Tax Controversy 2024 Comparisons

In Turkey, tax disputes mainly arise from issues in tax liability determination, assessment, notification, accrual, penalties, and collections, alongside their implementation. Such disputes are often triggered by tax audits in a system reliant on self-declared tax calculations, which are then verified through official audits. Disagreements also stem from incorrect tax assessments by authorities, non-payment, or delayed payments of taxes. Taxpayers frequently challenge claims by denying debt, disputing the claimed amount, or asserting a lack of prior notification. Additionally, disputes about refunds for wrongfully collected taxes are common, particularly when legally exempt individuals or entities are incorrectly taxed, despite being partially or fully exempt on a permanent or temporary basis.

In Turkey, income tax disputes are a frequent source of tax-related issues, focusing on the determination of taxable income, validity of expenses, deductions, exemptions, and incentives. These disputes stem from different interpretations of tax laws, classifications of income or expenses, objections to authority assessments, and disagreements on fiscal treatments of transactions. VAT disputes also play a significant role, given VAT’s importance in the taxation system. These involve interpretations of VAT laws, claims for exemptions or deductions, VAT rebate processes, and international transaction handling. Beyond income tax and VAT, disputes extend to corporate income tax, withholding tax, stamp duty, and local taxes, reflecting broader challenges in tax compliance and interpretation.

Taxpayers are advised to consult with tax experts to ensure the accuracy and completeness of their tax filings, particularly in complex situations or for businesses with significant tax obligations. Seeking advice from tax offices for clarifications on tax applications under specific rulings can also help. Utilising tax clearance certificates from certified financial accountants, independent audits, and advice from tax attorneys is crucial for maintaining compliance and accuracy in tax matters.

Turkey’s commitment to combating tax avoidance is demonstrated by its adoption of the BEPS (Base Erosion and Profit Shifting) guidelines, focusing on specific BEPS Action Plans. Although Turkey has progressed in legislating towards BEPS compliance, especially in areas such as Country-by-Country Reporting, it has not completely legislated across all BEPS Action Plans yet.

In Turkey, the legal framework governing additional tax assessments and disputes aims to balance tax collection with taxpayers’ rights to contest and fair treatment, including mechanisms for payment and guarantees, while outlining penalties for non-compliance.

Contesting Additional Tax Assessments

• Right to Contest – taxpayers can challenge additional tax assessments via administrative and, if needed, judicial appeals.
• Payment Obligation – taxpayers must either pay the additional tax or provide a guarantee to dispute the assessment, ensuring state revenue protection.
• Suspension of Collection – taxpayers can request to suspend collection during the appeal by providing a guarantee and showing likely success in their appeal.

Guarantees and Foreclosure

• Guarantees – to contest assessments without immediate payment, taxpayers can use bank guarantees or letters of credit, avoiding asset foreclosure.
• Foreclosure – without payment or guarantees, tax authorities may seize assets to recover taxes.

Penalties for Non-compliance

• Administrative Penalties – late declarations or payments incur fines, scaled by the extent of non-compliance and tax amount.
• Criminal Penalties – serious offenses like tax evasion may result in criminal charges, with punishments varying by the evasion amount and specifics.

The Tax Audit Board (VDK) selects taxpayers for audits using the VDK Risk Analysis System (VDK-RAS), identifying high-risk taxpayers based on certain criteria. Tax audit personnel requests and evaluations of reports, complaints about tax evasion, or avoidance also trigger audits. Additionally, tax offices, administrative and judicial bodies’ requests, or taxpayers’ requests to correct erroneous filings can initiate audits.

The Tax Procedure Law (TPL) No 213 outlines the statute of limitations and procedures for tax audits in Turkey. Tax audits can be conducted any time within a five-year statute of limitations, starting from the year following the tax period. If taxes are not assessed by the end of this period, they become statute barred. Audit durations vary: a full audit must be completed within one year, a limited audit within six months, and a VAT refund audit within three months, though extensions can be granted by the supervisory unit if justified. Full and limited audits may receive up to an additional six months, and VAT refund audits two months. Audits must adhere to the five-year limit; beyond this, tax liabilities cannot be enforced.

In Turkey, tax audits are carried out either at the tax authority’s offices or the taxpayer’s premises, depending on the audit’s nature, convenience, and the tax officials’ requirements. Taxpayers are asked to submit necessary documents for audits at the authority’s offices. On-site audits at the taxpayer’s location require agreement from both parties and a suitable environment. Turkey’s tax authorities are moving towards digitalisation, blending traditional paper-based audits with electronic data analysis.

Tax audits in Turkey rigorously assess both procedural and substantive elements of financial activities to identify inaccuracies, combat tax evasion, and ensure precise financial reporting.

Procedural Formalities

• Tax Returns/Declarations – audits check for timely and accurate filing of VAT, corporate, and personal income tax returns.
• Record-Keeping – auditors assess whether accounting records are accurate, complete, and maintained according to Turkish laws, documenting all transactions correctly.
• Invoices/Documentation – the legitimacy and compliance of invoices and supporting documents are reviewed to ensure reported revenues and expenses are lawful.

Documentation Standards

• Proof of Transactions – auditors require solid evidence for transactions, including invoices, receipts, bank statements, and contracts.
• Transfer Pricing Documentation – for companies with related-party transactions, especially multinationals, detailed transfer pricing documentation is vital to comply with the arm’s length principle.
• Employment Records – employment contracts, payroll, and payments are scrutinised for compliance with labour laws and accurate tax/social security deductions.

Substantive Concerns

• Tax Base/Calculations – the determination of tax bases and the precision of tax calculations for income, corporate, VAT, etc, are closely inspected.
• Tax Exemptions/Incentives – auditors verify the correct application of tax exemptions and incentives, like R&D and investment benefits.
• Cross-border Transactions – compliance with customs, VAT on international dealings, and transfer pricing rules for international transactions are critically examined.
• Related Party Transactions – transactions with related parties are reviewed for market value conformity and accurate reporting.

