Fear of losing one’s job and failure to earn a living for oneself and one’s family due to reasons such as old age, illness, accidents and economic crises has been one of the primary and common fears of man throughout the world; and from these fears and uncertainties the need for social security has arisen. Ever since, this need for social security is tried to be met through systems that are based on appropriations or met otherwise. In systems that are based on appropriations, people pay premiums in advance to the system, proportionate to the income that they demand to be paid in the future, and when they become entitled to their right of pension under conditions stipulated by law, they are paid back these premiums as retirement pension, again under rules stipulated by law. In such systems the place of work, type of work and position occupied have no significance in determining the retirement pension. The basis of the social security system “that is not based on appropriations”, is the relief funds incorporated by volunteering people or organizations that grant relief to those in need without the need for any return payment.

 

On the other hand, following the emergence of the social state concept in the 18^th century and its outspread throughout the World, providing social security to citizens has become one of the fundamental duties of the State. However, some countries have provided this assistance by introducing regulations in the social security system and supervising operation of this system, while other countries, including ours, have ensured that social security is provided by the systems and institutions that the state operates itself. On the other hand, although social security is a fundamental human requirement, social security support has reached such dimensions in some countries that some people have chosen not to work, causing their States to suffer great financial difficulties. Without doubt, in emergence of these financial problems, the economic and demographic developments experienced by countries have played a significant part, apart from exaggerated social security support. For instance, the deceleration of growth of population and even decreases in population, as well as the economic crises experienced have led to progressive elimination or cuts in social relief in many developed countries at present.

 

Likewise, our social security system is currently faced with severe financial problems due to developments in national economy, unemployment, failure of efficient use of collected funds, external system interventions, joint operation of health and retirement insurances, as well as privileged retirement option. Although regulations have been formerly passed for solution of these problems, it has been observed that these regulations were insufficient in eliminating the problems.

 

For temporary solution of these severe financial problems faced by these institutions, each year more and more resources are allocated to social security institutions from the budgets. Within this context, it will be required to allocate a total fund of TL 22 quadrillion from the general 2005 budget to three public social security institutions. The total deficits of the social security institutions that have been financed from the budget in the last decade, including the internal borrowing interest rate of the Treasury Undersecretariat, has been calculated as TL 345 Quadrillion by the Ministry of Labor and Social Security. This result reveals the magnitude of the problem and the urgency for a solution. Due to failure to generate an adequate level of employment and the heavy weight of the economic burdens on employment, it does not seem possible for these institutions to cover their deficits through their premium income in near or far future. The heavy burden on labor has caused a significant amount of unrecorded transaction in the field of employment, as has been in taxation. Due this unrecorded activity, the question  whether this has been the consequence of or the reason for high premiums or has lost its significance.

 

Due to this and similar problems, our security system has reached a stage where it can only be mended through fundamental and radical measures, rather than temporary and Palliative amendments. Therefore, another footing of the ongoing economic program is the regulations to be introduced in relation with the social security system. And the government has submitted four draft bills that it has announced within the framework of the Urgent Action Plan in the first days it has assumed the duties of the government, to the attention of the public again. Through the first of these drafts, the three existing social security institutions are abolished to be replaced with a Retirement Insurances Institution. Through the second draft bill, a general health insurance scheme that will be covering all people living in the country will be introduced; and through the third draft bill it has been planned to incorporate a Social Security Board Management as a supervising organization to all the social security institutions. Through this article we would like to emphasize a couple of issues on the subject at the stage these adjustments shall be introduced.

The first issue that we would like to emphasize is that the social security applications should be freed of the “for the people, in spite of the people” approach. Undoubtedly, social security is one of the most significant requirements of people. And the social state understanding has assigned the duty to meet this requirement to the State. However, this principle does not necessitate inclusion of all people in the system under the same conditions, at any circumstance. We believe that people should have a say and right to choose when it comes to meeting their own social security requirements. Within this context, people should not be forced to be a part of the public social security system, if they have opted to be included in private insurance company packages to acquire social security. Because in our opinion, the important issue is that everybody is protected under a social security umbrella in the country.

