VAT, VAT Reform

“English Model VAT System” says Minister Ağbal

News on July 6 says that Minister of Finance Naci Ağbal states the new VAT Law will be similar to the English VAT system.

What is current VAT system in Turkey ?

In general, current VAT system in Turkey allows taxpayers to deduct the input VAT paid on purchases from the calculated VAT on sales. When the difference of this offset is positive, the difference is paid to the tax office. However, when the difference is negative, tax office does not refund the negative balance but this balance is carried forward to be offset in the future.

The negative difference can only be refunded if the output VAT of the company is limited by VAT legislation. For example, if sales of the company is;

  • VAT exempt (exemption with deduction right) or,
  • Sales of the company is subject to VAT withholding (which limits the VAT collection) or,
  • Sales of the company is subject to reduced rate VAT.

And this refund is always limited with this VAT collection shortage on the output VAT side. Which means VAT refund only returns the company to a position like it collected full VAT (only after completing refund procedural applications).

However, in cases a company is in the investment period (i.e. purchases fixed assets, inventory more than its sales), or the company experiences loss for a time period, it is not possible to refund the carried forward VAT occurred for these reasons.

What is expected to be ?

The main purpose of the said English VAT system is expected to resolve this VAT refund problems of companies and return the company to its VAT natural position in all cases.

However, at this stage, it is not certain whether VAT group or other simplifications defined in English or EU VAT systems be applicable in Turkey or not.

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