Turkey VAT, GST, and Sales Tax Guide

Turkey

Istanbul GMT +2

EY Maslak Mahallesi Eski Büyükdere Caddesi

Orjin Maslak Plaza No:27 Kat:1-4 Sarıyer Istanbul Turkey

Indirect tax contacts

Sedat Tasdemir

+90 (212) 315-3000 sedat.tasdemir@tr.ey.com

Gozde Kucukcelebi +90 (212) 315-3000 gozde.kucukcelebi@tr.ey.com

A. At a glance

Name of the tax

Value-added tax (VAT)

Local name Katma deger vergisi (KDV)

Date introduced 2 November 1984

Trading bloc membership European Customs Union

The system of Pan-Euro-Mediterranean Cumulation

Administered by Turkish Revenue Administration (http://www.gib.gov.tr)

VAT rates

Standard 18%

Reduced 1%, 8%

Other Full exemption and partial exemption

VAT number format 1234567890

VAT return periods Monthly

Thresholds

Registration

None

Recovery of VAT by non-established businesses Limited

B. Scope of the tax

VAT applies to the following transactions:

• The supply of goods or services made in Turkey by a taxable person in the course of performing commercial, industrial, agricultural or independent professional activities

• Services received in Turkey or benefited from in Turkey by a taxable person or any other person responsible for payment of the tax

• Goods and services imported into Turkey

C. Who is liable

A taxable person is any person or legal entity that is registered or must register for VAT in Turkey. Any entity that has a fixed place of business or regularly carries out commercial or professional operations in Turkey must register in Turkey.

No VAT registration threshold applies. VAT registration is granted automatically by the tax office when a business registers for corporate and income tax purposes. It is necessary to have a fixed place of business to register for tax. A fixed place of business includes a residence, place of busi ness and registered head office or business center in Turkey. Only entities that are registered for tax may import goods into Turkey.

Partial VAT withholding. There is a “partial VAT withholding” mechanism in Turkey. Under this mechanism, a certain portion of VAT amount is withheld by the recipient (purchaser, service receiver, etc.), and the recipient pays this VAT directly to the tax office instead of the supplier (seller, service provider, etc.). The portion that is not subject to withholding is declared and paid to the tax office by the supplier.

Partial VAT withholding is applied to a list of transactions that covers but is not limited to:

• Construction works

• Maintenance and repair services related to machinery and equipment

• Catering and organization services

• Labor procurement services

• Contract textile manufacturing

• Cleaning, environmental and garden care services

• Delivery of copper, zinc, aluminum and lead products

The rate of withholding varies depending on the type of services.

Exemption from registration. The VAT law in Turkey does not contain any provision for exemp tion from registration.

Voluntary registration and small businesses. The VAT law in Turkey does not contain any provi sion for voluntary VAT registration, no special VAT registration rules for small businesses, as there is no registration threshold (i.e., all entities established in Turkey that make taxable supplies are obliged to register for VAT).

Group registration. Group VAT registration is not allowed in Turkey.

Non-established businesses. A “non-established business” is a business that has no fixed establishment in Turkey. A non-established business may not register for VAT only (other than “Special VAT Registration for Electronic Service Providers” – see the Digital economy subsec tion below). If a Turkish taxable person receives services from an entity that does not have a fixed establishment in Turkey, VAT is accounted for using the reverse-charge mechanism (that is, the Turkish recipient of the service must self-assess VAT).

Tax representatives. Tax representatives are not required in Turkey.

Reverse charge. The reverse charge is a form of self-assessment for VAT through which the recipient of services accounts for the tax. The reverse charge applies if certain services subject to Turkish VAT are made by a person that is not resident in Turkey or that does not have a per manent establishment or headquarters in Turkey. The Ministry of Treasury and Finance is autho rized to determine the parties responsible for the payment of VAT. The recipient does not need to be a taxable person under Turkish VAT law. The recipient may be an individual or an institution.