Turkey’s engagement in international tax cooperation frameworks enhances its capability to exchange taxpayer information with foreign tax authorities. This global sharing of financial data aids Turkish tax officials in uncovering income discrepancies, undeclared earnings, and signs of tax evasion or avoidance, potentially increasing tax audits, especially for cross-border and international tax concerns. Turkey’s commitment to the Common Reporting Standard (CRS) for automatic financial information exchange and its participation in the Global Forum on Transparency and Exchange of Information for Tax Purposes reflects its alignment with international efforts to combat tax evasion. The CRS specifically allows the exchange of information about residents’ foreign financial accounts, impacting cross-border tax audits, particularly in transfer pricing and dividend taxation.

To effectively manage a tax audit in Turkey, companies should adopt a strategic approach, focusing on:

• Pre-Audit Preparation – organise financial documents and ensure compliance with Turkish tax laws, including all tax filings and record-keeping practices.
• Understanding Tax Audit Focus Areas – pay close attention to international transactions, maintain transfer pricing documentation, and ensure electronic records are compliant with regulations.
• Engagement with Tax Authorities – maintain a co-operative relationship with the audit team and consider hiring tax advisors for expert representation.
• Risk Management and Internal Review – perform an internal audit to identify compliance issues and take corrective actions to address any potential problems.
• Strategic Response Plan – develop a strategy for responding to audit queries and prepare for potential disputes by understanding the appeals process.
• Post-Audit Actions – implement audit recommendations to improve compliance and enhance ongoing tax compliance measures.
• Leverage Technology and Expertise – use compliance software for efficient tax management and stay informed on tax law changes through continuous learning and expert consultation.

After receiving an audit report, taxpayers in Turkey have 30 days to respond to taxes and penalties, with failure to respond leading to their definitive imposition. Options include:

• Request for Reconciliation – both “pre-assessment” and “post-assessment” reconciliation options are available.
1. Pre-Assessment Reconciliation – enables negotiation before tax assessment finalisation, applicable to disputes from audits excluding penalties for tax evasion and serious misconduct. Agreement prevents lawsuits on resolved matters but excludes penalty reduction.
2. Post-Assessment Reconciliation – applies to taxes assessed by authorities, excluding certain penalties. An agreement finalises the dispute, with documentation issued to both taxpayer and tax office.
• Requesting a Reduction in Fines – under Article 376, penalties for tax loss can be halved, and other penalties reduced by a third, requested within the lawsuit filing period. Choosing this option precludes reconciliation or lawsuit for the discounted issues.

If unresolved, taxpayers may initiate a lawsuit in Tax Court within 30 days of notification. Reconciliation efforts or seeking fine reductions offer pathways to resolve disputes without litigation, but choosing one avenue typically excludes others, guiding taxpayers through structured decision-making post-audit.

In Turkey, when a taxpayer appeals against a tax assessment or penalty, tax authorities must decide within 60 days from the appeal date. This timeframe may vary with procedural specifics or legal amendments. Failure of the tax authorities to respond within this period allows the taxpayer to view it as an implicit rejection, enabling further legal actions:

• Hierarchical Appeal – while direct appeals to tax courts are standard, taxpayers can informally seek intervention from higher tax authority levels before considering litigation, although it is not a compulsory step.
• Judicial Claim – if the appeal is rejected (explicitly or implicitly), taxpayers can file a lawsuit in tax courts within 30 days from the decision or the end of the response period. Tax disputes go through the Administrative Court, with possible appeals to higher courts, including the regional administrative courts and the Council of State, depending on the case’s complexity.

When administrative appeals do not resolve tax disputes in Turkey, litigation becomes the next step. Under Article 7 of the Law on Administrative Judicial Procedure No 2577, taxpayers have 30 days to initiate a lawsuit in the tax courts after receiving notification of taxes and penalties, unless specific laws dictate otherwise. The process begins with the taxpayer or their legal representative filing a complaint against tax authority actions, such as audits or penalties. This must occur within the 30-day period, with the submission including a petition and relevant supporting documents, signed by either the company’s officials or the individual taxpayer. After paying the necessary filing and postage fees, the tax court registers the lawsuit, marking its official filing date.

Tax litigation in Turkey involves several key stages:

• Preparation of the Lawsuit Petition – individuals or their legal representatives must draft a detailed petition, outlining the legal basis, claims, demands, and supporting evidence for the case.
• Submission of the Lawsuit Petition – this petition is filed at the relevant Tax Court, which assesses its admissibility and procedural compliance before officially registering the lawsuit, initiating the legal proceedings.
• Preliminary Examination and Response Phase – the court conducts a preliminary review of the petition to ensure compliance with procedural standards. The tax authority, as the respondent, is given a set period to prepare and submit a defence against the petition’s claims.
• Trial Stage – the litigation process may include a hearing, requested by the taxpayer or the tax office, though tax litigation typically focuses on written submissions and case file reviews, with hearings being rare.
• Decision Stage – after considering the evidence and arguments, the court issues a decision, communicated in writing to all parties, outlining the lawsuit’s outcome and detailing costs and resolutions.

In Turkey, when filing a lawsuit in tax courts, the evidence must be explicitly listed in the claim statement and submitted with it. Witness statements are rarely accepted as evidence in tax cases. Key principles include:

• The Tax Procedure Law (TPL) emphasises the importance of the taxable event and the actual nature of related transactions.
• The Law on Administrative Judicial Procedure (LAJP) outlines the judge’s and the Council of State’s duties to manage cases efficiently, including conducting examinations and investigations.
• Witness statements can only be considered if the witness has a direct economic interest in the taxable event, which means a mere casual relationship is not enough for admissibility. Witnesses with a direct legal or economic connection to the event, like borrowers, the taxpayer’s accountant, employees, or brokers, might provide admissible testimony.

In Turkish tax law, the allocation of the burden of proof is clearly outlined in Article 3 of the Tax Procedure Law, emphasising that proof is required from the party asserting claims that diverge from normal economic, commercial, or technical standards. This means:

• If a situation is claimed to be outside normal economic, commercial, or technical norms, the party making this claim must provide evidence to support it.
• The party claiming a situation adheres to normal practices does not need to provide proof.
• “Economic, commercial, and technical necessity” refers to the event’s economic context, commercial customs, and technical standards.
• When a taxpayer’s claims are in line with economic realities, accepted commercial practices, and scientific data, the opposing party bears the burden of proof.
• The burden of proof shifts away from the party presenting a scenario considered reasonable and ordinary.
• The party claiming deviations from established norms is tasked with substantiating their claim, placing emphasis on the importance of grounding assertions in commonly accepted standards.

