Like many other countries within the Civil Law tradition, there is a provision in Turkish tax law which acts as a general abuse prevention provision. The "primacy of substance over form" principle, which was introduced to Turkish substantive law in 1980 with an amendment made to Article 3 of the Tax Procedure Law, is expressed as "The basis of taxation is the taxable event and the actual nature of the transactions related to the event". According to the preamble of the Article, the basis of the amendment is Article 1 of the German Tax Procedure Law. On the other hand, the principle was being implemented in Council of State decisions and found in some legislation, without being patently mentioned, even before the said provision was introduced; e.g. the provisions regarding hidden income and hidden capital in Article 15 of the VAT Law No. 5420, and the provision stipulating that taxation must be based on the actual nature of the documents set forth in Article 4 of the Stamp Duty Law.
II. Debates regarding the scope
As it has been in other countries, the relevant provision has been controversial among Turkish tax practitioners and academics during its 30 years of history. The crux of the debate can be said to be formed by two axes. The first axis of the debate is concerned with whether the economic approach is a proof rule or a qualification rule; the second axis discusses the characteristics of the provision and its scope and place for implementation. Regarding the former debate, while most commentators approach the subject under the title of "interpretation and proof", there are authors who consider the issue as a qualification problem.
Regarding the second debate, according to some jurists, the provision bears the characteristics of a general abuse prevention provision, while some other jurists maintain that the provision, apart from displaying such characteristics, is a reflection of the civil law prohibition of abuse of rights. Nevertheless, there is consensus amongst commentators on the principle that the provision should not be used arbitrarily and in a manner inconsistent with the rule of law.
III. Practice of the tax administration
In current practice, the tax administration uses Article 3 of the Tax Procedure Law in order to justify actions like disregarding companies founded in free trade zones, rejecting tax exemptions regarding income generated from sale of participation shares and real estate, making VAT assessments claiming that a service which is non-existent is actually rendered, wholesale rejection of all transactions made with related parties, etc. The administration's approach is founded on two important concepts of civil law, namely simulation and tax-veiling.
In order to properly understand the theoretical basis of simulation and tax-veiling, these concepts must be handled carefully along the lines of the provision in Article 3 of the Tax Procedure Law. The said provision, in essence, theoretically addresses both tax dodging, i.e. tax-veiling actions (indirect cheating), and tax/financial simulation (direct cheating). In tax-veiling, the economic result is left out of the scope of taxation through a different legal appellation; the law is sought to be circumvented in this way, with a solely tax-related motive. Therefore, the elements of the act resulting in tax-veiling may be set forth as an economic result, legal form, abuse of legal form and will to abuse legal form. If the utilization of a legal form can be said to be artificial, irregular, contrary to the ordinary progression of affairs, discordant, complex, confusing, or illogical, then a finding of abuse can be made.
In tax-veiling, the form of the actual event is altered with intent to circumvent tax, although the result of the actual event is not changed. There never are two separate acts (in the form of apparent act and covert act) in tax-veiling; the apparent legal form is desired by the parties, it is valid in civil law, but it does not correspond with the economic context of the actual event. Therefore, in terms of "actuality" stipulated in Article 3B of the Tax Procedure Law, in tax-veiling the "legal actuality" (legal form) does not correspond to the "economic actuality" (economic context).
On the other hand, in tax/financial simulation, there are two acts, namely the apparent act and the actual act. The covert act, which is hidden under the apparent act, is the act of which the parties desire the economic results, and this act is directly subject to tax according to the tax laws. In tax simulation, the act which the taxpayers do not want to perform but perform nonetheless as cover is invalid, while the actual act which the taxpayers desire to perform and perform according to the conditions of validity is valid. Therefore, in terms of "actuality" stipulated in Article 3B of the Tax Procedure Law, simulation of the "legal appearance" does not correspond to the "legal actuality".
"The primacy of matter against form principle", whose theoretical foundations and development in Turkish Law has been briefly touched upon above, is an important tax law principle which is controversial still and will be so in the future. We would like to point out that it is essential in the practice of this principle (whether or not the absence of the principle would cause a problem should also be debated), that the rule of law be respected, that the constitutional principles regarding taxation be not violated (especially the legality rule), and the issue be addressed within the practice of wilful conformity with tax and democratic governance.
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.