TURKEY EXPENSE ALLOWANCE GUIDE

Transcription

1 TURKEY EXPENSE ALLOWANCE GUIDE

2 PricewaterhouseCoopers ( provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice. PricewaterhouseCoopers provides a full range of business advisory services to leading global, national and local companies and to public institutions. These services include assurance, accounting and tax advice; information technology and human resource consulting; global risk management solutions; financial advisory services including mergers & acquisitions, business recovery and project finance; business process outsourcing and training through a global network of professionals. PricewaterhouseCoopers operating in Turkey since 1981, consists of 5 offices; 2 in İstanbul, 1 in Ankara, 1 in Bursa and 1 in İzmir, with 17 partners and nearly 800 professional staff. ( PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.) Web site: address: marketing@tr.pwcglobal.com

3 TABLE OF CONTENTS I INTRODUCTION What is Expense Allowance? Can I, as a foreign national, benefit from this practice? Are all expenditures acceptable for the allowance? What happens if I do not have taxable employment income?... 6 II GENERAL PRINCIPLES What are the requirements to be fulfilled? How must I document my expenditures? Are there any further requirements with respect to valid documents?... 7 III ELIGIBLE EXPENDITURES Education expenses Health expenses Food expenses Clothing expenses Rent expenses IV INELIGIBLE EXPENDITURES V INDIVIDUALS ENROLLED IN THE LOCAL PAYROLL: What are my responsibilities? How do I make a record of my expense allowance? What should my employer do? How do I report my expense allowance and how am I reimbursed for it? What sanctions apply if tax is underpaid due to miscalculation of the allowance? What happens if I still have unused expense allowance at the year-end?... 14

4 VI INDIVIDUALS FILING ANNUAL TAX RETURNS What happens if I am paid abroad and not subject to payroll withholdings? How can I benefit from the expense allowance? How do I make a record of my expense allowance? What do I do if I pay tax on the payroll, but also file tax returns? VII SPECIAL CASES How do I benefit from the allowance if I retire? What if I change my job during my stay in Turkey? What happens if I am being paid by two local employers at the same time? What happens when my employer s tax liability is over before 31 December? Appendix 1: Example of Expense Allowance Calculation

5 I INTRODUCTION 1. What is Expense Allowance? Turkish Income Tax Law allows for a deduction from tax payable corresponding to the - 8% of the first TRY 3,300 of the eligible personal expenses - 6% of the second TRY 3,300 of the eligible personal expenses and - 4% of the remaining eligible personal expenses, if any, incurred during the calendar year. However, the amount of expenses that could be subjected to this allowance is limited with the annual income tax base of that year... For individuals paying their taxes through payroll withholdings in Turkey, the deduction takes the form of a tax credit to be offset against next year s payroll taxes. However, if the employment income is taxed via annual tax returns, the allowance is directly offset against the tax payable via the tax return. As explained in detail below, expense allowance is a practice that reduces the effective tax burden. 2. Can I, as a foreign national, benefit from this practice? Yes, foreign nationals can also benefit from the expense allowance provided that they fulfill the related obligations. 3. Are all expenditures acceptable for the allowance? In accordance with the Turkish Income Tax Law, the following types of expenditures made by the employees on behalf of themselves, their spouses and children can be used for the Expense Allowance: Education Health Food Clothing Rent Detailed explanations of the eligible expenses can be found in the following sections. The same law also requires that the aforementioned expenditures must have been made in Turkey and furthermore must be supported by proper documentation to be issued by real or legal persons that are liable to Turkish income or corporate taxation.

