International trade is an indivisible part of businesses in this century. One of the risks of the cross-border trade is that a creditor must still pay the relevant amount of Value Added Tax (hereafter ‘VAT’) to the tax office even if the debtor did not pay the sum to the creditor. In international trade, usually, the volume of a business transaction can be higher than the value of a domestic transaction. Therefore, payable tax amounts are relatively higher than domestic transactions. As a result, the businesses need to claim VAT refund to keep their loss at the minimum for each transaction.
This article aims to provide key points of doubtful debts which arise from cross-border commercial transactions according to the Turkish Law. The term ‘doubtful debt’ has been preferred in this article instead of ‘bad debt’ since bad debt points the debt which is certainly cannot be recoverable where there is still a possibility to recover the debt if it is a doubtful debt.
The Term of Doubtful Debt in Turkish Law
The Turkish tax system assumes the debt as it was received when it was created as opposed to when it was collected from the other party. Therefore, the tax office becomes entitled to charge VAT when the debt was created, in other words, when an invoice is issued. Due to this reason, creditors may end up paying VAT out of what they have not received and may not to be able to receive the debt amount at all. However, the Tax Procedure Law, Law No. 213 (hereafter “the Law”) prevents this unjust position by relieving creditors of VAT arising from doubtful debts (or unpaid receivables).
Article 323 of the Law regulates doubtful debts. The article states as follows;
Providing that in relation to gaining and maintaining commercial and agricultural earnings;
1. Debts which are at the stage of a court case or enforcement;
2. Small debts that do not worth pursuing at the court or via enforcement and that were not paid by the debtor despite it was protested or requested in writing more than once;
Are deemed as doubtful debts.
For the doubtful debts written above, the equivalent amount in passive shall be set aside pursuant to the saving value of the evaluation date.
It shall be displayed on the reserve accounts that which debts the equivalent amounts refer to. For secured debts, this equivalent amount refers to the remaining amount of the secured debt.
Subsequently recovered amounts of doubtful debts shall be written to the profit loss account of the period when they were recovered.
Provisions of Entitlement to Claim of Doubtful Debts
a. The doubtful debt must be related to gaining and maintaining commercial or agricultural earnings: Doubtful debts must be initially recorded as earnings to the creditors’ accounting books.
b. Keeping the records in compliance with the balance sheet account: As it says as follows ‘’ … For the doubtful debts written above, the equivalent amount in passive pursuant to the saving value of the evaluation date shall be set aside. … ‘’, only taxpayers who keep their records pursuant to balance sheet accounts may benefit from doubtful debt reliefs.
c. The debt shall not be secured debt: The Law makes it clear that secured debts are exempt from doubtful debt relief.
d. The debt must become doubtful pursuant to Article 323 of the Law: The Law lists the circumstances when the debt would be considered as doubtful debt. Accordingly, debts which are at the stage of a court case or enforcement or small debts that do not worth pursuing at the court or via enforcement and that were not paid by the debtor despite it was protested or requested in writing more than once would be deemed as doubtful debts. The Revenue of Administration of the Turkish Ministry of Finance (hereafter the “Revenue of Administration”) clarified the meaning of “small debts that do not worth pursuing at the court or via enforcement and those were not paid by the debtor despite it was protested or requested in writing more than once” in its ruling dated 09/10/2012. Accordingly, for a debt to be deemed as the small debt as specified above, the amount of debt must be higher than the sum of approximate court fees, notary public fees, lawyer fees and postal costs collectively. In such a case, it is possible to set aside an equivalent amount of doubtful debt (Ruling No: B.07.1.GİB.4.34.16.01-KVK 8-2868).
The Equivalent Amount Must be Set Aside within the Year that the Debt Became a Doubtful Debt
The Council of State of Turkey stated in one of its decisions that the creditor is entitled to set aside the equivalent amount of doubtful debt within the same year that the debt became a doubtful debt and the creditor would not be entitled to set aside the equivalent amount in a different year than the year that the debt became a doubtful debt. According to the Law, it is the creditors’ discretion to set aside the equivalent amount.
On the other hand, in its decision dated eight years later than the decision given above, 4. Tax Law Chamber of the Council of State stated that the Law does not specify a certain year for the doubtful debts to be set aside, and therefore, equivalent amounts could be set aside in any year that the creditor would prefer.
