International tax law and international taxation implementations in Turkey - part1

The provisions of the law referred to in this research paper is based on the Turkish Corporate Tax Law (Kurumlar Vergisi Kanunu) Code no. 5520 and Turkish Income Tax Law (Gelir Vergisi Kanunu) Code no. 193.

International tax law, in its broadest sense, is the whole of the tax law rules that states apply to foreign-related financial events and relations. International tax law constitutes one of the sub-branches of tax law.

One of the sources of international tax law is the tax treaties that states conclude by the concepts and criteria of international law. Such agreements may contain provisions regarding the mutual limitation of the powers of states to tax, as well as the principles of cooperation and assistance in the exercise of taxation authority. These agreements can be made according to various tax types, or they can be bilateral or multilateral. For example, agreements to prevent double taxation in income tax and corporate tax are usually bilateral. In contrast, Customs Tariffs and the General Agreement on Trade (GATT) are multilateral agreements on customs duties and equally effective obligations. States can also make agreements that include various cooperation and information exchange mechanisms to prevent tax evasion and tax avoidance. For example, the OECD - Council of Europe Mutual Administrative Assistance Agreement on Tax Issues is a multilateral agreement.

In addition to the tax treaties network, international tax law also includes transnational rules that arise from participation agreements in transnational economic integrations and that bring the obligation to harmonize national law rules to member states in terms of various taxes. Turkey's Ankara Agreement and the rules for creating a customs union with the European Union in the framework of the Additional Protocol is included in the scope of international tax law.

The subject of international tax law is not limited to tax treaties between states. Taxation domestic law regulations, which are included in the national law of states, but have legal consequences for cross-border events and relations, are also in the field of examination of international tax law, although they are domestic law provisions. The peculiarity of such domestic legal arrangements is that the regulatory state classifies its taxation authority unilaterally. To prevent double taxation in income and corporate tax, provisions related to the deduction of taxes paid abroad or exemption arrangements for revenues obtained abroad are such arrangement. Besides, the substantive law rules that determine the application of the laws in terms of place are also evaluated within the scope of international tax law. For example, national rules on the full and the narrow taxpayer in income and corporate taxes are of this nature.

International double taxation

International double taxation is divided into international legal double taxation and international economic double taxation. In international legal double taxation, the same taxpayer is taxed in two different states for the same tax issue. In international economic double taxation, the same tax issue is taxed in the hands of different tax-payers and two different states. The type of double taxation discussed here is international legal double taxation.

International double taxation is when two (or more) states tax the same taxpayer in connection with the same tax issue and with similar taxes for the same taxation period. The coincidence between the two states' taxation powers results from the fact that these states are two "sovereign" states. State sovereignty, the source of taxation authority, is the reason for the existence of tax.

Some principles determine the application area of tax laws;

The principle of residence:

According to the principle of residence, taxation is the taxation of worldwide income of persons residing under a state's "territorial sovereignty". The benchmark for taxation is where the residence is located. In this respect, nationality expands and gains personality. The legal relationship here is based on the "personal connection" and takes its source from "personal sovereignty in the personal sense”.

This place is a place of residence for real persons (residence), house (residence), workplace; For legal entities, it may be a legal center, administrative center or a similarly qualified place. The financial domicile of this is a top concept in terms of place of residence, which includes several criteria for establishing a personal relationship with a country.

In the taxation based on the principle of residence, both domestic income and foreign income of the person are taxed. The type of liability here is called full liability.

Income Tax Law of Turkey (GVK) in 1. bend of Article 3, in Turkey "resident", is defined as natural persons fully liable. The settlement is measured and is attached to two principles: "residence" and "residence time" in article 4. Accordingly, the ones whose residence is located in Turkey and also the ones that although not reside in Turkey even if they stay in Turkey within a calendar year continuously for more than six months whether they are foreigners or citizens, domestic and foreign income of them over Turkey is taxed. Some exceptions to full-time duty depending on the seating period have been introduced in Turkey. Some exceptions to full-time duty depending on the seating period have been introduced in Turkey. According to the Income Tax Code Article 5 the ones coming to Turkey for certain tasks and temporary work, scholars and scientists, experts, officials, media and press correspondents and the other people whose conditions similar to these persons, people who have been charged or have treatment or the ones stay in turkey because of travel, arrest, conviction or detained or the reasons like illness stay in Turkey or those who have not achieved, even if they stay more than six months in Turkey they are not taxed.

