Inflation accounting, postponed until 2023-end despite necessary conditions, will enter into force as of January 1st unless there is a new postponement.
Turkish Revenue Administration (GİB) published the draft communiqué on inflation accounting. Despite the conditions stipulated in the law, implementation of inflation accounting was postponed to the end of 2023 with an amendment to the law. According to the amendment, the law will enter into force as of January 1, 2024, unless there is a new postponement.
Inflation adjustment is a process, which involves restatement of balance sheets in terms of eroding current purchasing power due to the erosion in the purchasing power of TRY. This inflation adjustment system is a necessity according to some of the business world. Others oppose on the grounds that it will increase the tax burden. The Revenue Administration also opened an exposure draft communique for opinions on the inflation adjustment.
The demands of taxpayers, which were requested by taxpayers due to high inflation for many years but did not find a response, were included in our tax system as “Inflation Adjustment” with the Law No. 5024 at the end of December 2003. Subsequently, the system could only be applied to 2004 as inflation started to decline.
Nazmi Karyagdi, Co-founder of Yeni Ekonomik Danismanlik AS for the EKONOMİ daily:
“Although the conditions stipulated in the law were met in 2021, when inflation started to climb again, the implementation of inflation accounting was postponed to the end of 2023 with an amendment to the law.”
Karyagdi states that with that postponement despite hyperinflation in 2022 and 2023 no inflation accounting was implemented.
Here is the Q&A session with Karyagdi on inflation accounting:
– What are the conditions that trigger inflation adjustment?
Normally, inflation adjustment is mandatory if the producer price index (PPI) exceeds 10% in the current year and 100% in the last three years.
However, according to the provision in the postponement regulation made in 2022; balance sheets dated 31.12.2023 must be subject to inflation adjustment, regardless of whether the conditions for inflation adjustment are met.
-What is inflation adjustment?
It is the correction of the balance sheet, which does not reflect the real situation due to the erosion in the purchasing power of money, in terms of the current purchasing power.
In other words, inflation adjustment is the process of bringing non-monetary assets and resources (e.g. raw materials, materials, trade goods, prepaid expenses, subsidiaries, associates, subsidiaries, land, buildings, machinery, plant and equipment, vehicles, intangible rights, leasehold improvements, equity items, liabilities, adjusted profit/loss, funds in liabilities, provisions …) to their current values.
-What is not inflation adjustment?
It is not the process of calculating the real profit or loss by adjusting the profit or loss calculated at the end of the year for inflation with the help of a coefficient.
It does not mean that all businesses pay less tax. Depending on the structure of their balance sheet, they may pay more or less tax as a result of inflation adjustment.
-Can all taxpayers make inflation adjustments?
The basic condition for a business to make inflation adjustment is to be a taxpayer of income or corporation and to keep books on a balance sheet basis. Commercial income taxpayers, self-employed individuals such as lawyers, doctors, CPAs, Certified Public Accountants, Certified Public Accountants, those who earn agricultural income, those who earn rental income, those who earn securities income such as interest, dividends, etc., and those who earn wage income are not included in the scope of the inflation adjustment.
On the other hand, in the 2004 inflation adjustment application, enterprises with net sales or asset size above a certain amount were required to apply inflation adjustment.
Therefore, the Ministry of Treasury and Finance will make a determination in this direction in 2024. In this case, enterprises with a certain size will be included in the scope of inflation adjustment.
– Will the 2023 balance sheets subject to inflation adjustment change the tax payable?
Taxpayers within the scope will adjust their 2023 balance sheets in any case. However, tax declarations will be made on the profits/losses determined before the adjustment. The profit/loss difference arising from the inflation adjustment in 2023 will be shown in the previous years’ profit/loss account, the profit will not be subject to tax and the previous year’s loss will not be considered a loss.
– How many types of balance sheets will businesses have at the end of 2023?
Businesses within the scope of inflation adjustment will prepare 2 balance sheets as of the end of 2023: One is the balance sheet without inflation adjustment and the other is the balance sheet with inflation adjustment.
– Will inflation adjustment be made in every temporary tax period starting from 2024?
According to the current PPI rates; in accordance with the provision in the Tax Procedure Law that inflation adjustment will be made if the producer price index (PPI) exceeds 10% in the current year and 100% in the last three years, it seems that inflation adjustment with tax consequences will be made as of 2024/1st temporary tax period.
Because as of September 2023, the last three-year PPI increase is 433.84 percent and the annual PPI increase is 47.44 percent. When the conditions for inflation adjustment disappear as of the provisional tax period, the inflation adjustment will also end.
– Does inflation adjustment result in the same outcome for all entities?
It would not be correct to say that inflation adjustment will have the same result for all businesses. Inflation adjustment has an impact according to the balance sheet structure of the enterprises. Therefore, it causes different tax consequences for each enterprise.
The results of inflation adjustment in a business can be determined as a result of multiple valuations such as the fixed asset structure of the company, equity/debt status, the period of entry of fixed assets into assets. Therefore, it is best to evaluate each entity individually instead of generalizing. Any generalizations made in the market are misleading.
– For whom does inflation adjustment have positive results?
a) Businesses with strong fixed assets and inventory items,
b) Businesses with strong equity and using less foreign resources
– For whom does inflation adjustment have negative consequences?
i) Enterprises using foreign resources above their equity capital
ii) Enterprises with low fixed assets and low inventories
iii) Enterprises that use foreign resources and are inactive and not liquidated
– Can the inflation adjustment be postponed again, as in 2021?
Of course, it is possible if a new legal arrangement is made. However, to say that it can be postponed as of today means speculation.
– Will stock exchange companies also be subject to inflation adjustment?
Stock exchange companies will be subject to inflation adjustment for tax purposes.
However, the Public Oversight Accounting and Auditing Standards Board (KGK) is required to announce to the public whether companies applying the Turkish Financial Reporting Standards and the Financial Reporting Standard for Large and Medium-Sized Enterprises will make inflation adjustments in their financial statements within the scope of Turkish Accounting Standard 29.
When we examine the 3-year and annual CPI rates that the KGK considers as a benchmark, we see that the rate of increase as of September 2023 is 254.36 percent and 61.53 percent, respectively. In this case, it is possible to predict that inflation adjustments will also be made for listed companies.
– What experience have we gained from the one-time application of inflation adjustment in 2004?
To put it bluntly, the inflation adjustment applied in 2004 was under-, over- or incorrectly applied in many enterprises. Since it was not applied again afterward, and since the Ministry of Finance did not conduct many examinations on this issue, businesses paid under or over corporate tax.
Therefore, in the new period, inflation adjustments should be made correctly;
– to avoid underpayment or overpayment of tax and
– to avoid penal sanctions in a possible future tax audit.