| Ayça AKÇAY, Lawyer |
ABSTRACT
In our country, the application of minimum corporate tax at a baseline level has commenced with Law No. 7524 on Amendment of Tax Laws and Certain Laws and Legislative Decree No. 375 (“Law No. 7524/Law”). For the purpose of developing the implementation, following this Law, the Communiqué on Amendment of Corporate Tax General Communiqué (Serial No: 1) (Serial No: 23) (“Communiqué”) was published in the Official Gazette dated 28.09.2024 and entered into force. In the aforementioned Communiqué, in multiple articles and examples, although not included in the Law regulation and even remaining silent at the proposal stage which led to controversies, it was stated that past years’ losses would not be deducted from the minimum corporate tax base and would be taken into account in the calculation of minimum corporate tax. Following these controversies, with the issuance of the Communiqué provision, the matter was brought before the Council of State by a taxpayer who was likely to be affected by the subject matter, for the annulment of the relevant provisions of the Communiqué and primarily for the stay of its execution. The Council of State, in its decision dated 10.02.2025 and numbered E.2024/5700 regarding this regulation, ruled that while there was no provision in Article 32/C of Corporate Tax Law No. 5520 (“CTL”) stating that past years’ losses would not be deducted from the base and would be taken into account in the calculation of minimum corporate tax during the determination of the “Domestic Minimum Corporate Tax” base; the execution of the parts of the Communiqué containing the aforementioned regulation was stayed due to excess of authority. This study aims to examine the process prior to this decision of the Council of State and the possible consequences after the decision.
Keywords: Communiqué (Serial No: 23), Global Minimum Corporate Tax Calculation, Past Years’ Losses, Excess of Authority, Stay of Execution.
INTRODUCTION
Economic globalization and digitalization have caused tax law regulations to evolve rapidly in Turkey as well as worldwide. Although states have the authority to tax within their fiscal boundaries within the framework of their sovereignty, these authorities can sometimes create conflicts at the international level. For the resolution of these conflicts, tax agreements and cooperations between states are becoming increasingly important. The global minimum corporate tax regulation developed by the Organisation for Economic Co-operation and Development (“OECD”) and which most countries have incorporated into their domestic laws in similar ways, has emerged as a solution particularly to problems created by tax havens and budget deficits.
Turkey, with the spread of the digital economy in recent years, has shaped its own tax policies in parallel with global tax regulations. With Law No. 7524, it was decided that domestic minimum corporate tax of not less than 10% would be applied to corporate tax taxpayers. With this regulation, it was aimed to prevent tax losses experienced previously. With the amendment published in the Communiqué dated 28.09.2024, the Revenue Administration stated that past years’ losses would not be deducted from the base when calculating minimum corporate tax and these losses would be taken into account in the minimum tax calculation. This approach brought by the Administration on this matter, which has been debated since the Law was discussed in commissions, in our opinion, can be interpreted as an excess of the authority given to the administration regarding the intention of the legislator. Indeed, the Council of State, upon an application requesting stay of execution filed by a taxpayer likely to be affected by the matter, examined the subject and in its decision dated 10.02.2025, stayed the execution of the sections contained in the Communiqué regarding the matter on the grounds that this regulation lacked legal basis and constituted an excess of authority.
The stay of execution decision given by the Council of State, in our opinion, is legally appropriate, and when previous decisions on similar matters are also examined, although a decision towards the annulment of the Communiqué is possible, following this annulment decision, the matter of not including past years’ losses in the base calculation must be legalized and regulated in accordance with the principle of legality of taxation.
I. MINIMUM CORPORATE TAX
Article 32/C has been added to the CTL with Law No. 7524. In the first paragraph of the relevant article, after stating that the corporate tax calculated considering the provisions of Articles 32 and 32/A cannot be less than 10% of corporate earnings before deductions and exemptions, in the second paragraph, the exemptions and deductions to be deducted from corporate earnings are listed in detail. Indeed, a determination has also been made regarding liability in the same article, and as will be seen in the 4th paragraph, it is stated that the provisions of this article shall not apply for three accounting periods from the accounting period in which activities are commenced for institutions commencing activities for the first time, thereby indicating that new enterprises are within the scope of exemption for a certain period. In this respect, both deductions and exemptions and how the calculation will be made are specified broadly and clearly in the relevant article. It should be noted that the authority given to the Ministry of Treasury and Finance in the 7th paragraph of the article is only to reduce the rate in the first paragraph of the article to zero or increase it up to twofold, separately or together, by sectors, subject of activity, lines of business or production areas.
