September 17: A decision of the tax court of Turkey concludes that entities operating in free trade zones are not required to calculate value added tax (VAT) using a reverse-charge basis with respect to services provided by resident and non-resident companies to an entity operating in the free trade zone.
Background
An unresolved issue between Turkey's tax authority and taxpayers concerns the status of entities operating in free trade zones and whether services received (both from resident and non-resident companies) are subject to VAT.
Under Turkey's VAT law, services performed (or the benefits of which are provided) in Turkey are subject to VAT.
The position of Turkey's tax authority has been that free trade zones are within the political boundaries of Turkey geographically and, as such, services received by entities in free trade zones, either from resident or non-resident companies, are subject to VAT because the services are deemed to be used / to provide a benefit in Turkey.
There are exceptions—one is related to services that are actually performed within free trade zones (i.e., maintenance works performed within free trade zones); another exception relates to contract manufacturing services performed by a resident company in Turkey for its customer in a free trade zone—that are regarded as being exempt from VAT.
Other than these two exceptions, all other services received by entities in free trade zones are subject to VAT.
When it comes to the services received from non-resident companies, entities in free trade zones calculate the amount of VAT on a reverse-charge basis for these charges. In these instances, entities in free trade zones are to declare and remit the amount of VAT via the VAT-II tax return (actual cash out) whereas the incurred VAT will not be regarded as deductible VAT.
Because the entities are not considered to be VAT taxpayers, the incurred VAT will be regarded as a cost item that decreases the efficiency of entities operating in free trade zones.
Court decisions
Recent tax court and Supreme Court decisions conclude that—even though free trade zones are within the political boundaries of Turkey geographically, but taking into consideration that they have been formed with the aim of increasing exportation and are outside the customs area—free trade zones must be accepted as being outside of Turkey "economically." Accordingly, services received by entities in free trade zones from resident or non-resident suppliers are not subject to VAT.
KPMG observation
Even though there is no change in VAT law regarding this issue, entities operating in free trade zones (especially entities that calculated VAT on the reverse-charge basis over the charges received from the non-resident companies) may declare and file their VAT-II returns using a "reservation clause"—i.e., when the entity declares its intention that although a VAT declaration is made, it will initiate a refund judicial action.
Taking into consideration the outcome of the recent court decisions, tax professionals in Turkey express an opinion that following the route of a legal action might be preferable for entities operating in free trade zones because the conclusion of the legal holding in the entity's favor could create a saving both from "cash" and "cost" perspective.
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.
