TAX SYSTEM
 

In recent years, there have been significant changes in the tax legislation introducing a set of measures to simplify tax structure and to increase the efficiency of the tax administration while reducing the tax rates gradually.

Effective from 2004 tax year, a very major change has been implemented through the introduction of inflation accounting into the tax legislation. Lack of inflation accounting had been perceived as one of the major obstacles to foreign investment for many years. Revaluation of fixed assets and valuation of stocks with LIFO method were the only available measures in the tax legislation to exclude the inflationary gains from the tax base for many years. Furthermore, except for the BOT projects, capital brought by the foreign investors were subject to any indexation; hence, it was stated on the financial tables with the historical TL values calculated by using the exchange rates prevailing on the date of transfer of the capital into Turkey.

Inflation accounting will remove this major obstacle and allow the taxpayers to pay taxes on their inflation-adjusted profits. Inflation accounting will be applied in high inflationary’’ periods. The existence of high inflation is determined by the following two criteria;

• More than 100% increase in WPI in the past 3 years, and,
• More than 10% increase in WPI in the past 1 year.

Coexistence of both conditions is needed for the start of the inflation accounting and the obligation will continue until both conditions no longer exist.

The existence of certain level of black economy creates a comparative disadvantage with respect to fair competition for both foreign and local investors, having strong tax morality. The elimination of black economy had been the major target for the Ministry of Finance since many years. Recently, a new regulation has been put into effect enforcing the payments and collections exceeding YTL 10 000 (USD 7,000) through bank transfers.

The prevailing tax regime does not maintain any differentiation between local and foreign capital companies. As of 2005, the corporate tax rate for corporations is 30% and the effective tax rate is 37% together with the dividend withholding tax, in case of dividend distribution.

Following are the major type of taxes that are applicable in Turkey.

• Corporate Income Tax
• Dividend Withholding Tax
• Personal Income Tax
• Value Added Tax
• Special Consumption Tax
• Other Wealth and Transaction Taxes

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