Ercüment Erdem Att. Canan Doksat

VAT on Exchange Difference

February 2019

Introduction

Under Article 24 of Value Added Tax Code No. 3065 (“VAT Code”), it is regulated that earnings, such as delay interest, price differences, interest, premiums, etc., are included within the scope of the VAT base for domestic delivery of goods and services. Prior to the promulgation of Law No. 7161, the above-mentioned provision of the VAT Code clearly was not regulating that exchange differences are also included within the scope of the VAT base. Accordingly, this lack of certainty concerning the taxation of exchange differences in terms of VAT has been the cause of different applications and controversies amongst the Revenue Administration and taxpayers.

In general, with respect to tax cases initiated in relation to the VAT application on exchange differences, tax courts rendered their decisions in favor of the taxpayers on the grounds that exchange differences cannot be subject to VAT. However, despite the favorable court decisions, through the promulgation of Law No. 7161, it is now clearly regulated that VAT should be applied on exchange differences in relation to domestic delivery of goods and services.

Within this scope, this Article evaluates the situation of exchange differences in terms of VAT application for the period prior to the promulgation of Law No. 7161, the amendment made through Law No. 7161 and the relevant court decisions.

The Period before Law No. 7161

Prior to the promulgation of Law No. 7161, Article 24 of the VAT Code listed the items that are included within the scope of the VAT base, as follows:

  • The transportation, loading and unloading expenses made by the seller till the delivery place shown by the customer.
  • The packaging expenses, insurance, commission, and similar expense accruals, taxes, duties, fees and funds paid by the seller.
  • Delay charges, price differences, interest, premiums and similar revenues, all kinds of benefits, services and values.

Therefore, there was no specific law provision in the VAT Code stating that exchange differences were also included within the scope of the VAT base. The lack of certainty concerning the taxation of exchange differences in terms of VAT has caused controversy amongst the Revenue Administration and taxpayers. The ongoing view of the Administration also stated in VAT Communiqué Serial No. 105 and the VAT General Application Communiqué was that the exchange rate differences were subject to VAT. Pursuant to the Tax Administration’s view; during the transactions in which the price is defined in foreign currencies or as indexed to a foreign currency; in case the price is paid completely or in part following the date on which the taxable event occurs, since the exchange rate difference that emerged in favor of the seller is essentially in nature of a delay interest, it had to be taxed as an element of the tax base.

The Judicial Approach

In general, during the tax cases initiated in relation to the VAT application on exchange differences, the tax courts adjudicated in favor of taxpayers on the following grounds:

  • The tax legislation does not include a clear and specific provision stating that VAT should be applied with respect to exchange differences;
  • Taking into account the economic conjuncture, exchange differences may be also negative; therefore, it cannot be evaluated to be in the same nature as late interest.

Another tax case has been also initiated with the cancellation claim of the relevant part of the VAT General Application Communiqué. As a result of its examination, the case filed with the request for the cancellation of the relevant part of the VAT General Application Communiqué, which is based on the Communiqué of the present opinion of the Administration, which regulates that the exchange differences should be subject to VAT, 4th Chamber of the Council of State decided on the refusal of the cancellation claim.

However, during its appeal examination, the Plenary Session of the Tax Law Chamber has reversed the decision of the 4th Chamber of the Council of State with its decision dated 13 December 2017 and number E:2017/548, K:2017/606 on the following grounds:

  • Under Article 24/c of the VAT Code that lists the items to be included in the VAT base, exchange differences are not indicated;
  • The interpretation and enlargement of a law provision through communiqué, especially the essential items of taxation, is contrary to the legality of tax principle.

Law No. 7161

Following the above-summarized decision of the Plenary Session of the Tax Law Chamber dated 13 December 2017, numbered E:2017/548, K:2017/606, it was expected that if no new legal arrangements are made, it is unlikely for exchange differences to be included in the scope of the VAT base. However, contrary to expectations, and in spite of the decision of the Plenary Session of the Tax Law Chamber, through the promulgation of Law No. 7161, it is currently clearly regulated that exchange differences should be included within the scope of VAT base as per Article 24 of the VAT Code. As a result of this new legislation, in one sense, the decision of the Plenary Session of the Tax Law Chamber is legally “deactivated”.

Conclusion

Through the promulgation of Law No. 7161, exchange differences are included under Article 24 of the VAT Code. Therefore, at the current stage, it is clearly regulated that VAT should be applied for exchange differences in relation to domestic deliveries and services. However, the ignorance of all the former court decisions and, especially, the decision of the Plenary Session of the Tax Law Chamber through the promulgation of a new law, is thought provoking in terms of the legality principle of tax.