The value added tax (VAT), is a type of indirect turnover based tax that is levied during the final phase of the purchaser of the goods and is included in the price of the purchased item or service. Being a turnover tax, VAT is levied at each stage of the production and the distribution process as well. Although liability for the tax rests on the person who supplies or imports the goods or services, the real burden of VAT is borne by the final consumer (shifting feature). This means that such type of tax is characterized by its shift. It is non-cumulative, based on the method of invoice (only Japan is the exception), aimed at entrepreneurs as well. Tax shifting is the most important concept associated with VAT. With the deduction mechanism the difference between the VAT liability of a person on his (their) sales (output VAT) and the amount of VAT, has been already paid by them on his (their) purchases (input VAT). This brief article targets to summarize and compare the VAT systems of Turkey and of Poland with consideration on the general applications of VAT in EU countries.
A. VAT in Poland
In Poland, the VAT ('Podatek od Towarów i Usług' / PTU) is applied since 1993. Currently, VAT is regulated and adapted along with the current tax laws in the European Union, by the Act on Value Added Tax of 2004 (Journal of Laws of 2004, No. 54, item 535).
The basic rate applied in Poland (for the period between January 1, 2011 and December 31, 2013) is 23%. Although for some goods and services, the reduced rate of 8% and 5% are also applied (5% for food, books and magazines; 8% for supply, construction, renovation, modernization or reconstruction of thermal buildings or parts of building subjected to the concerned community housing scheme). A 7% rate is charged by the buyer of goods from a flat-rate farmer (Article 115 § 2 of the VAT Act) and 0% (exemption) is applicable for intra-community (EU) supply of goods and export of goods.
According to Article 85 of the Polish VAT Act, in areas of services of trade and catering, the taxpayer is allowed to calculate the amount of VAT with respect to the gross value of goods using the following rates:
- 18.70% of the gross value of goods and services for which the applied rate is 23%;
- 7.41% of the gross value of goods and services for which the applied rate is 8%;
- 4.76% of the gross value of goods and services for which the applied rate is 5%.
In accordance with tax calculation rules, the taxpayer is entitled the amount of tax applied to goods and services that are used to perform taxable transactions, in the amount of input tax and the input tax is the:
- sum of the amounts specified in tax invoices received by the taxpayer;
- total sum of taxes resulting from a customs document (for imports);
- lump-sum tax refund;
- amount of tax due on imported and the amount of tax due in respect of intra-Community acquisition of goods.
As for the method payment, the registered VAT taxpayers are required to submit their tax returns for monthly periods to the tax offices by the 25th day of the following month in which the tax liability arose. Small taxpayers (taxpayers whose sales - along with the amount of the tax, does not exceed the cap, that is the equivalent of €1,200,000, during the previous fiscal year), who have opted for a cash accounting method, may submit their quarterly tax returns by the 25th day of the month following each quarter.
The amount of output VAT may be reduced by the amount of input VAT when purchasing goods and services. The purchases must be related to a sale that is eligible for a VAT deduction. The input VAT reduction concerns the purchase of cars (up to 60 % of the VAT on the invoice) or real estate, used partly for purposes other than conducted business activity. The Polish VAT Act prohibits the deduction of input VAT for the purchase of fuel for cars or hospitality services.
If no taxable sales or sales outside of Poland are concluded, the taxpayer may apply for a tax refund within 180 days of filing the VAT tax return. The tax refund is paid into the bank account indicated by the taxpayer.
VAT rate in Poland is considered high within Europe concerning the average rates of other member countries. For example the basic rate of VAT in Spain is 18%, in Luxembourg 15%, in Germany 19%, in Slovenia and Slovakia 20%, in the Netherlands 19%, in France 19,6 % and in the Czech Republic, Bulgaria, Estonia and Austria is 20%. A higher rate of VAT is applied only in Hungary (27%), Romania (24%), Denmark and Sweden (25%) as well as in Croatia (25%).
B. VAT in Turkey
In contrast to Poland, VAT ('Katma Değer Vergisi' / KDV) is introduced earlier. The Turkish VAT Law No.3065 was enacted on November 2, 1984 and entered into force on January 1, 1985 (Official Gazette No. 18563, dated November, 1984). By such law eight previously enforced indirect taxes were abolished and replaced by one VAT.
The Turkish tax system levies VAT on the supply and the importation of goods and services.
VAT rate specified on Article 28 of the Law is 10% for each of the transactions that are subject to tax. What is important and differs from Polish system is that The Council of Ministers in Turkey is authorized to increase this rate up to 4 times, to reduce it down to 1%, to specify different tax rates for various goods and services and retail stage for some of the goods. Accordingly to such increases by the Council of Ministers, the currently applicable VAT rates are:
- standard rate - 18%;
- reduced rate - 8 % (applied certain products such as textile products, education services);
- reduced rate - 1 % (applied to certain products such as some agricultural goods, food products).