The reverse charge applies to the following services performed or used in Turkey:

• Transfers of copyrights, patents, licenses, trademarks, know-how and similar rights

• Import commissions

• Services of independent professionals, such as engineering, consulting, data processing and provision of information

• Interest payments made to foreign entities other than banks and financial institutions

• Rental services

• Transfer or assignment of the right to use capacity for the transmission, emission or reception of signals, writings, images, sounds or information of any nature by wire, radio, optical or other electromagnetic systems

• Other services not specified in this list

Domestic reverse charge. There are no domestic reverse charges in Turkey.

Digital economy. Nonresidents providing electronically supplied services to nontaxable real per sons (i.e., for business-to-consumer (B2C) supplies) in Turkey are required to register and account for VAT on supplies in Turkey. Nonresidents mean those businesses that have no resident, business place, legal or business center in Turkey.

The service providers must register for “Special VAT Registration for Electronic Service Providers.” Such service providers declare the VAT related to these transactions electronically with the VAT Return No. 3. There is no VAT registration threshold for these types of suppliers.

These service providers must fill in the form on the Turkish Revenue Administration’s website (www.digitalservice.gib.gov.tr) before filing the VAT Return No. 3 for the first time. Upon com pleting and filing the aforesaid form online, the “Special VAT Registration for Electronic Service Providers” will be registered in the name of the service provider.

Such service providers will be required to file VAT return type No. 3, electronically, by the 26th of the month following the end of the return period. See the Section I. Returns and payment below for further detail.

Nonresidents providing electronically supplied services only to tax-registered entities (i.e., for business-to-busines (B2B) supplies) in Turkey are not required to register and account for VAT in Turkey. Instead, the customer is required to self-account for the VAT via the reverse-charge mechanism (see the Reverse charge subsection above).

There are no other specific e-commerce rules for imported goods in Turkey.

Online marketplaces and platforms. No special rules exist for online marketplaces and platforms in Turkey.

Registration procedures. There is no online registration application system except for “Special VAT Registration for Electronic Service Providers” (see details above under the Digital economy subsection). To register for tax, an application must be submitted to the tax office with the docu ments listed below:

• Articles of association of the company

• Registration certificate or original trade registry gazette

• Signature circular document indicating the authorized signatories and their signature samples

• Trade registry document of the legal entity founder or authorized signatory (if any)

• Notarized passport copies of the authorized signatories and founders of the company

• Potential tax numbers of the founders and signatories that are obtained from the tax office

• Notarized lease agreement in the name of the company

• Originally signed Form of Commence Business (standard form to be received from the tax authority)

• Power of attorney (only if the application will be conducted by a representative)

Approximately one week after submitting an application with the above documents, the tax offi cer will conduct an inspection at the registered office of the company. This is to determine whether or not there actually is an office space with adequate equipment. The authorized signatory of the company shall be present for this inspection to sign the necessary documents, or such documents shall be signed by the representative via a power of attorney. Upon completion, the tax number will be issued within a few days.

Deregistration. In the case of the closing down of a business or the dissolution of a legal entity, the person authorized to represent the company must submit written notice to the tax office within one month of the date of closure. After submitting the application for the liability cancel lation, a visit to the relevant workplace is performed by the authority to confirm its closure.

Changes to VAT registration details. Taxable persons must notify the relevant tax office online or by post within one month from when there is a change in their registration details.

D. Rates

The term “taxable supplies” refers to supplies of goods and services liable to a rate of VAT.

The VAT rates are:

• Standard rate: 18%

• Reduced rates: 1%, 8%

The standard VAT rate applies to all supplies of goods or services unless a specific measure provides for a reduced rate or exemption.

Examples of goods and services taxable at 1%

• Newspapers and magazines

• Basic foodstuffs

• Used passenger cars

• Foodstuffs

• Textile products

• Pharmaceuticals

• Medical products

Examples of goods and services taxable at 8%

• Some construction equipment

• Admission charges for cinemas, theaters and operas

The term “exempt supplies” refers to supplies of goods and services that are not subject to VAT. “Partially exempt” supplies (as specified in Articles 16 and 17 of the VAT law) do not give rise to a right of input tax deduction (see Section F). Some supplies are classified as “fully exempt,” which means that no VAT is due, but the supplier may recover related input tax. These supplies include exports of goods and related services.