In the past, in Corporate Tax General Communiqués numbered 43 and 50 issued based on legal regulations¹, it was accepted as a rule that past years’ losses could be deducted from the base in minimum corporate tax calculation. However, it was stated that losses arising from equity comparison would not be included in the minimum corporate tax base, whereas losses arising from applied deductions and exemptions would be included in the base. Indeed, during the period of Law No. 3946, a lawsuit was filed for the annulment of the relevant part of Communiqué No. 50 regulating the distinction, and the Council of State annulled the aforementioned Communiqué’s explanations regarding that losses arising from deductions and exemptions could not be deducted from the minimum corporate tax base, on the grounds that there was no provision in the Law that past years’ losses would be subject to a distinction according to their sources².
Similarly, in a controversy in the pre-Communiqué period, since the purpose of the minimum corporate tax regulation was to prevent low-rate taxation caused by deductions and exemptions provided by the state to taxpayers as incentives, it was stated that if there was profit in the relevant period, an amount of deduction and exemption that could not be deducted from the minimum corporate tax base should be subject to the same treatment when it increases the loss arising in this period and carries it forward to the next period, that is, it should not be deducted from the domestic minimum corporate tax base³. A contrary practice would lead to collecting 10% domestic minimum corporate tax over past years’ financial losses in the nature of expense excess, the injustice and unlawfulness of which is evident⁴.
The Communiqué regulation was published in the Official Gazette dated 28.09.2024 based on the authority in the seventh paragraph and entered into force together with the Law implementation. Until the Communiqué provisions were published, since it was not explicitly stated in the Law, it was debated whether past years’ profits would be deducted from the base or not. In sub-section 32.5.4 of the Communiqué, “Past years’ losses subject to deduction in tax returns will not be deducted from the minimum corporate tax base and will be taken into account in the calculation of minimum corporate tax.” and in sub-section 32.5.6, “In the minimum tax calculation, past years’ losses will also not be deducted from corporate earnings and will be taken into account in the minimum tax calculation.” paragraphs and in sub-section 32.5.6, the third and fifth examples again contain sections including past years’ losses in the calculation. In this respect, although the relevant controversies came to an end regarding whether they would be included or not, this time the incompatibility of including past years’ losses in the calculation with the principle of legality and the Ministry of Finance exceeding the authority given to it by the Law with the regulation in the Communiqué began to be debated.
As will be explained below while the Council of State decision is discussed in detail, in our opinion, since it is explicitly stated in the Law in which areas the Ministry is given regulatory authority and what will be included or not included in how the calculation will be made is explicitly written in the Law article, the Ministry of Finance’s inclusion of past years’ losses in the base calculation through the Communiqué is contrary to the principle of legality.
II. PRINCIPLE OF LEGALITY
The calculation method adopted with the Communiqué is not in the Law, nor has the Administration been given the authority to make a regulation that would reduce the exemption to be utilized in this manner. However, an exemption granted by law must be restricted only by a law. In this context, the Communiqué went beyond being an explanatory communiqué and included regulatory explanations.
According to the hierarchy of norms; from top to bottom, “Constitution”, “Law”, “Legislative Decree”, “Regulation”, “By-Law” and “other subordinate regulatory acts” are listed, and it is not possible for the one at the lower level to be contrary to the norm at the upper level or to contain regulations exceeding its scope. As a natural consequence of this ranking, it is indisputable that putting regulatory dispositions contrary to legal rules at the upper level in the hierarchy of norms into effect by the administration would constitute a violation of the explained principle.
Indeed, in the decision of the Council of State 15th Chamber dated 07.10.2015 and numbered E.2013/14375, K.2015/5726, it was also mentioned that the by-law cannot be contrary to the laws: “…According to the hierarchy of norms, it is one of the fundamental principles of law that lower norms must comply with upper norms and cannot contain provisions that narrow or restrict upper norms. It is undoubtedly that accepting that a restriction not foreseen in the Law can be brought by regulations to be made by the administration would mean infringing upon the essence of the right. In this sense, it is not legally possible to bring a condition not foreseen in the law through a by-law or any general regulation. In this case, there is no conformity with law in bringing a time limitation not foreseen in the law through the contested by-law regulation…”
Since the “communiqué”, which is issued by the Tax Administration to ensure unity of practice and which are texts on how existing tax laws will be understood and applied, is also a general regulatory act of the administration, it is not possible to bring a condition not foreseen in the law with this regulation. As stated in the decision, based on the fact that a restriction not foreseen in the law cannot be brought by regulations that can be made by the administration; it is not possible for a communiqué, which is one of the general regulatory acts of the administration, to establish a rule not contained in the law or to restrict a rule contained in the law.
