Legal Evaluation of the Additional Tax Introduced by Law No. 7440
An Additional Tax obligation for 2022 has been introduced for corporate taxpayers under Article 10/27 of Law No. 7440 on "the Restructuring of Certain Receivables and Amendments to Certain Laws". In this article, we examine this Additional Tax from a legal perspective in the light of constitutional taxation principles.
Introduction
Law No. 7440 provides that an additional tax must be paid on the amounts that corporations deducted from their 2022 taxable income as exemptions and deductions, and on their tax bases subject to reduced corporate tax rates.
Who is liable for the Additional Tax?
The following are liable for the additional tax:
capital companies,
cooperatives,
public economic enterprises,
economic enterprises owned by associations or foundations,
joint ventures.
Limited taxpayer entities that file a corporate tax return are also within the scope of the additional tax.
Entities with corporate tax liability in the provinces of Adana, Adıyaman, Diyarbakır, Elazığ, Gaziantep, Hatay, Kahramanmaraş, Kilis, Malatya, Osmaniye and Şanlıurfa and in the Gürün district of Sivas as of 6/2/2023 are exempt from the additional tax.
What is subject to the Additional Tax?
The subject of the additional tax is the exemption and deduction amounts taken into account in determining corporate earnings under Law No. 5520 and other laws, together with the tax bases subject to reduced corporate tax under Article 32/A of Law No. 5520.
The exemptions under Law No. 5520 and other laws that fall within the scope of the additional tax are:
Participation income exemption (Law No. 5520, Art. 5/1-a)
Foreign participation income exemption (Art. 5/1-b)
Exemption for gains on the sale of foreign participation shares (Art. 5/1-c)
Share premium (emission premium) exemption (Art. 5/1-ç)
Exemption for gains on the sale of real estate, participation shares and fund shares (Art. 5/1-e)
Exemption for gains on the sale of real estate or participation shares by entities indebted to banks, leasing or financing companies or the SDIF (Art. 5/1-f)
Foreign branch income exemption (Art. 5/1-g)
Exemption for income from foreign construction, repair, assembly and technical services (Art. 5/1-h)
Education and training income exemption (Art. 5/1-ı)
Exemption for management companies in the taxation of foreign fund income (Art. 5/A)
Exemption for gains on the sale of industrial property rights (Art. 5/B)
Exemption for gains on the disposal of product certificates issued under Agricultural Products Licensed Warehousing Law No. 5300 (Law No. 193)
Exemption for income from operating ships registered in the Turkish International Ship Registry (Law No. 4490)
Free zone income exemption (Law No. 3218)
Technology development zone income exemption (Law No. 4691)
Exemption for income of research infrastructures from R&D and innovation activities (Law No. 6550)
Other exemptions in special laws that must be included in the additional tax base
The deductions under Law No. 5520 and other laws that fall within the scope of the additional tax are:
Deduction for income from software, engineering, education and health services provided abroad (Art. 10/1-ğ)
Interest deduction arising from cash capital increases (Art. 10/1-ı)
Investment allowance exemption (for amounts not subject to withholding under provisional Article 61 of Law No. 193)
R&D and design deduction (Law No. 5746)
Techno-initiative capital support deduction (Law No. 5746)
Technopark capital support deduction (Law No. 4691)
Other deductions in special laws that must be included in the additional tax base
Legal status of the Additional Tax
Below we examine the additional tax in the light of the constitutional principles of the rule of law and legal certainty, including the principle of predictability (certainty), and the principles of taxation according to financial capacity and tax justice, and assess whether it complies with them.
a) The principle of certainty
One of the fundamental principles of the rule of law under Article 2 of the Constitution is "certainty". Under this principle, legislation must be clear, precise, understandable and applicable, leaving no room for doubt for either individuals or the administration. Certainty is linked to legal security: individuals must know which legal consequence attaches to which concrete act or fact. Only then can they foresee their obligations and plan their conduct. Legal security requires norms to be predictable, individuals to be able to trust the State in all their acts and transactions, and the State to avoid methods that undermine this trust when legislating (Constitutional Court, 26.12.2013, E.2013/67, K.2013/164).