6 4. What happens if I do not have taxable employment income? Expense Allowance is a tax credit usable for taxable employment income only. Therefore, unless a certain amount of tax is paid/due, the tax credit cannot be used. II GENERAL PRINCIPLES 1. What are the requirements to be fulfilled? There are certain requirements in order for the aforementioned expenditures to be acceptable for the expense allowance. (i) The expenditures must be made in Turkey The expenditures must be made in Turkey in order to be eligible for the expense allowance, and hence expense allowance may not be used for any expenses incurred outside Turkey. (ii) Expenditures should be supported by documents received from taxpayers who are liable to Turkish income or corporate taxation Another requirement of the law is that the expenditures should be made to institutions that are liable to income/corporate tax in Turkey, as only such institutions are qualified to provide the viable documents, i.e. an invoice or a receipt. Hence education, health, rent and food payments made to governmental institutions with general, supplementary or private budgets cannot be acceptable for expense allowance. For example, payments for health expenditures made to university hospitals or institutions, which utilize funds sourced by the Ministry of Health, shall not be accountable for expense allowance since such institutions are exempt from corporate taxation. This also includes donations to parents associations of schools under the Ministry of Education, clothing and food expenditure to consumer co-operatives. One exception to the above-mentioned rule is the payments made to corporations that enjoy a corporate tax exemption under Article 8 of the Corporate Tax Law. In the case, for example, of a private school exempted from corporate taxation under this article, the fees paid to the school would be eligible for the allowance as long as the expenses incurred are documented properly. (iii) Expenditures must be made by and on behalf of the employee, his/her spouse or his/her children for their own needs Expenditures should be made by and on behalf of the employee, his/her spouse or his/her children for their own needs.

7 In addition, please note that it is important that the total amount of expenditures be reasonably proportional to the employee s salary earnings and also to the consumption potential of a family. For expense allowance purposes children, regardless of their ages, would mean the ones that are living with or financed by the employee in question. Children financed through alimony, grandchildren who lost their parents and are living with and financed by the employee and adopted children shall also be considered within this scope. (iv) Expenditure documents should be related to working periods Expenditures that are made during unpaid leave or the unemployment period between two jobs will not be subject to expense allowance. 2. How must I document my expenditures? Expenditures should be supported by the following documents that are received from income and corporate taxpayers. a) Invoice b) Self-employed receipts c) Retailers receipts d) Cash register receipts 3. Are there any further requirements with respect to valid documents? Other requirements for the documents to be usable for the allowance are as follows. Is there an upper limit for any one document? There is an upper limit only for the amount that a cash register and retailer s slips can have. This limit is TRY 480 for 2005 and revised annually. An invoice shall be necessary in order to document the amounts exceeding the limit. Are the documents of corporate tax exempted institutions valid? As explained in section II/1-ii in detail, documents provided by corporations and institutions that are exempt from income and corporate taxation will not be acceptable for the allowance. Such documents shall have a statement on them stating that the institution is exempt from taxation. What documents are needed when rent is paid to a real person? The necessary explanations can be found in section III/5-ii. To whom the documents should be addressed? Documents should be addressed to employees, their spouses and children in order to be usable for the expense allowance.

8 What do I do when there is more than one expenditure type on an expense document? Some documents such as cash receipts from retailers will include more than one expenditure type. For example, a single receipt may include expenditures for food, clothing and cleaning material. Food and clothing are acceptable, whereas cleaning materials are not. In such cases, the amount corresponding to the unacceptable expenses should be deducted from the sub-total of the receipt. On the other hand, although both food and clothing are eligible, the receipt can be used for only one of the categories. Therefore, the employee should include the receipt in the category of the higher expenditure item on the receipt. III ELIGIBLE EXPENDITURES Please find below further explanations on eligible expenditures and the required documentation. 1. Education expenses Payments regarding educational expenses such as fees paid to kindergartens, crèches, private courses, private schools, and private tutors, other educational expenses, for example cost of books and other equipment, and tools for educational purposes are considered eligible expenses, provided that they are properly documented. In addition, the subsequent incurred costs are also eligible: payments made to kindergartens payments made to private schools (provided that they are liable to corporate/income taxation in Turkey), payments made to private dormitories (provided that they are liable to corporate/income taxation in Turkey), transportation costs to education and training institutions paid to schools or shuttle buses which serve for this purpose (provided that they are liable to corporate/income taxation in Turkey), payments made for driving courses, fees paid to private courses for university or private school admission examinations, payments made for foreign language courses, periodicals bought for the aforementioned purposes and payments made to private universities only, provided that they are liable to income/corporate taxation.