Examples of partially exempt supplies of goods and services

• Leasing immovable property by an individual

• Financial transactions

• Supplies to certain cultural bodies

• Supplies by and to certain governmental bodies

• Water for agriculture

• The supply of unprocessed gold, foreign exchange money, stocks and bonds, duty stamps, scrap metal, plastic and certain other items

• Storage services performed at bonded warehouses or temporary storage places

• Delivery of goods or performance of services in free-trade zones

Examples of fully exempt supplies of goods and services

• Exports of goods and services

• Services rendered at marinas and airports for marine and air conveyances

• International transport

• Supplies to persons engaged in petroleum exploration

• Supplies of goods to investment incentive certificate holders

• Sales to the Directorate of the Defense Industry

Option to tax for exempt supplies. Taxable persons may submit a request to opt to tax exempt transactions by applying to the tax office in writing. The taxable persons who have an option to tax approved and become liable for VAT in this way will not be able to change this option for a minimum of three years after the date of the option to tax applying.

The option to tax cannot be requested for:

• Exemptions with the purpose of culture and education, social utility and military

• Exemption regarding the transactions within the scope of banking and insurance tax and the transactions of insurance agents related to insurance activities

E. Time of supply

The time when VAT becomes due is called the “time of supply” or “tax point.” The basic time of supply for goods is when they are delivered. The basic time of supply for services is when they are performed. However, if the supplier issues an invoice before the time of supply, VAT applies to the extent that the supply is covered by the invoice.

Deposits and prepayments. A deposit or prepayment alone does not create a tax point from VAT point of view if the supply has not been made and the invoice has not been issued yet. As outlined above, the tax point occurs when goods are delivered or services are performed, or when an invoice is issued if it is earlier than the time of supply. A deposit or prepayment is basically a transfer of cash in advance before the supply or invoice. Therefore, prepayment alone does not create a tax point for VAT.

Continuous supplies of services. If services are received continuously but payment is made peri odically, the tax is declared every month. If the invoice is issued before the declaration period, the tax point is the date of the invoice.

Goods sent on approval for sale or return. The time of supply for goods sent on approval for sale or return is when the customer accepts the goods and a supply is made.

Reverse-charge services. There are no special time of supply rules in Turkey for supplies of reversecharge services. As such, the general time of supply rules apply (as outlined above).

Leased assets. There are no special time of supply rules in Turkey for supplies of leased assets. As such, the general time of supply rules apply (as outlined above).

Imported goods. The time of supply for imported goods is either the date of importation or the date on which the goods leave a duty suspension regime.

F. Recovery of VAT by taxable persons

A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. A taxable person generally recovers input tax by deducting it from output tax, which is VAT charged on supplies made.

Input tax includes VAT charged on goods and services supplied in Turkey, VAT paid on imports of goods and VAT self-assessed on reverse-charge services.

If the input tax exceeds the output tax, the excess amount is generally not refunded but can be carried forward to subsequent VAT periods.

A valid document such as an invoice or customs document must accompany a claim for input tax.

The time limit for a taxable person to reclaim input tax in Turkey is until the end of the calendar year following the calendar year in which the taxable event takes place. The right of deduction may be exercised in the tax period in which the purchase documents are entered into the recipi

ent’s books of account, but only until the end of the calendar year following the calendar year in which the taxable event takes place.

Nondeductible input tax. Input tax is not recoverable if it is charged on purchases of goods and services that are not used for business purposes and are considered to be nondeductible expens es for corporate tax purposes. In addition, input tax may not be recovered for partially exempt transactions.