Similarly, in the decision of the Council of State 8th Chamber dated 23.06.2020 and numbered E.2020/2774; “…Since Administrations have the authority to take necessary measures to ensure efficiency in performing public services and to make regulatory acts within this scope, without contravening the hierarchy of norms, and since it is not always possible to determine in advance under which conditions and how public services will be carried out, they have discretionary authority to make regulations through by-laws and lower regulatory acts in order to meet the needs arising according to developing circumstances. The authority of Administrations to make regulations through by-laws and lower regulatory acts can be realized within the limits drawn by the legislative body, subject to the condition of not being contrary to superior legal norms, primarily the Constitution…” it was stated.
The aforementioned decision also shows that administrations can use their discretionary authority regarding making regulations through communiqués, which is one of the regulatory acts they possess, only on the condition of not being contrary to superior legal norms than the law. In this context, it is clear that with the Communiqué, rather than determining procedures and principles, restrictive provisions against the taxpayer were brought to the Law provisions which are at a higher position in the hierarchy of norms, and thus there is no conformity with law due to excess of authority in the regulatory act.
Moreover, in the Law, exemptions and deductions and items to be included in the calculation are specified, and the authority to determine procedures and principles regarding these and/or the authority to add or remove from these has not been given to the Ministry of Treasury and Finance. In the 7th paragraph of the relevant Law article, the authority to “reduce the rate in the first paragraph of the article to zero or increase it up to twofold, separately or together, by sectors, subject of activity, lines of business or production areas” has been given to the Administration. In this respect, it is clear that the legislator consciously did not give authority to the Ministry of Treasury and Finance in this article, and this situation is contrary to the principle of legality and the hierarchy of norms.
As is known, according to the 3rd paragraph of Article 73 of the Constitution, “Taxes, fees, charges and similar financial liabilities shall be imposed, amended or repealed by law.” What is important here is that at the level of a constitutional norm, it has been accepted that “amendment” and “repeal” can only be done through a law, as in taxation. However, although not stated in the law, this regulation brought regarding that it could not be deducted from the base in the minimum corporate tax base calculation has excessively restricted the scope of the exemption brought by the Law, and the authority to make this restriction has not been granted to the Administration that prepared the Communiqué. For this reason, the Communiqué is clearly contrary to the principle of legality, which is one of the most fundamental principles in the Constitution.
Indeed, in the decision of the Council of State 7th Chamber dated 09.04.2015 and numbered E.2011/4864, K.2015/1935, “…On the other hand; according to the hierarchy of norms, from top to bottom, ‘Constitution’, ‘Law’, ‘Legislative Decree’, ‘Regulation’, ‘By-Law’ and ‘other subordinate regulatory acts’ are listed, and it is not possible for the one at the lower level to be contrary to the norm at the upper level or to contain regulations exceeding its scope. As a natural consequence of this ranking, it is indisputable that putting regulatory dispositions contrary to legal rules at the upper level in the hierarchy of norms into effect by the administration would constitute a violation of the explained principle. …In this respect; the regulation made with the Communiqué is contrary to the aforementioned hierarchy of norms and the principles of the rule of law, and due to producing retroactive results…” stating that the relevant communiqué was annulled on the grounds that communiqués cannot be issued exceeding the authority given by the law⁵.
In this respect, since the authority to determine the procedures and principles regarding the application of the provisions of the Law on the calculation of the minimum corporate tax base was used by the Ministry of Treasury and Finance by exceeding its authority, this regulated Communiqué constitutes a violation of the “principle of legality of taxation”.
III. COUNCIL OF STATE’S DECISION TO STAY EXECUTION
As we stated in the previous sections, the Council of State has generally given stay of execution or annulment decisions in cases where the Administration makes regulations exceeding the authority given to it by the Law. Regarding the subject matter discussed in this study, the Council of State 3rd Chamber, with its decision dated 10.02.2025 and numbered E.2024/5700: “…Since there is no provision in Article 32/C of the CTL regarding that past years’ losses will not be deducted from the minimum corporate tax base, and there is no authority given to the Revenue Administration of the Ministry of Treasury and Finance on this matter, for this reason, the regulation made by the Finance Ministry regarding that past years’ losses will not be deducted from the minimum corporate tax base is within the scope of excess of authority and is contrary to Article 32/C of the CTL and Article 73 of the Constitution…” decided to stay the execution of the parts concerning past years’ losses of the seventh paragraphs of sub-sections “32.5.4.” and “32.5.6.” of the section “32.5. Domestic minimum corporate tax” of Communiqué No. 23 and the third and fifth examples in sub-section “32.5.6.”.
