ABSTRACT
In the event of duration of works for construction and repair work that spread to the subsequent years of the start of the construction, such a work is called ‘a construction and repair work spread over years’. Such distinction is important in terms of the implementation of a special taxation system regulated in articles 42, 43, 44 of the Income Tax Law numbered 193 (“ITL”) for the taxation of construction and repair works spread over years1.
The “periodicity principle”, one of the principles adopted in Turkish tax system, exposes as taxation being made in each calendar year. Therefore, pursuant to another principle of tax law, the “source principle”, taxation on construction commitment works spread over years is made in the calendar year in which the completion date appears; as the assessment of profit and loss for such works is only possible on the completion date of works. This article examines the terms of taxation on construction works spread over years and taxation of progress payments.
1. INTRODUCTION
Goods and services produced on private and public areas are factors having a great impact on formation of income economy of the relevant country. Services produced in the private sector can be priced. However, the fact that goods and services produced in the public sector does not have a price in principle, creates a financing problem in the public sector2. Nowadays, the governments overcome this problem by imposing taxes over services that they provide in the public sector. On the other hand, various principles have been adopted in the Turkish tax system in order for taxations not to be made unreasonable and suddenly, by using untrammelled public force. Limitations of tax liability are determined by principles of clarity and definiteness, retrospectivity, legality, taxation by financial power, periodicity principle, source principle and other similar principles.
It is provided by periodicity principle to divide operation into certain periods and to determine operation results of each period independently from other periods. In this way, occurrence of tax debts which taxpayers cannot overcome and which are against equity is prevented, and the reliance on law is protected. There are various provisions generating from the periodicity principle in our tax legislation. For example, it is envisaged on article 174 of Tax Procedure Law numbered 3475 that books shall be kept by accounting period and that the accounting period constitutes normally a calendar year of one year.
Taxation period, accepted as a “calendar year”, has been stretched for the construction and repair works spread over years. This stretching is a result of the “source principle” which is also a taxation principle. Pursuant to the source principle, all transactions and economic activities realized within the country are taxed under Turkish tax laws3. However for the construction and repair works spread over years, expenses and return will not fully be determined before the work is completed. For the taxation of such kind of construction works, all or a certain part of the construction work shall be completed, since the economic activity to be subject to the source principle will not occur before the completion.
2. GENERAL RULE FOR TAXATION OF CONSTRUCTION AND REPAIR WORKS SPREAD OVER YEARS
In the event that a construction and repair work is spread to next calendar year, such a work will be identified as a construction work spread over years. For instance, a construction that starts in November 2015 and ends in February 2016, will be considered as a construction work spread over years even though it only takes 4 (four) months, since the work is spread over more than one calendar year. Therefore, a construction work beginning in January 2016 and ending in December 2016, cannot be considered as a work spread over years even though it takes nearly 12 (twelve) months because of the fact that the starting and completion dates of the work take place in the same calendar year.
Since the profit and loss of construction works spread over years cannot be fully determined at the end of the calendar year, such works cannot be taxed before the completion of the work. Thus, the income determined at the completion of the work will be considered as an income of the year the work is completed and will be included in tax base of that year. Taxation of such kind of works is regulated on article 42 of the ITL within the scope of our legislation. The relevant article envisages that the profit and loss of a construction and repair work spread to more than one calendar year shall be determined definitely at the year the work is completed and it shall be deemed as the income of such year and included in the tax declaration of that year. Hence, it is required that there shall be a construction work spread over years in order to impose taxes pursuant to the aforementioned article.
3. REQUIREMENTS FOR CONTSTRUCTION AND REPAIR WORKS SPREAD OVER YEARS
In order to consider work as a construction and repair work spread over years, there are certain requirements which have been adopted in the doctrine and the practice. According to the doctrine and practice, in order for a work to be considered as ‘spread over years’ the work should be (i) a construction/building and repair work, (ii) a commitment work and (iii) spread over more than one year.
The first condition for a “Construction and repair work”, to be considered as a construction and repair work spread over years, it is necessary not to confine construction solely as construction of buildings. Construction works included are considered as a construction in the most general terms within the scope of “work contract” according to the law of obligations general terms4. Secondly, it is not expressed by the letter of the law, that the construction and repair work should be a commitment work; pursuant to the advance rulings published by the Ministry of Finance on such issue, only the contractors shall be included within such scope. Within this context, the persons doing construction work on their own behalf will not be subject to article 42 of the ITL. Lastly, the construction and repair work shall be spread over years. With respect to the construction and repair work being spread to more than one year, each construction work spread from a calendar year to the next calendar year will be subject to article 42 of the ITL without considering the amount of months spend for completing the work.
4. TEMPORARY ADMISSION AND PROGRESS PAYMENTS
Determination of work’s completion date for construction and repair works spread over years is important for the determination of the calendar year in which the taxation will take place. Within the scope of the legislation, two procedures are envisaged concerning the work’s completion; temporary and final admission. The procedures of temporary and final admission are implemented on construction and repair works tendered in public part subject to Public Procurement Law numbered 4734, General Specifications for the Construction Works and General Specifications for the Service Works. For the works that are not subject to such procedure, the parties could determine another procedure as they could choose the procedures of temporary and final admission5.
