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Vergide Gündem
English Translation

Tax measures against inflation and recession

Inflation or recession especially weakens the solvency of taxpayers. Because inflation
actually results in “hidden tax” and taxation of unrealized (fictitious) earnings. It
erodes their working capital.

Are there shields protecting enterprises?

With the amendment made in the Tax Procedure Law with the Law No. 5024, the
provision regarding "inflation adjustment in tax", which is valid for commercial
earnings, entered into force on 1.1.2004. With the same regulation, the
"inflationary" provisions in the legislation have been reduced to the "inflation
adjustment" and the following provisions of the TPL have been repealed:

Repealed Article Regulation
Article 274 of TPL “Inventory valuation” method, “last in first out method”
(“LİFO”)

repeated Article 298/B of TPL “Re-valuation” in terms of depreciable economic assets
Article 38/4 of TPL Cost Increase Fund (“CIF”)

As you may recall, the inflation adjustment was applied once in 2004 and it was not
applied in the subsequent years since the conditions (the PPI increase exceeded
100% in the last three years and 10% in the last twelve months) were not met. As
of 31.12.2021, inflation adjustment conditions were re-established, but with the
provisional article 33 added to the TPL with the Law No. 7352; financial statements
are excluded from the scope of inflation adjustment in taxation whether or not
inflation adjustment conditions are met in the advance tax periods of 2021 and
2022 and 2023, including the advance tax periods.

On the other hand, the financial statements dated 31.12.2023 will be subject to
inflation adjustment whether or not the inflation adjustment conditions are met,
but the profit/loss difference arising from this adjustment will be demonstrated in
the previous years' profit/loss account; the calculated “retained profits” will not
be taxed, and “retained year losses” will not be accepted as financial losses and
the adjustment will remain as a window-dressed balance sheet, perhaps making
companies “excess of liabilities over assets”.

While the inflation adjustment was postponed, taxpayers were allowed to re-valuate
their immovables and other depreciable economic assets which are recognized in
their balance sheets.

Why should LIFO come back?

In the light of above information, in 2004, while “revaluation” (even by paying taxes)
came back from the regulations in the tax legislation before the inflation adjustment
provisions, the failure to adopt the “LIFO” and “CIF” application results in taxpayers
paying taxes (inflation tax) on “non-real income”. Therefore, the “LIFO” and “CIF”
regulations, which were repealed in 2004, should be put into effect, at least during
the period when inflation adjustment is delayed. Because with LIFO, the last entry
cost will be taken into account in the cost of goods sold, so the taxation of the
fictitious income of the enterprises will be avoided.
Eylül 2022 September 2022 7