Important Decision from the Constitutional Court on Inflation Adjustment

New Development

In its decision No. E. 2023/105 K. 2023/208 dated 30 November 2023 (“Constitutional Court Decision” or “Decision“), the Constitutional Court of the Republic of Türkiye (“Constitutional Court“) annulled the regulation stating that inflation adjustment will not be made for 2021. The Decision was published in the Official Gazette numbered 32431 on 16 January 2024, and since the Decision does not make a special determination regarding the effective date, the related regulation has been abolished as of 16 January 2024.

Inflation Adjustment

Article 298 bis of the Tax Procedural Law No. 213 (“TPL“) defines inflation adjustment as the calculation of the purchasing power of non-monetary assets at the date of the financial statement by multiplying them with the adjustment factor, and the main purpose of inflation adjustment is to remove the effects of high inflation for many years and thus eliminate the negative effects of the increase in the tax base that does not reflect the real situation.

The last inflation adjustment was made in 2004. Years later, the Domestic Producer Price Index (D-PPI) increased by more than 100% in the last three accounting periods, including the current period, and by more than 10% in the one-year period. Accordingly, the conditions for inflation adjustment were re-realized as of the end of 2021.

However, the Provisional Article 33/1 of the TPL, which was added afterwards and was effective as of 20 January 2022, provides that the financial statements will not be subject to inflation adjustment in the 2021 and 2022 accounting periods, including the provisional tax periods, and the provisional tax periods of the 2023 accounting period, regardless of whether the conditions for inflation adjustment are met.

What Does the Decision Say?

The Constitutional Court Decision was issued as a result of the request made by a court, in the context of the lawsuit filed with the request for the refund of the overpaid tax on the grounds that the taxpayer had paid excess tax with a reservation due to the fact that the inflation adjustment had not been made because of the Provisional Article 33/1 of the TPL, despite the fact that the inflation conditions for 2021 were met.

In the Decision, the Constitutional Court ruled to annul the phrase “2021” in the aforementioned provisional article based on the following grounds:

• The subject of income tax and corporate income tax is the increase in the equity capital of the taxpayers as of a calendar year, and therefore, the end of the accounting period should be taken as the basis in determining the taxable event in terms of the income subject to these taxes
• In this context, since the taxable event occurred with the end of period-closing records made on 31 December and the data given by Turkish Statistical Institute’s regarding the inflation adjustment was determined on 3 January 2022, according to this date, the inflation adjustment obligation arises for 2021
• Therefore, the regulation dated 20 January 2022 that affected the tax base for income tax and corporate income tax results in the retroactivity of the laws to a degree incompatible with the principle of legal security, because the regulation entered into force after the taxable event occurred for that period
• In this context, the condition of legality was not fulfilled in the restriction of the right to property, and additionally, it is not in accordance with the principle of the legality of taxes.

What Will be the Effects of the Decision?

Since the annulment decisions of the Constitutional Court are not retroactive, the Constitutional Court Decision will only result in for those who filed their income tax/corporate income tax returns for 2021 with reservations, and who also filed a lawsuit. In other words, the Constitutional Court Decision will not have a positive effect on those who submitted their 2021 tax returns without a reservation and without filing a lawsuit. These taxpayers will not be able to get a refund the overpaid taxes based on the Constitutional Court Decision.

In this respect, the Constitutional Court’s Decision is important for banks and financial institutions, which are excluded from the scope of inflation adjustment. More spesifically, with the amendment made by Law No. 7491, it was stipulated that banks and financial institutions cannot consider profit/loss differences arising from the inflation adjustment to be made in the 2024 and 2025 accounting periods, including the temporary tax periods, in the determination of commercial income. As we pointed out in the legal alert on the amendment, it would not be a surprise if the mentioned regulation is challenged before the Constitutional Court based on the “principle of equality.” In such a case, if the Constitutional Court decides that there is a violation, banks and financial institutions that do not file their tax returns with reservations and file a lawsuit will not be able to benefit from the decision.

Besides, although the “principle of equality” is not discussed in the Constitutional Court Decision which is the subject of this client alert, we evaluate the Decision as important for banks and financial institutions that are contemplating to file their tax return with a reservation and file a lawsuit along. The Decision reveals that the Constitutional Court may issue an annulment decision for the tax regulations which contain unconstitutional provisions.

Additionally, the Constitutional Court had an approach in its previous decisions about the retroactivity of tax laws that the taxable event occurred with the filing date of the return. However, the Constitutional Court has now concluded that the taxable event for the income tax and the corporate income tax is occurred on 31 December (which is the end of period-closing records) and the amendments made after this date that affects the closed accounting period would constitute a violation of the Constitution within the scope of “real retroactivity”. We believe that the change of jurisprudence of the Constitutional Court is also important in terms of the interpretation of the non-retroactivity of laws principle.