In Turkish tax litigation, effective case management involves several strategic considerations:

• Timely Submission of Documents – ensure all necessary documents and evidence are prepared and submitted within court deadlines to avoid weakening the case.
• Solid Legal Arguments – build strong arguments backed by relevant laws, regulations, and judicial precedents to support the case.
• Settlement Consideration – evaluate the possibility of settling with the tax authority to potentially save time, reduce costs, and lower litigation risks.
• Expert Reports – in complex cases, expert reports can offer valuable insights and bolster the case’s position.
• Evidence Organisation – present evidence clearly and systematically to effectively support claims.
• Procedural Adherence – follow procedural rules and court requirements meticulously to prevent negative impacts on the case.
• Appeal Planning – consider appeal options in advance for potential recourse following an unfavourable trial outcome, ensuring readiness for all eventualities.

In Turkish tax litigation, particularly for complex international tax issues, courts may consider jurisprudence, doctrine, and international guidelines as persuasive authorities, though not legally binding:

• Jurisprudence – decisions from international courts like the European Court of Justice (ECJ) and the European Court of Human Rights (ECHR) can influence Turkish courts in international tax matters, serving as guidance, especially in interpreting international treaties and principles.
• Doctrine – administrative opinions, academic articles, and scholarly works provide interpretations of tax laws, treaties, and principles that can enrich judicial decisions, offering insights into complex tax issues.
• International Guidelines – as an OECD member, Turkey often aligns with OECD guidelines, including the Model Convention and BEPS reports, in cases involving cross-border transactions and transfer pricing.

These elements, while not mandatory for Turkish courts to follow, can significantly inform and guide judicial reasoning in tax litigation, especially in cases with international elements. The extent of their influence varies with each case and the court’s discretion.

In Turkey, administrative tax litigation involves specialised courts operating at different levels of judicial review:

• Tax Courts (Vergi Mahkemeleri):

1. First instance courts for administrative tax disputes.
2. Specialised in handling cases related to tax assessments, penalties, and other tax issues.
3. Taxpayers can appeal decisions made by tax authorities to these courts within specified timeframes.
4. Located in major cities and operate regionally.
• Regional Administrative Courts (Bolge Idare Mahkemeleri):

1. Appellate courts for decisions made by Tax Courts.
2. Taxpayers dissatisfied with Tax Court rulings can further appeal to these courts within specified timeframes.
3. Have jurisdiction over appeals concerning administrative actions by various government agencies, including tax authorities.
• Council of State (Danistay):

1. Highest administrative court in Turkey, serving as the final appellate authority for administrative tax litigation.
2. Taxpayers can escalate appeals from Regional Administrative Courts to the Council of State within specified timeframes.
3. Reviews the legality and validity of decisions made by lower courts, ensuring consistency and adherence to legal principles.

Following a decision by the Tax Court in Turkey, tax appeal procedures can progress through several stages.

• Appeal to the Regional Administrative Court:

1. Either party, the taxpayer, or the tax authority, can appeal the Tax Court’s decision to the Regional Administrative Court within 30 days.
2. The appellant submits a written appeal petition outlining grounds for challenge and providing supporting arguments and evidence.
• Preliminary Review by the Regional Administrative Court:

1. The Regional Administrative Court conducts a preliminary review to assess admissibility and procedural compliance.
2. Additional information may be requested before substantive review.
• Substantive Review and Hearing:

1. If admissible, the court conducts a substantive review, considering arguments, evidence, and legal grounds.
2. A hearing may be scheduled for oral arguments and witness testimonies.
• Issuance of Judgment by the Regional Administrative Court:

1. The court issues a judgment upholding, reversing, or modifying the Tax Court’s decision.
2. Judgment is communicated to parties, and compliance is required.
• Appeal to the Council of State:

1. Dissatisfied parties can further appeal to the Council of State within 30 days of Regional Administrative Court’s judgment.
• Final Decision by the Council of State:

1. The Council of State reviews the case and issues a final, binding decision based on appeal submissions and lower court records.
2. The decision concludes the tax appeal process in Turkey, with mandatory enforcement for parties.

In Turkish tax litigation, the composition of judges and the appellate process vary based on monetary thresholds:

• Court of First Instance:

1. For cases up to TRY31,000 – a single judge presides over the case, and the judgment is final with no right of appeal.
2. For cases between TRY31,000 to 270,000 – also heard by a single judge, with the judgment being final.
3. For cases between TRY270,000 to 920,000 – heard by a committee at the regional administrative court, with no right of appeal.
4. Cases exceeding TRY920,000 – heard by committees of judges across all courts, allowing for both appeal and cassation remedies.
• Appointment of Judges:

1. Tax Courts – judges appointed by the High Council of Judges and Prosecutors (HSYK).
2. Regional Administrative Courts – judges appointed by the HSYK to ensure qualification and impartiality.
3. Council of State – judges appointed by the President based on recommendations from relevant authorities.

In Turkish tax law, reconciliation is the primary alternative dispute resolution (ADR) mechanism, allowing taxpayers to negotiate with tax authorities to settle disputes outside of court. However, other non-litigation options are also available.

• Invitation to Explanation (Aciklama Davetiyesi):

1. Tax authorities invite taxpayers to clarify discrepancies before formal tax assessments.
2. Provides an opportunity to resolve issues before they escalate into disputes.

• Ombudsman (Kamu Denetciligi Kurumu):

1. Taxpayers can lodge complaints with the Ombudsman if they feel their rights have been violated by tax authorities.
2. While recommendations are non-binding, the Ombudsman can facilitate resolutions.
• Reduction in Penalties (Ceza Indirimi):

1. Taxpayers disclosing errors voluntarily before audits may receive penalty reductions.
2. Aims to promote compliance through incentives for self-correction.
• Regret (Pismanlik):

1. Allows taxpayers to rectify previously filed inaccurate or incomplete returns.
2. By acknowledging errors and amending returns, taxpayers can potentially minimise associated penalties.
• Reclamation (Itiraz):

1. Taxpayers can appeal tax assessments, penalties, or decisions to a higher authority within the tax administration.
2. If dissatisfied with the outcome, taxpayers can then pursue judicial appeal.

In Turkish tax law, several alternative dispute resolution (ADR) mechanisms exist to address tax disputes outside of traditional litigation.

