Value Added Tax in Turkey
Although value added tax was recommended to be implemented as tax on consumption instead of numerous transaction taxes for the first time in Germany, the first taxation based on created value-added throught the transaction chain was put into force in France. By the year 1954, the VAT mechanism was fully integrated into French taxation system. Since then, value added tax has not only become the common consumtion tax in European Union, but also was adopted by tens of OECD-member countries accross the world.
On the other hand, the endaevours to incorporate value added tax into the Turkish tax system can be traced back to as early as 1950s. Initially, Turkey was more interested, due to a number of historical and political reasons, in adopting the French version of this novel European taxation called VAT. But, because of the lack of an appropriate infrastructure needed to install such an collosall tax system at that time and some technical flaws found by Turkish experts with respect to French VAT system, the adoption of VAT into Turkish tax system was delayed until 1980s.
Eventually, after numerous researches, translations, preperation of consecutive draft laws and parlimentarian votings; the final version of draft VAT Law numbered 3065 and with Turkish initials as KDV was accepted by the Turkish Parliament on November 2, 1984. The new Turkish VAT Law, which was designed and prepared based on the German VAT, subsequently went into force on January 1, 1985 culminating in the abolisment of eight indirect taxes on consumption.
The aim of this note is not to explain Turkish VAT elebotately by encompassing all its technical facets; but rather to provide a brief summary of the overall VAT Law and to lay down some principal mechanism to maket this vital law understandable at first sight.
What is VAT in Turkey?
As noted in the general explanation section, VAT is an indirect tax imposed on consumer spendings irrespective of the legal status of the relevant consumer. It is levied on value-added created in all stages of economic transaction chain, from production to the consumption by the final consumer. Turkish VAT Law is a relatively short legal document with 63 articles.
What is VAT charged on?
As stipulated in the first article of Value Added Tax Law,
- supply of goods and performance of services within the context of commercial, industrial, agricultural and independent professional activities carried out in Turkey
- Importation of all kinds of goods and services into Turkey
- ‘Other types’ of supply of goods and performance of services
are subject to VAT with differing rates.
Some of the ‘other types’ of supplies and services are spesified in the same article as;
- Services related to mail, telephone, telegram, telex, television and radio and other similar services
- Organization and performance of all kinds of lotteries
- Organization of shows, concerts and sporting events with the participation of professional artists and sportsmen
- Leasing of goods and rights spesified in Article 70 of Income Tax Law
Taxpayer person or entity
Although the actual burden of VAT is shouldered by the ultimate consumers that buy goods and services suject to this very tax; producers, wholesale or retail traders and importers, in other words those who carry out taxable activities spesified in Article 1 are designated as taxpayers. Taxpayers are held responsible to collect computed VAT form buyers on value added for each stage of transaction. This mechanism functions through tax-credit method which enables the taxpayers(practically the sellers) to deduct VAT calculated on their purchases(the VAT amount they pay;input VAT) from VAT amount calculated on their sales. They are obliged to pay the excess amount to the relevant tax office. Tax-credit mechanism is depicted with a simplified sample in the table below.
According to Article 8 of VAT Law, the following are deemed as taxpayers:
- Those that supply goods and perform services
- Those that carry out the importation of goods and services
- Those that organize lotteries
- Those that lease the goods and rights spesified in the Article 70 of Income Tax Law
- Those that organize artistic shows, concerts and sporting events
- Those that apply for voluntary VAT liability.
VAT Responsibility and Reverse Charge Mechanism
Because the number of economic agents that produce, import or supply goods and services is by far fewer than the number of final consumers, the Turkish VAT Law is mainly based on the tax liability of suppliers of goods and services; thus calculated VAT is charged and accounted for by them. However, in certain limited circumstances the recipient of goods or services, rather than the suppliers, are obliged to account for the VAT due. It is regulated in the Article 9 of the VAT Law that Finance Ministry is authorized to hold those that are part of taxable transactions responsible for the payment of the tax provided that the taxpayer doesn’t have any permanent residence, workplace, legal head office and center of transactions in Turkey or in other cases to be spesified by secondary legislation.
Tax Base and Tax Rate
The tax base on which VAT is calculated is the total sum the person/entity supplying the goods or services becomes entitled to receive, including all taxes, commissions, costs and charges but excluding the VAT amount with regard to the relevant transaction.
There are a number of different rates of VAT applied in Turkey. In general, the standard rate of VAT applies to the supply of goods and services in Turkey. In specific circumstances VAT is charged at the special reduced rates.
The standard rate of VAT on taxable transactions is set at 18% in the VAT Law, but the reduced rates are implemented as %1 or %8 depending on the type of transaction.
%1 VAT rate is implemented for the supply of goods and performance of services mentioned in List No. I attached to the Law (e.g. agricultural products such as raw cotton, dried hazelnuts, supply etc.)
%8 VAT rate, on the other hand, is implemented for the supply of goods and performance of services included in List No. II attached to the Law (e.g. basic food stuffs, books etc.)