New regulations aim to render more effective the procedure of invitation to explain introduced in 2016 for the first time. However, it would be useful to harmonize some of the practices in the communiqué with some other communiqués issued by the authority.

Dear Fortune readers, I would like to hereby share with you my assessments regarding the recent regulations.

Due to the rapid increase in digitalization in the new century, lots of data have now become accessible to the public and in this respect, the tax authority has acquired direct or indirect access to information on many transactions carried out by taxpayers within the country. As a matter of fact, the tax authority can even have access to the international financial data of the persons resident in Turkey through the bilateral double tax treaties, information exchange and automatic information exchange agreements concluded with various countries. In the light of these developments, the tax authority can now request an explanation from  taxpayers by way of an invitation to explain based on the indications of tax loss by going beyond traditional methods, and resolve such issues without going through any bureaucratic process.

In this context, the procedure of invitation to explain was first introduced in 2016, additional regulations were issued on the functionality of the procedure with some amendments introduced in 2019 and the scope of invitation to explain, which was previously limited to sixteen subjects, was expanded to cover all kinds of issues that raise the suspicion of tax loss.

Based on the letter of invitation to explain, taxpayers have the right to make an explanation or not. If the taxpayer does not prefer to make an explanation within 30 days following the notification of the invitation to explain, the commission of the invitation to explain will decide on the declaration of the tax amount that may be subject to loss as specified in the letter of invitation to explain and the tax loss penalty will apply as 20% over the tax subject to loss on the condition that the tax returns that are not submitted are submitted and incomplete or inappropriate tax returns are paid together with an explanation fee equivalent to the late fee within 30 days. If the taxpayer makes an explanation and this explanation is accepted, no action will be taken against the taxpayer. However, if the explanation is not considered sufficient and not accepted, an action will be taken as in the preference of not making any explanation but the transactions of the said taxpayers may be referred to the tax inspection or valuation committee if it is concluded that the tax loss is higher.

On the other hand, the new regulation stipulates the monetary limits for invitation to explain if false or misleading documents by content (FMDBC) are used.  Taxpayers were previously invited to explain regarding the use of FMDBC but the new regulation stipulates that no explanation will be requested from taxpayers for such cases and they will be directly asked to pay an explanation fee equivalent to the tax, tax loss penalty and late fee upon the preliminary determination letter of the tax authority regarding the use of false and misleading documents.

However, the VAT General Practices Communiqué still contains a provision as to the effect that an explanation may be requested under invitation to explain from the taxpayers which have received a VAT refund and about which a negative report is present. Therefore, I am of the opinion that parallel regulations must be issued in the VAT practices communiqué so as to ensure harmonization between the communiqués. Besides, I would like to state that the invitation to explain communiqué in question does not contain any explanation on whether the taxpayers issuing necessary returns and making payments under the "Preliminary Determination Letter for FMDBC" will be included by the tax authority in the list of taxpayers using FMDBC or not.