Another aspect that differs the Turkish VAT system from the Polish, is the taxable period and submission of VAT returns. In Turkey, the Ministry of Finance has established monthly taxable periods for all taxable persons under the normal VAT regime as of October 1, 1985. Taxable persons shall submit their returns to the local tax office within 24 days following the end of each taxable period.
VAT on purchases of cars, missing and lost stocks, and on expenses are accepted as non-deductible in determining income according to Turkish Income Tax Law and Turkish Corporate Tax Law and input VAT on exempt deliveries listed in Article 17 of the Turkish VAT Law as transactions that are not considered/counted as taxable transactions.
VAT is refunded only when the invoices include the transactions which are exempt from the tax, such as the exportation of goods and services, exemption for vehicles, petroleum exploration and investments made under an investment incentive certificate, transit transportation and diplomatic exemption. In the absence of transactions subject to VAT, or if the output VAT is less than the input VAT, then the input VAT which cannot be deducted is refunded to those who perform such transactions.
There are different procedures implemented in the Turkish tax system for VAT returns. Accordingly, there are two basic types of exemption; full exemption and partial exemption. In full exemption, the VATs may be deducted or refunded however in partial exemption, the excess VAT cannot be deducted or refunded. Refund is the cash return of the already paid VAT. On the other hand deductions are made by reducing such amount by a credit for VAT previously paid on importation and on goods and on services supplied to taxable person since the VAT is initially computed by applying the appropriate rate of taxation to the taxable amount for goods and services supplied by the taxable person during a taxable period. It shall be mentioned that deductions can also be reflected to any present or future public debts including but not limited to VAT, insurance premiums and corporate tax. Article 13 of the Value Added Tax Act sets forth the full exemptions to be applied on the VAT. According to Article 13, full VAT exemption is provided for; exportation, sea, air, and railway vehicles, services provided to sea and air transportation vehicles, petroleum explorations, exploring, processing, enrichment and refining activities for precious metals, and for sales of equipment and machinery to tax payers with investment incentive certificate. In accordance with Article 32 of the same Act, any VAT stated by an invoice that is issued for a transaction exempted from VAT by Article 13, is deducted or if deduction is not possible, is refunded.
C. VAT in European Union
Tax harmonization task in the EU tries to implement the idea of a common market, based on the four freedoms (the movement of persons, movement of goods, movement of services, the movement of capital). Therefore, indirect taxes call for a high degree of harmonization. The aim of VAT harmonization is to simplify the tax system in order to make different tax systems more accessible to the taxpayers. The second one is broadening the tax base, and the third one is the removal of tax barriers.
Among members of the EU, the difference between the standard applicable VAT rates may be as much as 10%. The lowest possible rate 15% is applied at Cyprus, Luxembourg and the United Kingdom and the highest rate 25% is applied at Denmark and Sweden.
EU VAT was introduced by the Directive 77/388/EEC, 17 May 1977 (6th Directive). From January 1,2008, the directive 2006/112/EC has entered into force. Accordingly each Member State's national VAT legislation must comply with the provisions of EU VAT Law as set out in Directive 2006/112/EC. A harmonization process was initiated both in Poland, as a member state, and in Turkey, as a candidate.
However, disharmony can still be pointed out in Turkish tax system with regards to the EU VAT harmonization. Some VAT regulations do not comply with the requirements of the 'Acquis Communautaire' (the legislation of the EU) which is noted in the 'Screening Report of Turkey, Chapter 16 - Taxation', approved by the EU Council at January 24, 2007. It is said that 'Turkey has partially aligned its legislation in the field of value added tax and VAT system of Turkey follows the main structure of the legislation of the EU'. The disharmony concerns the 1% and 8% VAT rates. 1% is not in line with acquis (WHY) and 8% for textile products is not allowed under European law. The use of a reduced rate of 1% is not seen as in line with the scope to Which the reduced rates are applied. In addition, each Member State may apply only one reduced rate in relation to the basic rate. Currently, Member States in accordance with the negotiated terms and conditions may apply the transitional rate (parking rate).
Unfortunately, the current tax systems in Poland and in Turkey rely both heavily upon the VAT. VAT is recorded as 40% State tax revenue in Poland and 29% in Turkey (158,4 billion TRY as of July 2013). Therefore it is unlikely that any government will abolish and/or replace the application of VAT anytime soon. Although Poland has changed is VAT law to adopt to the EU requirements, it kept its high rates. Turkey is expected to reform its VAT regulations if and when EU accession process requires immediate action.
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.