• Reconciliation (TPL, Additional Article 1 et seq):

1. Involves negotiations between the tax administration and the taxpayer to resolve taxes assessed through extraordinary procedures and associated penalties.
2. Initiated by submitting a petition to the Tax Administration Reconciliation Commission within 30 days of penalty notification.
3. Successful negotiation can result in a reduction of tax or penalty amount, with the commission’s reconciliation report being conclusive.
• Reduction in Penalties (Article 376 of the TPL):

1. Allows taxpayers to reduce penalties by paying a discounted amount under specific legal conditions.
2. Offers a “pay and resolve” solution to avoid court proceedings, with entitlement to discount upon meeting legal requirements.
• Invitation to Explain (Article 370 of the TPL):

1. Tax authorities may invite taxpayers to explain actions potentially causing tax loss based on preliminary assessments.
2. Taxpayer must respond within 30 days, and the Commission assesses the explanation within 45 days.
3. If explanation is accepted, no tax inspection is initiated; if rejected, taxpayer can challenge decision via annulment lawsuit in tax court.
• Regret and Reclamation (Article 371 of the TPL):

1. Allows taxpayers to rectify undeclared taxes voluntarily, avoiding penalties and prosecution for tax evasion.
2. Taxpayer notifies tax office of actions, settles taxes due with interest, and benefits from penalty waiver.
3. Not applicable to certain taxes and requires prompt notification and payment.
• Ombudsman (TPL, Articles 116–124):

1. Provides avenue for taxpayers facing unfair or unlawful actions to seek correction without resorting to judicial remedies.
2. Requires exhaustion of administrative remedies first, with Ombudsman Institution mandated to finalise applications within six months.
3. Decisions are not final and binding like court decisions but can facilitate resolution of disputes.

An agreement to reduce tax penalties can be achieved through several mechanisms in the Turkish Tax Law system, including reconciliation, invitation to explanation, engagement with the Ombudsman, penalty reduction, and the processes of regret and reclamation.

In practice, interest and penalties are generally lowered through reconciliation process.

In the Turkish tax system, taxpayers can seek advance information, advance agreements (such as Advance Pricing Agreements or APAs), and tax rulings from the tax administration to clarify their tax obligations and mitigate risks. Here’s how these mechanisms work.

• Advance Rulings:

1. Taxpayers can request official guidance on the tax implications of prospective transactions through advance rulings.
2. These rulings are beneficial for complex transactions or situations with ambiguous tax laws, offering clarity on tax consequences before proceeding.
3. Obtaining an advance ruling helps taxpayers make informed decisions about their economic activities.
• Advance Pricing Agreements (APAs):

1. APAs are formal agreements between taxpayers and tax authorities regarding transfer pricing criteria for related-party transactions over a specified period.
2. They establish methods, comparable examples, and adjustments to determine transfer pricing, reducing the risk of future tax disputes.
3. APAs are crucial for multinational companies to ensure compliance with tax laws and regulations across jurisdictions.
• Pre-rulings for Investment Incentives:

1. Investors can obtain pre-rulings related to investment incentives in Turkey, clarifying tax implications and eligibility for incentives.
2. These rulings assist investors in making informed decisions about investments and taking advantage of available incentives.
• Obtaining Advance Agreements or Rulings:

1. Taxpayers must submit detailed applications to the tax authorities outlining the specifics of the transactions or issues requiring clarity.
2. The tax authority reviews the application, may request additional information, and ultimately provides a ruling or agreement outlining the tax treatment.

Type of Controversy – reconciliation covers various tax disputes, including assessments and penalties, but may not extend to all types, like certain administrative decisions.

Value of the Claim – there is no set monetary threshold for reconciliation; it is based on the disputed tax amount or penalty.

Deadline for a Decision – the law sets a timeframe, often 1–3 months, for the reconciliation process, depending on complexity.

Possibility to Appeal – unsatisfied parties can resort to litigation if reconciliation fails, disagreeing with the outcome.

Number of Commission Members – commissions typically have at least three members, including tax officials, with variation by jurisdiction.

Appointment of Members – members are appointed based on tax authority rules, unlike arbitrator selection in traditional arbitration.

Importance of Precedence – while past decisions inform, they do not bind the reconciliation process, which focuses on negotiation.

Basis of Decisions – Strict Law vs Equity – decisions adhere to the law but allow flexibility for equitable solutions within its spirit.

Reconciliation in Transfer Pricing Cases – transfer pricing disputes, involving transactions between related parties, can be resolved through reconciliation to avoid lengthy court battles.

• Application – taxpayers facing transfer pricing adjustments in tax assessments can seek reconciliation to avoid litigation.
• Process – negotiations occur between the taxpayer and a Reconciliation Commission, potentially including external experts.
• Resolution – the goal is to agree on fair transfer pricing methodologies, documented in an agreement, thus settling the dispute outside of court.

Reconciliation for Cases with Taxes Determined by Indirect Methods – when tax assessments rely on indirect methods due to insufficient records, reconciliation offers a path to resolve disputes.

• Eligibility – taxpayers facing assessments from indirect methods can apply for reconciliation to contest tax authority assumptions.
• Negotiation – discussions centre on the validity of tax authority calculations, aiming for a fairer assessment.
• Outcome – successful reconciliation leads to an agreed-upon tax liability, avoiding further legal action.

General Considerations:

• Deadline – applying for reconciliation promptly after-tax assessment or penalty notification is crucial.
• Appeal Possibility – if reconciliation fails or one party is unhappy, litigation may follow.
• Expert Involvement – given the complexity, including specialists in reconciliation discussions can aid in reaching fair agreements.

In Turkey, the handling of additional tax assessments and tax infringements involves a nuanced approach to differentiate between inadvertent errors and deliberate evasion or avoidance.

Additional Tax Assessments:

• Issued by tax authorities to correct unpaid taxes due to errors like incorrect deductions or application of anti-avoidance rules.
• Focus on rectifying tax liabilities to reflect the correct amount owed.

Administrative Tax Offences:

• Result in penalties or fines imposed by tax authorities, depending on the nature of non-compliance.
• Inadvertent errors may lead to lighter penalties, especially with prompt co-operation.
• Application of anti-avoidance rules can result in more significant penalties.