The first paragraph of article 44 of the ITL envisages that, (i) for the works that are subject to the procedure of temporary and final admission, the date of approval by the administration of the report indicating the temporary admission; (ii) for other situations, the date of de facto completion or the date of de facto abandonment shall be deemed as the completion date of such construction and repair work. Hence the taxation on the works that the procedure of temporary admission is applied shall be made on the administration’s approval date of such temporary admission. The statement “the date of issuance of the report indicating the temporary admission” of the previous text of the law, has been changed afterwards to “the date of approval of the report”. For the works that the procedures of temporary and final admission are not implemented on; a Court of Accounts’ General Assembly Resolution6, envisages that the completion date of the work shall be the date of de facto abandonment rather than the date specified in the contract7.
General rule is that the taxation in construction works spread over years is made in the year when the work is completed. Nevertheless; progress payments have an importance in terms of taxation. In the first paragraph of article 15 of Corporate Tax Law numbered 5520 (“CTL”) progress payments made in the construction works spread over years are included in the deductions to be made on corporate tax.
The second paragraph of article 44 of CTL explains whether the expenses and revenue subsequent to the temporary admission can be deducted retrospectively after the progress payments. Pursuant to that, the expenses made regarding such works and regardless of the name under which the revenue obtained shall be taken into consideration for the determination of profit or loss of the year that such expenses are made or revenue is obtained, after the completion date of the construction works. Accordingly, expenses and revenue occurred subsequent to the temporary admission cannot be deducted retrospectively; such expenses and revenue shall be taxed in the calendar year in which they occur.
5. CONTRACTOR’S PROGRESS PAYMENTS AND TEMPORARY ADMISSION
The contractor may agree with sub-contractors for the performance of the works requiring expertise, independently from the contract between the administration and the contractor. The sub-paragraph (a) of the first paragraph of article 15 of the CTL envisages that the taxation will be made on progress payments regarding the works of the institutions doing construction and repair works spread over more than one year according to the rules determined under the ITL. In the same way, in the third sub-paragraph of first paragraph of article 94 of the ITL, it is envisaged that the tax deduction will be made on the progress payments paid to the persons doing such works, with regard to construction and repair works spread over more than one calendar year. Thus, in the event that theconstruction and repair works spread over the years are done by sub-contractors, the taxation shall be made on progress payments of the sub-contractor pursuant to the ITL’s provisions8.
On the advance ruling published by Diyarbakır Tax Office on May 20th, 20139 it is stated that in the event that the contractors undertaking the works included within the scope of article 42 of the ITL makes such a work completed by sub-contractors wholly or partially; the situation of such sub-contractors against article 42 of the ITL shall be determined by whether the part committed by the sub-contractor (i) is within the scope of works of construction and repair by nature and (ii) spreads over years in terms of time. Pursuant to the aforementioned advance ruling, to the extent the work done by sub-contractors can be qualified as a construction and repair works; in other words if such work satisfies the conditions of (i) being a construction/building and repair work, (ii) being a commitment work and (iii) being spread over more than one year, the progress payments of the sub-contractor shall be taxed in the calendar year in which the temporary admission is confirmed by the administration or the work is completed pursuant to article 42 of the ITL.
6. CONCLUSION
In the Turkish tax law, the rule is that the income will be taxed in the year that it is obtained, in respect to corporate tax and income tax, while the construction works spread over years are envisaged to be taxed in the calendar year when the work is completed. On the other hand, for the construction works spread over years, the progress payments made before the work is completed will be taxed in the calendar year where the relevant progress payment is made. In the event that all or a certain parts of the work is done by the sub-contractor whether the taxation of sub-contractor’s income will be subject to the same procedure as the contractor will depend on the nature of the work done by the sub-contractor.
BIBLIOGRAPHY
İnan, Atilla. “Yıllara Yaygın Yapım ve Onarım İşlerinde Vergilendirme”, Sayıştay Dergisi, January-March (2006). accessed on 28.08.2015, http://dergi.sayistay.gov.tr/ icerik/der60m3.pdf.
Karakoç, Yusuf. Genel Vergi Hukuku. (Ankara: Yetkin, 2007)
Eşsiz, Bedri. Basel II Düzenlemeleri Çerçevesinde İnşaat Taahhüt Sektöründe Faaliyet Gösteren Şirketlerin Kredi Değerliliğinin Ölçülmesi. (Ankara, 2010)
FOOTNOTE
1 Bedri Eşsiz, Basel II Düzenlemeleri Çerçevesinde İnşaat Taahhüt Sektöründe Faaliyet Gösteren Şirketlerin Kredi Değerliliğinin Ölçülmesi, (Ankara, 2010), 58.
2 Yusuf Karakoç, Genel Vergi Hukuku, (Ankara: Yetkin, 2007), 55.
3 Yusuf Karakoç, Genel Vergi Hukuku, (Ankara: Yetkin, 2007), 114.
4 Atilla İnan, “Yıllara Yaygın Yapım ve Onarım İşlerinde Vergilendirme”, January-March 2006, Sayıştay Dergisi, 60.
5 Revenue Administration of Republic of Turkey, the advance ruling numbered B.07.1.GİB.4.01.16.01- 2010-3161-KV-71
6 Court of Accounts’ General Assembly Resolution dated 02.06.1966 and numbered 3122/5
7 Atilla İnan, “Yıllara Yaygın Yapım ve Onarım İşlerinde Vergilendirme”, January-March 2006, Sayıştay Dergisi, 60.
8 Revenue Administration of Republic of Turkey, the advance ruling numbered B.07.1.GİB.4.67.15.01-2010- GVK-94-KVK-15-15
9 Revenue Administration of Republic of Turkey, the advance ruling numbered 71387770-120[42-2013/78]-21