Ensuring legal security for individuals is a precondition of the rule of law under Article 2 of the Constitution. It requires laws to contain rules that allow foreseeable, forward-looking planning. Restricting individuals' rights through retroactive regulations without regard to legal stability and security is incompatible with the rule of law.
The legal security principle also requires certainty in taxation. Certainty requires the obligation to be clear and definite for both individuals and the administration, and the legal rule to be drafted so that those concerned can reasonably foresee the consequences of a given transaction under existing conditions. Taxation must not become an insecure system for taxpayers (Constitutional Court, E.2004/94, K.2008/83, 20.3.2008).
Certainty is an indispensable legal safeguard for commercial and social life. All natural and legal persons carry out their activities, and make every kind of economic and commercial plan and investment, relying on it.
Indeed, in a case seeking the refund of an income tax withholding incentive that had been only partly granted, concerning a provision of Law No. 5084 on the Promotion of Investment and Employment that required the minimum living allowance to be taken into account in taxing wages benefiting from the withholding incentive, the Constitutional Court (22.12.2011, E.2010/7, K.2011/172) held: "By the contested rule, the principles of certainty and predictability have been violated through the retroactive amendment of the income tax withholding incentive system applicable to taxpayers; instead of the rules in force when the incentivised investment began, the investor has been confronted with rules unknown at the time of investment, under which it benefits from a lower incentive. A clear retroactive intervention has been made by law in incentivised investments that started before 6.6.2008 and continued after that date." The Court further held that "by introducing a regulation covering the period before the publication date of the law, producing consequences against taxpayers who had started investing before that date in a way they could not foresee, the rule breaches the rule-of-law principle, which requires the exercise of public power to be predictable and to apply equally to everyone", and annulled the provision.
Taxpayers knew how much tax they would pay for the 2022 accounting period and made their commercial and economic plans accordingly. In our view, introducing an additional tax for the already closed 2022 tax period violates the principle of certainty and is incompatible with the rule of law.
b) The principle of non-retroactivity
In various decisions on the non-retroactivity of laws, the Constitutional Court distinguishes between genuine and non-genuine retroactivity. Genuine retroactivity is the application of a new rule to legal situations, relationships and events that were completed and produced their legal consequences under the old rule. Non-genuine retroactivity is the application of a new rule to situations that began under the old rule but have not yet been concluded. In the Court's case law and in legal doctrine, genuine retroactivity is, as a rule, considered unconstitutional, while non-genuine retroactivity is considered constitutional (Constitutional Court, 2019/26345, 22.9.2022).
To determine whether there is retroactivity in tax law, one must establish when the taxable event occurred. In this case, it is therefore important whether the taxable event for income taxes occurred before the legislative change. A change in tax rates made during a tax period and applied from the beginning of the year is a consequence of the tax system and does not amount to genuine retroactivity. Conversely, a tax change made after the tax period has ended must be accepted as genuine retroactivity.
The additional tax introduced by Article 10/27 of Law No. 7440 is imposed on corporate taxpayers, and for commercial income, which is the subject of corporate tax, the taxable event must be determined by reference to the end of the accounting period.
Since the Tax Procedure Law sets the accounting period essentially as the calendar year, the accounting period ends on 31 December. Accordingly, for corporate tax, the taxable event is the increase in the equity of corporate taxpayers over a calendar year, and this income arises with the year-end closing entries made on 31 December (Constitutional Court, Plenary, E.2018/103, K.2019/4, 13.2.2019).
Regarding the additional tax introduced after the 1999 earthquake, Law No. 4837 [sic] imposed an additional income and corporate tax of 5% on the 1998 income and corporate tax bases of income and corporate taxpayers. The Constitutional Court rejected the annulment application on the grounds that the regulation served the public interest and that the special circumstances and financial capacity of taxpayers had been taken into account in calculating the 1998 taxes, making it an exception to the prohibition of retroactivity.