Criminal Tax Offences:

• Involve severe charges like tax evasion, pursued in cases of deliberate tax avoidance.
• Initiated based on evidence from audits or investigations, leading to criminal investigations.
• Accused taxpayers have rights to due process, with the burden of proof on prosecuting authorities.
• Co-operation, such as voluntary disclosure, may mitigate penalties or prevent criminal prosecution, incentivising compliance.

In Turkey, taxpayers facing tax disputes often navigate two parallel proceedings: civil tax assessment disputes and administrative or criminal litigation arising from the same facts.

Civil Tax Assessment Disputes:

• Revolve around contested tax assessments issued by tax authorities.
• Taxpayers can challenge assessments through objections and appeals to tax courts.

Administrative Infringement or Criminal Litigation:

• Arise if authorities suspect intentional misconduct like tax evasion.
• Penalties range from fines for administrative infringements to criminal charges with severe penalties.

Relationship and Proceedings:

• Civil tax disputes and administrative/criminal proceedings are legally independent but practically interdependent.
• The outcome of the civil dispute can impact administrative or criminal cases, especially regarding intent or negligence evidence.
• While there is no automatic suspension rule, authorities or courts may opt to temporarily suspend administrative or criminal proceedings, recognising the potential impact of civil dispute outcomes.

In Turkey, administrative infringement processes and criminal tax cases are initiated by tax authorities based on the severity of the taxpayer’s actions and the presence of elements indicating intent to evade taxes or commit fraud.

Administrative Infringement Process:

• Begins with tax authorities identifying violations like errors in tax returns, late payments, or incorrect deductions during audits.
• Triggers include non-compliance with tax obligations or inaccuracies leading to underpayment.

Criminal Tax Case:

• Initiated for intentional tax evasion, fraud, or criminal activities related to taxes.
• Triggers include deliberate under-reporting of income, falsification of documents, or fraudulent activities to reduce tax liability.

Evolution from Administrative to Criminal:

• Occurs if evidence of intentional evasion or fraud emerges during administrative reviews.
• Transition involves steps like discovering evidence, assessing intent, and referring the case to prosecutorial authorities.

Commonality:

• While most discrepancies are resolved administratively with penalties or adjustments, the progression to criminal proceedings is less frequent and requires clear evidence of intent or significant tax evasion.

In Turkey, the handling of tax administrative infringements and criminal tax cases involves distinct stages overseen by different legal bodies.

Tax Administrative Infringement Process:

• Identification of Infringement – tax authorities identify potential infringements during audits or assessments.
• Preliminary Notification – taxpayers are notified of findings and given a chance to respond or rectify issues.
• Assessment and Penalties – official assessment includes additional taxes owed and administrative penalties.
• Objection – taxpayers can object to the assessment and penalties, appealing to tax authorities and courts if needed.
• Resolution or Escalation – objection outcomes can lead to resolution or escalation to higher courts for final decisions.

Tax Criminal Case Process:

• Investigation – initiated by tax or prosecutorial authorities if evidence of tax evasion or fraud is found.
• Prosecution Decision – prosecutor decides whether to press charges based on investigation findings.
• Court Proceedings – criminal cases are heard in criminal courts, not administrative or tax courts.
• Trial and Verdict – evidence is presented by prosecution and defence; court decides guilt or innocence.
• Appeals – criminal court decisions can be appealed to higher courts.

Courts Involved:

• Tax Disputes and Administrative Infringements – resolved in administrative or tax courts.
• Criminal Tax Cases – heard in criminal courts separate from administrative and tax courts, based on severity and evidence of intent.

In Turkey, taxpayers who promptly settle additional tax assessments before formal audit notifications can receive substantial reductions in associated fines, reflecting adherence to tax laws and good faith.

Penalty Reduction:

• Pre-Audit Notification – payment before audit notifications leads to significant penalty reductions, incentivising voluntary disclosure.
• Post-Notification but Pre-Audit Results – payments after notification but before audit findings can also reduce penalties, albeit less than pre-notification payments.

Legal Basis:

• Turkish Tax Procedure Law provides the legal framework, encouraging voluntary corrections to tax records.

Conditions and extent of reductions depend on disclosure timing, payment, and the nature of the tax offence.

In Turkey, taxpayers have avenues to settle tax liabilities, potentially avoiding or halting criminal tax trials, depending on the case’s specifics and the taxpayer’s compliance intent.

Settlement Before Criminal Proceedings:

• Voluntary Disclosure and Pre-Audit Payment – early disclosure and payment before audit or investigation initiation can prevent tax evasion charges, signalling compliance intent.
• Payment Post-Audit, Pre-Criminal Charges – clearing assessed amounts with interest and penalties before charges are filed may avert criminal proceedings if the case has not reached the prosecutor yet.

Settlement After Criminal Proceedings Start:

• Agreements with Prosecutor – in limited cases, agreements with the prosecutor can suspend or end trials, subject to specific conditions and for lesser crimes.

Limitations and Conditions:

• Not for Severe Offences – serious tax fraud cases with evident criminal intent usually do not qualify for settlement options.
• Crime-Specific Provisions – certain tax-related crimes may allow for trial suspension or penalty reduction based on offence nature, taxpayer’s history, and other factors.

Appeal Routes in Turkey for Criminal Tax Offences

1. Regional Courts of Justice (Bolge Adliye Mahkemeleri):

• Scope of Review – reviews legality, facts, and evidence for errors in lower court decisions.
• Procedure – appellants file within specified timeframe; court examines procedural and substantive issues.

2. Supreme Court of Appeals (Yargitay):

• Scope of Review – primarily reviews legal points, ensuring correct interpretation and application of law.
• Procedure – petition filed after Regional Court of Justice decision; decides to uphold, reverse, modify, or remand.

3. Further Appeal Options (less common) after exhausting appeals through the Supreme Court of Appeals:

• Constitutional Court of Turkey – addresses claims of constitutional rights violations.
• European Court of Human Rights (ECHR) – sought for violations of fundamental rights and freedoms under European Convention on Human Rights.

In Turkey, transactions and operations scrutinised under frameworks akin to General Anti-Avoidance Rules (GAAR), Specific Anti-Avoidance Rules (SAAR), transfer pricing regulations, or additional anti-avoidance measures may culminate in both administrative actions and, for more egregious instances, criminal tax litigation. The strategy employed by the Turkish Revenue Administration and judicial system hinges on the specifics of the non-compliance, the intent behind the taxpayer’s actions, and the gravity of the avoidance or evasion tactics involved.

