Problem regarding communiqué no. 35 in VAT withholding

With the VAT communiqué serial no. 35, the VAT declared and accrued by the buyer must be paid by the buyer in order for it to be returned to the seller. The execution of this practice was stopped by the Council of State but it was subsequently overturned on procedural grounds and was put into practice again.

Dear Fortune readers, I cordially wish you a happy New Year and hope that 2022 brings health, peace and happiness to our country and the world.

In this month's article, I would like to share with you the final decisions by the judiciary regarding the payment obligation for VAT withholding refunds as stipulated in the VAT General Communiqué serial no. 35.

As is known, in terms of Value Added Tax, the VAT paid while purchasing goods and services is compensated by tax relief and the difference is either paid to the tax office or transferred to the next period as deferred VAT.

One of the exceptions to this general principle is the application of withholding. We see that the said application first entered our tax legislation as a means of tax security but later became a tax collection tool.

We can define VAT withholding as the payment of a certain percentage of the VAT calculated on the invoice as issued by the seller for the specified goods and services after declaring it to the tax office instead of being paid by the buyer to the seller. For instance, 3/10 VAT withholding is applied in advertising services. Accordingly, 7/10 of the VAT on the invoice for advertising services will be declared to the tax office by the seller who issues the invoice, and the remaining 3/10 will be declared by the buyer, who withholds that portion on the invoice instead of paying it to the seller. In case of deferred VAT in the VAT return of the seller for the relevant period, it is possible to claim for refund from the tax office the tax withheld by the buyer as reverse charge VAT.

Until February this year, the VAT refund declared by the buyer with VAT declaration no. 2 was not required in the fulfillment of the VAT refund requests arising from the withholding. However, pursuant to the VAT communiqué serial no. 35, the VAT declared by the buyer must be paid in order for it to be returned. Thus, in case of withholding declared but not paid by the buyers, the sellers will not be able to get the said VAT refund.

Tax offices have started to dismiss refund requests by numerous taxpayers since the Communiqué makes the VAT refund conditional on the buyer's payment of the tax withheld and the buyers have not paid this tax for various reasons. Taxpayers have thus filed applications before the Council of State for the stay of execution and cancellation of the said regulation.

The Council of State decided to stay the execution of the relevant regulation since the VAT Law did not include such a term, although the communiqué stipulated that VAT be paid for the refund.

However, the Revenue Administration appealed the decision of stay of execution on procedural and substantive grounds. The substantive examination of the case is still pending before the appellate court. However, on procedural grounds, it was decided that the adverse party of the case should be the Ministry of Finance rather than the Revenue Administration, and the judgment for stay of execution was thus revoked. In that case, it is important to take the defense statement of the Ministry of Finance and pass a judgment on the stay of execution and to complete the substantive examination as soon as possible to clarify the situation. Otherwise, it will be inevitable for many taxpayers to suffer.