Question

Explain the types of tax liability in the Turkish Tax System by giving examples.

Answer 1

The Turkish tax regime is an important part of the economy and can be divided into 3 main categories:

• Income Taxes, such as Individual Income Tax and Corporate Income Tax
• Taxes on Expenditure, such as Value Added Tax or Banking and Insurance Transaction Tax or Stamp tax
• Taxes on Wealth, such as Property Tax or Inheritance and Gift Tax

Income Taxes

Income taxes in Turkey are levied upon the income, both domestic and foreign, of individuals and corporations resident in Turkey. Non-residents earning income in Turkey through employment, ownership of property, carrying on a business or other activities providing an income are also subject to taxation, but only on their income derived in Turkey.

Individual Income Tax

The limited tax liability covers trade or business income from a permanent establishment, salaries for work done in , rental income from real property in Turkey, Turkish derived interest, and income from the sale of patents, copyrights and similar intangible assets. The personal income tax rate varies from 15% to 40%.

Corporate Income Tax

For tax purposes, companies are grouped as limited liability companies and personal companies. Corporate tax applies to limited liability companies. State economic enterprises and business entities owned by societies, foundations and local authorities are also subject to corporation tax.

Taxes on Expenditure

Value Added Tax (VAT)

The VAT (KDV in Turkish) rates vary between 1% - 18% but it's generally applied as 18%. VAT payable on local purchases and on imports is regarded as "input VAT" and VAT calculated and collected on sales is considered as "output VAT".

Input VAT is offset against output VAT in the VAT return filed . If output VAT is in excess of input VAT, the excess amount is paid to the related tax office. On the contrary, if input VAT exceeds the output VAT, the balance is carried forward to the following months to be offset against future output VAT. There is no cash refund to recover excess input VAT, except for exportation.

Special Consumption Tax

Special Consumption Tax (ÖTV in Turkish) was implemented in August 2002 by abolishing 16 different indirect taxes and funds in order to make the direct taxation system becoming in line with the European Union directives. Unlike VAT, which is applied on each delivery, ÖTV is charged only once. There are mainly 4 different product groups that are subject to ÖTV at different tax rates:

• Petroleum products, natural gas, lubricating oil, solvents and derivatives of solvents
• Automobiles and other vehicles, motorcycles, planes, helicopters, yachts
• Tobacco and tobacco products, alcoholic beverages
• Luxury products

Banking and Insurance Transaction Tax

Banking and Insurance company transactions remain exempt from VAT, but are subject to a Banking and Insurance Transaction Tax of 5%, due on the gains by the banks for their loan interest or transactions for example. The purchase of goods and services by banks and insurance companies are subject to VAT but is considered as an expense or cost for recovery purposes.

Stamp Tax

Stamp duty applies to a wide range of documents, including contracts, agreements, notes payable, capital contributions, letters of credit, letters of guarantee, financial statements and payrolls. Stamp duty is levied as a percentage of the value of the document at rates ranging from 0.15% to 0.75%. Each and every signed copy of the agreement is separately subject to Stamp Tax.

Taxes on Wealth

Property Tax

Property taxes are paid each year on the tax values of land and buildings at rates varying from 0.1% to 0.6%. In the case of the sale of property, a 1.5% levy is paid on the sales value by both the buyer and the seller.

Inheritance and Gift Tax

Items acquired as gifts or through inheritance are subject to taxes between 1% and 30% of the item's appraised value.

Withholding Tax

Under the Turkish tax system, certain taxes are collected through withholding by the payers in order to secure the collection of taxes. These include income tax on salaries of employees, lease payments to individual landlords, independent professional service fee payments to resident individuals, and royalty, license and service fee payments to non residents. Companies in Turkey are responsible to withhold such taxes on their payments and declare them through their withholding tax returns.

Environmental Tax

Municipalities are authorized to collect an Environmental Tax as a contribution towards the financing of certain services such as garbage collection.