 

The second issue concerning the subject is the external intervention to the current social security institutions. As we have mentioned above, at the bottom of the financial difficulties of current public social security institutions, lie the external interventions to these institutions. In other words, some privileged retirement applications that the institutions have realized for some of their participants has upset the actuarial balances of the system. However, these kinds of institutions that base their relief on the basis of appropriations can only strive through actuarial balances that are established in the long term. The legal regulations to be introduced should be regulations that would inhibit the intervention of political parties that came to power from now on. The political parties that came to power should have no say on the premiums to be paid to social security institutions that provide pension in return for appropriations, as well as the payment periods, pension to be provided by these institutions and as determination of increase rates of these pensions pays.

 

Another issue that we would like to emphasize on the issue is related with the Code of Obligations-existence of health and retirement insurance under a single scheme. In both institutions in question, a worker who is with low income, therefore pays low amounts of premiums to the system benefits from the health services of the system together with family elders, his/her spouse and numerous children and creates a great burden on the system (the total health expense of the Social Security Institution in 2003 has reached TL 7.5 quadrillion, together with the medicine expenses. And the fact that no one is happy about the services of the said institution, in spite of such an extravaganza of resources is another point that should be analyzed);  whereas a person who has never visited the SSK health institutions and has paid premiums at the upper level of income has become the financer of those in the first group.

 

The final issue that we would like to emphasize is the fact that the health subsidies to be granted by the State within the scope of the general health insurance, doubled with the social security relief offered by volunteering institutions may impose the risk of curbing the inclination of people to work and employ birth control. This is a worldwide syndrome. Any unemployed person who receives the opportunity to live in the same circumstances that he can achieve by working, may start to think that working is unnecessary. Therefore, especially in general health insurance treatment, a time limit should be determined for the State subsidy on payment of the premiums of those who are unemployed, but are in fact able to work. This treatment should be subject to no time limits for those who are too old and disabled to work. Within this context, work on birth control should be given priority more than ever.

THE STATUS OF THE PROVISIONS FOR SEVERANCE PAY VIS-À-VIS CORPORATION TAX APPLICATIONS IN THE CASE OF THE TRANSFER OF A BUSINESS PLACE OR A PART OF THE BUSINESS PLACE TO ANOTHER PARTY

Recently, it is noted that a great number of enterprises transfer all of a part of their places of business to another enterprise, due to economic reasons, or due to the obligations imposed by the legislation.  During the transfer of places of business, the treatment of the accumulated severance pay indemnities relating to the workers employed in the places of business subject to the transfer operation, emerges as a significant issue.

 

In Article 6 of the Turkish Labor Code No. 4857, it is stipulated that in the case of transfer of all or a part of a place of business to another person, the employment contracts of the workers employed in the concerned place of business, or the concerned part of the place of business that has been transferred, shall also be transferred to the party who is taking over the concerned place of business, together with all its rights and obligations; that in the case of rights where the period of service of the worker is taken as basis, the new employer shall  be obliged to arrange the procedures relating to employment by taking as basis the beginning date of employment of the workers by their previous employers; that in transfer of places of business according to these provisions,  the previous and the current employers will be jointly responsible for the liabilities that have incurred prior to the transfer, and that should be paid on the date of transfer; however, that the period of liability of the previous employer shall be limited to two years as of the date of transfer. According to this article, the transfer of the place of business has not been identified as a reason that  entails the payment of severance pay indemnity to the workers.

 

When this subject matter is assessed from the standpoint of the tax legislation, the period on which the severance pay indemnities will be recorded as expense in the determination of the corporate profits, emerges as a significant subject matter. In Article 40/3 of the Income Tax Code, it is stipulated that the losses, damages, and indemnities paid based upon written agreements, judicial decrees, or by order of law, can be recorded as expense in the calculation of the corporate profits, provided they are relevant to the business. According to the general application and the judicial decrees relating to the subject matter, during the expense recording of the severance pay, the deduction of severance pay from the corporate profit is disallowable, unless the severance pay indemnity takes the nature of a liability on behalf of the employer, in other words, unless the severance pay is physically accrued.  Meanwhile, in cases when the transfer of the place of business is realized among the corporations among which a direct or indirect partnership relation exists, the provisions concerning disguised profit regulated in articles 15 and 17 of the Corporation Tax Code, should be taken into consideration.

