It is a well-appreciated general knowledge that Personal Income Tax Law, the main pillar of the Turkish tax system whose enactment dates back as early as 1960s, have long been lagging behind the rapidly changing and evolving trends in economic realities and diversity of novel transactions on the ground and eventually lost its systematic nature. Thus, the need to profoundly reformize that law has always been on the top of the agenda.
Eventually, the government embarked on a tax reform by merging two essential income tax laws (personal and corporate) in such an era when taxation-linked issues have risen to the top of the global agenda, and barely a day goes by without news regarding tax reforms carried out either by a country or a group of countries, in the case of the European Union, across the world.
The endeavor of conducting such a profound tax reform with the aim of ensuring that a tax jurisdiction remains harmonious with the standards of developed nations – especially members of the OECD – and compatible with international best practices is a vivid demonstration of a strong will manifested by the Turkish government in terms of its unabated push for a robust public finances and a sound tax system.
It also goes hand in hand with other reform initiatives taken to improve the economic outlook as a whole, raise Turkey’s international trade profile, deepen domestic financial markets and bring the overall legal structure of the country closer to EU standards.
Historically, the Turkish tax system has been based on two separate laws, namely the Personal Income Tax Law and Corporate Income Tax Law, which tax, respectively, real and legal persons.
Since virtually all income elements that can possibly be derived from any kind of activities liable to be taxed happen to be technically the same for both a real or a legal personality, the frustrating repetition of provisions regarding topics such as the concept of tax liability, immunities, exemptions, deductions and tax credits becomes inevitable.
In addition, Personal Income Tax Law, enacted more than half a century ago when the Turkish economy was controlled by the state and which has undergone 76 amendments and recently reached 210 articles, including many additional and provisional ones that are extremely long and complicated due to the desire of successive governments to grant multi-layered immunities and exemptions, has not only lost its authentic logical setup and systematic structure, but also departed substantially from its original mission of delivering for the needs of Turkey’s ever-accelerating pace of development.
The flaws of these two laws cited above, multiplied with the need for increasing the rate of direct taxes to GDP – one of the lowest in the OECD – has drawn attention to the urgency of reforming the Turkish tax system.
Drawing on these reasons, the Turkish government, after an extensive process of brainstorming with nongovernmental organizations, professional associations, academics and freelance experts with high credentials, has drafted a unified Income Tax Law replacing both the Income Tax Law and the Corporate Income Tax Law. The Draft Income Tax Law was subsequently sent to the parliament on June 12, 2013, and since then has been pending before parliament’s Planning and Budget Committee to be finalized as a law fully in effect.
The Draft Income Tax Law, unlike the two laws it replaced which together contained 255 articles, was tailored according to the principles of simplicity and plainness with only 95 articles in total.
The immunity enjoyed by some taxpayers with respect to filing annual tax returns is narrowed; thus paving the way for hundreds of thousands of more tax returns to be filed each year.
Widespread immunities and exemptions granted to capital gains, which are making concerned tax provisions unnecessarily long and complicated and constitute the deep root for the complaints of unfairness, have been substantially reduced.
Generous tax advantages have been offered to business start-ups, young entrepreneurs and agricultural sector to boost investment, production and employment.
The obligation to file a fourth-quarter advance tax return has been abolished to ease the burden of taxpayers, thus enforcing other legal and administrative measures aimed at increasing voluntary compliance.
The disposal of one single residential place has also been made exempt from any taxes.
Last, the cabinet has been granted greater authority to move certain ratios and fixed-quantities up and down within the boundaries specified by the Draft Law.
Since a tax jurisdiction deeply affects daily transactions of people from every walks of life and inherently has the potential to change the course of development of any country, this reform initiative has also, from the outset, been closely watched, if not fully supported, by almost all elements of Turkish civil society of differing political persuasion.
The full impact of the reform will become evident after its passing into law and the prospects of delivering for its core targets will stay uncertain for some time to come, but the sheer pace of development experienced in Turkey for a decade or so necessitated such a tax reform given that legal frameworks still hold a sway over macroeconomic structures everywhere in the world.