One of the most important discussions occupying the agenda for almost two years, the issue of inflation adjustment has gained even more prominence following the recent Constitutional Court's decision.
Scope of Deferral Article
Provisional Article 33 added to TPL with Article 1 of Law no. 7352 dated 20/1/2022 stipulates that financial statements will not be subject to inflation adjustment, regardless of whether the conditions for inflation adjustment have been met for 2021, 2022 and 2023 accounting periods, including provisional tax periods.
Scope of Annulment Decision
In the lawsuit filed at the court of first instance, it was asserted that the expression "2021 ... including provisional tax periods" was contrary to Article 2 of the Constitution (principle of state of tax), and the dispute was submitted to the Constitutional Court by the court of first instance.
In consequence of its evaluation, the Constitutional Court found out that the necessity has arisen to subject the financial statements and balance sheets dated 31/12/2021 to inflation adjustment, and concluded as follows: "The amendment on the inflation adjustment that affects the income tax and corporate tax base after occurrence of the taxable event has led to retroaction of rules of law in a way that it does not comply with the principle of legal security. Accordingly, it is understood that the restriction imposed on proprietary rights does not meet the principle of legality, and also conflicts with the principle of tax legality." ( Official Gazette: 16/1/2024, E.2023/105, K.2023/208)
Who can benefit from the annulment decision?
Only taxpayers who has filed a relevant lawsuit can benefit from the annulment decision. Therefore, taxpayers who have no pending lawsuits regarding the issue are not within the scope of the annulment decision.
Can taxpayers who has filed a lawsuit apply for error correction?
A recent decision of the Council of State on the issue gave a negative answer, referring to the decision of the Board of Unification of Conflicting Judgements. The decision of the Council of State indicates that the unification of judgements will not retroact based on similarities in terms of outcomes, with the acceptance that transactions performed contrary to the decision in terms of tax assessments for the period before the decision are not tax errors, and the same applies for Constitutional Court decisions as per the decision no. E.1992/1, 1993/2 dated 10/06/1993 by the Board of Unification of Conflicting Judgements. (Decision of Council of State, Plenary Session of Tax Law Divisions, E.2023/2, K. 2023/4, OG: 22.07.2023)
New article of the law for the financial institutions
Following the annulment decision, unconstitutionality of the new amendment to the same article has become more important. With the amendment to the Provisional Article 33, dated 28 December 2023 it was accepted that banks, insurance companies, asset management companies, etc. -in short, institutions carrying out their activities in the financial sector- would be subject to inflation adjustment; however, the profit/loss differences arising from the inflation adjustments in 2024-2025 accounting periods would not be taken into consideration in the determination of earnings. The fact that taxpayers carrying out their activities in the financial sector cannot take profit/loss differences arising from inflation adjustments into consideration in the determination of earnings violates multiple principles in Article 73 of the Constitution.
Principle of equality in tax
According to Articles 10 and 73 of the Constitution, all taxpayers in the same legal situation should be subject to the same tax-related procedures. In terms of the outcomes for taxpayers in the financial sector, the law is far from providing justification criteria for the restriction it has imposed. Assuming the presence of justified reasons does not bring us to an objective and reasonable basis.
Taxation according to financial power
Although the main justification of the law was to fulfil the requirement of taxation by excluding the inflation effect, it resulted in not taking the adjusted accounts in tax calculation. In this respect, the fact that differences are not taken into consideration in the determination of earnings is also contrary to the Constitution in terms of the principles of "taxation according to financial power" and "fair and balanced distribution of tax burden".
How can Provisional Article 33 be taken to court?
The issue can be brought to the Constitutional Court's agenda directly through a lawsuit for annulment, or through an objection if the unconstitutionality objection is found serious in an ongoing dispute. In order to bring the issue to the Constitutional Court's agenda through an objection, taxpayers should file a lawsuit at the court of first instance with reservation and unconstitutionality objection within the relevant period, and the court should find the issue serious and submit the claim to the Constitutional Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.