Constitutional Court ruling creates a tax loophole
Traditionally, income taxation in Turkey is based on a dual system; namely the taxation of individuals’ personal income and taxation of corporations’ corporate income, regulated in two distinct laws.
Tax treatment of corporate income of legal entities is dealt with in the Corporate Income Tax Law, numbered 5520.
According to relevant provisions of CITL, only legal entities (mostly stock companies) that meet certain criteria are held responsible as taxpayers of corporate taxation.
Since the legal tax liability rests solely with an entity, not a real person, in corporate taxation; the problem of designation of the responsible person to pay the accrued taxes and other public receivables and the ultimate collection of that public receivables arises when the legal personality of the liable corporation is financially unable to pay.
That is why, the Turkish taxation system is devised in such a way to provide an all-out tax-collection mechanism that employs the ultimate responsibility of ‘legal representatives’, ‘managers’ and ‘partners’ of liable corporations should the relevant corporations lack sufficient financial resources to pay accrued public receivables.
Both Tax Procedural Law(numbered 213) and the Law on the Procedures of the Collection of Public Receivables(numbered 6183), a law that encompasses the principles and procedures of the collection of virtually all public receivables including taxes, have very effective provisions to deter managers, partners and other legal representatives of corporations from abusing the system and avoid paying accrued public receivables by transfering their responsibilities and liabilities to irrelevant third parties.
One such article that had tremendous significance in stemming the attempts by individuals that operate as founders, partners, managers and legal representitives of corporations(legal entities with coprporate tax liability) to abuse their influence on organizations by carriying out business transactions in an evasive manner tax-wise and still not being held responsible to ultimately pay the taxes in the aftermath was the repetitive article 35 of law numbered 6183 with its reinforced form after incorporation of 5th and 6th clauses in 2008.
Before being annuled by the recent ruling of the Constitutional Court, it was stated in the 5th and 6th clauses of repetitive article 35 that; former legal representatives and managers who ran a corporation in different periods of time would be held jointly responsible for the payment of the public receivables accrued even after the administration of the corporation is transfered to a third party.
Joint responsibility, in Turkish tax laws, means that the fiscal authority has the right and mandate to seek public receivables simultaneously from the personal wealth of any one of the responsible parties, which in turn enable the collection regime to secure accrued public receivables including corporate taxes even in cases of bankrupt corporations.
The loophole arised as a result of the annulment of the joint responsbility mechanism
Upon a lawsuit filed by a former manager of a corporation in the Council of State on the ground that his property was under legal seizure by law enforcement authorities with the pretext of unpaid taxes of that corporation pertaining to his tenure in office but accrued after his departure; the High Court decides to take the case to the Constitutional Court via action for annulment claiming that the relevant provisions that jointly hold the plaintiff, together with current manager, responsible for the payment of public receivables even he dosn’t have any legal, administrative and financial affiliaiton with the corporation breach the basic pillars of the Constituion such as justice and fault-based liability.
Ensuing the examination of the case in general and the disputed provisions in particular regarding their constitutionality, Constittutional Court proceeded, with a majority vote, to issue a ruling dated 19.03.2015 that annuled the 5th and 6th clauses of the repetitive article 35 of law numbered 6183 due to their violation of one of the most basic tenets of constitution by jointly holding individuals responsible for fiscal liabilities that are created by the actions of others.
Although the supremacy of the Constitutional Court vis-a-vis the rest of judicial and public authorities including legislative body is indispensable to the establisment and maintaining of the principle of ‘seperation of powers’ and a functioning ‘rule of law’ which every individual and entity, without any exemption, should adhere; it is evident that we, as a country, will remain short of having a coherent collection system that is able to seek and ultimately collect the public receivables from ill-intended former legal representatives of bankrupt corporations.
With that ruling, a detrimental loophole, in its broadest sense of term, that has the prospect and potential to deprive the collection system from its capabilities to track down abusive acts carried out by managers and legal representatives, such as selling the corporations to be able to transfer their liabilities to third parties with no financial resources like homeless people or fictional personalities emerges.
In the absence of a provision that strictly prohibit malicious sale of corporations by their legal reperesentatives to avoid taxes and other public receivables; it is highly likely that the cases of fictitious alienation of companies with substantial amount of debt will skyrocket.