9 Expenditures listed below shall not be considered as eligible expenses: Education expenses incurred outside of Turkey Daily newspapers, weekly, monthly and annual periodicals or magazines (other than those stated above), Donations made to parents associations (Such associations are not liable to income and corporate taxation, and hence will not be entitled to issue the proper documents. Please see section II/1-i for further explanation.), Payments to education institutions in foreign countries (The law requires that the expenditures must be made in Turkey. Please see section II/1-i for further explanation.), Payments to institutions with general, supplementary and private budgets, State university fees and expenditures (State universities are not liable to income/corporate taxation, and hence will not be entitled to issue the proper documents. Please see section II/1-i for further explanation.) 2. Health expenses Eligible health expenses Expenditures made by the employees on behalf of themselves, their spouses and children, related to medicine, examinations, surgical operations, eyeglasses, and contact lenses in addition to the payments made to hospitals, doctors, and dentists are deemed as eligible expenses. Ineligible expenses Toothbrushes, toothpaste, toiletries and make-up supplies are not considered as health expenses, and thus they cannot be used for expense allowance purposes. The health expenditures paid to hospitals financed by the Ministry of Health or by universities are not subject to expense allowance because these institutions are not liable to corporate tax. However, expenditures for skin health approved by a doctor s prescription would be acceptable for the allowance. In addition, membership fees paid to sports centers/clubs shall not be considered as eligible expenses. Employer contributions If the health expense concerned is partially paid by the employer, only the portion compensated by the employee can be used for expense allowance. However, if there is only one invoice for the whole amount the employer is likely to keep it for a corporate tax deduction.

10 Although the Ministry of Finance has not clarified the issue up to this date, we believe that the employee can use a copy of the invoice on which the employee portion should separately be stated, if cached by the employer, for expense allowance purposes. Private insurance premiums Premiums paid to private health insurance companies established in Turkey can be deducted from the employee s income tax base up to a certain limit. The exceeding amount, however, can be used for allowance purposes. 3. Food expenses All expenditures on food and beverages at restaurants, cafés and hotels as well as food and beverage expenses incurred at markets are viable for expense allowance. However, this excludes cigarette and alcohol expenses. In the case of accommodation and foodstuffs being separately disclosed on hotel invoices, the food expenditure can be used for allowance. Otherwise, the expenditure in total will not be considered as qualified due to documentation requirements. Please also note that, foodstuffs for pets are also not eligible for expense allowance. 4. Clothing expenses This includes all expenditures on fabric, clothing, shoes, hats, underwear, socks and belts. Sewing, repairing and fabric dyeing expenses are also viable. Wedding gowns should also be considered within the scope of clothing expenses. However, cleaning material costs and dry-cleaning are not subject expense allowance. 5. Rent expenses All rent expenditures for residences are subject to expense allowance, regardless of whether they are paid in advance, quarterly or monthly. However, the period to which the payment relates should be mentioned on the related document, e.g. the rent contract. (i) What happens if I pay my rent in advance? As per the Income Tax Communiqué No: 255, rent paid in advance could be used for the expense allowance in the period that the payment relates to. Therefore if the rent was paid in advance for 2005 and 2006 in 2005, only the amount corresponding to the portion relating to 2005 could be used for the expense allowance of The remaining portion will be eligible for the following year.