 

Due to the reasons explained above; in order to avoid uncertainties during the transfer of all or a part of the places of business; in our opinion, the severance pay totals that are paid to the workers may be treated as deductible expense during the determination of the corporate profit of the period on which they have been paid; provided that:

 

a.       A transfer agreement is concluded;

b.       A list containing the names of the employees who have been transferred and showing the severance pay liability incurred for each personnel on the date of the transfer is provided in the attachment to the Agreement;

c.       The criteria to be taken as basis in the payment of the severance pay indemnities to the employees subsequent to the date of transfer pursuant to the provisions of the Turkish Labor Code is specified on the Agreement. 

PERIOD END TRANSACTIONS IN ENTERPRISES: CONDITIONS FOR SETTING ASIDE OF PROVISIONS FOR THE RECEIVABLES THAT HAVE BECOME DOUBTFUL

According to  the Turkish tax system, the commercial and agricultural gains are taxed on accrual basis. In the accrual basis, income that is derived within the scope of  commercial and agricultural gains and that have accrued in terms of  type and amount, are taxed disregarding whether or not they have been collected.

 

However, this application may sometimes result in the occurrence of results that conflict with the purpose of the “taxation of the actual tax bases”. As a requirement imposed by the economic realities of Turkey,  a substantial part of the sale of goods and services realized in Turkey are conducted on credit sales basis. Consequently, the merchants are required to pay taxes over the totals that they have not yet collected from their customers in return for the goods and services that they have sold.  However, as the  requirement set forth by the “accrual basis”, although they are not collected yet, the amounts in question are carried to the relevant accounts for the purpose of determination of the tax basis; and sometimes the merchants face difficulties in their collection.  In such cases, for the purpose of reaching the actual tax base totals, the Law Maker allows the taxpayers to set aside provisions for such receivables, and  through this way, the taxpayers are allowed to exclude their doubtful receivables from the scope of the tax base.

 

THE CONCEPT OF DOUBTFUL TRADE RECEIVABLES IN THE TURKISH LEGAL SYSTEM

 

In the Turkish Tax legislation, the provisions concerning doubtful receivables have been regulated in Article 323 of the Tax Procedures Code.  According to the concerned article, provided that they are  relevant to the acquisition and continuation of commercial and agricultural earnings, receivables that have reached the stage of legal or administrative action, and receivables that have not been paid by the debtor even though protest has been made or their collection has been demanded more than once in writing, but which are too small to be worth legal or administrative action, are considered as doubtful receivables Accordingly, a provision may be set aside on the liabilities side for the disposable value on the day of appraisal for the doubtful receivables indicated above, and an  indication shall be made in the provision account as to the receivables for which these provisions are being made. In secured receivables, this provision shall be restricted to the amount remaining over and above the security.

 

Hence, in order for a receivable to be considered as doubtful, and to be recorded as expense through the setting aside of a provision,  the following conditions must be fulfilled:

 

A.                   The receivable must be relevant to the acquisition and continuation of commercial and agricultural earnings;

B.                   The receivable must have reached the stage of legal or administrative action;

C.                  The receivable must be too small to be worth legal or administrative action;

D.                  The receivable must be unsecured;

E.                   The taxpayer must maintain his books on balance sheet basis;

F.                   The receivable against which a provision will be set aside must have accrued;

G.                  The receivable must have become doubtful as of the date of appraisal.

ISSUES TO BE TAKEN INTO CONSIDERATION  IN THE SETTING ASIDE OF  PROVISION FOR DOUBTFUL RECEIVABLE

 

According to Article 323 of the Tax Procedures Code, in order for a receivable to be considered as a doubtful receivable, and in order to be allowed to set aside a provision over the concerned receivable,  a legal or administrative action must have been initiated against  the debtor; and if the receivable is  too small to be worth legal or administrative action, a  protest must be made, or their collection must be demanded more than once in writing. Since the receivable in question will become doubtful during the period in which the concerned legal procedures have been initiated, the provision will be set aside in the same period. In the decisions passed by the Council of State regarding the subject matter, it is generally stated that the provision for the doubtful receivable shall be set aside at the year in which the receivable has become doubtful.  However, in some of the decisions, it is also opined that the provisions that were not set aside during the year in which the receivable has become doubtful,  can be set aside in the subsequent  years.

