasingly complex and specialized.
One of the significant issues over how to tax the income of any person is the matter of residence. Residency, in tax terms, refers to a person’s status as a settled member of the country in which he or she works. In principle, persons are taxed in the countries in which they are resident for the income they earn anywhere in the world. Whether or not a person is deemed resident in any given country is determined by the local tax laws of that country. However, in international assignments, situations may arise such that persons are deemed to be resident in both countries according to local regulations. In such cases, taxes are determined under the auspices of a double taxation agreement between the two countries. Another significance of residency is that avoiding double taxation is the responsibility of the country in which the person is resident.
In general, expatriates depart Turkey permanently at the end of international assignments and are then categorized as limited taxpayers (non-residents). Non-residents pay tax in Turkey only for the income they acquire
from Turkey. For the income to be acquired in Turkey, as per the Income Tax Law, the service should be carried out in Turkey, the payment should be made from Turkey or charged as expenses in Turkey.
Therefore, the state of being a limited taxpayer does not imply that compensation obtained by persons after leaving Turkey for their services carried out in Turkey previously will not be subject to taxation. Despite the existence of some exceptions, compensation is widely defined in the Income Tax Law and it is ensured that payments to be made afterwards for services provided in the past shall be taxed as wages.
Additionally, the legislation for double taxation avoidance has a structure allowing the taxation of compensation in Turkey for the period
that the service had been carried out in Turkey in terms of payments made following the assignment.
The most common in practice are the premiums paid for past performances, severance pay and share acquisition plans. The income corresponding to the period for which the service is carried out in Turkey is considered as Turkish-origin revenue and will have to be taxed even under circumstances where the payment was made outside of Turkey and was not charged to the employer in Turkey, even when people are treated as limited taxpayers in Turkey.
However, one should not ignore the fact that some problems related to tax may arise in practice. These problems can be briefly classified into three groups:
Difficulties faced by fully-amenable taxpayers when providing the documentation required for avoidance of double taxation in Turkey, as demanded by the law and within the specified legal period.
For limited taxpayers, the complex structure of taxation of compensation made following the assignment that requires expertise as well as difficulties faced during the refund of the tax paid unduly in certain cases. The detection of the authorized tax office during the declaration process and the difficulties in the acceptance of that process by that authority regardless of the liability.