11 Please bear in mind that rent expenditure should be supported by a document received from an income or corporate taxpayer in order to be viable for personal expense allowance. (ii) How should I document rent payments made to real persons? Your property owner may not be licensed to issue a receipt or an invoice. Therefore, tax authorities consider the following as adequate documentation, when and if rent is paid to a real person: A bank slip, if rent is paid through a bank (please bear in mind that bank slips would not qualify as appropriate documents for other expenditures) and a copy of the rent contract A document issued by the property owner verifying the actual payment and a copy of the rent contract (no need for notarization), if the rent was paid in cash. Other than these documents, the submission of the rent contract properly signed by the landowner and showing the amount of rent collected from the employee in the related year to the employer will also be valid for expense allowance. (iii) Can I submit ATM receipts for documentation of my rent expenses? Rent payments through ATMs will not be subject to expense allowance since there is no information on the subject or receiver of the payment on an ATM receipt. (iv) Can I use my rent expenses even though my landowner is a public institution? If your real estate owner is a public institution, your rent expenditures would not qualify for the allowance as such institutions are not liable to income/corporate taxation. However, the rent expenses for lodgings of state economic enterprises that are liable to taxation would be viable for expense allowance, on the condition that these institutions can provide an invoice for the rent payment. (v) Can I deduct rent paid for my housing abroad? In order for the expenses to be accountable for the allowance, the law requires that the expenditures be made in Turkey. Therefore expenditures for housing abroad will not fall into the scope of the allowance.

12 IV INELIGIBLE EXPENDITURES Apart from those stated in Section III, the expenditures which are not eligible for Expense Allowance coverage are as follows: Fuel expenditures (firewood, coal, fuel-oil, kerosene) for residences, Proxy payments, Expenditures on transportation of freight and passengers, Payments made to hotels, motels and pensions for accommodation, Expenditures on theatres, movies, concerts, beaches and swimming pools (recreation expenses), Ornamental goods (jewellery), Cleaning materials and supplies Any kind of toiletries, perfume or after-shave, Cosmetic materials, Flowers, Fees paid to hairdressers and barbers, Fees for photograph films and film developments, Purchase of electric bulbs and batteries, Purchase of records, tapes, VCDs, DVDs and videotapes and fees paid for their rental, Expenditures for paint, whitewash and wallpaper made for the residences, Expenditures paid for installation of electricity and water, Crystal and glassware Toys Purchase of towels, bed linen, Purchase of plastic goods, Purchase of bags and suitcases, LPG expenses,. Expenditures related to furniture, household appliances, electronic goods, etc.

13 V INDIVIDUALS ENROLLED IN THE LOCAL PAYROLL: RESPONSIBILITIES 1. What are my responsibilities? Employees should collect the eligible documents addressed to themselves, their spouses and children from 1 January to 31 December. In addition, it is the employee s responsibility to record their expense documents on the back page of the expense allowance notification form (which is a pre-printed envelope) according to their expense groups and submit the eligible documents to their employers with the notification form by January 20 th of the following year. (If January 20th is a holiday, the documents can be submitted until the end of the next business day.) On the expense allowance notification, employees are expected to declare the total amount of their expenditures and calculate the amount of credit according to the thresholds explained in the Introduction Section. (Please see also Appendix for an example of the calculation.) 2. How do I make a record of my expense allowance? The employees who will benefit from expense allowance should record their expense documents on the back page of the expense allowance notification according to their expense groups. If there are more than 50 expense documents, the remainder may be recorded on a photocopy of the expense allowance notification page. The total amount of expense documents should be categorized under the corresponding total sum heading, which is on the back page of the notification. The total amount of each expense group should be recorded under the corresponding heading on the front page. The employee should fill in all other required parts and sign the notification. 3. What should my employer do? The employers are liable to check the validity and the acceptability of these documents and the correctness of the calculations that are declared by the employee. The employers prepare the expense allowance payroll slip up until the end of January based on the declared notifications. On these payrolls, the income tax difference from which the employee is to benefit should be calculated for each employee separately. Employers are liable to keep the notifications and documents of expenditures for the next 5 years and present these when required for tax inspection purposes.