 

According to an argument, although the advances that have been paid in connection with the purchase of goods or services are related to the commercial activity, since they are not carried to the income accounts previously, they will not be allowed to be recognized as loss through the setting aside of a provision. According to another argument, in order to set aside a provision for a receivable, there is no obligation concerning the recording of the concerned receivable as income during the previous period, and provided that the receivable in question is relevant to the acquisition and continuation of the commercial earnings, it will be possible to set aside a provision for the concerned receivable.

 

The basic argument of  those who assert that provisions shall not be set aside over the receivables due from the public administrations and establishments is that, the state will anyhow pay its receivable in the future and therefore, that the receivables due from the state  should be considered as secured receivables. However, since Article 323 of the Tax Procedures Code do not contain any provision stipulating that a provision shall not be set aside over the receivables that become due from the public administrations and establishments,  it is also argued that a provision may be set aside for the receivables due from the public sector. 

 

Provision for doubtful receivables cannot be set aside for the accommodation bills and checks that are not based on an accrual purchase and sale transaction, and that are issued mainly for purposes of  meeting the financing needs of enterprises; since they are not issued in connection with  the sale of any goods or the rendering of any services realized for the purpose of acquisition or continuation of commercial or agricultural earnings. 

 

Composition with creditors does not mean that the receivable has become doubtful; just on the contrary,  through composition, a security is granted through decree that the receivables of the creditors will be paid  based on a payment schedule. Therefore, the receivables that are subject to composition with creditors, are not considered as doubtful receivables and accordingly,  provisions are not set aside over receivables of this type.

 

In the event of the declaration of bankruptcy by customers who have purchased goods and services from the merchants on credit basis, provided that such receivables are registered at the bankrupt’s estate, provision may be set aside over the receivables in question. However,  in such cases, the provision must be set aside during the period in which the concerned receivable is registered in the bankrupt’s estate.

 

During the transfer of corporations, provided that the required conditions are met,  the receivables that are formed in the transferred corporations, are allowed to be recorded as loss by  the acquiring company as receivables without value or as doubtful receivables.  In the case of  transfers through inheritance,  the receivables that were formed prior to the death of the deceased person, are allowed to be recorded as loss by  the inheritors as receivables without value or as doubtful receivables, provided that the required conditions are met. 

 

The doubtful receivables that were set aside for the receivables that were subsequently collected,  should be recorded as income and should be added to the tax base during the period on which they have been collected.

The attachment of the properties owned by the debtor due to his default in the payment of his debts within the specified term, means that the receivable has become secured. Accordingly, provisions for doubtful receivables are  not set aside for receivables that have become subject to attachment.

 

In order to set aside a provision over the receivables due from ordinary partnerships, a prosecution must have been initiated for each partner separately, and the receivable must have remained uncollected.

 

Setting aside of a provision for the doubtful receivables due from the unlimited companies, is based on the condition that a legal prosecution has been initiated against the unlimited company and its partners, and that the concerned legal prosecutions must have remained without a tangible result. 

 

Provided that they fulfill the required conditions, the receivables of the holding companies due

from their subsidiaries and affiliates, can be recorded as loss through the setting aside of a provision during the period on which they have become doubtful.

 

In order to set aside a provision for receivables of whose debtors are abroad, generally, a legal or administrative action must have been initiated in the country where the debtor is resident.  However, for the verification of the fact that the receivable due from abroad has become doubtful,  to documents to be procured from abroad must be certified by the Turkish consular representatives abroad, or must be apostiled in accordance with the provisions of the Convention on Abolishing the Requirement of Legalization for Foreign Official Documents Approval Obligation, prepared on the basis of the Hague Conference on International Private Law.

 

According to one argument, the setting aside of  doubtful provision over the portion of the receivables relating to Value Added Taxes that have become doubtful, shall not be allowable, on grounds that such receivables are not  directly relevant to the acquisition and continuation of commercial earnings. According to another argument,  the separation of the receivable on the basis of the cost of goods and the VAT is not required, and that provided that the transaction is relevant to the acquisition and/or continuation of agricultural or commercial earnings, a provision for doubtful receivable may be set aside over the concerned receivable total.