Is there a need for a revision in VAT refund simultaneously with the increase in VAT rates?”

Is there a need for a revision in VAT refund simultaneously with the increase in VAT rates?”

With the Presidential Decree No. 7346, the general VAT rate, which was applied at 18%, has been increased to 20%, and the VAT rate for goods and services subject to 8% VAT has been raised to 10%. This regulation was published to be effective as of July 10, 2023.

As the agenda is focused on the increase in VAT rates, it is essential to consider the impact of this change on VAT refund requests.

VAT is an expenditure tax collected and declared by the seller with a deduction mechanism, except for the final consumers. If the calculated VAT amount is lower than the deductible VAT amount, a carry-over VAT occurs in the seller’s VAT declaration. The provision regarding this carry-over VAT is stated in Article 29/2(b) of the VAT Law No. 3065: “If the total amount of deductible value-added tax for a tax period exceeds the total amount of value-added tax calculated for the taxable transactions of the taxpayer, the difference is carried over to subsequent periods and is not refundable.” Generally, the carry-over VAT is not subject to refund unless the transactions fall under the exceptions defined in Article 32 of the VAT Law, allowing for the refund of VAT contained within the carry-over amount.

Article 32 of the VAT Law stipulates that a refund opportunity exists for transactions qualifying for full or partial exemption, and transactions covered by temporary provisions, based on the invoices and similar documents indicating VAT in relation to transactions exempt from VAT according to Articles 11, 13, 14, and 15 and Article 17(4)(s) of the same law. If there are no taxable transactions or the calculated tax is less than the deductible tax, the undeducted VAT can be refunded by the relevant parties according to the principles determined by the Ministry of Finance and Customs, provided that it is claimed until the end of the second calendar year following the period of the transaction.

The procedures and documents required for VAT refund requests are specified in the General Application Communiqué on VAT.

Considering the inflationary environment, the time value of money should be taken into account in the process of VAT refund requests until the date of appropriation.

Regarding the time interval mentioned, the control between the submission of the CPA reports and the response to deficiency letters falls under the control of the CPA, and thus there is no criticism in this regard.

For refund requests with offsetting:

  • Offset requests for tax debts to the tax offices are completed within 10 days following the completion of the necessary information and documents, as required by Article 2.1.1.a of the General Application Communiqué on VAT.

For cash refunds, the time limitations are as follows:

  • Within 10 business days from the creation of the VATIRI control report due to the delivery of the mandatory documents for inspection,
  • Within two months from the submission of the CPA report regarding the refund if the CPA report is submitted, VATIRI control, YMM report-related checks, and other checks to be made by the tax office are completed, and
  • Within five business days for refund requests with collateral, according to the relevant communiqué.

In cash refund requests, there is no predetermined period for the control by the tax authorities based on the YMM VAT refund approval reports.

Recently, the VDDK decision regarding the “Non-Application of Delay Penalties for the Period after the Additional 30-Day Period in VAT Offset Transactions” is in force. According to this decision, late payment penalties cannot be applied for periods exceeding the periods specified by the law and spent in the tax administration in offset requests.

Considering that no period has been specified for the control of cash refund requests based on the YMM reports submitted to the Tax Administration, the time value of the refund claim erodes during the tax authority’s control process. Adding the lack of standardization in the control of YMM VAT refund approval reports to this issue leads to further depreciation. Furthermore, delayed report checks result in customer loss for YMMs.

In the refund request phase:

  • The monthly VAT return is submitted the following month,
  • Mandatory documents are created and uploaded to the system,
  • VATIRI control reports are generated in the first week of the following month,
  • Reciprocal examinations are performed, and
  • The report is prepared and delivered.

After these stages, most of the process is under the control of the taxpayer, with the exception of the period between the delivery of deficiency letters and response letters. This can lead to delays in refund requests due to daily tasks that need to be prioritized, such as cash refunds with priority, SGK, and customs duty refunds, and may cause financial difficulties for taxpayers in an economic environment where obtaining funds is challenging.

The Directorate General of Revenue should take necessary measures to expedite cash refund requests based on YMM VAT refund approval reports and ensure the implementation of the taken measures. The refund of eroding VATs, which taxpayers are entitled to, as quickly as possible, will balance the financial situation.

In conclusion, our suggestion is to determine a reasonable period for the control and detection of deficiencies after the delivery of YMM VAT refund approval reports, and to apply these periods to all cash refund requests (as in the case of refund requests with pre-control). It is crucial for the Directorate General of Revenue to take necessary measures to expedite cash refund requests based on YMM VAT refund approval reports and ensure the implementation of these measures. This will enable taxpayers to receive the refunds they are entitled to without unnecessary delays, particularly in an inflationary environment.

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