Advance Tax Ruling for ambiguous tax matters
Diyadin Yakut*Similar to many jurisdictions across the world, specifically OECD members, the tax system in Turkey has an administrative mechanism — namely advance tax ruling — with which taxpayers (both real persons and legal entities) endeavor to alleviate the threat of sanctions concerning ambiguous tax matters and legal loopholes that emerge, despite the presence of elaborate explanations in tax laws and related secondary legislation.
As an indispensable element of secondary tax legislation, an advance tax ruling is, by definition, a written statement issued by the relevant public authority upon the request of an individual person or legal entity, offering binding clarification on how a certain provision of a tax law applies to a pre-determined business transaction of the applicant taxpayer.
The concept of advance tax ruling was incorporated into the Turkish tax system for the first time with the codification of the Turkish Tax Procedural Law (TTPL) in 1961. This mechanism provides taxpayers with the opportunity to strike some sort of agreement with the tax authority with respect to tax implications of certain business transactions, which would otherwise remain precarious tax-wise and pose a threat to the wellbeing of the relevant business entity.
For the last five decades or so, the advance tax ruling mechanism has been extensively employed by both tax authorities and taxpayers alike to clarify uncertain and ambiguous tax problems and loopholes and resolve future disputes likely to arise well before the concerned business transaction takes place.
The principle aspects of the advance tax ruling mechanism and concerned public bodies vested with authority to execute the mechanism’s implementation are laid down in Article 413 of Law No. 213 in the TTPL. This particular article has gone through a number of amendments since its enactment and took its final form in 2010, after being substantially altered by Article 15 of Law No. 6009.
The Finance Ministry is authorized by the current provisions of Article 413 to issue a public act to regulate the day-to-day implementation of the advance tax ruling mechanism.
The Public Act drafted and issued by the Finance Ministry went into effect after its promulgation in the Official Gazette on Aug. 28, 2010. The mechanism through which ambiguous tax matters are clarified either by an advance ruling or a circular is dealt with elaborately in this public act in the following manner.
Competent authorities, scope and binding effect of advance tax ruling
Conventionally, an advance tax ruling request may include any ambiguous tax matter emanating from vague clauses of tax laws, multiple interpretations of tax laws, or novel forms of business transactions regardless of the scope and scale of transaction and the status of the taxpayer (full or limited tax liability).
Although the ultimate authority to issue advance tax rulings rests solely with the central commission chaired by the President of the Directorate of Tax Administration (RA), initial written applications for advance tax rulings are filed to the provincial branches of the RA with which the applicant taxpayer has its permanent tax liability or to provincial branches of the Finance Ministry when there are no provincial branches of the RA.
In the case of no errors with the application, the local authorities draft an advance tax ruling addressing the ambiguous tax matter that the individual taxpayer states in the petition, unless there is an advance tax ruling previously drafted and ratified for an identical tax matter. The draft advance tax ruling is sent to the presidency of the RA in Ankara to be examined and ultimately rejected or ratified by the commission.
After being approved by the commission, the advance tax ruling is sent back to the provincial branch, signed, and delivered to the taxpayer. As the last step in the process, the local authority adds the advance tax ruling to the web-based advance tax ruling pool in the Advance Tax Ruling Automation System. This pool contains previously drafted and ratified rulings that constitute a precedent for subsequent advance tax ruling requests.
Provincial branches can issue an advance tax ruling without getting the approval of the commission in Ankara as long as there is a similar advance tax ruling in the advance tax ruling pool.
Once an advance tax ruling is properly issued and forwarded to the taxpayer, it gains legal force and becomes binding to both tax authorities and tax auditors, as well as the applicant taxpayer, thus providing the tax ruling-receiving taxpayer with a legal protection amounting to full immunity from tax penalties that would otherwise arise as a result of execution of the specific business transaction cited in the ruling.
On the other hand, the commission has the authority to issue circulars to address ambiguous tax matters for all taxpayers in the country if there is more than one explanation request regarding an identical matter.
* Diyadin Yakut is a tax inspector at Turkey’s Ministry of Finance.