Tax disputes in Turkey historically resolved through domestic litigation, with Mutual Agreement Procedure (MAP) under-utilised due to legal framework gaps. However, Law No 7338, effective from 1 January 2022, integrates MAP articles from Annex 14 to 18 into the Tax Procedure Law, aligning with BEPS standards. These amendments cover MAP initiation, conclusion, and legal proceedings, fostering negotiation-based dispute resolution over litigation.

Preference for MAP Over Litigation

MAP’s efficiency and cost-effectiveness drive its increased adoption, meeting taxpayers’ desire to avoid protracted litigation. Turkey offers various resolution options for taxpayers facing double taxation from cross-border adjustments.

Domestic Litigation vs Treaty Mechanisms

• Domestic Litigation – challenges additional tax assessments via Turkey’s judicial system, yet may not resolve double taxation without foreign jurisdiction co-operation.
• Double Tax Treaty (DTT) Mechanisms – Turkey’s DTT network facilitates double taxation resolution through MAP, sometimes with arbitration alternatives if MAP fails.
• Concurrent Use – taxpayers pursue both MAP and domestic remedies, necessitating careful co-ordination to prevent adverse outcomes.

Impact of Multilateral Instrument (MLI) and EU Tax Disputes Directive

• MLI – Turkey’s MLI participation aims to amend tax treaties, possibly broadening arbitration availability. Influence depends on changes in each bilateral treaty.
• EU Tax Disputes Directive – though not an EU member, Turkey is indirectly affected by the Directive, enhancing dispute resolution mechanisms among EU states, potentially affecting its international tax negotiations.

In Turkey, robust enforcement against tax avoidance strategies exploiting bilateral treaties aligns with global efforts. The application of General Anti-Avoidance Rules (GAAR) and Specific Anti-Avoidance Rules (SAARs) varies but emphasises transactions’ genuine economic substance and intent, aiming to curb evasion. Judicial trends prioritise substantive economic reality over explicit GAAR or SAAR invocation, addressing treaty abuse through existing legislative frameworks. Court challenges underscore efforts to counteract abusive tax strategies, focusing on transaction details.

Multilateral Instrument (MLI) and Principal Purpose Test (PPT)

The implementation of the Principal Purpose Test (PPT) via the Multilateral Instrument (MLI) signifies a pivotal change in addressing treaty abuse globally, including Turkey. Aligned with OECD’s objectives to prevent Base Erosion and Profit Shifting (BEPS), the MLI ensures tax treaties don’t facilitate avoidance. Incorporating the PPT and DTT preamble amendments through the MLI is expected to significantly impact how Turkish tax authorities combat BEPS challenges.

Challenges and Implementation

Courts in Turkey are anticipated to grapple with complexities introduced by the MLI and PPT. However, given the MLI’s recent nature, practical application, including the PPT, remains uncommon.

In Turkey, objections to transfer pricing adjustments are raised before domestic tax courts, with appellants often citing double tax treaties and provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) as the basis for their appeals. Considering the relatively recent integration of these regulations into Turkish law, such objections have not become widespread instead they are mostly referred during administrative negotiation or appeal stages for in advance payment agreements (APAs).

Despite their availability, Advance Pricing Agreements (APAs) in Turkey see limited adoption. The process begins with a written application to the Revenue Administration, accompanied by necessary information and documentation. Upon request, a preliminary meeting with the Administration discusses the APA’s scope, procedures, and suitability. The Administration conducts a thorough evaluation, analysing submitted materials, and may request further information or discussions if needed. This involves examining comparable transactions, functions, risks, assets, and assessing transfer pricing methods’ applicability. Finally, the Administration approves, conditionally approves with modifications, or rejects the application based on its comprehensive analysis.

In Turkey, cross-border tax disputes commonly arise from withholding tax (WHT), permanent establishment (PE), and transfer pricing issues.

Common Sources of Litigation:

• Withholding Tax (WHT) – disputes stem from the interpretation of tax treaty provisions and tax residency determination for dividends, interest, and royalties.
• Permanent Establishment (PE) – challenges emerge regarding the existence of a PE, impacting foreign companies’ tax liabilities, with differing interpretations of PE definitions.
• Transfer Pricing – increased litigation surrounds transfer pricing adjustments, focusing on the arm’s length nature of transactions between related entities.
• Residence Matters – disputes involve tax residency for high-net-worth individuals (HNWI) and companies, often regarding dual residency conflicts and treaty benefits.

Mitigation Strategies:

• Clearer Legislation and Guidance – enhancing tax legislation and guidance clarity could reduce ambiguities, aiding compliance for WHT, PE, and transfer pricing.
• Advance Pricing Agreements (APAs) or Tax Office Rulings – APAs or tax office rulings establish agreed pricing methodologies, pre-emptively mitigating transfer pricing disputes.

This is not applicable in this jurisdiction.

This is not relevant in this jurisdiction.

This is not applicable in Turkey.

This is not relevant in Turkey.

Turkey’s decision to forego mandatory binding arbitration under Part VI of the Multilateral Instrument (MLI) aligns with its broader tax policy and dispute resolution approach.

Possible Reasons for Not Opting for Mandatory Binding Arbitration:

• Preference for Bilateral Negotiations – Turkey favours resolving tax disputes through bilateral negotiations, prioritising diplomatic relations.
• Concerns About Sovereignty – mandatory arbitration might be perceived as impeding Turkey’s sovereignty over tax matters.
• Capacity and Resource Constraints – implementing mandatory arbitration necessitates substantial administrative and financial resources.
• Legal and Institutional Framework – Turkey’s current legal and institutional structures may not fully meet the requirements for mandatory binding arbitration.
• Historical Approach to Dispute Resolution – Turkey’s traditional reliance on domestic processes may influence its hesitancy towards adopting mandatory arbitration.

Arbitration Clauses in Turkey’s DTTs:

• Turkey’s tax treaties historically emphasise mutual agreement procedures (MAP) for resolving disputes, with arbitration clauses not yet prevalent.

