Turkish Tax Law is the subject of the most important court decision to be published in recent times. This decision is the first decision to approach ECHR standards, which have been specified in literature and practiced for some time now at the Constitutional Court level, and the first to make reference to ECHR property rights at tax dispute basis. The decision was made after the plaintiff, who lost his case in the courts of first and last instance, took a mistake related to the description of revenue type to the Constitutional Court by way of an individual application.
Two points related to Turkish Law should be understood before approaching the facts of the case. The first is the right of the taxpayer to apply to the Constitutional Court, and the second is the right to make a constitutional objection by way of individual complaint.
Law No. 5982, which contains important amendments concerning the judicial provisions of the 1982 Constitution, was enacted with the referendum held on September 12, 2010. One of the most remarkable amendments enacted is the acceptance of the right to make individual applications for legal remedies. After this amendment was enacted, it became possible to apply to the Constitutional Court individually if any of the fundamental rights and freedoms that are guaranteed in the Constitution and are in the scope of ECHR are violated. As a result, a large number of applications made by Turkish taxpayers on various subjects and certain Constitutional Court cases have been published. Generally, these cases concluded with a decision that there had been a violation of the right to due process.
Another point is that also important when making concrete decisions states that supplementary funds are established by banks to provide benefits to employees. It should be remarked that the subject implementation is fairly controversial in terms of Turkish Law. Banks, insurers and reinsurers, boards of trade, boards of industry, stock exchanges, and associations were formed by these established funds and foundations to support their personnel upon disablement, old age, and death under Turkish Law. The legal status of foundations established for making the aforementioned payments and which take part in the social security system has become questionable due to several decisions of the Constitutional Court and is presently under discussion.
The status of the aforementioned funds and foundations, and payments made by them, are determined according to Article No. 128 and Provisional Article No. 20 of former Social Security Law No. 506, Provisional Article No. 20 of the General Health Insurance Law, Article No. 468 of the former Turkish Commercial Law, Article No. 77/a of the former civil law, and Article No. 110 of applicable civil law No. 4721. Even though these technical discussions will not be made for the sake of the integrity of the topic, it can be stated that there are two kinds of payments in Turkish law which are part of the social security system and take as their sources social security legislation and Turkish civil law.
It should be remarked that the source of payments made by plaintiffs is not Article No. 20 of former Social Security Law No. 506 in that dispute.
The plaintiff, who carries on a business in the banking field, made contribution payments by way of the foundation affiliated with the plaintiff and established for the purpose of providing benefits to customers. A tax inspection of the plaintiff was initiated for 2007–2011 in relation to contribution payments. These contribution payments were considered to be wages in the tax inspection made by tax inspectors. Therefore, income tax, stamp tax, and tax loss fines were imposed on the plaintiff.
Numerous lawsuits were filed on behalf of various branches by the bank, with the claim that contribution payments made to the foundation cannot be considered wages. Most of the cases were dismissed by district administrative courts, some with prejudice, even though these cases were accepted by tax courts, and some of the cases are pending at present because of reversals of decisions of the 3rd and 4th Chambers of the Council of State in 2013, on the grounds that these cases should be dismissed with prejudice.
After the dismissal of the cases contesting the fines assessed, the plaintiff proceeded to the Constitutional Court by way of individual application, on the grounds of violation of property rights and right to due process.
The tax inspectors' main claims in the dispute are as follows:
- The source of payments made by the plaintiff for the matter of dispute is not Article No. 20 of former Social Security Law No. 506, because the bank has another fund within this scope.
- Accordingly, the fund which is the subject of the inspection provides additional benefits to the other fund. It therefore has the characteristics of private insurance.
- The main source of financing of the aforementioned fund is certain contribution margins provided by employees and the bank. Accordingly, some additional benefits that are provided by the foundation are delivered by way of the bank.
- Contribution margins in the main financing should be considered to be the employers share.
- The main purpose of the act is to determine the benefits gained by employees.
