The concern that well-intentioned taxpayers might be accused of using counterfeit documents and the fear of being subjected to special provisions is always a possibility. In the face of such accusations, the taxpayer might have to pay the tax along with the penalty once again, could be subjected to special provisions, and might be referred for a tax audit. Years ago, while in an administrative position, I recommended a withholding method to taxpayers who came with these complaints and concerns, which has now been included in the VAT Implementation General Communique (VAT IGC). With the newly introduced “optional full withholding application” in the VAT IGC, taxpayers can largely overcome these concerns.
In summary, for transactions within the scope of partial withholding, if taxpayers make a contract with their sellers and notify the tax office of the contracts they make, they can withhold and deposit the entire VAT on the invoice to the tax office. By depositing the VAT, which normally should be paid to the seller, to the tax office using this method, taxpayers can alleviate their concerns about being subjected to special provisions and paying the tax and late interest again due to allegations of using counterfeit invoices. Therefore, I especially recommend the optional full withholding application for service procurements such as renovation, maintenance, repair, contract labor, labor supply, organization, transportation, printing, and publication.
1. Full Withholding Application in VAT
As known, there are two types of withholding applications in VAT: full and partial. While performing transactions subject to full withholding as determined by the Revenue Administration, buyers pay the entire VAT, which they would normally pay to the sellers, by withholding it and paying it directly to the tax office. The VAT Implementation General Communique specifies in which transactions VAT withholding should be done. It is mandatory for buyers to withhold in the following transactions listed in the Communique:
· Transactions performed by those whose residence, workplace, legal center, and business center are not in Turkey,
· Deliveries and services performed within the framework of incidental professional activities,
· Leasing transactions of goods and rights,
· Advertising transactions received from those who are not VAT taxpayers.
As of April 21, 2022, an optional full withholding application has been added to some transactions where withholding is mandatory.
2. Optional Full Withholding Application
The newly introduced optional full withholding application provides additional security for well-intentioned taxpayers. With this, taxpayers can choose the optional full withholding application for purchases from certain sellers, thereby avoiding joint liability arising from the use of counterfeit documents. Taxpayers can secure themselves for transactions with sellers they are purchasing from for the first time, do not know well, or cannot trust. By withholding the entire VAT that should be paid to the sellers and depositing it to the tax office, the likelihood of using counterfeit invoices and being subjected to special provisions is significantly reduced. For this, the following are necessary:
- The purchase transactions must fall under the scope of partial withholding,
- There must be a contract between the taxpayer and the seller indicating the applicability of the “optional full withholding application” in terms of VAT (with the seller’s consent),
- The contract must be notified to the taxpayer's tax office.
The contract mentioned in the Communique should be valid for one year, meaning the buyer must make purchases under full withholding from the contracted seller for a year and cannot revert from this application within the year. Even if the buyer taxpayer, who receives renovation and decoration services for store opening, uses the service only once a year as specified in the contract, they can benefit from the optional full withholding application. In other words, there is no need to continuously receive renovation and decoration services throughout the year. The optional full withholding application cannot be abandoned within a year. After starting to apply full withholding, the buyer cannot pay VAT to the seller before the end of the year. If it is desired to continue the application in the following years after the end of the one-year period, the contract with the seller needs to be renewed.
Buyer taxpayers should notify the tax office of the information of the sellers they will transact with under this application (name, title, tax office, tax identification number, contract implementation period) along with a copy of the contracts before submitting the VAT declaration related to the transaction. Any termination, amendment, etc., of the contract should also be notified to the tax office before the VAT declaration related to the transaction is submitted. Transactions with sellers who do not have a contract cannot be processed under the “optional full withholding application.”
3. Scope of the Optional Full Withholding Application
Generally, all deliveries of goods and services considered under partial withholding fall under the scope of the optional full withholding application. Having or not having any responsibility within the scope of partial withholding does not prevent the application. Taxpayers can choose the optional full withholding application while performing one of the transactions listed in the VAT Implementation General Communique as follows.
a. Service Transactions Subject to Partial Withholding
· Construction works along with engineering-architecture and survey-project services performed together with these works (VAT IGC 1/C-2.1.3.2.1)
· Survey, plan-project, consultancy, audit, and similar services (VAT IGC 1/C-2.1.3.2.2.)