Examples of items for which input tax is nondeductible

• Input tax of nondeductible expenses in corporate tax law

• Input tax of passenger cars

• Input tax of lost goods (covering all situations where goods were lost, other than an earthquake, flood disaster or fire disaster that has been announced by the Ministry of Finance as a force majeure)

Examples of items for which input tax is deductible (if related to a taxable business use)

• All kinds of commercial expenses for operating activities of the entity

• All direct and indirect expenses for commercial purposes of the entity

Partial exemption. An input tax deduction is granted for taxable supplies and for supplies that are exempt with credit. An input tax deduction is not granted for partially exempt supplies. If a taxable person makes both taxable and partially exempt supplies, it may recover only input tax related to supplies that are taxable or fully exempt.

Approval from the tax authorities is not required to use the partial exemption standard method or special methods in Turkey.

Capital goods. In general, input tax incurred on fixed assets is recoverable. Taxable persons can deduct the whole amount of VAT paid for fixed assets in the taxation period in which the related invoices are recorded in the legal books.

On the other hand, input tax of lost goods is not deductible and needs to be corrected in the taxation period in which the goods became lost.

However, if depreciable assets are lost (due to fire, being stolen, etc.) after completing their use ful lives, then there is no need for VAT correction.

If depreciable assets are lost before fully completing their useful lives, then the portion of input tax corresponding to the remaining useful life needs to be corrected.

Refunds. If the amount of input tax recoverable in a period exceeds the amount of output tax payable in the same period, a refund is, as a rule, not granted. In most cases, the taxable person must carry forward the excess amount to a future VAT period. Refunds of the excess are available only for the following:

• VAT related to supplies of goods subject to a reduced rate

• VAT related to supplies of goods and services that are exempt with credit

• VAT related to supplies in the scope of partial VAT withholding

The amount of the VAT refund may be credited against other tax liabilities. In addition, it is mandatory to submit all VAT refund certification reports on electronic environment via the internet tax office.

Pre-registration costs. The amount of incurred VAT for the prior costs and expenditures related to the registration process could be deductible after the registration process is complete. The main condition that must be met is that they are related to the registration process. As for recovery, there is no separate/special rule – normal recovery rules apply (as outlined above).

Bad debts. Taxable persons must declare and pay the VAT related to their supplies of goods and services, whether or not they receive the consideration for these supplies.

Taxable persons can deduct the VAT that has been calculated and declared related to the receivables that became a bad debt (as per the article 322 of the Tax Procedures Code).

A “bad debt” is defined as receivables that are no longer possible to be collected according to a judicial decision or a satisfactory document, as per the article 322 of the Tax Procedures Code.

Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Turkey.

G. Recovery of VAT by non-established businesses

Input tax incurred by non-established businesses in Turkey is not recoverable, except for the fol lowing:

• Expenses by nonresident international transporters on repairs, fuel and spare parts

• Expenses by non-established businesses on fairs and exhibitions (if the business’ country of residence is on mutual terms with Turkey)

• Expenses by foreign producers of cinematographic works approved by the Ministry of Culture and Tourism

H. Invoicing

VAT invoices. Turkish taxable persons must provide invoices for all taxable supplies and services. Taxable person recipients of the supplies and services must retain copies of the invoices.

Credit notes. Credit notes may not be used to reduce VAT charged and reclaimed on supplies of goods or services.

Electronic invoicing. Electronic invoicing is allowed in Turkey, but not mandatory. However, for certain Turkish taxable persons, electronic invoicing is mandatory. See the list below for such taxable persons:

• Taxable persons whose gross sales revenue is TRY5 million or more in 2018 and subsequent fiscal years

• Taxable persons with licenses from Energy Market Regulatory Authority for their activities in production, importation, delivery, etc., of goods listed in the List I attached to the Special Consumption Tax Law

• Taxable persons who produce, import or build goods in List III attached to the Special Consumption Tax Law

• Taxable persons running an e-commerce business or providing intermediary services through the internet

• Taxable persons engaged in the fruit and vegetable trade as brokers or merchants

• Taxable persons who perform medical services or deliver medical products

• Taxable persons who must use the e-invoice application because of the mandatory transition to the e-delivery note or the e-archive invoice application

Simplified VAT invoices. Simplified VAT invoicing is not allowed in Turkey. As such, full VAT invoices are required.

