Turkey awaiting new income tax law to provide greater clarity

Tax systems have a high level of impact on economic development. One of the topics criticised in Turkey is the failure to use tax to serve development to the desired level. Therefore, the authorities need to be aware of how tax policies can be used as an effective tool in rapid, fair and balanced development attempts, and introduce the necessary regulations to that effect.

Laws in the Turkish taxation system can be complex, and may cause conflicts between the fiscal administration and taxpayer. To create a more confident environment, regulators should ensure that tax rules are as stable and predictable as possible to allow investors to plan for the future, and keep any increases in costs for businesses to a minimum.

Moreover, the administration should be committed to providing a high-quality service to taxpayers, including a commitment to voluntary compliance by taxpayers and enabling the collection of tax revenue with the aid of IT platforms and services.

Tax Procedure Act

The Tax Procedure Bill drafted by the Tax Council as a result of efforts to renewing tax laws was made public on September 30, 2011. However, no changes have been made so far.

Income Tax Act

The Income Tax Bill was presented to the Turkish Grand National Assembly on June 12, 2013, and remains pending as a bill. If enacted, the provisions of the Income Tax Act and Corporation Tax Act will be combined under the rubric of the Income Tax Act. This piece of legislation aims to encourage voluntary compliance while increasing the amount of revenue generated from direct taxes. Items scheduled to be changed by the bill are as follows:

• Encouraging investments, production, employment and savings;
• Enhancing voluntary compliance with taxation;
• Broadening the tax base;
• Reinforcing tax security;
• Introducing regulations in compliance with social and environmental policies; and
• Enhancing flexibility and efficiency in enforcement.

Bringing Clarity

The bill deals with various tax exemptions, immunity and other taxation matters concerning each income element in the same chapter. As a result, it aims to bring clarity to existing laws. Changes to withholding provisions:

• Sections concerning tax deductions are covered in a single section;
• Two withholding rates of 15% and 25 % are stipulated depending on the type of income; and
• Broad authority is granted to the Council of Ministers for resetting withholding rates as is the case in existing regulations. It is expected that existing rates will apply until the Council of Ministers adopts a new decision. Changes to the tax return period:
• The fourth period provisional tax return has been eliminated; and
• The temporary tax will be at the rate implemented on the first income tranche of the schedule in paragraph one of Section 77 for natural person taxpayers (15%) and at the rate stipulated in paragraph four of the same section for corporations (20%).

Changes planned to the Free Trade Zone Act: Studies on a bill for changes on the Free Trade Zones Act are ongoing and no bill has been drafted so far. The planned changes will be as follows:

• Plot changes to fit the needs of the investors;
• Clustering and setting up of zones with infrastructure and all supporting elements for projects; and
• The provision of an efficient service for the project owner, including the minimisation of bureaucracy and an emphasis on promoting and marketing.

Regarding applications for permission to operate in free trade zones under the Free Trade Zones Act, the bill will particularly encourage the production of high-value-added goods services production that contributes to research and development. This can be done by considering the added value that would be created by the investment in addition to the nature and size of the project and its contribution to employment.