Turkey: Proposal Of Amended Rules Concerning The Tax Procedures Code And The Income Tax

Last Updated: 14 May 1997
SUBJECT: New rules proposed in a draft law concerning the amendment of a number of articles of the Tax Procedures Code and the Income Tax Code that was prepared by the Ministry of Finance and submitted to the Grand National Assembly of Turkey by the Council of Ministers on 28 March 1997.

A bill entitled "Draft law concerning the amendment of a number of articles of the Tax Procedures Code (Statute 213) and the Income Tax Code (Statute 193)" was sent up to the Grand National Assembly on March 28th. The bill, which is presently before parliament, proposes to make a number of changes in the legal framework that are discussed below.


The draft proposes to make changes in articles 227, 279, 280, duplicate 298, and duplicate 414 of the Tax Procedure Code and to add an interim article 19 to that law.


An amendment proposed in the fourth paragraph of article 227 (TPC:227/4, "Documents that constitute proof") authorizes the finance ministry to determine what information must be contained in documents that must be drawn up, to require taxpayers to substantiate collections and payments pertaining to their transactions by means of documents issued by banks or similar financial institutions, and to determine the scope of this requirement and the principles of its implementation.

This change would authorize the finance ministry to determine limits beyond which collections and payments must be made through banks or similar financial institutions and to require taxpayers to substantiate such transactions by means of the documents issued by such institutions. Its purpose is to make it possible to track the movements of money in companies and to make use of information obtained from banks and similar financial institutions available for use in tax audits when necessary.


Under a change proposed in TPC:279 concerning the valuation of stocks and bonds, corporate shares as well as shares in real estate investment or risk capital investment funds will continue to be valued at their acquisition price (the existing rule); all other marketable securities however will henceforth be valued at their current market price.

"Current market price" furthermore is defined as being the price at which a marketable security is quoted on an exchange except that if there is no such quote price or if it should be ascertained that the market-quoted price was arrived at collusively, the taxable current market price will be determined by adding, to the acquisition price, all forms of income (including translation gains) secured at the maturity of the instrument corresponding to the period between the date of acquisition to the date of valuation. Only securities whose current market price is unknown and whose return is dependent upon the profit or loss of the issuer and consequently cannot be reckoned as of the valuation date will be valued at their acquisition price.

The effect of these proposed changes will be to introduce an accrual-basis method of valuing marketable securities (other than corporate shares and shares in real estate investment or risk capital investment funds). The object of this is to permit tax to be collected sooner and also to bring tax practices and procedures into line with capital market regulations.

Since the draft bill is anticipated to gain effectiveness within 1997, gains derived in 1997 will probably be determined based on the following criteria.

                                NEW                   PREVIOUS

Turkish and Foreign Stocks      Purchase Cost         Purchase Cost

Real Estate Investment Fund     Purchase Cost         Purchase Cost
Participation Shares

Venture Capital Investment      Purchase Cost         Purchase Cost
Fund Participation Shares 

Foreign Bonds, Bills, etc.      Market Value          Purchase Cost

Profit/Loss Sharing 
a)If Market Value is not        Purchase Cost         Purchase Cost
available or if valuation 
is not possible
b)If Market Value is            Market Value          Purchase Cost

Private Sector Bonds            Market Value          Purchase Cost
(Bonds, Commercial Papers,
Assets Backed Securities,

Government Bonds, Treasury      Purchase Cost         Purchase Cost
Bills and the marketable        until 01.01.2000,
securities issued by Mass       market value after 
Housing Management Public       the said date
Partnership Administration 
and the Directorate of the 
Privatization prior to the 
date of enactment of the Law 

Of the Government Bonds,        Purchase Cost until    Purchase Cost
Treasury Bills and the          01.01.2000, market
marketable securities issued    value after the said
by Mass Housing Management      date
Public Partnership 
Administration and the 
Directorate of the 
Privatization subsequent to 
the date of effectiveness
of the Law, those that have
maturity of one year or longer 

Participation Certificates      Purchase Cost until    Purchase Cost
for Type A Mutual Funds(1)      01.01.2000, market 
                                value after the said

Participation Certificates      Market Value           Purchase Cost
for Type B Mutual Funds

(1) Unit shares in security investment funds at least 25% of whose portfolios consist of corporate stocks.


The third article of the bill adds a provision to the third paragraph of TPC:280. Under the new rule, when the values of notes receivable and payable that have not yet fallen due are prorated to the valuation date as specified in TPC:281 and TPC:285, the particular rates announced by the finance ministry are to be employed. The values of these payables and receivables will thus be calculated by applying the rates of exchange determined according to TPC:280 to the discounted value of their notes.

