Turkey: New taxes on the table

October 26, 2017

On September 27, Turkish Finance Minister Naci Ağbal announced a comprehensive package including tax increases in a meeting held for the medium-term programme of 2018-2020. Draft legislation including the tax issues that have already been sent to the Turkish Grand National Assembly for the enactment process.

One of the notable changes includes increasing the corporate tax rate on companies operating in the field of financial services (e.g. commercial banks, insurance companies). Accordingly, corporate income taxes of such companies will increase from 20% to 22%. However, no changes will be applicable for other corporate income taxpayers.

Another important amendment is that a 1% withholding tax will be applicable on the retained earnings of corporate taxpayers. Thus, a 1% withholding tax will be payable even if the retained earnings are not allocated by corporate taxpayers.

Currently, an exemption of 75% is applicable for the disposal of company assets if they are held by the corporate taxpayers for more than two years. In the draft law, it is expected that the rate of the tax exemption will be decreased from 75% to 50% in case the companies dispose of their estates that are retained for more than two years.

Turkish individual income tax rates are based on a progressive tax schedule. Through the draft legislation, tax rates for the third tax bracket of the income tax schedule (including wages) will be increased from 27% to 30%. This clearly indicates that the tax burden of individual income taxpayers will be higher in 2017 as the amendments in the Individual Income Tax Law will be retroactively applicable from January 1 2017. However, this change will be applied for wages as of January 1 2018.

A considerable increase is expected for the motor vehicles tax. Within the framework of tax overhaul, the motor vehicle tax for passenger cars would be increased by 40%. However, due to public reaction to this increase, we expect increase in the motor vehicles tax will be lesser than 40%.

Besides, as of January 1 2018, a new motor vehicle tax variable will be introduced to the tax calculation. The value of newly purchased passenger cars will be determinative as the motor vehicle tax is computed. There will be an increase from 10% to 20% in the taxable amount as the car's value falls.

The draft legislation also contains a VAT new mechanism for the electronic services provided to individual buyers in Turkey by non-resident taxpayers. Under the current legislation, VAT registration is not permitted without a corporate income tax registration. However, new legislation allows non-resident taxpayers providing electronic services to Turkish individual residents register only for VAT purposes. Such service providers will be responsible to collect and pay VAT on their electronic services, accordingly.

Some of the other expected tax provisions also include:

Withholding tax rate over lottery winnings will be increased from 10% to 20%; and
A special consumption tax for rolling papers used by tobacco production will be applied.

As a final remark, it is obvious that new taxes are on the table for Turkish corporate and individual taxpayers.