In the Turkish Corporate Tax Law (KVK), the concept of the corporate center is included. The types of corporate headquarters are "legal center" and "business center". If one of the legal central or business centers of the corporations in Turkey, institutions are fully responsible and they should be taxed on corporate earnings that they receive in foreign countries as well as in Turkey.

The Principle of Source:

The basis for taxation in this principle is where income is born or where goods are located. This principle derives its source from "personal sovereignty". The legal relationship here is based on the "economic link", the location or nationality of the taxpayer's residence is irrelevant.

The principle of residence forms the basis of personal and corporate income tax which is full liability, on the other hand, narrow liability has been formed on the base of principle of the source.

According to clause 2 of article 3 of KVK in the case of the absence of an institution's registered office or business center in Turkey, the institutions only to be taxed on gains in Turkey, which leads to a narrow liability.

The Principle of Nationality:

It is the taxation of a state of worldwide income and wealth of its citizens under the personal sovereignty of the state.

GVK adopted the principle of nationality in full liability in a very limited area. According to GVK article 3 clause 2, Turkish citizens who are residing in foreign countries to work in institutions that are affiliated with the government offices or enterprises whose headquarters entities in Turkey are fully liable taxpayers. If these people have been taxed through their income and subjected to a similar income tax or other taxes in the country where they reside, they are not also taxed on such income in Turkey.

Methods to Eliminate International Double Taxation

To prevent problems caused by overlapping taxes, national and international solutions have been produced.

National Methods

These methods are the local legal methods used in the territory of Turkey.

Tax Rate Reduction Method

Taxes applied to all or part of the income in another country are deducted.

Method of Discount from Tax Assessment

The tax paid in the foreign country is deducted from the total tax base, not from the total internal tax to be paid. In this way, international double taxation is not entirely but partially eliminated.

Offsetting Method

The distinguishing aspect of this method is that the country of residence deducts the tax paid in another country. The country of residence treats foreign tax as a tax paid in its home country. When the foreign tax rate is lower than the domestic tax rate, the part of the domestic tax exceeding the foreign tax is paid to the country of residence. If the foreign tax is higher than the domestic tax, the country of residence does not charge any taxes, but the excess is not refundable. In the Turkish income tax system, the offset method has been adopted to eliminate the international double taxation that may arise in terms of the earnings of the full liable chargeable accessions abroad.

According to the GVK article, 123 corresponding parts of taxes paid by full obligors abroad on income obtained in foreign countries are deducted from taxes to be paid in Turkey. As with corporate income tax, the principle of deducting taxes paid in foreign countries has been adopted.

According to KVK article 33 taxes revenues were obtained in foreign countries and reflected in the overall results account in Turkey is deducted from the levied tax in Turkey, however, the amount to be deducted cannot be more than the amount to be found by applying the rate stated in article 32 of the KVK to the earnings obtained in foreign countries. Therefore, the amount of offset selected in the corporate tax application is normal offset as in income tax implementations.

Exception Method

Income obtained abroad is exempted from tax in the country of residence or source. The country of residence accepts the exclusive taxation authority of the source country in the taxation of foreign revenues, thereby abandoning the principle of taxing residents’ worldwide income. In terms of the states that apply the principle of resource, the income obtained in a foreign country is completely excluded from the account. The exemption method application in the Turkish income tax system has been accepted in a limited area. This method is applied only to taxation based on nationality.

According to Article 3 of the GVK, Turkish citizens who are taxed based on nationality as a fully liable person, are not taxed separately from the income tax if their income is taxed abroad.

In this part of our research article, we talked about the general structure of international tax law, its subject and the principles that dominate international tax law. We have mentioned double taxation and methods of double taxation prevention. We talked about solutions to prevent double taxation at the national level. We will talk about measures to prevent double taxation at the international level, the OECD Tax Model and UN Tax Agreement Model in the next article. Wait for our next post.

Yours sincerely.

Legal Intern Tuba Kızılkaya
Güneş & Güneş Law Firm

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