Vital Tax Amendments Made By Legislation No. 7394 – Gross sales Taxes: VAT, GST

26 April 2022

Esin Attorney Partnership

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Law No. 7394 made significant amendments related to tax
legislation. These amendments cover: an effective repentance
mechanism for tax crimes and penalties; a successive offense
mechanism in tax crimes and penalties; an increase of the upper
limit on prison sentences for tax fraud crimes; VAT exemption for
certain goods and services obtained within an investment incentive
certificate; corporate income tax exemptions regarding investment
funds and partnerships; and an increase of the corporate income tax
rate applied to certain financing entities.

New developments

Law No. 7394 on Certain Amendments to Utilization of Immovable
Properties Belonging to the Treasury and to the Law on Certain
Amendments to Value Added Tax Law and to the Law on Amendments to
Certain Laws and Statutory Decrees (“Law No.
7394“) introduced various amendments related to the
tax legislation. This alert covers the significant amendments made
by Law No. 7394.

What do the amendments made by Law No. 7394 mean?

Amendments regarding tax crimes and
penalties

With the amendment made to Article 359 of Tax Procedural Law
No. 213 (TPL), Law No. 7394 increased the upper
limit of prison sentences for tax fraud crimes to five years for
crimes with an upper limit of three years, and to eight years for
those with an upper limit of five years.
Meanwhile, an effective repentance mechanism was provided for
tax fraud crimes to be applicable in the investigation, prosecution
and execution stages as follows:
i. If a tax loss was incurred due to the actions covered under
Article 359 of the TPL, the prison sentence would be
written off by half if the following is paid
during the investigation stage:
- All of the assessed tax, delay interest and late payment
  interest
- Half of the imposed tax loss penalty and late payment interest
  pertaining to it
If the indicated amounts are paid during the prosecution stage
and before the decision is rendered, one-third of
the prison sentence to be imposed will be
written off.
The abovementioned repentance provisions would also apply to the
cases in the investigation and prosecution stage at the date when
Law No. 7934 was published. In that case, the amounts should be
paid until the decision is rendered.
ii. If no tax is assessed or a tax-related penalty is imposed,
the prison sentence to be imposed would be written off by half.
iii.Those who are sentenced and at the execution stage can
benefit from the repentance provisions if they pay all of the
assessed tax, delay interest and late payment interest, together
with the half of the imposed tax loss penalty and late payment
interest pertaining to it. The payment should be made within one
year following the entry into effect of Law No. 7394 (i.e., until
14 April 2023). In that case, the prison sentence would be
decreased by half.
iv.The cases that were at the first or final appellate stage
when Law No. 7394 was published should be reversed if they require
favorable consideration due to the amendments made by Law No.
7394.
For the application of the repentance provisions, which rely on
the taxpayers’ discretion to be availed of, no lawsuit should
be filed for the assessed taxes and penalties. If a lawsuit was
filed, the lawsuit should be withdrawn. In addition, no appellate
application should be made; if an appellate application was made,
this application should be withdrawn.
Article 43 of the Turkish Criminal Code No. 5237 regarding the
“successive offenses” would apply if a tax crime
regulated under Article 359 of the TPL is committed within more
than one calendar year or taxation period and is within the scope
of the execution of the decision on the same crime. Accordingly, in
the case of crimes committed within more than one calendar year or
taxation period, separate sentences will not be imposed for each
crime; instead, one sentence would be imposed and increased
by one quarter to three quarters. Before the
amendment, the successive offense provisions used to apply only to
crimes committed within the same calendar year or taxation
period.

With the amendment made to Article 367 of the TPL, Law No. 7394
provided that if it is found during investigation or prosecution
that another person committed the crime under Article 359 of the
TPL, or that the crime was committed together with another person,
no separate tax crime report or report evaluation committee opinion
would be sought for them.

