CREDIT & DEBIT NOTE UNDER TURKISH LEGISLATION
What is Credit & Debit Note?
Credit and debit note can basically be defined as instruments used due to price differences in international trade. Credit note is a document that shows that the buyer/customer is credited from the seller due to price reductions arising for various reasons and is used instead of an invoice. Debit note, on the other hand, is a document issued by the seller to show that the seller is credited from the buyer/customer, is an additional expense or cost that the buyer/customer has to pay for the imported goods and is used instead of an invoice like credit note. Related applications are used by companies engaged in international trade in order to mutually balance the cost-related elements that arise unpredictably in trade. These notes are generally used by companies as a means of correction for price differences, as well as for reasons such as commercial, logistics, technical demands, commissions and discounts sent by the seller to the buyer/customer.
Related Legislation
Credit & debit note application is in contact with the Customs Regulation in terms of calculation and reporting of customs duties and other related financial obligations in import and export transactions within the scope of Turkish legislation, Tax Procedure Law No. 213 (“TPL”) in terms of taxation processes and keeping related documents, and Value Added Tax Law No. 3065 (“VAT Law”) and related secondary legislation regulations in case VAT applications and calculations are affected.
The certifying documents that taxpayers are obliged to use in order to document and prove their commercial and financial transactions are listed as invoices, retail sales certificates, expense vouchers, producer receipts, self-employment receipts, payroll, transport waybill, passenger lists, daily customer lists and correspondence documents in the second part of the TPL titled “invoices and invoice substitute documents”. Article 227 of the Tax Procedure Law states that “Unless otherwise stipulated in this Law, it is obligatory to certify the records kept in accordance with this Law and pertaining to relations and transactions with third parties. Taxpayers who are not obliged to keep books are obliged to certify their expenses related to the determination of their tax base.” Pursuant to the relevant provision, it is obligatory to prove the records kept in accordance with the Tax Procedure Law, which are related to transactions and relations with third parties, with certifying documents, and taxpayers who are not obliged to keep books are required to prove their expenses related to the determination of their tax base with certifying documents.
In the General Communiqué No. 253 on Tax Procedure Law, it is stated that “Taxpayers who obtain documents from persons or companies abroad shall show these documents as expenses in their book records by converting the amounts written in the documents into Turkish lira at the foreign exchange buying rate determined by the Central Bank on the day the documents are issued. However, if deemed necessary by the examiner during the examination, taxpayers are obliged to have these documents translated.”
Pursuant to the relevant provision, it is possible to record a document issued by a company resident abroad for a debit note in the expense accounts in Turkey, provided that it is a valid document in accordance with the accounting records in the country where the relevant company is resident. In this context, the records of relations and transactions with third parties shall be certified on the basis of documents. However, it should be noted that a debit note is not recognised by the official authorities as a certifying document within the scope of TPL.
To give an example; if a price discount is made on behalf of the company resident in Turkey based on the amount of goods sold by the company resident abroad or the price difference, the price of the goods or services purchased will decrease, thus the debt of the company resident in Turkey to the company resident abroad will decrease and its income will increase. In this case, the resident company in Turkey is required to issue an invoice on behalf of the other company and it is also possible for the resident company abroad to issue a credit note. However, in this case, the obligation to issue the invoice in terms of verification of the records according to the tax legislation does not disappear. It should be noted that credit note, like debit note, is not accepted by the official authorities as a certifying document within the scope of TPL.
Pursuant to Article 8/2 of the VAT Law, “Those who show VAT in such documents, even though there is no taxable transaction or they are not entitled to show VAT in invoices or similar documents, are liable to pay this tax. This also applies to taxpayers who show an amount higher than the amount of tax they owe according to the law.”
For such reasons, the tax that is over or improperly calculated and paid to the treasury is refunded to the taxpayer who made the transaction according to the procedures and principles to be determined by the Ministry of Treasury and Finance. In order for the said refund to be made, the declarations related to the transaction must be corrected and the excess or improperly calculated tax must be returned to the buyer by the seller. However, it is unclear how the credit note, which is not regulated in our law, will be handled by the competent authorities in the event that there is an over- or under-calculated tax in the invoice or similar documents issued previously as a result of the credit note and paid to the treasury.
In the section titled I/C-1.1.2. Refund of Excess or Improperly Paid Tax of the Value Added Tax General Implementation Communiqué, it is stated as follows: “Taxes paid excessively or improperly due to decreases in the import base of taxpayers with the right to discount after the import transaction (including cases where it is determined that disguised earnings are distributed through transfer pricing) are not refunded since they are taken into discount accounts by these taxpayers. There is no need to make any correction in the discount accounts in relation to these taxes paid excessively or improperly during importation.”
As explained, the national competent authority has referred to Article 227, 229 and subsequent articles of TPL regarding the issuance of credit note and in this direction, in the event that the debt of a resident company in Turkey to a resident company abroad decreases and its income increases, an additional invoice including VAT will need to be issued by the resident company in Turkey on behalf of the other company.
Actual Implementation Reflections
In the light of the relevant explanations, companies resident in Turkey will pay VAT on the increase in the tax base as a result of the debit note issued to them, but the VAT amounts overpaid due to the decrease in the tax base as a result of the credit note may not be refunded to them. Therefore, in cases where the VAT amounts carried forward are high, the excess VAT amounts paid as a result of the credit note may not be deducted, and the VAT amounts in question will remain as a financial burden. In this context, it can be said that the relevant practice brings an additional burden that increases the debt of companies resident in Turkey to abroad.
GRC LEGAL Comment
This practice may be detected by the relevant Ministry of Treasury and Finance, Revenue Administration and relevant Tax Office Directorates in Turkey, may cause ex officio investigations and examinations in addition to periodic controls and audits, and may cause companies to be included in the list of risky and/or suspicious taxpayers. Especially in temporary tax periods, the balance sheet, which is shown as a loss in the first three quarters from the beginning of the accounting period, may turn into profit in the last quarter and draw the attention of the competent authorities to the companies.
As a final risk factor, since credit note/debit note is not included among the documents which are considered as conclusive evidence in Turkish procedural law and which are issued as certifying documents within the scope of TPL, the transactions made will not be official and this situation may bring up the nature of illegal activities. Apart from all these, fluctuations related to the price of the product in free circulation under international transfer pricing practices are another factor that carries the risk of attracting the attention of the competent authorities in terms of non-compliance with the legislation.
In this respect, it is considered that the one-time or continuous implementation of the credit & debit note programme cannot be explained to possible investigation and audit authorities in a way to eliminate legal and tax risks in terms of legal grounding and justification; therefore, it is important to balance the risk by approaching the relevant practices with caution.