Turkey’s policy regarding arbitration in Double Tax Treaties (DTTs) and its positions under the Multilateral Instrument (MLI) reflect a cautious approach to arbitration as a method for resolving tax disputes. The MLI offers signatory countries the option to apply Part VI, which deals with improving dispute resolution mechanisms, including arbitration. However, as previously mentioned, Turkey has chosen not to adopt the mandatory binding arbitration provisions of the MLI. This decision is indicative of Turkey’s general stance on arbitration in tax matters.

Baseball arbitration, also known as the independent opinion procedure, is not a widely recognised or specifically regulated dispute resolution mechanism within Turkish law.

Turkey’s approach to international arbitration, particularly in tax disputes, is shaped by its status as a non-European Union (EU) member and its commitments under the Multilateral Instrument (MLI) developed by the OECD.

MLI Implementation in Turkey:

• Turkey is a signatory to the MLI, aimed at combating base erosion and profit shifting (BEPS) by multinationals. However, Turkey has chosen not to adopt mandatory binding arbitration under the MLI.
• This decision reflects Turkey’s cautious stance on arbitration, preferring control over tax dispute resolutions within its bilateral treaties and domestic procedures.

Turkey’s Commitment to BEPS Objectives:

• Despite not embracing mandatory arbitration, Turkey remains committed to broader BEPS objectives, including transparency, preventing treaty abuse, and ensuring taxation aligns with economic activity.

Current Trends in International Tax Arbitration:

• The OECD and UN model tax conventions emphasise effective dispute resolution, including arbitration, in tax treaties.
• Turkey’s tax policies and treaty practices may evolve in response to these trends, potentially involving:
1. Selective adoption of arbitration provisions in future tax treaties or specific circumstances.
2. Strengthening Mutual Agreement Procedures (MAP) to align with international best practices.
3. Observing arbitration outcomes in other countries and engaging in international dialogue to inform future policy decisions.
4. Building capacity in alternative dispute resolution mechanisms, including arbitration, for potential future adoption.

Implementation of Multilateral Instrument (MLI) in Turkey

Turkey has taken steps to implement the Multilateral Instrument (MLI), with the resolution of specific cases under revised provisions depending on dispute particulars and treaty application scope.

Participation in Mutual Agreement Procedure (MAP)

Turkey participates in the Mutual Agreement Procedure (MAP), facilitating dispute resolution. While detailed information on MAP cases in Turkey is limited, the OECD periodically releases comprehensive statistics and reports on MAP activities, revealing 15 cases excluding transfer pricing disputes.

Challenges and Outlook

Turkey’s engagement with the MLI and MAP underscores its commitment to international tax co-operation. However, challenges may arise in aligning domestic practices with international standards. Continued monitoring and reporting by organisations like the OECD will provide insights into Turkey’s progress in resolving tax disputes.

Turkey’s Adoption of the Two-Pillar Solution

Turkey, alongside the OECD/G20 Inclusive Framework and the United States, reached a political agreement on the Two-Pillar Solution on 8 October 2021, aiming to address digitalisation tax challenges and ensure multinational enterprises (MNEs) pay fair taxes.

Key Components of the Agreement:

• Pillar One – reallocation of profits to countries based on customer and user location.
• Pillar Two – establishment of a global minimum tax rate of 15% to prevent tax undercutting between countries.

Transition Period and Abolition of Digital Services Tax (DST)

Turkey designated the period from 1 January 2022, until Pillar One’s implementation as the “Transition Period”. During this time, Turkey committed to abolishing the Digital Services Tax (DST). Collected DST will be reconciled with tax liabilities under Pillar One, ensuring fairness through a rate and proportion method.

Challenges and Anticipated Impact:

• Implementation Complexity – Pillar One may take time due to significant changes required in international tax rules and the need for a multilateral convention. In contrast, Pillar Two’s global minimum tax could be swiftly realised through domestic legislation and bilateral treaties.
• Effectiveness in Dispute Resolution – the effectiveness of the pillars in preventing and resolving disputes in Turkey depends on legislative adaptation, administrative preparedness, international cooperation, and stakeholder engagement. The proposed mechanisms by the OECD aim to enhance tax certainty, but their efficacy relies on robust implementation, the capacity of tax authorities and judiciary, and global collaboration among tax authorities.

Confidentiality Protocols Under the Multilateral Instrument (MLI)

The MLI strengthens information exchange between treaty partners while upholding strict confidentiality standards. It prohibits the disclosure of received information to any other party without explicit consent from both the providing state and the taxpayer involved. This aligns with international frameworks and domestic tax laws, ensuring secure handling of taxpayer information.

Publication of Tax Dispute Decisions in Turkey:

• Court Decisions – Turkish court decisions are generally accessible but anonymised to protect privacy and confidentiality.
• MAP and Arbitration Decisions – resolutions from the Mutual Agreement Procedure (MAP) or arbitration under the MLI remain confidential to safeguard agreements between tax authorities or taxpayers. Aggregated data may be released by the OECD or Turkish tax authorities, maintaining taxpayer anonymity.
• MLI Provisions – while the MLI does not mandate the publication of individual dispute resolutions, it emphasises confidentiality standards. Information from dispute resolutions adheres to these standards set by involved jurisdictions, ensuring taxpayer privacy.

Utilisation of Double Tax Treaty (DTT) Network

Turkey extensively relies on its DTT network to manage cross-border tax disputes. The Mutual Agreement Procedure (MAP) provisions within these treaties serve as primary diplomatic channels for resolving disputes between treaty partners.

Impact of the Multilateral Instrument (MLI)

The adoption of the Multilateral Instrument (MLI) modifies existing DTTs to enhance global tax compliance, emphasising improved dispute resolution provisions. These enhancements streamline dispute settlement, including the introduction of arbitration under specific conditions. Turkey’s reservations and notifications regarding the MLI determine its application.

Domestic Resolution Avenues

Before resorting to international dispute resolution mechanisms, Turkish taxpayers typically pursue domestic avenues. This involves administrative objections to tax authorities, which, if unresolved, may escalate to litigation in tax courts.

Engagement of Independent Professionals

In Turkey, taxpayers commonly engage independent professionals such as tax advisors, lawyers, or accountants when navigating tax disputes. These professionals play key roles at various stages of the dispute resolution process:

• Initial Stages – taxpayers enlist professionals to aid in preparing and submitting objections or appeals against decisions issued by the tax authority.
• During Litigation – if disputes progress to litigation before tax courts, taxpayers seek legal representation and guidance from independent professionals.