Amendments regarding VAT

i. Exemption for investment
incentive certificates regarding the manufacturing industry and
tourism

With Temporary Article 37 amended to Value Added Tax Law No.
3065 (VAT Law), Law No. 7394 introduced a VAT
exemption for the goods and service deliveries for construction
works within the scope of the investment incentive certificates
related to the manufacturing industry and tourism.
This exemption applies until 31 December 2025.

ii.Exemption for engineering
services provided for the manufacturing of electrical motor
vehicles

With Temporary Article 42 amended to the VAT Law, Law No. 7394
provided a VAT exemption for the taxpayers who avail of the
project-based incentives under Law No. 6745 and manufacturing
electrical motor vehicles developed as a result of the R&D
activities realized exclusively in Turkey in order to develop
technologies for completely eliminating exhaust oscillation causing
greenhouse gas.
The exemption applies only to the engineering services provided
for the development of the mentioned vehicles and that are included
in the investment incentive certificate. The exemption applies
until 31 December 2023.

Regarding both of the exemptions provided under the
abovementioned Temporary Articles 37 and 42 of the VAT Law, if the
investment subject to the investment incentive certificate could
not be completed, taxes that are not collected in time would be
collected as a tax-loss penalty imposed and delay interest applied.
The statute of limitations for these taxes starts running as of the
calendar year following the date when the event caused the
imposition of the assessment and penalty (i.e., when the investment
was not completed).

In addition, taxes incurred during the goods and service
deliveries that are subject to the incentive can be deducted from
the calculated taxes; it can also be refunded if it could not be
deducted.

Amendments regarding corporate income
tax

With the amendment made to Article 32 and Temporary Article 13
of Corporate Income Tax Law No. 5520 (CITL), Law
No. 7394 increased the corporate income tax rate to 25% for
companies within the scope of Law No. 6361 on Financial Leasing,
Factoring, Financing and Saving Financing Companies, electronic
payment and money institutions, authorized currency entities, asset
management companies, capital market institutions, insurance and
reinsuring companies, and retirement companies. This amendment came
into effect with the publishing of Law No. 7394. The amendment is
applicable for returns to be filed as of 1 July 2022 and to the
business income pertaining to the taxation period starting on 1
January 2022.
With the amendment made to Article 5 of the CITL, Law No. 7394
provided that the following would be covered by the corporate
income tax incentive:
- Income generated from the refund of the participation shares
  from full taxpayer venture capital funds and other investment
  funds
- Gains from appreciation of the investment fund participation
  shares as securities
Income of funds and partnerships whose main fields of activity
are management of real estate, real estate projects and rights
depending on the real estate are excluded from the scope of the
exemption for 2023.
At that point, both the abovementioned funds and partnerships
whose main fields of activity are management of real estate, real
estate projects and rights depending on real estate, are excluded
from the scope of the exemption. The increase of the corporate
income tax to 25% for the mentioned financing institutions has
given rise to various discussions as to their effective dates
because, although these amendments were meant to be permanent, the
wording of Law No. 7394 within the provisions on the effective
dates thereof indicates that these provisions apply only for
2023.
Meanwhile, sales of the investment fund shares are included in
the scope of the exemption provided for the income generated from
the sales of participation shares, promoters’ stocks, dividend
shares and rights of priority that are held for at least two years.
Accordingly, 75% of the income generated from the sale of the
investment fund participation shares that are held for two years
would be exempt from the corporate income tax.

Conclusion

Law No. 7394 includes an effective repentance mechanism for the
implementation of tax crimes and penalties, successive offense
practice regarding tax crimes and penalties, an increase in the
upper limit of the prison sentence subject to tax fraud crimes, VAT
exemption for certain goods and services purchased based on an
investment incentive certificate, corporate tax exemptions for some
investment funds and partnerships, and an increase in the corporate
income tax rate applied to certain financial institutions. We are
of the opinion that Law No. 7394 — which has given rise to
discussions regarding the effective dates of some of its articles
— should be carefully evaluated and tax practices should be
guided by it accordingly.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.