Self-billing. Self-billing is not allowed in Turkey.

Proof of exports. Turkish VAT is not charged on exports. However, to qualify as VAT-exempt, export supplies must be supported by evidence that confirms that the goods have left Turkey. The evidence required consists of the customs declaration, which clearly identifies the exporter, the customer, the goods and the export destination, and invoice information.

Foreign currency invoices. An invoice issued for a domestic sale must be issued in the domestic currency, which is the Turkish lira (TRY). The invoice may also show the invoiced amount in a foreign currency if the TRY equivalents are stated.

An invoice issued for an export sale may be issued in a foreign currency. The amount of the invoice must be recorded in the supplier’s books together with the exchange rate on the date of the transaction.

Supplies to nontaxable persons. For supplies made by taxable persons to private consumers (i.e., not VAT registered), where the price of the supply is below TRY2,043, a till receipt is sufficient to be issued from the supplier to the purchaser, and there is no obligation to issue a full VAT invoice unless requested by the purchaser.

Records. Records that must be held for VAT purposes include the legal books (i.e., the journal ledger, inventory ledger) and the substantiating documents (such as invoices, expense vouchers, bank receipts, payrolls, contracts, etc.).

Records can be kept in or outside Turkey. However, if kept outside Turkey, the records must be presented in a timely manner when requested by the tax authorities.

Record retention period. The record retention period is 5 years as per the Tax Procedures Code and 10 years as per the Turkish Commercial Code. The retention period of five years is only valid for tax purposes. Therefore, considering the Turkish Commercial Code, it is recommended to maintain all files for 10 years.

Electronic archiving. Taxable persons using e-archive system archive their data on an electronic environment. However, they are required to archive original hard copy of the documents that were originally issued in hard copy format.

Taxable persons not using e-archive system archive their data and files in their original format. They will be required to submit these data/files to tax authorities when requested.

Taxable persons who are permitted to use e-invoicing, must e-archive the invoices, and those that are issued electronically must be archived electronically. Taxable persons who are allowed to benefit from the e-archive application have to issue, deliver, archive and, when requested, submit the invoices as e-invoices, which are issued for those who are registered for e-invoicing. Taxable persons may use e-archiving in two methods: through their own information technology system or through a special integrator information technology system authorized by the Revenue Administration.

I. Returns and payment

Periodic returns. The VAT return period is monthly. Returns must be submitted electronically through the internet by the 26th day of the month following the end of the return period. Returns must be declared in the form that was designated according to the provisions of Tax Procedural Law. There are five types of VAT returns:

• VAT Return No. 1: Filed by the taxable persons who are subject to real taxation to declare VAT calculated over their supplies

• VAT Return No. 2: Filed by taxable persons responsible to declare reverse charge and partially withheld VAT

• VAT Return No. 3: Filed by the non-established companies to declare VAT on their electroni cally supplied services to Turkish real persons (B2C)

• VAT Return No. 4: Filed by the taxable persons who are subject to revenue-based taxation system

• VAT Return No. 5: Filed by the enforcement offices and those who are not subject to real taxation to declare VAT on sales made in auction halls

Periodic payments. Payment in full must be made by the 26th day of the month following the end of the return period (i.e., month of submission). Tax return liabilities must be paid in Turkish lira.

For “Special VAT Registration for Electronic Service Providers,” payment of VAT is made online via using debit cards (via a Turkish public bank or any foreign banks) and only foreign bank credit cards. Alternatively, there is also EFT option to the bank account of the Large Taxable Person Tax Office.

Partial VAT withholding. There is a “partial VAT withholding” mechanism in Turkey. Under this mechanism, a certain portion of VAT amount is withheld by the recipient (purchaser, service receiver, etc.), and the recipient pays this VAT directly to the tax office instead of the supplier (seller, service provider, etc.). The portion that is not subject to withholding is declared and paid to the tax office by the supplier.

