Turkey: Glance At Turkish Tax Practice From The Perspective Of European Court Of Human Rights

Last Updated: 25 February 2014
Article by Tayfun Ercan and Can Yaman

The fact that decisions of the European Court of Human Rights apply to domestic law makes such decisions even more critical. These decisions also provide guidance for tax practices, so it is essential to address this subject in our article.

Bulves/Bulgaria Decision: Joint Liability of VAT

The reason for this dispute which was sent to the European Court of Human Rights was that the buyer's request to apply a deduction to the VAT paid to the seller was rejected because the seller failed to record and present the VAT in a timely manner. The Bulves decision states that the liability to pay the VAT that someone else is obliged to pay is "wrongful interference with assets". Also, the same decision states that authority to follow up whether or not VAT was paid by the seller should be granted and the buyer who followed up his/her tax liabilities should not bear the results of a tax breach which occurs because the seller did not take on his/her responsibility to pay his/her own tax liabilities.

The Turkish Tax Authority has interpreted Article 11 of the Tax Procedural Law similarly. According to this regulation, in a merchandise transaction, the parties to the transaction are severally responsible by reserving the right to recourse. The existing interpretation of Article 11 of the Tax Procedural Law is contradictory to the Bulves decision. Current interpretation and practice are also contradictory to the Constitutional Law, specifically, the prohibition of drudgery which is regulated by Article 18 of the Constitutional Law and the rule in Article 128 of the Constitutional Law which states that public services and duties should be conducted by public servants. In addition, withholding tax is mentioned in Article 11 of the Tax Procedural Law. VAT is another issue.

Funke/France Decision: Document Submission During a Tax Inspection

In the Funke case, Funke was invited by financial police to submit documents regarding his possessions overseas and his home was searched because he did not respond to this invitation. The police could not find any documents at his home and for this reason a penalty in the form of a fine along with preventive detention was requested. However, the court only imposed the fine. On the principle that no one shall be forced to provide statements and evidence against himself as per the fair trial provision in Article 6 of the European Convention on Human Rights (ECHR), the court asserted that the Convention had been breached and stated that evidence should be found in other ways and not be requested from the defendant. Also, the court considered it "impeaching" that authorities reviewing customs crimes requested evidence from a person and suspended his/her bank accounts.

It is contrary to the right to remain silent, which is a constitutional right, and contrary to the Funke/France decision for civil servants to conduct tax inspections in such a way that they: do not show tax inspection minutes, ask tricky questions, give directions, oppress, force the taxpayer to give statements or documents impeaching himself, and act in a hasty manner.

Yukos/Russia Decision: Rejection of an Objection Mark-up

The Yukos case was widely covered in the Russian media for a long time; Yukos is a significant oil company in Russia and among the major companies which affect the Russian economy. It was asserted that tax-veiling and a fictitious company structure were identified during a tax inspection of Yukos, resulting in a tax assessment of more than EUR12 billion, a fine which included interest, due to the accusation of tax fraud. In addition, a punitive execution compensation of approximately EUR1.16 billion was applied on the total debt of the company because the debtor did not follow the requirements of the payment order. Important shares of the Yukos company group were sold through execution. Consequently, the company went bankrupt and began the process of liquidation. The ECHR found this intervention undue and beyond reasonable measures.

The Turkish Tax Law regulates the "rejection of objection markup" in a way similar to the punitive execution compensation mentioned in the decision of the ECHR. The rejection of an objection markup is a binding financial sanction which is applied to a taxpayer whose objection to a payment order was rejected. This regulation is contradictory to the Yukos/Russia decision because taxpayers fall into difficult situations when the amount of the rejection of objection markup increases. In addition, it is not clear which loss or expense this markup provides compensation for. In this respect, the practice of applying a rejection of objection markup is contrary to Constitutional Law.

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.

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Tayfun Ercan
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