Turkey: Is "Two Sets Of Books" An Issue In Acquisitions?

In recent years foreign investors interested in Turkey often prefer to acquire enterprises rather than establishing new companies. As a matter of fact, the acquisition rate of established entities has dramatically increased. When planning such investment it is crucially important to discover the facts and critically asses the material risks in the acquisition process that have the potential to negatively affect the process.

Although risks mentioned may vary depending on the sector involved, duly kept commercial books have importance for each type of enterprise. One example of failure to duly keep commercial books in accordance with the relevant legislation is keeping two sets of books. Furthermore, the issue of keeping two sets of books can be especially seen in smaller-scale companies and family-run enterprises and merits examination in the text below.

WHAT DOES IT MEAN TO KEEP TWO SETS OF BOOKS?

Keeping two sets of books means recording sales and purchases in separate sets of books for the purpose of concealing revenue. In other words, companies may seek to avoid taxes by excluding a portion of their transactions from official company records, and often these transactions are recorded in second 'undeclared' books. In practice, this situation of keeping two sets of books may be discovered by the authorities through denunciation or tax inspection. Legal entities and executives thereof can be subject to statutory liability for undue book keeping and resulting sanctions may be imposed by virtue of both Turkish Commercial Code No. 6102 (the "TCC") and Tax Procedural Law No. 213 (the "TPL").

SANCTIONS FOR KEEPING TWO SETS OF BOOKS

Under the heading of "Tax evasion and related sanctions" in paragraph (a) of TPL Article 359, one of the tax evasion crimes is carried out by: "those who record the accounts and transactions to an alternative book instead of a book that should be kept according to provisions of TPL for the purpose of decreasing the tax base". The corresponding sanction of imprisonment of "one year to three years" has been amended in 2009 increasing the minimum threshold for imprisonment to eighteen months for those convicted of tax evasion by means of keeping two sets of books. The purpose of the amendment sought to prevent the operation of the relevant provisions of Turkish Criminal Law No. 5237 (the "TCL"), which allows for prison sentences of one year or less than one year may be changed into punitive fines. As a result of the amendment, offenders convicted of keeping two sets of books will almost certainly face imprisonment, due to the mandatory 18-month minimum term.

Under Article 341 of the TPL, a tax deficit is defined as when tax is not computed timely or incompletely, and as a result of the inability to wholly or partially fulfil the relevant tax burden borne by the taxpayer or the responsible individual. Where a tax deficit results from a tax evasion offence listed under TPL Article 359, then the penalty for the tax deficit may be increased threefold. In addition, a prison sanction may be imposed as well as the penalty applicable to the tax deficit.

Corporate entities also have obligations under the TCC with regard to duly keeping commercial books and sanctions may be applied for failing to comply with these obligations. In joint stock companies, board of directors' members are liable for accurate representation and administration, whereas in limited liability companies managers share a similar burden and both are subject to liability as per the relevant provisions of the TCC.

Article 375 of the TCC sets forth the non-delegable duties and authorities of the board of directors and such duties include: accounting, financial auditing and the establishment of necessary organization for the financial planning as necessitated by administration. Accordingly, the board of directors' members is liable for duly keeping the commercial books. Furthermore, where such liability under the TCC attaches to board of directors' members and they are found to be negligent in performing their duty, they become exposed to liability in respect of claims by both the shareholders and the company itself. Additionally, Article 562 of the TCC provides for administrative fines to be applied to those failing in their responsibility to duly keep commercial books in respect of the company.

Furthermore, liability may attach to legal representatives of joint stock companies for the outstanding public debts of the company, whereas both shareholders and legal representatives are liable for such debts in limited liability companies, in accordance with the Law on Procedures of Collection of Public Receivables, No. 6183.

CONCLUSION

Far from modern business practice, keeping two sets of books can be considered an old 'trick of the trade', but could still leave a question mark in the minds of investors contemplating acquisition. The sentences related to keeping two sets of books have been aggravated in order to prevent the conversion of minimum prison sentences into punitive fines, following the most recent amendments to Article 359 TPL. Notwithstanding the increased deterrence factor of the related sanctions for keeping two sets of books, the issue remains critical in the process of acquisition necessitating the strictest of scrutiny in due diligence.

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.