Partial VAT withholding is applied to a list of transactions that covers but is not limited to:

• Construction works

• Maintenance and repair services related to machinery and equipment

• Catering and organization services

• Labor procurement services

• Contract textile manufacturing

• Cleaning, environmental and garden care services

• Delivery of copper, zinc, aluminum and lead products

The rate of withholding varies depending on the type of services.

Electronic filing. Electronic filing is mandatory in Turkey for all taxable persons. Taxable persons are obliged to submit their tax returns by using the Ministry of Treasury and Finance’s system called “e-beyanname.” All tax returns must be submitted through this system and are electroni cally archived. Tax returns from previous periods are easily retrievable from this system.

Payments on account. Payments on account are not required in Turkey.

Special schemes. Specified sectors. As of 1 January 2019, a revenue-based taxation system has been established for taxable persons operating in specified sectors in Turkey. Accordingly, those operating within the sector and occupational groups determined by the President, if requested, may pay a certain percentage of their proceeds (including VAT) by declaring it without consider ing the deductible VAT amount. Currently, suppliers of public transportation services who fulfill certain conditions are in the scope.

Annual returns. Annual returns are not required in Turkey.

Supplementary filings. BA-BS forms. Taxable persons are required to file BA-BS forms to declare the transactions over TRY5,000 between the purchaser company and seller company. The pur chases from other companies are stated within the BA Form, whereas the sales to other compa nies are stated within the BS Form. The “BA-BS” stands for “Bildirim Alış-Bildirim Satış” in Turkish, which means notification of purchases and sales.

Correcting errors in previous returns. To correct any errors on a tax return, a new tax return is filed on an electronic environment by including an explanation for the purpose of correction on the return. If a tax amount is corrected, the new tax return must show the final corrected amount and not only the part of amount to be added or deducted.

Digital tax administration. There are no transactional reporting requirements in Turkey.

J. Penalties

No specific penalties relate to VAT offenses. Penalties are prescribed by the Tax Procedures Code, which defines various acts of noncompliance with the tax laws, as outlined in more detail below.

Penalties for late registration. In case of late registration, the following penalties could apply:

• Tax loss penalty

• Late payment charge (interest)

• Irregularity penalty

Penalties for late payment and filings. Late submission of tax returns on electronic environment is subject to tax loss penalty and special irregularity penalty. In such a case, the special irregular ity penalty is TRY3,405 (for 2022) per tax return and the tax loss penalty is the amount of the tax loss itself.

Late payment of taxes due is subject to late payment interest at the rate of 1.6% per month.

The penalty for the failure to account for VAT under the reverse-charge mechanism is the full amount of tax that has not been accounted for (i.e., 100% of the tax due). The amount of interest is calculated starting from the due date of the tax payment until the date on which the penalty notice is issued.

Penalties for errors. Penalties for errors should be evaluated based on the result of error.

If, for example, the error causes a tax loss, then the tax loss penalty may apply. If the error does not cause a tax loss but is only related to form, such as not using the correct line of the return to declare a tax, then the irregularity penalties may apply. The amount of irregularity penalties var ies depending on the type of irregularity.

The failure to notify or late notification of a change in a taxable person’s VAT registration details is subject to second degree irregularity penalty of TRY3,405 (for 2022).

Penalties for fraud. Manipulating or destroying the legal books and accounting records or issuing misleading or forged documents are evaluated under smuggling and penalized accordingly. Smuggling acts may result in jail sentence varying between 18 months and 5 years.

Personal liability for company officers. The directors that have management powers are liable to perform their obligations with due care and to protect the interest of the company. The liability of directors is based on fault, meaning that the directors may be personally held liable due to their fault or negligence while performing their duties against the company, shareholders and other related third parties and compensate the damaged parties. In case the tax debts of a company cannot be collected, in part or in a whole, from the assets of such company and the said tax col lection is due to the failure of fulfillment of duty of the directors, then such taxes would be collected from the assets of the directors who have failed to perform their legal duties.

Statute of limitations. The statute of limitations in Turkey is five years.