Understanding Value Added Tax (VAT) in Turkey

What is VAT?

Value Added Tax (VAT) is a broadly based indirect consumption tax levied on goods and services. While the legal responsibility for filing and paying the tax lies with businesses, the actual economic burden is borne by the final consumer. VAT is designed to be “tax-neutral” for businesses, as it is collected and offset at each stage of production and distribution.

Scope of VAT in Turkey

In accordance with Turkish Tax Law, VAT applies to:

• All commercial, industrial, agricultural, and professional activities.
• Importation of goods and services into Turkey.
• Deliveries of goods and services resulting from other specific activities.

How the VAT Mechanism Works

The Turkish VAT system operates on an “Input-Output” offset principle. Businesses collect VAT on their sales (Output VAT) and pay VAT on their purchases (Input VAT). The difference is either paid to the tax office or carried forward.

Practical Example: How VAT is Calculated

To better understand the flow of VAT, let’s look at a typical commercial transaction using the standard 20% VAT rate:

Phase 1: The Purchase (Input VAT)

A company purchases a product for its inventory.

• Purchase Price: 100.00 TRY
• VAT Paid (20%): 20.00 TRY (Input VAT)
• Total Amount Paid: 120.00 TRY

Phase 2: The Sale (Output VAT)

The company sells the same product to a customer with a profit margin.

• Selling Price: 150.00 TRY
• VAT Collected (20%): 30.00 TRY (Output VAT)
• Total Received from Customer: 180.00 TRY

Phase 3: Settlement with the Tax Office

The company must calculate the net VAT payable by subtracting the Input VAT from the Output VAT.

• Output VAT (Collected): 30.00 TRY
• Input VAT (Paid): 20.00 TRY
• Net VAT Payable: 10.00 TRY (To be paid to the Tax Office)

What if Input VAT is higher? (VAT Carryforward)

If the company’s purchases are higher than its sales in a given month:

• Example: Input VAT: 30.00 TRY / Output VAT: 20.00 TRY.
• Result: The 10.00 TRY difference is not refunded in cash; instead, it is carried forward as a credit to the following month to be offset against future sales.

SCOPE AND  VAT RATES IN TURKEY

VAT Rates and Exemptions in Turkey

The Turkish VAT system applies different rates depending on the type of goods and services provided. Understanding these rates and the nature of exemptions is crucial for accurate financial planning and compliance.

1. VAT Rates

• Standard Rate (20%): This rate applies to all goods and services that are not specifically subject to a reduced rate or an exemption.
• Reduced Rate (10%): Applicable to specific sectors and products, including:
  • Foodstuffs (processed) and catering services (restaurants/cafes).
  • Textile products, clothing, and leather goods.
  • Overnight accommodation services (hotels, motels, pensions).
  • Medical products and certain pharmaceutical supplies.
• Reduced Rate (1%): Reserved for basic necessities and strategic products, such as:
  • Basic food staples (bread, flour, etc.).
  • Agricultural products (raw seeds, grains).
  • Residential properties (up to specific square meter thresholds).
  • Newspapers and magazines.

2. VAT Exemptions

Turkish VAT Law classifies exemptions into two main categories based on whether they allow the deduction of input VAT.

• Exemptions with Credit (Full Exemption):
  These transactions are effectively “zero-rated,” allowing the business to deduct the VAT paid on related purchases. Key examples include:
  • Export of Goods and Services: Deliveries to customers outside of Turkey.
  • International Transportation: Cross-border logistics and transport services.
  • Investment Support: Delivery of machinery and equipment to VAT taxpayers with investment incentive certificates.
  • Harbor and Airport Services: Services rendered for vessels and aircraft at ports and airports.
  • Roaming Services: Provided in Turkey for non-resident customers.
• Exemptions without Credit (Partial Exemption):
  In these cases, VAT is not charged on the sale, but the business cannot deduct the input VAT related to these transactions. Instead, the input VAT is treated as an expense. Key examples include:
  • Public and Cultural Deliveries: Activities performed by the government or cultural, educational, and health organizations for public benefit.
  • Financial Transactions: Banking and insurance transactions (as they are subject to BITT).
  • Free Trade Zone Services: Certain services provided exclusively within Free Trade Zones.

VAT Compliance: Returns, Settlement, and Refunds in Turkey

Navigating VAT compliance is a critical aspect of financial management in Turkey. At Atlas Global Audit & Accounting, we ensure that your VAT processes are managed accurately, timely, and in full accordance with the Turkish Tax Procedures Law.

1. VAT Return Procedures and Deadlines

• Taxation Period: The standard taxation period for VAT in Turkey is one month.
• Filing and Payment: VAT returns must be filed electronically through the Ministry of Treasury and Finance’s portal. Both the filing and the payment must be completed by the 28th day of the month following the end of the related taxation period.
• Mandatory Filing: Businesses are required to file a VAT return every month, even if no taxable transactions (deliveries or services) occurred during that period.
• Import VAT: VAT on imported goods is typically declared and paid via the Customs Entry Declaration. If this is not applicable, it must be reported through a specific VAT return.

2. How VAT is Settled (The Offset Mechanism)

The Turkish VAT system operates on an “Input-Output” offset principle:

1. Output VAT: Calculated by applying the appropriate rate to the taxable amount of goods and services supplied by the business.
2. Input VAT: VAT paid by the business on its own purchases and importations.
3. Settlement: Monthly, the business deducts the Input VAT (recorded from invoices and customs documents) from the Output VAT (collected from customers).
   • If Output VAT > Input VAT: The difference is paid to the Tax Office.
   • If Input VAT > Output VAT: The difference is carried forward to the next taxation period as a credit.

3. VAT Refunds in Turkey

As a general rule, excess Input VAT is not refunded in cash but is carried forward to be offset against future tax liabilities. However, VAT Refunds are possible for specific transactions defined by law, including:

• Full Exemptions: Transactions with refund rights, such as the export of goods and services or international transportation.
• Reduced Rate Transactions: Deliveries subject to 1% or 10% VAT where the input VAT exceeds the output VAT.
• Partial Reverse Charge: Specific services where the VAT is partially withheld by the buyer.
• International Agreements: Transactions specified under diplomatic or international treaties.
• Correction of Overpayments: Recovery of excess or unnecessary tax payments.