Inflation Differential, Active Persistence – Determination Of Net Institutional Income
Republic of Turkey
Council of State
4th Chamber
Case No.: 2013/1150
Decision No.: 2013/9562
Date: 9.12.2013
Summary: When the tax base is calculated based on the profitability ratio for the construction and contracting sector, the amount reached reflects the taxable income of the business, and it must be accepted that all expenses incurred during the execution of the work are taken into account in this manner.
Appellant: … Tax Office Directorate
Opposing Party: … Forestry, Electricity, Construction, Contracting Industry, Trade
Limited Company
Summary of Request: Based on the tax audit report containing findings that the cost of the work completed in 2004 by undertaking contracts with official institutions could not be determined due to invoices that did not reflect the actual amounts recorded in the books, the plaintiff company filed a lawsuit requesting the cancellation of the corporate tax levied ex officio for 2004 and the tax penalty imposed on the basis of the tax base determined by accepting 20% of the earned amounts as net income. In accordance with the Council of State’s reversal decision, the Sivas Tax Court’s decision dated 10/18/2012 and numbered E:2012/348, K:2012/339 ruled that the 20% net profit margin accepted for construction contracting work could be accepted in a non-inflationary environment and when operating with equity capital, Since it was determined that some of the plaintiff company’s expense documents were misleading in terms of their content, the tax base should be calculated by applying a 20% net profit margin based on the declared income for 2004, taking into account the inflation difference expenses and financing expenses that were declared and not criticized by the audit staff. Accordingly, the Courts ruled that there was no legal violation in the tax levied on the base reached as a result of including these expenses in the calculation and in the penalty imposed, and therefore dismissed the relevant part of the case, while canceling the additional assessment and penalty. The Defendant Administration argues that taking into account the inflation difference expenses and financing expenses declared by the plaintiff in the relevant year in determining the tax base is contrary to the established case law of the Council of State and requests that the part of the decision accepting the appeal be overturned.
Summary of Defense: No defense was submitted.
Opinion of Reviewing Judge Melek Karalı Saunders: Since the issues raised in the appeal petition are not of a nature that would justify overturning the court decision subject to appeal, it is considered that the appeal should be dismissed.
IN THE NAME OF THE TURKISH NATION
The Fourth Chamber of the Council of State, having deliberated on the matter, ruled as follows:
The part of the Tax Court’s decision partially accepting and partially rejecting the lawsuit filed by the plaintiff company, which was accused of documenting some of its purchases with false invoices in 2004, requesting the cancellation of the corporate tax imposed ex officio and the tax penalty imposed, has been appealed.
Article 13 of the Corporate Tax Law No. 5422 stipulates that corporate tax shall be calculated on the net corporate income earned by the taxpayers listed in Article 1 during an accounting period, and that the provisions of the Income Tax Law regarding commercial income shall apply in determining net corporate income. Article 2 of Income Tax Law No. 193 also stipulates the principle that actual income shall be taxed.
In the case file under review, it was determined that the plaintiff company’s entire activity during the period of dispute consisted of work performed under contract for the Provincial Directorate of Environment and Forestry and the Rural Services Union. According to the income statement attached to the 2004 corporate tax return, the company’s net sales were TL 81,173.79, and in the same year, it recorded and declared … Machinery, … Petroleum, … Construction Materials, … Consultancy, … Petroleum Products Limited Companies, were excluded from the expense records because they did not reflect the truth, and in accordance with the established decisions of the Council of State, since the actual expenses and costs could not be determined, 20% of the revenue obtained from construction and contracting works was accepted as net profit, and therefore, 20% of the declared net sales amount , resulting in a corporate tax amount of 1,638.96 TL to be paid after deducting the 3,718.50 TL tax paid in the previous period through withholding. In the decision rendered in accordance with the Council of State’s reversal decision, the Tax Court, based on the net profit calculated by the examination officer, determined the tax base to be 16, 324.75 TL net profit, as well as the 1,848.52 TL inflation difference expense declared by the plaintiff and not subject to criticism and the 3,838.31 TL financing expense, and that it was decided to cancel the assessment and the penalty imposed in excess of this amount.
