Clarifying VAT on exchange rate differences
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.