Tax Refund in Turkey – Procedures Applicable to Imports & Exports
1. Overview
Tax refund in Turkey is an issue that needs careful consideration. Turkey has a complex tax system, which can sometimes cause issues to foreign investors when trying to implement a profitable tax structure for their businesses. This is especially the case for businesses conducting international trade transactions, where raw materials are imported into Turkey, used to produce a specific product, which is later exported to third countries.
In such cases, the procedures concerning the payment and tax refund in Turkey for customs tax, value added tax (VAT) and other tax and duties applicable to the specific materials and/or products can be overwhelming to those who are not accustomed to the procedures.
2. Tax Refund in Turkey & Deductions for Imported Raw Materials
There are different exceptions, exemptions, and mechanisms available at law, that allow for the deduction and/or tax refunds for taxes paid by taxpayers for certain products and services, and each mechanism has different criteria and requirements for applicability.
i. Procedures of Standard Value Added Tax Refund in Turkey
The main text regulating VAT payments, exceptions and tax refund procedures is the Value Added Tax Law No. 3065 ("VAT Law"). VAT Law sets forth that products and services exported to foreign nationals shall be subject to exemptions from VAT applications. A similar provision is also noted in the VAT General Application Communique ("VAT Communique"), which further clarifies the procedures required for such exemption and refund applications. Accordingly, both the VAT Law and the VAT Communique state the standard exemption available for exported products and services.
Further provisions of the VAT Law also allow for these standard exemptions to be used to claim value added tax refunds paid for imported products that are used and processed to produce exported products. Accordingly, invoices issued in connection with transactions noted in Article 11 of the VAT Law may be deducted from the taxpayer's total VAT amount, depending on the fulfilment of certain other criteria as set forth by the legislation.
The procedures and methods for value added tax refunds can also vary, as there are two different options, refund by deduction and refund in cash, noted in the VAT Communique. Refund by deduction is the main method of value added tax refunds as it is much easier and faster, and refund in cash is rarely utilized by the taxpayers. The main reason for this is the extra procedures and costs required to utilize the refund in cash mechanism, such as sworn public accountant reports and additional tax office investigations etc.
ii. Domestic Processing Regime
Another mechanism available for tax refunds is a trade regime called the Domestic Processing Regime (DPR). This is a tax exemption provided to local manufacturers who import raw materials or intermediary products they require for production of goods, and requires the importer to obtain a prior clearance or inward processing certificate. According to provisions of the VAT Communique, products imported with DPR certificates can be exempted from VAT payments or can be subject to value added tax refunds based on the DPR rules.
According to the provisions of the Domestic Processing Regime Communique ("DPR Communique"), taxpayers that import goods as per the DPR with proper certificates can benefit from DPR exemptions either by providing a partial guarantee or through the refund mechanism. These DPR exemptions may include a deduction (either partial or in full) from VAT, customs tax, Special Consumption Tax, Resource Utilization Support Fund payments and other customs duties as may be applicable to the specific products and goods that are being imported through the DPR mechanism.
For taxpayers to benefit from this DPR regime, they will be required to obtain a clearance or a license/certificate from the Trade Ministry. These certificates are issued for limited durations, and the taxpayer that receives the certificate undertakes to import the goods, process it and then export the final products overseas within the given time period.
The main benefit of this mechanism is that taxpayers can claim tax refunds in cash (if authorized by the certificate) directly from the customs, without the need to go through the red tape required for cash refunds from tax offices as per the standard refund mechanism, and refunds or exemptions for customs tax as well as other taxes (if applicable) can be claimed in addition to value added tax refunds/deductions.
3. Contract Manufacturing & VAT
As a rule, the liability and responsibility to pay VATs, arising from invoices for sales of services and products, rests on the party issuing the invoice (the seller). Accordingly, in a standard sale transaction, the seller issues an invoice (including VAT amounts) to the buyer, the buyer pays the total amount (the price of the good/service plus the VAT) to the seller, and then the seller will be required to pay the VAT amounts it charged from the buyer to the tax office before the end of the following month.
However, there is a special mechanism called VAT withholding mechanism, where the duty to pay a part of the VAT (depending on the transaction) is transferred to the other party. Accordingly, in sales where this VAT withholding mechanism is applicable, the burden to pay a part of the applicable VAT to the state is transferred from the seller to the buyer. This allows the state to guarantee the partial payment of the applicable VAT, by forcing the buyer to directly pay it to the tax office rather than paying it to the seller (hence the name withholding/stoppage).
For example, VAT withholding is applied to invoices issued for services of contract manufacturing from a ratio of 3/10. This means that for such invoices, only 3/10 of the total VAT of a specific invoice will be paid to the supplier (seller), whereas the remaining 7/10 will need to be paid to the tax office directly by the buyer.
This is an important mechanism that directly impacts the tax base of a specific business transaction, as it decreases the total VAT that can be deducted by a company for a specific transaction. Therefore, it is important to structure the business accordingly to establish an efficient tax model for the company.
4. Final Remarks
As reviewed in detail above, Turkish tax system and Tax Refund in Turkey are quite complex and any attempt at implementing a more efficient tax and financial model will require an in-depth review of the company business structure as a whole.
To better understand the basics of the tax refund in Turkey and the tax system, please refer to our related blogs, "CORPORATE TAX LAW 101 – Beginner's Guide for Foreign Investors" and "CORPORATE TAX LAW 102 – Tax ID, Cycles, Submission of Declarations & Invoicing in Turkey", which can shed more light on the basics of the tax system applicable to corporations and for personal income.
5. Additional Resources
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.
