Turkey Introduces Digital Services Tax and Amendments to Various Tax Laws

Digital Tax

A tax bill was submitted to the Turkish parliament by the ruling party on October 24th, 2019 and adopted in the General Assembly on November 22nd. The Law is expected to be published on the Official Gazette soon.

This new law introduces a range of new taxes, namely the digital services tax (“DST”), luxury housing tax and hospitality tax. It also covers many changes to various existing tax laws. The newly introduced DST and the changes to current tax laws are summarised below.

1. Digital Services Tax

The most important component of the bill is the newly introduced DST. In the preamble of the bill, it is stated that with the developments in information technologies, multinational companies are generating revenues in countries where they do not hold any physical assets, and it is commonly accepted that these companies should contribute a fair share to those countries’ public revenues.

Considering other countries’ application of this tax and views discussed within the international tax institutions, Turkey has now drafted its own digital tax law.

The tax would be applicable to companies with revenues in Turkey of 20 million TRY (Approximately 3.125 million euros) and with 750 million euros or more in consolidated worldwide group revenue.

The rate of digital services tax is proposed as 7.5% of gross revenue from sales in Turkey, much higher than the proposed tax rate in many other countries. The bill authorizes the President to double the tax rate by a decree. For comparison, the tax rate is 3% in France and 2% in the UK. Hungary has also proposed a digital services tax with a rate of 7.5%.

The tax base for the DST is revenue derived from the provision of the respective services during the related tax period. The taxation period for the DST is one-month periods of the calendar year. The paid digital services tax is deductible for taxpayers with respect to personal income and corporate income tax bases.

Based on the bill, income from following services provided to parties in Turkey would be subject to digital service tax:

  • All kinds of online advertising services (including services such as advertisement control and performance measurement services, the services for data transmission and management of users, and technical services for the presentation of ads),
  • The sale of any audio, visual or digital content in digital media, and services provided in digital media for listening, viewing, playing or recording or using them in digital media (including computer programs, applications, music, video, games, in-game applications, among others),
  • Services for the provision and operation of digital media, in which users can interact with each other (including services of allowing or facilitating sales of goods or services among the users),
  • Intermediary services rendered within the digital environment in relation to the aforementioned services.

Digital service providers shall be liable to pay this tax regardless of if they are a resident taxpayer in Turkey or not and without rendering these services through a permanent establishment or via a representative resident in Turkey.

The Turkish Ministry of Treasury and Finance (“the Ministry”) is being authorized to hold the parties involved in said digital services and the intermediaries of these services and related payments for remitting the digital services tax to authorities in order to ensure tax collection where the actual taxpayer has no residency, workplace, or legal or business centre in Turkey.

Importantly, the bill provides that the Ministry will warn companies and their representatives that if they do not register for the digital services tax, and the Ministry will request the Turkish Information Technologies and Communication Authority ban the electronic activities of the respective companies.

2.Raise in Foreign Exchange Transactions Tax

The draft bill shall raise the Banking and Insurance Transaction Tax on foreign exchange transactions from 0.1% to 0.2% and shall give the president authority to raise it up to 1%. This tax had not been implemented for a long time until a decree was published in May 2019.

3. Liability of Filing a Return for Wage Income

Based on the new draft bill, for the first time, an employee earning a wage from a single employer shall be required to file a tax return for this wage income in the event the total wage exceeds the threshold with respect to the fourth income tax bracket. This amount is 148,000 TRY for 2019 and will be adjusted according to the inflation at the end of the year. As per the current law, an employee shall not include any wage income from a single employer to her/his tax return without regard to its amount. If she earns a wage from a second employer in the same year, however, all the wage income should be included in a personal income tax return as long as the second wage exceeds the threshold with respect to the second income tax bracket (40,000TRY for 2019).

4. The Highest Income Tax Bracket is Increased to 40%

The draft bill also introduces an additional tax bracket to the Income Tax Law in order to increase the marginal tax rate to 40% for persons that have income above 500.000 TRY per year with a view to tax higher earning persons at a higher tax rate.

5. Limitations with respect to Vehicle Expenses

The new bill shall also aim to limit the businesses in deducting expenses with respect to passenger automobiles either they are leased or purchased. The preamble of the bill states that this rule is being introduced with a view to eliminate misuse of deductibility of business vehicle expenses. In this respect, taxpayers leasing passenger vehicles will not be able to deduct related expenses if the amount exceeds 5,500 TRY per month while taxpayers who purchase passenger vehicles will not be able to depreciate costs higher than 250,000 TRY. Self-employed professionals shall also be subject to this restriction.

 6. Possible Withholding Tax Rate Increase for some Financial Gains in Foreign Currency

The draft bill entitles the President to double the withholding income tax rate over returns arising from securities and savings accounts in foreign currency. Currently, the President could increase these rates by only 5 points.

7. Luxury Housing Tax in Introduced

A luxury housing tax will be imposed for residential houses located in Turkey with a value of over TL5 million. Currently, a house in a metropolitan area is subject to 0.2 % property tax and the tax base is estimated as per the Property Tax Law, which is mostly below the fair market value. The value of the housing will be determined by the General Directorate of Land Registry and Cadastre, which will result in rises in most cases. The luxury housing tax rates are:

    • Between TL5,000,000 – TL7.500.000: %0.3
    • Between TL7,500,000 – TL10,000,000: % 0.6
    • 10,000,000 and above: %1

8. A New Settlement Method between Tax Authority and Taxpayers

The bill introduces a new settlement method between the tax authority and taxpayers, which is called “Waiving the right to appeal” with a view to reducing the workload of the tax courts and to expediting the resolution of tax disputes.

In this respect, subsequent to a court order (first instance with the courts or provincial court of appeal), if the taxpayer agrees to pay whole amount of the tax upheld and 60% of the tax overturned by the court along with 75% of the tax penalty upheld, they will not have to pay the remaining amounts and the case will be resolved. The taxpayer will also get an extra 20% discount from the tax and penalty amounts in the event they pay the agreed amount within a month (the discount shall not apply to the upheld tax amount though). Interest will also be applied to the accrued tax amounts.

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