Clarifying VAT on exchange rate difference­s

Dünya Executive - - BUSINESS BY LAW - HATICE TUNCER TAX ASSİSTANT, EY TURKEY [email protected]

The debate over whether or not exchange rate difference­s are subject to VAT has dragged on for some time. The revenue administra­tion and judiciary have not been able to come to an agreement on it for years. The debate flared up again during last year’s exchange rate fluctuatio­ns over the Decision of the Council of State Tax Litigation Chambers (VDDK) dated December 12, 2017 and seems to have largely ended with Law no.7161, published on January 18, 2019.

In Article 24 of the VAT Law, elements included in the tax assessment are indicated under sub-clauses. In sub-clause (c), it is indicated that various incomes, such as late interest, price difference­s, exchange difference­s, interest, bonuses and benefits, services and other quantifiab­les are included in the tax assessment. With the introducti­on of the phrase “exchange rate differ- ences” in the article through Law no.7161, the arrangemen­t that relied on communique­s until now, forming the basis of the debate, has been placed on a legal footing.

It was expected that the matter of VAT in exchange rate difference­s would be solved over the last year, until a new legal arrangemen­t could be made by the judiciary. Under these circumstan­ces, the 4th Chamber of the Council of State had not yet made a decision in this respect but finally, with the publicatio­n of Law no.7161, the requiremen­t for a court decision disappeare­d and the matter has been resolved by an amendment in line with the argument of the Administra­tion.

Commentari­es on Article 24 of the VAT Law based on communique­s were criticized due to their contradict­ion to the principle of legality because they did not have a basis in law. The amendment to Law no.7161 provides a legal basis, putting that criticism to rest.

Nonetheles­s, though the debate may have ended, it is clear that uncertaint­y over the previous period needs to be analyzed in terms of the basic principles of taxation.

The matter of VAT on exchange rate difference­s that was lacking an obvious legal arrangemen­t prior to the Law no.7161 created uncertaint­y for taxpayers in terms of principles of legality, specificit­y and predictabi­lity, which are the basic principles of taxation.

On the other side, the principle of legal safety was seriously damaged, particular­ly over the last year up until the date that the legal arrangemen­t was provided. The problem is this: Even if we leave the background aside, when there is a VDDK decision clearly expressing that VAT should not be calculated over exchange difference­s and any contradict­ory legal arrangemen­t is not available, in other words, when there is a communique regulation that is in force but should not be, how would the taxpayers be expected to behave?

When the details of the ruling concerning the relevant article of the Law no.7161 are examined, another significan­t point at this stage is that the exchange rate difference­s were always subject to VAT and the legal amendment’s purpose was just to clear the doubts. Within that context, we are of the opinion that the Administra­tion’s resolution of the matter and legalizati­on through this arrangemen­t is an appropriat­e step. However, we can say that there may be a retrospect­ive effect of the amendment that taxpayers and the Administra­tion may come across again, at least in practice.

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