In the decision, “…it is understood that while calculating the domestic minimum corporate tax, it is stated that the exemptions and deductions listed in the 2nd paragraph will be deducted from the corporate earnings specified in the 1st paragraph, no other determination has been made regarding the calculation of the minimum tax base besides these, and no authority has been given to the defendant administration regarding the determination of the base, nor is there any legal regulation that would not permit other elements other than deductions and exemptions to be deducted from the minimum tax base, and it has been reached the conclusion that there is no conformity with law in the contested regulation regarding that past years’ losses will not be deducted from the minimum corporate tax base and will be taken into account in the calculation of minimum corporate tax, and its implementation may lead to damages that are difficult or impossible to compensate…” the expression was included.
On the other hand, as similarly expressed in the previous sections of this study, “…past years’ losses may arise as financial losses as a result of benefiting from various exemptions, as well as arising as commercial balance sheet losses as a result of comparison of equity at the end and beginning of the period. Although it is stated that the purpose of the regulation is to prevent low taxation due to various deductions and exemptions, not permitting past years’ losses arising from expense excess that are not of this nature to be deducted from the minimum tax base will lead to collecting tax at the rate of 10% over commercial balance sheet loss, and considering that the subject of corporate tax is the earnings of institutions listed in Article 1 of the Law, it is also clear that a taxpayer who has no earnings subject to tax due to past years’ losses will have to pay tax due to the contested regulation⁶…” thus, in the decision, a ruling was given in a direction parallel to the principles of legality of taxation explained above regarding the controversies made before the Communiqué regulation came.
In this respect, in parallel with the decisions previously given by the Council of State, its decision to stay the execution of the relevant sections of the aforementioned Communiqué which is contrary to the principle of legality is, in our opinion, a decision compliant with the law. Although it is not known whether the Ministry of Treasury and Finance has applied to any objection route during the period this study was made, or although there is no annulment decision on the matter, when looking at the examples in the decisions of the Council of State given in the previous sections of our study, it is possible that it will decide towards the annulment of the Communiqué. However, following this annulment decision, the matter of not including past years’ losses in the base calculation must be legalized as one of the exemptions, and an end must be put to the controversies on the matter in a manner compliant with the principle of legality of taxation.
CONCLUSION
The minimum corporate tax institution, brought as a solution to problems arising from globalization and digitalization in terms of tax law, has been introduced with Law No. 7524 to be implemented as of 2025. There is controversy regarding the silence on whether past years’ losses will be included in the base calculation since the proposal stage of the Law and regarding not being taken in previous periods by making an important distinction in the base calculation as a rule. Although many exemptions were specified in the Law regulation and the Administration was given regulatory authority only regarding the rate, the inclusion of past years’ losses in the base calculation through the Communiqué caused it to be brought to the Council of State with a request for annulment due to the thought that the relevant parts of the Communiqué were contrary to the principle of legality.
The Council of State’s stay of execution decision given on the grounds of excess of authority on the matter is important in terms of the functioning of the rule of law and the principle of legality which is its requirement in the tax system in Turkey. Considering that the Council of State has also given similar decisions in previous periods, this decision once again reminds that the administration must make regulations within the limits determined by the legislator and every regulation must be compatible with its legal basis. In this respect, the stay of execution decision given by the Council of State is, in our opinion, legally appropriate. When the Council of State’s decisions on similar matters are examined, although a decision towards the annulment of the Communiqué is possible, following this annulment decision, the matter of not including past years’ losses in the base calculation must be legalized and regulated in accordance with the principle of legality of taxation.
¹ Law No. 3824 published in the Official Gazette dated 11.7.1992 and numbered 21281, and Law No. 3946 published in the Official Gazette dated 26.12.1993 and numbered 21804 (Supplementary)
² Decision of the Council of State 4th Chamber dated 20.03.1996 and numbered E.1995/2669, K.1996/1076
³ Erdal GÜLEÇ, “Domestic Minimum Corporate Tax”, Tax World Journal, September 2024, Year: 44 No. 517
⁴ Güleç, op.cit. p.517
⁵ In the same direction: Decision of the Council of State 10th Chamber dated 15.10.2020 and numbered E.2017/1143, K.2020/3844
⁶ Güleç, op.cit. p.517