In our 2023 Corporate Tax Reservation and Litigation note; we have examined the issues of "application of reduced corporate tax rate to earnings from services provided to foreigners in Türkiye (accommodation, health, etc.)" and "excess profit declared due to not subjecting the assets sold in 2023 to inflation adjustment".
1. Applying a reduced corporate tax rate to earnings from services provided to foreigners in Türkiye (accommodation, health, etc.).,
A 5-point corporate tax discount is applied to the export earnings of companies making export pursuant to Article 32/7 of the Corporate Tax Law. In other words, the corporate tax rate applicable to export earnings is 20%, not 25%. Service exports are also within this scope and can benefit from the reduced rate.
Although export earnings are subject to the reduced rate in the Law, the definition and framework of export is not defined. The Directorate of Revenue Administration has issued a Communiqué stating that services utilized in Türkiye are not within this scope. In other words, the Fiscal Administration does not consider services provided to foreigners in Türkiye as exports. It is understood that this regulation was modeled after the VAT Law and legislation. The VAT Law stipulates that the services must be utilized abroad in order to be considered as an export of services. A similar regulation is not provided in the Corporate Tax Law. Therefore, an administrative regulation restricts the taxpayers' eligibility to benefit from the reduced rate by introducing a condition that is not stipulated in the law. The established jurisprudence is that the regulations limiting the taxpayers' tax rights must be regulated by law, and a limitation that is not regulated by law cannot be regulated by administrative regulations.
As a matter of fact, a Presidential Decree defines services provided to non-residents in Türkiye as "domestic service exports". Therefore, we consider that the earnings from accommodation, health and other services provided to foreigners in Türkiye should benefit from the reduced corporate tax rate within the scope of service exports and that companies in this situation can file their 2023 corporate tax returns with a reservation indicating their objection and then file a lawsuit.
2. Excess profit declared due to not subjecting the assets sold in 2023 to inflation adjustment
In 2021, although the conditions for inflation adjustment were met, the inflation adjustment was postponed to 2023 with a regulation. In a recent decision, the Constitutional Court ruled that the regulation is unconstitutional on the grounds that the postponement made in 2021 constitutes retroactive application of the law for the year 2021.
In this case, since inflation adjustment could not be made in 2021, the book values of the assets sold in 2023 cannot be increased. As a result, the profit from the sale of these assets appears higher, leading to the payment of additional taxes.
In light of the Constitutional Court decision, we are evaluating that the profit from the sale of assets within the year 2023 should be calculated based on the value that the book values (costs) of these assets would have been if inflation adjustment had been made at the end of 2021. Consequently, companies affected by this situation may consider submitting their 2023 corporate tax returns with a reservation indicating their objection and may initiate legal proceedings.