14 4. How do I report my expense allowance and how am I reimbursed for it? Employers would prepare payroll slips, indicate the income tax that is levied and declare these amounts with the monthly withholding tax return. In addition to these, it is also the employer s liability to calculate the income tax difference resulted from expense allowance on an extra payroll slip; i.e. Expense allowance payroll for each employee separately. Thus, each individual will separately benefit from the tax credit available. Employers will offset that amount from the income tax of the salaries that will be paid in February. The employers should pay the difference resulting from the tax credit to the employees by the deadline for the declaration of withholding income tax notification. If the amount of income tax credit payable to employees exceeds the tax liability of the first month, the remaining portion will be deducted from the tax liabilities of the following months until it has been completely offset. 5. What sanctions apply if tax is underpaid due to miscalculation of the allowance? As mentioned above, the employers are responsible for the accuracy of the withholding tax calculated. On the other hand, if the use of any fake or misleading document were proved, employers can charge the tax and late payment penalty and interest to the employee. The employees should be paid the deducted tax difference in the month in which the deduction is made. Otherwise, the tax difference that is not paid in cash will be treated as an inaccurate withholding tax declaration and a penalty will be applied to the employer for the inaccurate declaration of tax. 6. What happens if I still have unused expense allowance at the year-end? Tax differences arising from the Expense Allowance is paid to the holders of the right by way of deduction from their income taxes. If the deduction process could not be completed by the year-end, the remaining portion would be deducted from the December tax base. If the discrepancy payable to the employee exceeds the tax payable in December, the exceeding portion will be reimbursed to the employee by the tax office.

15 VI INDIVIDUALS FILING ANNUAL TAX RETURNS RESPONSIBILITIES 1. What happens if I am paid abroad and not subject to payroll withholdings? Individuals who are not subject to local payroll withholdings but are liable to report and pay tax on their employment income by filing annual income tax returns in Turkey can also benefit from the expense allowance practice. 2. How can I benefit from the expense allowance? Under the Turkish income tax law, a tax return for employment income generated in one calendar year has to be filed by the 15 th of March of the following year. The related tax is payable in two equal installments by the ends of March and July. Employees who are taxed through an annual tax return will benefit from the expense allowance after the relevant tax office has reviewed all documents submitted as to their content & form. The tax office will then inform the employee of the usable amount of tax allowance by the end of April. Where the second installment of tax is not paid earlier than April, the expense allowance will be credited against the second installment of the tax. If, however, the full tax liability has already been paid before April, the tax office will be liable to refund the relevant amount in cash. Please note that if you have personal income other than your employment income, e.g. investment income that is included in your tax base, the allowance will be applicable to the tax base of your salary income only. 3. How do I make a record of my expense allowance? Employees who will benefit from the allowance should collect the eligible documents addressed to themselves, their spouses and children from 1 January to 31 December. In addition, it is the employee s responsibility to record their expense documents on the back page of the expense allowance notification form (which is a pre-printed envelope) according to their expense groups and submit the eligible documents to their tax office with the notification form by the filing deadline. On the expense allowance notification, employees are expected to declare the total amount of their expenditures and calculate the amount of credit according to the thresholds explained under the Introduction Section. (Please see also Appendix for an example of the calculation.)

16 4. What do I do if I pay tax on the payroll, but also file tax returns? If part of an individual s salary is taxed through payroll withholdings in Turkey, whilst there is other employment income for which a tax return must be filed, expense allowance would be available only for the portion that is not taxed by way of payroll withholdings.. Accordingly, should you be required to declare your salary income fully taxed on separate payrolls* by way of withholdings, you would not be eligible to benefit from the expense allowance on your tax return. In such case, the expenses would need to be used on the local payroll. (*) Under the local legislation, an individual whose 100% of salary income is taxed on a single local payroll in Turkey does not need to report his salary income on an annual tax return. Additionally, individuals who receive employment income from multiple local payrolls would need to report such income only if the income received from the second and consecutive employers exceed the annual declaration limit.

