INCIDENTAL INCOME AND OUTCOMES IN CONSTRUCTION WORKS EXTENDING TO YEARS
Whether the interests revenues obtained from remunerations from construction and repair works extending to years which are collected and deposited in time deposit or current accounts or various investment instruments will be stated as of each year or they will be qualified as an income of the construction and repair works extending to years causes hesitation in the practice. The Tax Administration thinks that the tax payers should take the income factors into consideration in the determination of the current year’s profit/loss as non-operating incomes without waiting for the completion of the works and state such incomes. However, the Council of State thinks that the exchange difference, repo incomes and other incomes obtained during the course of the construction and repair works extending to years are parts of the construction and repair works extending to years as they are not carried out within the scope of a separate commercial organization and they should be stated together with construction contract works at the end of the works. In relation to this matter, after an investigation on a company is submitted to the court, the Council of State decided:
“It is necessary to consider the exchange differences in relation to construction works extending to years as a factor of the progress payment. As a result of this, it is necessary that exchange differences should be related to the account in which progress payments are recorded, in other words they should be taken into consideration along with the progress payment in determining the taxable income obtained as a result of the construction work. Similarly, the interest amount obtained in return for the amount of the remuneration which was taken for the construction works extending to years but deposited in the bank without being spent should be related to the construction account and taxed as of the completion date of the work.” (Council of State, 4th Division, Date: 08.06.1994 and E: 1994/581, K: 1994/3495)
The petition of the tax office for correction of this decision by the Council of State was rejected unanimously by the 4th Division of the Council of State. (Council of State, 4th Division, Date: 30.05.1995 and E: 1994/4989. K: 1995/2383)
In a case related to the exchange rate of the foreign exchange that the companies conducting overseas construction business bring to Turkey, 3rd Division of the Council of State decided;
“It is not possible that the exchange difference incomes obtained by the company conducting overseas construction work extending to years as a result of bringing its progress payment incomes to Turkey and depositing in foreign exchange deposit accent are taxed as a revenue obtained in Turkey. The exchange difference in favour should be considered as a factor, derivative of the progress payment unless it was obtained as a result of a commercial activity other than construction.” (Council of State, 3rd Division, Date: 23.05.1996 and E: 1995/406 T.K: 1996/1941)
In relation to this matter, in another decision by the 4th Division of the Council of State, it is decided that the interest and exchange difference incomes obtained by … which conducts construction works extending to years by means of depositing its progress payments in repo, foreign exchange deposit accounts and state bonds should not be considered as revenue obtained from an activity other than the contracting work. For that reason, abovementioned revenues should be stated along with the income obtained from the contracting work.” (Council of State, 4th Division, E. No: 2003/1545, K. No: 2003/2569)
In a recent ruling by Ankara Tax Administration in relation to this matter, it is decided;
“In this respect, it is necessary that the deposit interests obtained from using the remunerations taken for ‘… University Olympic Swimming Pool Construction’ work contracted by your joint venture within the scope of construction works extending to years are deposited in banks and liquidated fund incomes should be considered separately from the incomes obtained from construction works extending to years and such incomes should be taxed annually as of related periods without waiting for the completion of the abovementioned construction works.” (Ruling dated 09.09.2011 and No B.07.1.GİB.4.06.16.01-2010-GVK-42-19-710)
CONCLUSION: Within the framework of above explanations, the Council of State argues that the interest incomes of companies carrying out construction works extending to years obtained by means of using the remunerations in the banks and the exchange differences they obtained in relation to these remunerations should be taxed at the end of the work, not in the year they were obtained. However, the Tax Administration stated its opinion as incidental incomes and outcomes should be stated annually as of the related periods without waiting for the completion of the construction works.
The opinion of our Sworn-in Certified Public Accountant is that the method which has been applied until this day (incidental incomes and outcomes are distributed to the shareholders in the rate of their shares as of advance tax periods) should be maintained.
APPLICATION OF CORPORATE TAX EXEMPTION IN THE SALE OF THE SHARES OF CORPORATE TAX PAYERS IN JOINT VENTURES AND ORDINARY PARTNERSHIPS
As known, in accordance with the article 5/1-e of the Corporate Tax Law No 5520; “75% of the incomes arising from the sales of the real estates and participation stocks that the organizations kept in their assets for at least two complete years and their establishment bonds, dividend shares and subscription rights” are exempted from corporate tax. All corporate taxpayers including limited taxpayers can benefit from abovementioned exemption provision. In the Communique on Corporate Tax Serial No 1, it was stated that the “participation stocks” mentioned in the article refers to the equity shares included in the securities portfolio and partnership shares and that these can be listed as;
- Partnership shares or equity shares of stock companies (including investment trusts established in accordance with the Capital Market Law),
- Participation stocks in Limited companies,
- Participation stocks of the limited partners of the limited partnerships capital of which is divided into shares,
- Participation stocks of joint ventures and ordinary partnerships,
- Participation stocks of cooperatives.
As it can be seen, 75% of the income obtained from the sale of Participation stocks of joint ventures and ordinary partnerships included in the assets of the corporate taxpayers within the framework of the Law and Communique can benefit from corporate tax exemption. Conditions related to the implementation of the exemption are summarized in both Law and the Communique as follows:
A- KEEPING IN ASSETS FOR TWO COMPLETE YEARS
Real estate and participation stocks and establishment bonds, dividend shares and subscription rights to be subject to exemption should be kept in the assets of the organization for at least two complete years (730 days), in other words, the organization should actually own these assets for two complete years.
B- KEEPING THE SALES INCOME IN FUND ACCOUNT
It is necessary that the part of the income which benefits from the exemption should be taken into a special passive fund account and kept in this account until the end of the fifth year following the sales. In this framework, it is necessary that the transaction of taking into the fund account should be realized from the beginning of the accounting period following the year when the sales is completed until the date when the statement of the corporate tax of the period in which income is stated is submitted. As exemption is applied to 75% of the income, it is not necessary that all of the income is taken into the fund account and it is adequate that the related part of the income which will benefit from the exemption is taken into the abovementioned fund account. As in cash sales, in case of sale on account, 75% of the income can benefit from the exemption in the period when the sales is realized provided that it is kept in a special fund account for five years. However, it is necessary that all of the sales price is collected until the end of the second calendar year following the year when sales was realized.
C- NOT WITHDRAWING THE INCOMES KEPT IN FUND ACCOUNT FROM THE COMPANY
In the exemption application, in case of transferring the incomes, which should be kept in a special passive fund account until the end of the fifth year following the year when sales is realized, to another account from the fund account within five years, withdrawing such income from the company, transferring abroad by limited taxpayers or in the event that the organization is liquidated within this period of time; the taxes accrued to the income which is subject to abovementioned transactions which were not collected due to exemption shall be collected by the tax office along with the loss of tax and interest for delay. The period of keeping in the fund account shall mean the period until the end of the fifth year following the year when the sales was realized.