This change will make it possible for foreign currency-denominated notes payable and receivable to be rediscounted on their valuation date by applying ministry-specified discount rates. The foreign-currency value of the discounted notes will then be determined on the basis of its current market rate. If there is no such rate, the valuation will be made at a ministry-specified rate of exchange. The question of whether or not foreign currency-denominated credit and debit instruments valued at year-end exchange rates are to be rediscounted according to the Turkish central bank's discount rates has been a matter of dispute lately and this change in the law is intended to clear up the matter.



The fourth article of the bill is concerned with an amendment of duplicate article 298 of the Tax Procedures Code.

If the draft bill is ratified under its present form, the following amendments will be in question regarding the Revaluation applications (inflation indexation), as of the date of its promulgation in the Official Gazette.

a) The wording except for the concessionary companies have been deleted from the text, and accordingly, the concessionary companies (2) have been granted the opportunity for the application of revaluation.

However, such entities that apply revaluation over their fixed assets that are entirely or partially subject to depreciation, will not be allowed to record as expense the capital shares that they will amortize starting as of the first year of revaluation for tax purposes. According to Article 325 of the Tax Procedures Code, in concessionary enterprises a fund corresponding to a particular proportion of the capital could be distributed to the shareholders, and this amount could be expense recorded as the amortization of the capital.

The draft bill in question particularly eliminates the disadvantage of the concessionary companies of not being able to apply revaluation during the operation of the facilities to be established within the framework Build-Operate-Transfer (B-O-T) Model, since BOT companies are regarded as concessionaire companies .

b) The limit of TL 5,000,000 relating to the commercial assets to remain outside the scope of Revaluation will be raised to TL 25,000,000 and commercial assets whose values are below the TL 25,000,000 limit, will be excluded from the scope of revaluation.

c) In the draft bill, it has been stated that leasehold improvements and cinematographic films which were excluded from revaluation, will become subject to revaluation process.

d) Besides the foreign exchange differences that are added up to the cost of commercial assets, loan interests were also envisaged not to become subject to revaluation.

e) The word building in paragraph 4 of the article was deleted from the text, and accordingly, setting aside of depreciation over the revaluated value of the buildings have become possible.

f) Through the addition made to paragraph 7 of the article, it was envisaged that in cases when the revaluation surplus fund that is formed in share capital companies and foreign enterprises defined in the Laws Concerning B-O-T Model No. 3096 and 3996 and in the relevant laws, corresponding to the portion of the fixed assets that have been amortized through redemption, is withdrawn from the company, such withdrawn amount will not become subject to taxation. Through this legal arrangement, the companies operating based on the B-O-T Model will be provided the opportunity to withdrawn the amount of revaluation surplus fund shown under the balance sheet corresponding to the portion of the commercial assets amortized through redemption, tax free.

(2) Concessionaire companies are the companies which have granted privileges by the Government for certain business (i.e. gas distribution, electricity distribution)

4.2.Fixed Limits And Amounts In The Tax Procedures Code

The fifth article of the bill amends duplicate article 414 of the Tax Procedures Code and revises the law's fixed limits and amounts.

As a result of this change, the fixed limits and amounts specified in the law will henceforth be updated taking previous years' rates of inflation into account specifically, they are to be increased each year according to the assets revaluation coefficient announced for the previous year. The object of this is to safeguard the real value of legally-specified limits and amounts without having to incorporate them into the body of the law each time. The Council of Ministers is also authorized to increase or decrease the resulting limits and amounts by up to one-half and also to increase a proportional limit by up to twice its legally-prescribed level and reduce it to that level.

4.3. Changes in the Income Tax Code(ITC)

Article 7 of the bill changes the date on which subparagraph 7 of interim article 39 of the Income Tax Code (ITC:39/7) is to go into effect to 1 January 1998.

This change has the effect of postponing the introduction of the annual reporting requirement for interest income subparagraphs 5, 7, 12, and 14 of ITC:75 from 1 January 1997 to 1 January 1998.

Had this not been done, there was a risk (under the economic conditions that now prevail) that the requirement to report such income annually would have turned taxpayers towards foreign currencies and similar alternative investment vehicles at the expense of bank deposits, government bonds and Treasury bills, and the like and thus have an adverse impact not only upon the banking system but also upon the Treasury's ability to borrow.

Another consequence of this change is that the provisions of articles 85, 86, and 87 of the Income Tax Code (as amended by Statute 3946) will have no effect on the taxation of interest income in subparagraphs 5, 7, 12, and 14 of ITC:75 that were earned prior to 1 January 1998.

If passed into law, the changes proposed in article 7 of the bill as well as the one-year postponement of the provisions of ITC:39/7 will go into effect retroactively to 1 January 1997; the other changes will go into effect as of the date of the law's publication.

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.

For further information contact Mustafa Camlica, Tax Manager on Tel: +90 212 232 1210, Fax: +90 212 230 8231, or e-mail mustafa.camlica@arthurandersen.com or enter a text search 'Arthur Andersen' and 'Business Monitor'.

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