17 VII SPECIAL CASES 1. How do I benefit from the allowance if I retire? The documents relating to expenses incurred in the year of retirement can fully be used for the expense allowance regardless of your retirement date provided that they are submitted to the employer by the statutory deadline. The employers are liable to pay the corresponding tax credit by close of business on February What if I change my job during my stay in Turkey? If you change your job, you would need to submit your expense allowance notification of that year to your new employer. Additionally you should secure a document from your former employer displaying your previous tax base, related withholding tax amount and associated payment receipts. Then your new employer would be liable to complete the process. However, if you commence your new job between January 1 st and 19th, you will need to submit your eligible documents and notification concerning the previous years expenses to your former employer until January 20th. 3. What happens if I am being paid by two local employers at the same time? Such employees can submit their expense allowance notifications to both employers. Each employer would apply the general procedure based on the salaries they pay. 4. What happens when my employer s tax liability is over before 31 December? Employees of an employer whose tax liability ends before 31 December and who do not start working for another employer should submit their Expense Allowance Notification directly to the tax office that the employer was linked to in April. Such employees should also submit their payroll slips certified by the employer with these notifications. The tax office concerned would calculate the tax credit owing to the expense allowance, and provided that the employer has fulfilled the tax liability, the related credit would be paid to the employee. If the tax liability on the Withholding Tax Return was partially settled by the employer, the tax credit would be paid, on condition that the tax paid covers the whole amount of the tax credit. In circumstances where the tax is fully unpaid, the tax difference owing to Expense Allowance will be paid after the collection of the mentioned taxes. With respect to the companies that are in liquidation, the Expense Allowance process would be performed by the Liquidation officials. Appendix 1: Example of Expense Allowance Calculation Chandler William s employment income related to year 2005 and his eligible expenses is as follows:

18 TRY US$ (*) A) Taxable Income (after applicable deductions) 65,000 50,000 B) Total Eligible Expenses 26,000 20,000 D) Upper Limit for the Usable Expenses (=A) 65,000 50,000 E) Income Tax Due 16,920 13,015 (*) The exchange rate is considered as 1.30 TRY per US $1 for rounding purposes. THE CALCULATION OF THE EXPENSE ALLOWANCE AMOUNT TRY US$ (*) 8% of the first TRY 3,300 (3,300 x 0.08) % of the second TRY 3,300 (3,300 x 0.06) % of the remaining expenses [(26,000 6,600 x 0.04] Total 1, (*) The exchange rate is considered as 1.30 TRY per US $1 for rounding purposes. THE EFFECT OF EXPENSE ALLOWANCE ON TAX TRY US$ (*) A) Tax Due Before the Expense Allowance 16,920 13,015 B) Total Usable Expense Allowance (1,238) (952) C) Tax Payable 15,682 12,063 (*) The exchange rate is considered 1.30 TRY per US $1 for rounding purposes.

19 Suleyman Seba Cad. No:48, BJK Plaza, B Blok K Akaretler, Besiktas-Istanbul TURKEY Telephone: +90 (212) Facsimile: +90 (212) Buyukdere Cad. No:111 Kat Gayrettepe, Istanbul TURKEY Telephone: +90 (212) Facsimile: +90 (212) Paris Cad. No:12/ Kavaklidere, Ankara TURKEY Telephone: +90 (312) Facsimile: +90 (312) Hurriyet Bulvari No:4/1 Kat 6/605, Kavala Plaza Alsancak, Izmir TURKEY Telephone: +90 (232) Facsimile: +90 (232) Contact names : Adnan Nas (Tax Senior Partner) Bilgutay Yasar (Tax Director) Pinar Onok (Tax Senior Manager) adnan.nas@tr.pwc.com bilgutay.yasar@tr.pwc.com pinar.onok@tr.pwc.com