State’s Approach

The State primarily relies on its cadre of state-employed lawyers and experts to handle tax dispute procedures. This ensures in-house expertise is utilised for efficient dispute management. However, for complex cases, particularly those involving cross-border elements, the State may also seek assistance from independent professionals.

At the administrative level, which involves objections to decisions made by the tax authorities before any court involvement:

• Objection Fees – generally, filing an objection to a tax assessment with the tax authority does not require a specific fee. However, taxpayers are expected to pay the disputed tax amount or a portion thereof as a condition for the objection to be considered in some cases.
• Professional Fees – if taxpayers engage independent professionals such as tax advisors or lawyers to assist with the objection process, the costs will depend on the agreement between the taxpayer and the professional.

In Turkey, litigating tax disputes involves various fees and expenses, but they are mostly insignificant and vary across different stages of judicial proceedings, from filing a lawsuit in tax courts to appealing decisions in higher courts. The structure and responsibility for these costs currently applied are outlined below, integrating specific fee amounts and general practices.

Initial Litigation Costs at Tax Courts

• Postage Fee – a required fee based on the nature of the lawsuit:
1. TRY1,200 for basic filing.
2. TRY1,440 if requesting a hearing.
3. TRY1,680 if requesting a stay of execution.
4. TRY1,920 if requesting both a hearing and a stay of execution.
• Application Fee – TRY427.60 for filing the lawsuit.
• Proxy Fee – TRY60.80, applicable if the plaintiff is represented by an attorney.

Appeals and Cassation

• Appeal Application Fee – TRY1,239.30 for appealing first-instance court decisions.
• Cassation Application Fee – TRY1,863 for applying for cassation at the Council of State.
• Additional Fees for Stay of Execution Requests:
1. TRY891.50 for requesting a stay of execution during the appeal.
2. TRY891.50 for the Council of State fee plus an additional TRY891.50 for a stay of execution request at this level.

Payment Responsibilities and Timing

These fees are paid upfront at the commencement of the proceedings by the plaintiff or the party initiating the legal action.

Costs at the End of Proceedings

• Decision and Judgment Fee – a fee based on the transaction value in dispute is levied at the conclusion of the case:
1. 4.55 per thousand for Tax Courts.
2. 9.10 per thousand for Council of State decisions.

Refunds and Offsets

If the taxpayer prevails at the Regional Administrative Courts or the Council of State, proportional and lump-sum fees imposed by the final decisions of the Tax Courts are refundable within one year from the notification date of the final decision or can be offset against tax debts upon request. However, the initial application fee is non-refundable.

Full Remedy Lawsuits in Turkish Law

In Turkey, if a court deems an additional tax assessment resulting from a tax inspection to be unlawful, taxpayers can file a lawsuit to seek compensation for damages incurred. These lawsuits, known as full remedy lawsuits, are regulated under Article 2 of the Administrative Procedure Law No 2577.

Nature of Full Remedy Lawsuits:

• Purpose – full remedy lawsuits are filed against the administration by individuals whose personal rights have been violated due to administrative actions, seeking compensation for both material and moral damages suffered.
• Legal Basis – these lawsuits serve as the public law manifestation of private law compensation lawsuits, essentially functioning as typical compensation cases.

Filing Procedures:

• Time Limits – individuals must apply to the relevant administration within one year of learning about the administrative actions, or within five years from the date of the action, to request the fulfilment of their rights before filing a lawsuit.
• Precondition – it is necessary to make a claim to the administration before initiating a full judicial action against it.

Relation to Tax Disputes:

• Timing – taxpayers can file a full remedy lawsuit alongside or after an annulment lawsuit aimed at cancelling the additional tax imposed by the administration.
• Purpose – the purpose of the full remedy lawsuit is to compensate for damages resulting from administrative actions, including those related to tax assessments.

Taxpayers are not required to pay fees and expenses for participating in alternative dispute resolution (ADR) methods. However, should taxpayers opt to enlist the support of a lawyer or accountant to navigate these processes, additional costs may be incurred.

Justice statistics in Turkey, including those related to tax cases, are released annually by the General Directorate of Judicial Record and Statistics, operating under the Ministry of Justice. The most recent official statistics available are for the year 2022. According to this latest report, in 2022, there were a total of 168,530 tax cases, with 114,913 cases resolved and 53,617 cases still pending. Additionally, the report highlights that, on average, there were 462 cases per judge in 2022.

In 2022, lawsuits filed across various tax categories were as follows:

• Collection of public claims – 26,724.
• Value Added Tax (VAT) – 16,479.
• Tax penalty – 10,837.
• Income tax – 3,710.
• Corporation tax – 3,891.
• Stamp tax – 2,767.
• Charges – 2,736.
• Tax administration and settlement works – 509.

It is important to note that these figures only represent cases initiated within the specified year (2022), excluding any cases carried over from prior years.

The resolution of lawsuits in 2022 for different tax types was as follows:

• Collection of public claims – 23,621.
• Value Added Tax (VAT) – 16,261.
• Tax penalty – 10,463.
• Income tax – 6,108.
• Corporation tax – 3,467.
• Stamp tax – 2,760.
• Charges – 2,607.
• Tax administration and settlement works – 551.

There is no published data available for Turkey. However, our own statistics show that taxpayers do succeed in over 75% of the cases filed by our office.

Documentation and Compliance – maintain detailed records and ensure compliance with Turkish tax regulations to support your position in disputes.

Early Engagement with Authorities – initiate proactive communication with Turkish tax authorities to address issues promptly and prevent escalation.

Alternative Dispute Resolution (ADR) – explore reconciliation options before resorting to formal litigation, as ADR methods can offer quicker and confidential resolutions.

Compliance with Deadlines – adhere to statutory deadlines for appeals and responses to tax notices to preserve your rights and options.

Transfer Pricing Documentation – ensure transfer pricing documentation meets Turkish regulations and international standards, as discrepancies in transfer pricing often lead to disputes.

Tax Incentives and Exemptions – stay updated on available tax incentives and exemptions to mitigate the risk of disputes and optimise tax planning.

International Aspects – consider the implications of double taxation treaties in cross-border transactions, as they may offer relief and affect dispute resolution strategies.