Source: US Global Legal Monitor
(Jan. 14, 2020) On December 5, 2019, Turkey’s parliament passed Law No. 7194, which, among other things, introduced three new taxes. The Law, which was published in the Official Gazette on December 7, provides for a “digital services tax,” an “accommodations tax,” and a “valuable real estate tax.”
Digital Services Tax
This tax is assessed on gross revenue generated from “services provided in Turkey,” defined as
the provision of the service in Turkey, the use of the service in Turkey, the direction of the provided services to persons located in Turkey, and the valuation of the services in Turkey (wherein valuation in Turkey means the payment for the services rendered being made in Turkey, or if the payment is made abroad, the reflection of the payment in the accounts of the person making the payment or that of the person on whose behalf the payment is made in Turkey, or the detraction of the payment from the profits of these persons in Turkey). (Law No. 7194, art. 2(1)(ç).)
The Law excludes the provision of advertisements directed at persons outside of Turkey from the definition of a “taxable event.” (Art. 2(1)(ç), last sentence.)
The tax base is set as gross revenue generated from the following activities:
- “Provision of all kinds of advertisement services in the digital medium (including advertisement control and performance monitoring services, personal data transmission and management services, and technical services relating to advertisements)” (Art. 1(1)(a).)
- “The sale of all kinds of audio, visual, and digital content in the digital medium (including computer programs, applications, music, video, games, in-game applications, etc.) and provision of services aimed at listening, watching, [or] playing [such content on an electronic device] or storing or using [it] in an electronic device” (Art. 1(1)(b).)
- “The provision and management of digital mediums in which users can interact (including services enabling or facilitating the sale of goods and services between users)” (Art. 1(1)(c).)
Revenues generated by digital service providers from acting as mediators for the provision of the abovementioned services are also subject to the digital services tax. (Art. 1(2).) The Law provides for a tax rate of 7.5% on all listed revenues, and gives authority to the president of the republic to alter the tax rate for the listed services, individually or all together, within the range of 1% to 15%. (Art. 5(3), (5).)
Businesses whose gross revenue in Turkey is less than 20 million Turkish lira (TRY) (about US$3.35 million) or whose global gross revenue is less than 750 million euros (about US$837.6 million) are exempted from the digital services tax. (Art. 4(1).)
The Law also authorizes the Ministry of the Treasury and Finance to order the blocking of access to the digital services in question in case of nonpayment of the tax. (Art. 7(2).)
The Digital Services Tax will enter into force on March 1, 2020. (Art. 52(1)(a).)
Article 9 of the Law introduces a 2% tax on revenues generated from the provision of lodging services by hotels, motels, holiday resorts, boarding houses, apart hotels, guesthouses, camping sites, alpine chalets, and cabins. The tax also covers all services related to such lodging services, such as food, drinks, activities, entertainment services, and the use of pools, sports areas, thermal pools, and other areas on the premises. The service providers are liable for the tax. The Law authorizes the president of the republic to alter the tax rate within the range of 1% to 4%.
The Accommodations Tax will enter into force on April 1, 2020. (Art. 52(1)(b).)
Valuable Real Estate Tax
By amending articles 45 to 49 of the Real Estate Tax Law No. 1319, the Law No. 7194 introduces an annual “valuable real estate tax” on residential real estate that is valuated by the General Directorate of Land Registries at 5 million TRY (about US$837,000) and above. Taxpayers may challenge the valuations before the administration within 15 days of being notified (all administrative decisions are subject to judicial review according to article 125 of the Constitution of Turkey). The tax rate is determined in three tiers, depending on the valuation of the real estate, which also constitutes the tax base. The tiers are determined as follows:
|5,000,000 TRY to 7,500,000 TRY||0.3%|
|7,500,001 TRY to 10,000,000 TRY||0.6%|
|10,000,001 TRY and above||1.0%|
The liable party is the proprietor or, if applicable, the holder of usufruct rights. (Law No. 1319, art. 45(1).) Owners (or usufructuaries) of only one residential real property in Turkey who do not have any income other than that provided by social security institutions established by law are exempted from paying the tax on the real estate in question. (Art. 46(b).) Residential real estate owned by foreign states that are used for ambassadorial or consulatorial purposes and real estate allocated to the residence of ambassadors and their annexes are exempt from the tax on the basis of reciprocity, as is residential real estate belonging to international organizations and their representative offices. (Art. 46(c).) Residential real estate present in the inventories of construction companies that have not yet been sold and are not leased are also exempt from the tax. (Art. 46(ç).)
The Valuable Real Estate Tax entered into force with the Law’s publication in the Official Gazette on December 7, 2019.
Criticism of the Law
The Law and the new taxes it introduces were heavily criticized by the members of parliament (MPs) in the opposition. Among other things, they raised constitutional objections against the authority given to the president of the republic to change the tax rates for the digital services tax and the accommodations tax within the wide ranges provided, as well as the access-blocking authority given to Ministry of the Treasury to compel payment of the digital services tax. Some MPs criticized the digital services tax for being designed in an arbitrary way and without reference to the efforts made within the Organisation for Economic Co-operation and Development (OECD) and by the European Union (EU) in creating similar tax schemes. In particular, the rate of 7.5% was criticized as being too high by numerous MPs both at the commission level and in the plenary assembly debates. For comparison, a proposal for a digital advertising tax prepared by the Council of the European Union (which was ultimately not adopted) proposed a 3% tax on digital advertisement revenues of companies that report a revenue of at least 750 million euros worldwide, with at least 50 million euros (about US$55.7 million)generated within the EU.
Also criticized by opposition MPs was the governing party’s practice of preparing omnibus bills that contain major amendments or new rules that are not related to each other and thus getting the bill approved by only one parliamentary commission (in the case of this Law, the Planning and Budget Commission), even though the bill relates to matters that fall under the domains of several other commissions.
The Valuable Real Estate Tax has met with some popular consternation: it has been reported in the press that many tax payers have challenged the valuations made by the General Directorate of Land Registries on their properties, and President Erdogan is reported to have said that a postponement or reassessment of the tax may be considered, given that a larger than expected number of home owners have been found to be liable for the tax as it stands.
On January 9, 2020, the Republican People’s Party (CHP)—the main opposition party in the parliament—held a press conference announcing that it had petitioned the Constitutional Court of Turkey to invalidate all three of the new taxes and other tax-related provisions contained in Law No. 7194.