- The actual beneficiaries of the contribution margins are the employees; additional funds are only intermediary.
- The subject payments are wages according to Article No. 61 of the Income Tax Law and allowing the deduction of these payments from the basis for taxes was not enacted by Article No. 63. Article No. 63 only ensures payments are made by funds that are in the scope of provisional Article No. 20 of former Law No. 506.
Despite the objections of the taxpayer, the tax inspector's claims were accepted before the court of first instance and the Council of State, and the dispute concluded to the detriment of the taxpayer.
In decisions of tax courts that have accepted the lawsuit in the first instance stage, and dissenting vote letters of those who have not agreed with the decision of the Council of State precedent dated November 14, 2013 and numbered E. 2013/5743, K.2013/7966, that is given by majority of votes. The dissenting vote letters state that they do not agree with the majority votes of some members and the lawsuits should be accepted for the following reasons:
"...the source of the contribution payment is the articles of the foundation, the function of the foundation is to provide variable social security aid, and if the conditions are satisfied then the benefits provided cannot be deemed as remuneration. When calculating the supplementary fund, taking the employee remuneration as a base is a security premium calculation technique and does not mean that the supplementary payment can be assessed as remuneration. The foundation providing benefits to the employees does not on its own mean they are remuneration; this should be determined when the legal and actual saving is realised. However, it has not been determined when and to which employee the benefit applied, thus there is no direct benefit to bank employees, the benefit was not realised according to the employment agreement between the bank and the employee but according to the legal link between the foundation and the beneficiary, it cannot be determined how much benefit has been provided to which employee, and thus the benefit does not represent a certain amount of money, those who take advantage of the benefits provided by the bank are not only the paid workers but also those who work at the foundations of the bank and those who resigned, there is no legal obligation for the bank to first add the supplementary fund to the payroll, cut tax, and then pay it to the foundation, the subject of tax cannot be expanded by comparison or by expanding interpretation, and accepting the opposite is contrary to the nature of the taxable event and the legality principle of tax."
Afterwards the taxpayer made an individual application to the Constitutional Court and asserted that the court decision was against the Constitution.
The claimant's basic allegations before the Constitutional Court regarding whether the supplementary fund cannot be deemed wages is as follows:
- In order to name the payments made according to the Income Tax Law as remuneration, employees should have power of disposition over payments and such payments, as a factor, have to be obtained by employees. According to Article No. 6/1 of the Income Tax Law, "Wages are benefits that can be represented by money and in kind for the services realised by employees who work at a workplace and are dependent on an employer." Determining the supplementary fund as a wage analogically without satisfying these conditions is against the 'tax legality principle.'"
- According to Article 13 of the Constitution "basic rights and freedoms can be limited by law and without harming their spirits".
- According to Article 35 of the Constitution, "Everyone has the right to property and reversion. These rights can be limited by law for the sake of law. Property rights cannot be used to the detriment of society."
- Since it is a fundamental right, restrictions of property rights can only be made with laws. In parallel, in order to provide legal security, as stated in Article 73/3 of the Constitution, tax liabilities can be added, removed, or changed with laws.
- The right to a fair trial under Article 36 of the Constitution is violated by not taking into account the Supreme Court decision and advance ruling that were submitted as evidence to the petition.
The decision of the Constitutional Court about the merits of the case is as follows:
- By referencing Article 35 of the Constitution and ECHR Additional Protocol No.1, it has been stated that property rights are not fundamental and can be limited for the sake of society. They often make reference to ECHR precedents in which conditions limiting property rights have been deemed legitimate (Spacek, s.r.o./Czech Republic, No. 26449/95, 9/11/1999, §§ 56-61; Hentrich/France, No. 13616/88, 22/9/1994, § 42).
