Base Increase and Restructuring of Public Receivables

The eagerly awaited "Draft Law on the Restructuring of Certain Receivables and Amending Certain Laws", also known as the tax amnesty/peace, was submitted to the Grand National Assembly of Turkey (TBMM) on January 27, 2023.

We will provide another informative update once it is enacted into law.

The topics covered in this law, in brief:

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1- Tax / Customs / SSI / Debt Restructuring

Almost identical to the previous Tax/Customs/SSI restructuring.

Debts accrued up to the period of December 31, 2022, are within the scope (those under tax audit and litigation are evaluated separately).

Application deadline is April 30, 2023.

While the principal tax/SSI debt remains, the default penalty is waived, and a new interest is calculated based on the requested number of installments (Domestic D-PPI, monthly 0.75%).

90% of this calculated interest is waived for lump-sum payments.

Installment options of 12, 18, 24, 36, and 48 months are available.

Timely payment of the first 2 installments is crucial; otherwise, the restructuring agreement will be nullified.

In installment payments, if more than 3 installments are not paid on time within a calendar year, the rights acquired under the restructuring will be lost.

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2- Base and Tax Increase

A regulation awaited by many businesses.

Application is not mandatory; it is optional.

Applications for base increase can be made even during an ongoing tax audit or litigation stage.

If this right is utilized, no tax audits will be conducted for the tax type and period benefited. Audits may still be conducted for unbenefited tax types and periods.

Available for the last 4 years: For the years 2018, 2019, 2020, and 2021 (2022 is not included for now).

You can benefit from the base increase for 3 main tax types: Corporate Income Tax, VAT, and withholding tax (withholding returns).

There are varying rates and amounts for each period and tax group (attached), as well as minimum thresholds for income and corporate tax base increases; you cannot make payments lower than these amounts.

Application deadline is April 30, 2023.

There is a 10% discount for lump-sum payments; an additional coefficient difference will apply to installments.

Timely payment of the tax is essential. If not paid on time, you cannot benefit from tax audit protection, and furthermore, you may be required to pay the accrued tax along with a default penalty. Additionally, you may be prioritized for a tax audit.

The calculated tax cannot be deducted as an expense (Nondeductible Expenses - KKEG).

You can also increase your tax base even if you generated income before your tax liability officially commenced.

Unfortunately, applications cannot be made by amending past period tax returns and submitting revised returns.

If there is a prior-year tax loss in the period benefited, you will lose half of this loss.

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Corporate and Income Tax

The amount payable for corporate and income tax is 20% of the increased base.

If the tax return for the applied period was filed and paid on time, the applicable tax rate is 15%.

If the company declared a loss in the relevant period, 50% of the financial loss cannot be utilized.

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For Limited and Joint Stock Companies

Base Increase and Tax Rates with Minimum Increase Amount (JSC and Ltd.)

Year of Tax Return

Base Increase Rate

Minimum Increase Amount

Tax Rate

Discounted Rate

Minimum Tax (20%)

Minimum Tax (15%)

2018

35%

200.000

20%

15%

40.000

30.000

2019

30%

215.000

20%

15%

43.000

32.250

2020

25%

230.000

20%

15%

46.000

34.500

2021

20%

260.000

20%

15%

52.000

39.000

Total

181.000

135.750

If paid in lump sum

162.900

122.175

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Sole Proprietorship - Balance sheet basis and self-employment income

Base Increase (Sole Proprietorship - Balance sheet basis and self-employment income)

Year of Tax Return

Base Increase Rate

Minimum Increase Amount

Tax Rate

Discounted Rate

Minimum Tax (20%)

Minimum Tax (15%)

2018

35%

94.000

20%

15%

18.800

14.100

2019

30%

99.600

20%

15%

19.920

14.940

2020

25%

105.800

20%

15%

21.160

15.870

2021

20%

112.400

20%

15%

22.480

16.860

Total

82.360

61.770

If paid in lump sum

74.124

55.593

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VAT

Calculated by multiplying the calculated VAT of the relevant year by the base rate of the respective year. It varies by years and ranges between 2% and 3%.

Paid VAT cannot be treated as a deduction.

In certain cases, applying for Corporate Income Tax base increase is also required in order to make a VAT base increase.

There is no base increase regulation for withholding VAT 2 payments.

Based on the "annual" total of calculated VAT:

3 percent for the year 2018

3 percent for the year 2019

2.5 percent for the year 2020

2 percent for the year 2021

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Withholding Tax

There are different rates for different withholding items (payroll withholding, rent withholding, self-employment withholding, expense voucher withholding, etc.). It can range from 2% to 6%.

Applications can be made separately for different withholding items.

Based on the "annual" total of payroll withholding:

6 percent for the year 2018

5 percent for the year 2019

4 percent for the year 2020

3 percent for the year 2021

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If one or more of the following situations apply to you, you may consider applying for the Base and Tax Increase

- The company incurring losses for a long period

- Having accumulated deductible VAT for a long period

- High balances in Cash and Due from Shareholders accounts

- Profit margins being lower than sector and regional averages

- High amounts of Nondeductible Expenses (KKEG) and deduction items on tax returns

- Presence of personal expenses or external invoices unrelated to company operations in the records

- Off-the-books salary/wage payments

- Unrecorded income and expenses

- Difficulty in accessing accounting documents for the last 5 years, potential tax audits taking too long and consuming excessive time

- Generating income in previous periods without being a registered tax taxpayer

- Another point to consider: If a large number of companies benefit from the Base and Tax Increase, the likelihood of audits increasing for companies that do not participate in this practice

Participating in the Base and Tax Increase does not create a negative impression in the eyes of the tax administration. On the contrary, the tax administration encourages companies to participate in the Base and Tax Increase. Participating in the Base and Tax Increase does not imply that you have significant tax risks. You can think of it as insuring your tax risks for a certain fee. Many foreign-capitalized companies also apply for the Base and Tax Increase to avoid tax audits. Furthermore, the tax administration may direct its auditing staff toward companies that do not opt for the Base and Tax Increase.

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3- Correction of Business Records

3.1. Correction of Cash / Receivables from Shareholders Accounts Present in Records but Absent Physically

Fictitious balances present in the records as of December 31, 2022, can be written off.

A tax equal to 3% of the amount will be paid within the tax return filing period.

The written-off amount and the paid tax will be recorded as Nondeductible Expenses (KKEG) and cannot be accepted as deductible expenses.

For amounts up to 250 thousand TL, eliminating them through the calculation of attendance fees (payroll) rather than the cash amnesty has a lower cost.

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3.2. Correction of Inventory / Fixtures Physically Present in the Business but Absent in Records

The inventory list will be reported to the Tax Office (by April 30, 2023).

50% of the VAT calculated over the fair market value will be paid within the tax return filing period.

The VAT paid for fixtures will be treated as Nondeductible Expenses (KKEG), whereas the VAT paid for inventory can be deducted.

The corresponding amount increased for inventory can be credited to the shareholders' account and distributed to shareholders tax-free.

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3.3. Correction of Inventory / Fixtures Present in Records but Absent Physically

Invoices will be issued for these items.

Payment will be made in 3 installments.

The details of the regulation whose main headings we tried to outline above are quite extensive and complex, including various exceptions and exemptions, etc.

A more comprehensive review must be conducted to avoid loss of rights.

If you would like to discuss the topics mentioned above in more detail, we can organize a meeting at your earliest convenience.

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