Revenue of Administration’s Circulars and Rulings About Doubtful Debts Arising from Cross-Border Transactions
The Revenue of Administration published many circulars and rulings regarding the doubtful debts originating from cross-border transactions. In this article, some of these documents will be shortly touched upon below.
Corporation Tax General Circular Serial No. 50: It was stated that the equivalent amount of the doubtful debt could not be set aside for secured debts unless otherwise specified in the Law and other laws.
Ruling No: B.07.1.GİB..0.02.29/2978-323-243: In this ruling, the Revenue of Administration clarified that it does not matter for the creditor to set aside the equivalent amount of doubtful debt whether the debt is originating from Turkey or abroad. Therefore, the creditor can set aside the equivalent amount of the doubtful debt arising from a foreign country. The creditor can also set aside the equivalent amount of the currency difference that is subject to the principal debt.
Ruling No: B.07.1.GİB.4.34.19.02-019.01-548: In case of an insolvency, it is not possible to pursue an individual enforcement method of debt collection in a foreign country where the debtor is located. As insolvency is a way of enforcement and the aim is to recover the debt, it would be deemed that the creditor proceeded to the enforcement stage for the debts that are registered to the estate of the insolvent debtor. Taxpayers can set aside the equivalent amount of doubtful debt if the debtor becomes insolvent. However, the equivalent amount must be set aside in the same accounting period that the doubtful debt is registered on the insolvent debtor’s estate, in other words, that it has proceeded to the enforcement stage. The Revenue of Administration stated in its ruling that the creditor was not eligible to set aside the equivalent amount of the doubtful debt as it was not sufficient to merely provide the document which lists all creditors including the creditor and which was presented to the court in abroad. However, it would be acceptable if the creditor proved that the debtor is owed money to the creditor by providing a valid document which shows that the said debt was registered on the estate of the insolvent debtor’s estate. In other words, this document must show that the debtor was insolvent and the debtor is owed to the creditor.
Ruling No: B.07.1.GİB.4.34.19.02-105[322-2012/VUK-1- . . .]-2702: In this ruling, the creditor stated that they were not able to make an application at the court of the registered country of the debtor and seeking doubtful debt relief. The Revenue of Administration did not change its precedent and repeated its previous rulings stating that the creditor must present valid and acceptable document(s) showing that the debtor is insolvent and the creditor is one of the creditors of the insolvent debtor.
Ruling No: 77058783-105-110: The Revenue of Administration stated that it would be sufficient to present the document(s) that show(s) filing a claim at the court or commencing an enforcement action against the debtor who is located in abroad in compliance with the said country’s laws in order to set aside the equivalent amount of the doubtful debt.
Ruling No: 67854564-105-E.11117: In this ruling, the Revenue of Administration stated that the court in Germany was awaiting an expert report regarding the debtor’s status of insolvency. Therefore, it was not certain at the time whether the debtor was insolvent or not. Based on these facts, it is not determinable whether the debtor was insolvent. The Revenue of Administration repeated its previous rulings stating that the creditor would need to commence the enforcement action in the said country to recover the debt or register the debt to the estate of the insolvent debtor in order to be able to set aside the equivalent amount of the doubtful debt.
Doubtful debt relief is a technical procedure that requires legal support. Nevertheless, it offers an opportunity for the businesses registered in Turkey to reduce their loss when they are not likely to recover their receivables. The Turkish businesses who export their goods and services abroad can also well benefit from this relief if they have reasonable grounds which were summarised above.
Taking the practices, rulings and circulars of the Revenue of Administration into consideration, it can be seen that the key points of being entitled to the doubtful debt relief is that creditors must genuinely follow up their legal disputes in abroad to recover the debt, make required applications to the courts and authorities in these countries to prove that they are the creditors of the said debtors in the eyes of these authorities as well. Therefore, professional legal advice needs to be obtained in those countries where the creditors are pursuing their rights.
Berkay Özdoğu, LL.M.
Attorney at Law – Avukat
OZ Legal signature
Tel : +44 (0) 1227 238968
Addr : 1 Knight Ave, Canterbury, Kent
CT2 8PZ, United Kingdom