In Turkish Tax System, taxation period is determined as 1 year. Income tax payers state the income and revenues they obtain within one calendar year (between January 1 and December 31) and corporate tax payers state the incomes and revenues they obtain within an accounting period and they pay their taxes according to these statements. Accounting period refers to a one year period and normal accounting period is the calendar year. For corporate tax payers, “special accounting period” implementation is possible provided that permission is taken from the Ministry of Finance and special accounting periods also refer to a one year period. For example, between July 1 and June 30.
The only exception of the annual taxation period is the construction and repair works extending to years. In article 42 of the Income Tax Law No 193, it was ensured that “profit and loss in construction and repair works extending to more than one calendar year shall be determined definitely in the year when the work is completed and it shall be considered as the income of that year and shall be stated in related year’s (the year when the work is completed) statement.” However, when the “exchange differences” and “interest incomes” will be stated has always been a matter of discussion among people working in construction works extending to years. There are two different views about that. First view (the Tax Office also has this view); “In construction works extending to years, after progress payments are collected, that money is not related to construction works extending to years anymore. The beneficiary company may dispose such money freely. In construction works extending to years, the revenue or income taxation of which is delayed to the date when the work is completed is the progress incomes which are directly the cost of construction works. The incomes or losses accrued by somehow using the construction revenue collected in abovementioned manner are not related to the construction works extending to years anymore. These should be taxed in the year in which they are obtained in accordance with the Article 43/2 of the Income Tax Law.”
According to the second view, which is also the view of the jurisdiction; “It is necessary that the exchange differences and interest incomes related to the construction works extending to years should be stated and taxed as of the completion date of the work, not in the accounting period they are obtained. It is indisputable that the exchange differences, which are direct factors of construction progress income as the amount is determined in foreign exchange or indexed on foreign exchange, will be stated in the year when the work is completed. This perception was also accepted in some rulings by the Ministry of Finance. On the other hand, it has been all along mentioned by the authors that the exchange differences accrued in favour of the company as a result of using the progress payments obtained after collecting the progress payments in safe deposits and/or banks as foreign exchange are a factor of the progress payment and therefore these incomes should be stated in the year when the work is completed and the jurisdiction has also adopted this view. The same view also applies to the interest incomes. Moreover, due to the fact that the initial part of the construction and repair works extending to several years will be financially advantageous, the disadvantageous final part of the work could be compensated with the initial revenue. According to these comments, it is necessary that the exchange differences accrued as a result of using the collected progress payments as foreign exchange and the interest incomes accrued as a result of depositing these in banks should be stated in the period in which the work is completed, not in the period when such incomes are obtained.
As a result of the lawsuit filed in relation to the tax imposed as a result of an investigation on the matter, 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 addition, there are also other decisions made in the same direction as abovementioned decisions. Some of them are:
1- Council of state, 4th Division, Date: 11.10.1996 and E: 1995/4230, K: 1996/3651;
2- Council of state, 4th Division, Date: 21.10.2002 and E: 2001/3786, K: 2002/3300;
3- Council of state, 4th Division, Date: 08.06.1994 and E: 1994/581, K: 1994/3495 and Date: 30.05.1995 and E: 1994/4989, K: 1995/2383;
4- Council of state, 4th Division, Date: 27.10.2003 and E: 2003/1545, K: 2003/2569;
5- Council of state, 4th Division, Date: 26.10.2004 and E. 607;
6- Council of state, 4th Division, Date: 26.10.2004 and E. 161;
7- Council of state, 4th Division, Date: 31.05.2010 and E. 2009/4531, K. 2010/1929.
Within the framework of above explanations and in accordance with the decisions by various divisions of the Council of State, it is considered that the interest incomes obtained by the companies conducting construction business extending to years by means of depositing their progress payments in banks and the exchange differences they obtain in relation to these progress payments need to be taxed when the work is completed, not at the date when such incomes are obtained. We've mentioned about taxation concept on construction works in Turkish Tax System.