In the case at hand, where the actual cost of the work completed by the plaintiff under a commitment to a public institution could not be fully and accurately determined due to the falsity of the invoices reflecting this cost in the records, it is mandatory to determine the tax base for the period by accepting that 20% of the sales revenue consisting of the plaintiff’s entitlements constitutes net profit, in accordance with established Council of State case law. it is necessary to accept that all expenses incurred by the plaintiff during the performance of the work are taken into account, as required by the definition of net profit. Therefore, when the tax base is calculated using the aforementioned method, it is not possible to include the expenses declared by the plaintiff in the calculations for determining the tax base.
Accordingly, the Tax Court’s decision to remove the excess portion of the tax and penalty corresponding to the tax base calculated by taking into account the plaintiff’s inflation difference and financing expenses is not in accordance with the law.
For the reasons explained, it was decided by majority vote on 09.12.2013 to accept the appeal and to overturn the part of the Sivas Tax Court’s decision dated 18/10/2012 and numbered E:2012/348, K:2012/339 that accepted the appeal.
DISSENTING OPINION
Since the cost of the work completed by the plaintiff company in 2004, which it undertook to official institutions, could not be determined due to invoices that did not reflect the reality recorded in its records, the plaintiff company’s claim for the cancellation of the corporate tax levied ex officio for 2004 and the tax penalty imposed on the basis of the tax base determined by accepting 20% of the earned amounts as net profit was rejected. In accordance with the Council of State’s reversal decision, accepting that 20% of the payment amounts constituted net income, the Tax Court’s decision to cancel the excess portion of the tax and penalty calculated on the basis of the tax base, taking into account inflation differences and financing costs, was appealed.
Article 49, paragraph 4 of the Administrative Procedure Law No. 2577 states that courts may insist on their previous decision without complying with the reversal; if the insistence decision is appealed by the relevant party, it shall be examined by the Council of Administrative or Tax Courts of the Council of State, depending on the subject matter of the case. If the relevant chamber of the Council of State finds the decision appropriate, the court’s decision shall be overturned; otherwise, it shall be upheld, and compliance with the decisions of the Administrative and Tax Chambers of the Council of State is mandatory.
In the case file under review, the Tax Court determined that the invoices recorded as expenses in the plaintiff company’s records were issued by … Machine Mining Transportation and Publishing Industry Trade Limited Company, … Petroleum and Petroleum Products Limited Company, … Construction Materials Textile Industry Limited Company, … Petroleum Products Limited Company, and … Consultancy Services Construction Transportation Cleaning Food Limited Company, were found to be false in the tax technical reports prepared about them, and it was understood that the tax assessment in question was made by deducting the invoice amounts from the company’s expenses. In the case filed with the Court under file number E:2007/458, seeking the cancellation of the value-added tax imposed by rejecting the deductions of the value-added taxes included in the invoices received from the aforementioned companies and the tax penalty imposed, it was concluded that the invoices were fake. However, for the same reason, in order for an assessment to be made for corporate tax purposes, it is necessary to conduct an additional examination as to whether the goods listed on the invoices were actually purchased and whether they are proportional to the nature and size of the taxpayer’s activities. In the case in question, since the defendant administration did not make such a determination and the invoices were found to be fake through counter-examinations, it was decided to accept the case on the grounds that the corporate tax levied by removing these invoices from the expense records and the tax penalty imposed were not in accordance with the law. As a result of the appeal review of this decision, the Fourth Chamber of the Council of State, in its decision dated March 26, 2012, E. 2009/8237, K. 2012/1051, ruled that since it was understood that some of the invoices recorded in the books as commodity purchases in the relevant year were fake, the Tax Court’s decision was overturned on the grounds that the corporate tax imposed ex officio and the tax penalty imposed were in accordance with the procedure and the law, based on the 20% net profit margin accepted for construction contract work in established Council of State decisions.
In the decision reviewed on appeal, it was stated that the Tax Court complied with the reversal decision of the Fourth Chamber of the Council of State, and although it was decided to partially accept the case based on the tax base determined by taking into account the inflation difference and financing expenses, since the reversal decision ruled that the ex officio corporate tax and the tax penalty imposed were in accordance with the law, the decision to be rendered in compliance with the reversal decision should have been in line with this and dismissed the case. However, the decision rendered by taking into account the inflation difference expenses and financing expenses constitutes a persistent insistence on the previous decision.
Therefore, I disagree with the majority decision, as I believe that the appeal review should be conducted by the Tax Courts Council in accordance with the provisions of Article 49 of the Administrative Procedure Law No. 2577 mentioned above.