Because the additional tax under Law No. 7440 is limited to corporate taxpayers that benefit from specified exemptions and deductions, we believe it should be assessed differently from the earlier additional tax, and should also be examined in terms of proportionality, tax justice and the generality of taxation.
c) The principle of generality of taxation
The principle of generality means that everyone with financial capacity should share the tax burden and pay tax without discrimination. Taxation according to financial capacity means that tax is levied according to the economic and personal circumstances of taxpayers. The principle of equality in taxation means that those with the same financial capacity pay tax at the same rate and those with different capacity at different rates; in other words, taxpayers contribute to the general tax burden according to their ability to pay.
In economics and tax law, income, capital and expenditure are accepted as indicators of financial capacity. Financial capacity is the source, basis, reason and precondition of the ability to pay. The legislator must take into account the economic value held by persons and their financial capacity when imposing taxes (Constitutional Court, Plenary, E.2003/48, K.2003/76, 23.7.2003).
The additional tax under Law No. 7440 covers only corporate taxpayers that benefit from statutory deductions and exemptions, and is therefore contrary to the principles of generality, taxation according to financial capacity and equality. By restricting, after the accounting period has closed and only for some taxpayers (those benefiting from deductions and exemptions), tax advantages that can be regarded as acquired rights for the 2022 corporate tax period, an unfair and unforeseeable additional burden is imposed on those taxpayers.
Similarly, regarding Law No. 4837 on "Additional Taxes to Ensure Economic Stability", which imposed, on a one-off basis for 2003, an additional motor vehicle tax equal to the motor vehicle tax accrued for that year on listed vehicles, the Constitutional Court held: "By accruing and collecting an additional tax for a second time in 2003 on the updated amount, the tax burden is increased against vehicle owners and is not passed on to other taxpayers such as income and corporate taxpayers. This prevents a balanced, fair, proportionate and equal distribution of the tax burden and breaches the taxation principles in Article 73 of the Constitution. Although the general preamble of the Law states that the regulation was made to ensure economic stability and reduce the public debt stock, this cannot be accepted as a justified reason required by extraordinary circumstances." The Court annulled the provision because the burden of the additional tax was left on a single class without being distributed to other taxpayers (Constitutional Court, Plenary, E.2003/48, K.2003/76, 23.7.2003).
Likewise, Law No. 4842 provided that no fund share would be calculated on income and corporate tax computed in annual returns for 2003 tax periods due after 1.1.2004, while the contested rule provided that fund shares paid during the tax period on such income would not be offset or refunded. In its decision of 20.03.2008 (E.2004/94, K.2008/83), the Constitutional Court held: "By increasing the tax burden against taxpayers who paid fund shares by withholding in 2003, fairness and balance in the distribution of the tax burden between taxpayers who earned income subject to withholding and those who did not in the same tax periods has been disrupted, in breach of the principles in Article 73 of the Constitution that 'everyone shall pay taxes according to their financial capacity' and of 'the fair and balanced distribution of the tax burden'." The Court thus found that making only a certain class of taxpayers liable disrupts fairness and balance in the distribution of the tax burden.
In our view, the fact that the additional tax under Law No. 7440 applies only to corporate taxpayers benefiting from specified deductions and exemptions breaches the principle of "the fair and balanced distribution of the tax burden" set out in Article 73 of the Constitution ("The fair and balanced distribution of the tax burden is the social objective of fiscal policy").
Conclusion
Since the additional taxes introduced by Article 10/27 of Law No. 7440 on "the Restructuring of Certain Receivables and Amendments to Certain Laws" may be contrary to constitutional taxation principles, it is possible to file the related returns with reservation and to raise the claim of unconstitutionality in lawsuits before the tax courts.
