Value Added Tax

In Turkey, there are several indirect taxes  but most important indirect tax is V.A.T.

The beginning of the studies on Value Added Tax (VAT) in Turkey goes back to 1970. In 1974, a draft VAT law, which was the result of studies of a technical group, was prepared. The subject (VAT)was discussed by different levels of public opinion and some project games were organized to test the drafts with the volunteer enterprises. After the appreciation of the results of these discussion and games, seven law drafts were prepared between 1974-1984. The 8th draft was enacted on November 2nd , 1984 and entered into force on January 1st , 1985. By the VAT Law, eight indirect taxes on consumption were abolished.

The Turkish Tax System levies value added tax on the supply and the importation of goods and services. The Turkish name for Value Added Tax is Katma Değer Vergisi, abbreviated to KDV.
 
            Liability for VAT arises;
 
(a) when a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey,
(b) when goods or services are imported into Turkey.
           
            VAT is levied at each stage of the production and the distribution process. Although liability for the tax falls on the person who supplies or imports goods or services, the real burden of VAT is borne by the final consumer. This result is achieved by a tax-credit method where the computation of the VAT liability is based on the difference between the VAT liability of a person on his sales (output VAT) and the amount of VAT he has already paid on his purchases (input VAT).
           
            The Turkish VAT system employs multiple rates and the Council of Ministers is authorized to change the VAT rates within certain limits.
 
VAT TAXPAYERS
 
General

VAT taxpayers are defined in the VAT Law as those engaged in taxable transactions, irrespective of their legal status or nature and their position with regard to other taxes.
 
Taxpayers

            The following people or entities are liable to VAT:
 

• Those supplying goods and services,
• Those importing goods or services,
• Those required to complete customs formalities in case of transit of goods

through Turkey,

• General Directorates of the Authorized Public Lotteries, including Spor-Toto and National Lottery,
• General Directorates of Postal Services (PT and Telecom) and radio and television corporations,
• Organizers of horse races and other betting activities,
• Organizers of shows, concerts and sporting events with the participation of professional artists and professional sportsmen,
• Lessors of goods and rights stated in Article 70 of the Income Tax Law.

 
Goods and rights set out in Article 70 of the Income Tax Law including immovable property such as land, buildings, mines and rights which are in the nature of immovable property; and. other goods and rights.. such as all kinds of motor vehicles, machines and equipment, ships, literary, artistic and commercial copyrights, commercial or industrial know-how, patents, trademarks, licenses and similar intangible properties and rights.
 
VAT Responsibility and Reverse Charge VAT

In the event that the taxpayer is not resident or does not have a place of business in Turkey, a legal head office or place of management in Turkey, or in other cases deemed necessary, the Ministry of Finance is authorized to hold any one of the people involved in a taxable transaction responsible for the payment of tax.

According to the Turkish VAT law, there is a so-called reverse charge VAT mechanism, which requires the calculation of VAT by resident companies over payments to abroad. Under this mechanism, VAT is calculated and paid to the related tax office by the Turkish company or customers on behalf of the non-resident company (foreign company). On the other hand, the local company treats this VAT as input VAT and offsets it in the same month.
           

• Toll-manufacturing and ready-made materials (textiles) are subject to partial withholding: Only 1/3 of the calculated VAT is paid to the seller by the purchaser. Therefore, the purchaser will be responsible for paying 2/3 of calculated VAT to the tax office directly.
• Junk metal, waste paper, junk plastic material deliveries are exempted from VAT: In the case of the renouncement of the above mentioned exemption, the purchaser pays 10% of the calculated VAT to the seller. Therefore, the purchaser will be responsible for paying 90% of the calculated VAT to the tax office directly.  

      In the case of the deliveries of the petroleum products by the sellers, excluding importers, refineries, fuel oil distribution companies and fuel oil agents, only 1/10 (10%) of the Value Added Tax is paid to the seller by the purchaser. Therefore, the purchaser will be responsible for paying 9/10 (90%) of the VAT to the tax office directly.
 

            Taxable Base

The taxable base of a transaction is generally the total value of the consideration received, not including the VAT itself. The VAT Law deals with the taxable base under four headings, namely the taxable base on deliveries and services, on importation, on international transportation, and special types of taxable base.
In case a consideration does not exist, is unknown or is in a form other than money, the taxable base is the market value. Market value is the average price payable in the market for similar goods and services and is determined with reference to the Tax Procedural Law.
 

            Exclusions From the Taxable Base

The taxable base for goods delivered and services rendered does not include the VAT itself or any discounts, provided that they are at a reasonable rate with regard to commercial practice and are explicitly listed in all invoices or similar documents.

            Tax Rates

Standard rate:

The standard rate of VAT on taxable transactions is set at 10% in the VAT Law, but this rate was increased to 18% as of 15 May 2001.
 

Special rates:

• For the deliveries and services mentioned in List No. I ......1% (e.g. agricultural products such as raw cotton, dried hazelnuts, supply and leasing of goods within the scope of the Finance Leasing Law)
• For the deliveries and services mentioned in List No. II...........8%  (e.g. basic food stuffs, books and similar publications)

            The Credit Mechanism

VAT is collected at every stage of the production and distribution process from the initial sale by the producer to the final sale to the consumer. At each of these stages, the amount of tax payable is the difference between the total amount of tax charged on the invoices issued by the taxpayer and the total amount of tax charged on invoices issued to the taxpayer during the same period. Thus the VAT is initially computed by applying the appropriate rate of taxation to the taxable base for goods and services supplied by the taxpayer during a taxable period. This amount is then reduced by a credit for VAT previously paid on importation and on goods and services supplied to the taxpayer.
           
            Non-deductible VAT (Cost or non-deductible item or capitalized)

            In the following cases, VAT may not be credited from the VAT computed on taxable transactions.
 
(a) VAT on purchases of cars (which should be recorded as an expense or cost) (except for businesses related with lease or operation of cars)
(b) Missing and stolen stocks,
(c) VAT on expenses accepted as non-deductible in determining  income according to Income Tax Law and Corporate Tax Law,
(d) Input VAT on exempt deliveries listed in Article 17 of the VAT Law.

            VAT Refund

            Value Added Tax (input VAT) shown on invoices and similar documents related to the transactions which are exempt from the tax, such as:
 

• Exportation of goods and services,
• Exemption for vehicles, petroleum exploration and investments made under an investment incentive certificate (IIC),
• Transit transportation,
• Diplomatic exemption ,

are deducted from the Value Added Tax (output VAT) to be calculated on the transactions of the taxpayer which are subject to VAT. In the absence of transactions subject to VAT, or if the output VAT is less than the input VAT, then the input VAT which cannot be deducted is refunded to those who perform such transactions, on the basis of principles to be determined by the Ministry of Finance