- Intervention for the sake of society is permitted according to the law, and is prudent. This aspects should be reviewed and whether the intervention is legitimate should be researched (look for Malonei/U.K, No. 8691/79, 2/8/1984, § 66-68; The Sunday Times/U.K., No: 6538/74, 26/4/1979, § 47; Spacek, s.r.o./Czech Republic, No. 26449/95, 9/11/1999, § 57).
- According to ECHR precedents, the first criterion to review for an intervention in property rights should be the legal basis. In other words, the intervention should be done according to a law, and there should be accessible and predictable rules in domestic law.
- It has been emphasized that Article 35 is more protective than ECHR Additional Protocol No. 1, it interprets the principle of legality of tax more conservatively, and legality means being in accordance with law. It has been stated that Article 35 does not accept the wide discretion authority that regulations other than laws also meet the legality criteria. This has been stated in Protocol No.1.
- According to the Constitutional Court, when the judicial decisions are reviewed, a benefit is provided by the foundation to bank employees, some of this benefit is financed with a bank supplementary fund, and the benefit is provided when the determined conditions are satisfied and as a retirement payment. With the assessment according to the legality of tax principle, it has been understood that in the case at hand, the basic principles of statutory tax have been determined; however this does not satisfy the predictability conditions and requires interpretation.
- In the case at hand, the subject that requires interpretation is when the benefit will be deemed as obtained by the employees. In Article 1 of Law No. 193, the income subject to tax is defined as, "...the net amount of income and revenues obtained by a natural person in a calendar year." According to this provision, in order for an income to be taxable, it should be obtained. Article 61 of Law No.192 about obtaining the remuneration income states, "benefits that can be represented by money and that are provided with given money and in kind" and states that "paid remuneration" in Article 94, it has been pointed out that while obtaining remuneration the "collection principle" is valid. Within this framework, according to the judicial decisions in favour of the applicant and in the dissenting vote letters, have stated it is not apparent to whom and when the benefit is given, the employee does not have legal and actual savings at the time the payment is made, thus there is no direct benefit to bank employees, the benefit is not realised according to the employment agreement between the bank and the employee but according to the legal link between the foundation and beneficiary, it cannot be determined how much benefit has been provided to which employee, and thus the benefit cannot be represented by money."
However issues of judicial decisions against the applicant are as follows:
- Money transferred to the foundation by the bank is reflected to employees.
- Some of the benefits provided by the foundation are financed by the bank.
- The net amount of the material benefit provided to every employee is determined by calculating the bank share as a certain percentage of wages and bonuses of employees.
- Records are kept on the basis of personnel and material benefits provided are exclusively for these people
- Although the benefit is not provided monetarily, payments made by the bank are tracked and ultimately payments are made when requirements materialise. Accordingly, personal benefits occur with the payment.
It is understood from the provisions of law that it is not possible to clearly define when the employees earn the benefits which result from the contribution margin payments made to the fund by the bank, as a result of considerations related to the provisions of law. It is seen that the Council of State's interpretations of provisions of law in this manner are hard to associate with the predictability principle (for similar considerations of ECHR, see also Jehovah's Witnesses/France, No. 8916/05, June 30, 2011, section 70; Serkov/Ukraine, No. 39766/05, June 7, 2011, section 41). It would be unfair to expect individuals to suffer as a result of court interpretations made long after the taxation period and implemented retroactively (for similar considerations of ECHR, see also Serkov/Ukraine, No. 39766/05, June 7, 2011, section 41).
It is understood that ECHR standards are implemented effectively and in detail. This decision can be seen as the beginning of a new age and as a landmark regarding freedom in terms of taxpayer rights under Turkish tax law. It is believed that this decision will establish confidence from a taxpayer perspective.
With this conclusion, although mostly seen in the banking sector, it can be said that funds that operate within the scope of social security legislation or civil law, statutory to both legislations and which make payments to employees have tax risk. Under the circumstances, the legal status of the foundation should be determined correctly and based on this determination, legal arguments and/or defences should be made. Taxpayer should be informed about tax consequences based on the legal status determined.