Actions to be taken on tax returns by taxpayers subject to inflation adjustment of balance sheets in the second quarter of 2024 in Turkey:

1. For income or corporate taxpayers keeping books on the balance sheet basis:

When determining the taxable income to be declared in the annual income tax and corporate tax returns, as well as in the provisional tax returns, starting from the 2024 fiscal period, taxpayers shall take into account the non-deductible past year financial losses related to the 2023 and previous fiscal periods, based on the pre-adjustment balance sheets, at their book values.

2. According to the last paragraph of subsection (5) of paragraph (A) of the repeated Article 298 of Law No. 213:

“In determining the taxable base, non-deductible expenses, exemptions, and past year financial losses shall be taken into account at their amounts adjusted for inflation.”

Pursuant to this provision, income or corporate taxpayers keeping books on the balance sheet basis shall:

a) When determining the taxable base to be declared in their annual income tax and corporate tax returns, as well as in their provisional tax returns, to be submitted from the beginning of the 2024 fiscal period, take into account the past year financial losses for the 2024 and subsequent fiscal periods, based on the balance sheet at the end of the adjusted 2023 fiscal period, at their amounts adjusted for inflation, depending on the existence/continuation of the conditions for making inflation adjustments.

b) When determining the taxable base to be declared in their provisional tax returns and annual income tax and corporate tax returns for the 2024 fiscal period, they shall:

• Consider the non-deductible expenses arising from non-monetary assets subject to adjustment on the balance sheet at their adjusted amounts;
• Take into account tax-exempt income at the amounts determined by including the differences resulting from the adjustment of the balance sheets on which this income is based, and no further adjustment will be made on the tax return.

In this context, expenses such as traffic fines, non-deductible portions of fuel expenses for passenger vehicles, and motor vehicle tax payments, which cannot be considered as expenses, shall not be subject to inflation adjustment and will be treated as non-deductible expenses on the tax return at their existing amounts. Expenses such as excess depreciation amounts, which are subject to inflation adjustment, will be treated as non-deductible expenses on the tax return at their adjusted amounts.

For example, a taxpayer (M) who keeps books on the balance sheet basis with a calendar year fiscal period purchased a passenger vehicle on 15/07/2022 for a total price of 1,000,000 TL, including VAT and SCT, to be used in their commercial enterprise, and included the taxes paid during the acquisition in the cost of the vehicle. The taxpayer calculates annual depreciation under the normal depreciation method according to general provisions and treats the portion of the depreciation amount exceeding the amount that can be considered as an expense in determining the net income as a non-deductible expense.

The taxpayer will subject their 2023 and 2024 balance sheets to inflation adjustment and will depreciate the passenger vehicle based on its adjusted value as of 31/12/2024. However, the depreciation amount corresponding to the portion of the cost exceeding the depreciation base determined according to the Income Tax Law will be treated as a non-deductible expense.

Additionally, since the adjusted depreciation in the 2024 balance sheet will include depreciation amounts previously treated as non-deductible expenses, the portion of the differences arising in the accumulated depreciation account due to the adjustment of the 2024 balance sheet corresponding to these amounts will also need to be treated as non-deductible expenses on the tax return.

Thus, non-deductible expenses will be considered at their adjusted amounts on the tax return.

Similarly, tax-exempt income will be determined according to the balance sheets subject to inflation adjustment, and the income amounts adjusted for inflation will be deductible on the tax return.

For example, a taxpayer operating in a free zone with all of their income being exempt may subject their 2024 balance sheet to adjustment and show the income amount resulting from the adjustment as an exemption on the tax return, thus deducting it from the taxable base.

3. For adjustments limited to the balance sheet as of the end of the 2023 fiscal period:

The amount of non-depreciated real financing costs deducted from the cost or purchase price of assets with unexpired depreciation periods may be considered as an expense in determining the income for the 2024 and subsequent fiscal periods over five years and in equal installments. Since these real financing costs will not appear on the balance sheet in the inflation adjustment application, they must be deducted on the tax return at their book values.

However, if the depreciable asset is sold after 01/01/2024, the unamortized portion of the real financing cost as of the sale date may be considered as an expense in the fiscal period in which the asset is sold.

Source: VUK 555
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