The Financial Restriction regulation had thus far not found any application area since the ratio for restriction had not been specified despite the decision itself having been published in the Official Gazette dated June 15, 2012. With the determination of the ratio to 10% by the President of the Republic, the Financial Expense Restriction has entered the lives of businesses as of 2021.
Dear Fortune readers, in this article, I would like to share with you my assessments on the Financial Expense Restriction regulation.
As is known, the financial expense restriction had been put into force following its publication in the Official Gazette dated June 15, 2021 and had been carried into effect with Law No. 6322 to incentivize companies to finance their financial needs with equity capitals instead of borrowing. According to the regulation in question, businesses whose liabilities (cash outflows) exceed their equity capitals will not be able to have their expense and cost elements pertaining to liabilities considered expense while their corporate income is determined, the ratio of these expenses and costs not exceeding 10% of the total expense and cost elements, and as determined by the Presidency of the Republic. This application will be exclusive to the exceeding part of liabilities versus equity capitals used by businesses and will exclude those added to the cost of investment. Credit institutions, financial institutions, financial leasing, factoring and financing companies are exempt of the Restriction. There is a similar regulation in the Income Tax Law as well.
Due to the fact that to date, the Presidency has not taken any decisions on the matter of ratio, the financial expense restriction has not been implemented. However, the Presidential Decree No. 3490 determines the financial expense restriction rate as 10% to be applied as of 2021. Accordingly, interest rates, commissions, delay interests, exchange differences and other expense and cost elements under similar titles pertaining to the exceeding part of the liabilities versus capital equity will have their 10% considered as legally-rejected expenses. The financial expense restriction will be applied separately and annually for each provisional tax period and will apply to liabilities allocated after 1.1.2013.
When we analyze the draft notice on the matter presented to the public opinion, we observe that the determination of debts that are subject to financial expense restriction and expenses to be subject to financial expense restriction is quite complex and open to discussion. For instance, the subjection to calculation of the totality of short and long-term liabilities included in the calculation without any distinction is a significant issue. For many companies follow complex and similar elements that have nothing to do with liabilities in the calculations in question.
Furthermore, the determination of whether the business is subject to the restriction through a comparison to be made between equity capital versus liabilities based on balance sheets before financial expense restriction as of the last day of each provisional tax period will cause companies which have not issued any balance sheets thus far during provisional tax periods to issue one just like at the end of the fiscal year. It is obvious that this will put an additional burden to the workload of companies.
Again, aside from financial expenses, taxpayers who have earned financial incomes will be faced with the problem of not being able to appropriate these incomes and expenses (exchange differences excluded) with one another. This will indeed represent an important issue on the agenda to be dealt with.
Besides the fact that financial expense restriction has been brought to the agenda amid a problematic period, I do believe that the complexity of implementation will cause an unnecessary waste of time to both businesses and professionals. A notice where all issues in question are resolved and which is simpler and more applicable will help in the resolution of the problem in general.