· Maintenance and repair services for machinery, equipment, fixtures, and vehicles (VAT IGC 1/C-2.1.3.2.3.)
· Catering and organization services (VAT IGC 1/C-2.1.3.2.4.)
· Labor supply services (VAT IGC 1/C-2.1.3.2.5.)
· Building inspection services (VAT IGC 1/C-2.1.3.2.6.)
· Subcontracted textile and garment works, bag and shoe sewing works, and intermediary services for these works (VAT IGC 1/C-2.1.3.2.7.)
· Customer finding/taking services provided to tourist shops (VAT IGC 1/C-2.1.3.2.8.)
· Transactions related to the publication, advertisement, and name rights revenues of sports clubs (VAT IGC 1/C-2.1.3.2.9.)
· Cleaning, environment, and garden maintenance services (VAT IGC 1/C-2.1.3.2.10.)
· Transportation services (VAT IGC 1/C-2.1.3.2.11.)
· All kinds of printing and publishing services (VAT IGC 1/C-2.1.3.2.12.)
· Withholding application for services provided during the operational period of health facilities built with the public-private partnership model (VAT IGC 1/C-2.1.3.2.14.)
· Commercial advertising services (VAT IGC 1/C-2.1.3.2.15.)
b. Goods Delivery Transactions Subject to Partial Withholding
· Delivery of bullion metals (VAT IGC 1/C-2.1.3.3.1.)
· Delivery of copper, zinc, aluminum, and lead products (VAT IGC 1/C-2.1.3.3.2.)
· Delivery of scrap and waste (VAT IGC 1/C-2.1.3.3.3.)
· Delivery of raw materials obtained from metal, plastic, rubber, paper, glass scraps, and waste, and confectionery leftovers (VAT IGC 1/C-2.1.3.3.4.)
· Delivery of cotton, mohair, wool, and fleece along with raw hides and skins (VAT IGC 1/C-2.1.3.3.5.)
· Delivery of wood and forest products (VAT IGC 1/C-2.1.3.3.6.)
· Delivery of iron-steel products (VAT IGC 1/C-2.1.3.3.8.)
However, the following deliveries and services cannot be included in the optional full withholding application:
· All other service deliveries performed to public institutions and organizations, professional organizations, banks, insurance, reinsurance, and retirement companies, pension and assistance funds, and development agencies (VAT IGC 1/C-2.1.3.2.13.)
· All other deliveries made to the General Directorate of State Supply Office (VAT IGC 1/C-2.1.3.3.7.)
4. Conclusion
As can be seen, the above-listed service deliveries and goods deliveries are transactions where the use of counterfeit documents is widespread. By opting for the optional full withholding application in these transactions, buyer taxpayers can effectively insure themselves against counterfeit invoices. Taxpayers applying optional full VAT withholding, provided they declare and pay the withholding amount, cannot be held jointly liable for the tax that has not been transferred to the Treasury due to previous stages of these transactions, cannot be forced to submit an amendment declaration, cannot be subjected to special provisions, cannot be referred for an audit, and do not need to file a lawsuit.
If the VAT paid in this context is requested for a refund due to reasons such as export or reduced rates, additional obligations such as performing a counter-examination or presenting paid documents will be eliminated. It will suffice to present that the document in question is subject to optional full withholding and that the resulting VAT has been paid.
On the other hand, VAT refunds may be made to the seller limited to the VAT subjected to optional full withholding. In fulfilling refund requests, the tax office will check that the VAT declared and accrued by the buyer with the No. 2 VAT Declaration has been paid.
In conclusion, the optional full withholding application is a new and excellent practice that will largely eliminate the claims of some purchases being fake, remove joint liability since tax loss is not caused, and put an end to taxpayers’ nightmares about counterfeit invoices. Especially in goods and services purchases, such a concern is seen in transactions where the more corporate and stronger buyer deals with the less corporate and weaker seller. In these cases, it is highly recommended