Countdown begins for inflation adjustment

The Revenue Administration has published the draft communiqué regarding inflation accounting. Despite the conditions stipulated in the law being met, inflation accounting, the implementation of which was deferred to the end of 2023 through a legislative amendment, will come into effect starting January 1, 2024, unless there is a new postponement.

The countdown has begun for inflation adjustment, which involves subjecting balance sheets to an adjustment process in terms of current purchasing power due to the erosion of money's purchasing power. Despite the conditions stipulated in the law being met, inflation accounting, the implementation of which was deferred to the end of 2023 through a legislative amendment, will come into effect starting January 1, 2024, unless there is a new postponement.

The inflation adjustment (inflation accounting) system, which some in the business world view as a 'necessity' while others oppose on the grounds that it will increase the tax burden, will be automatically activated on January 1, 2024. The Revenue Administration (GİB) has also opened the draft communiqué regarding the inflation adjustment planned for the new period to public consultation.

Demands made by taxpayers for many years due to high inflation, which had not previously found a response, were included in our tax system as "Inflation Adjustment" with Law No. 5024 at the end of December 2003. Subsequently, with the onset of a decline in inflation, the system could only be applied for the year 2004.

Nazmi Karyağdı, Founding Partner of Yeni Ekonomi Danışmanlık AŞ, analyzed everything curious about inflation accounting.

Stating that since the conditions for inflation adjustment determined by law were not met until the end of 2020, the need for inflation adjustment did not arise again, Karyağdı said, "Although the conditions stipulated in the law were met in 2021, when inflation began to climb again, the implementation of inflation accounting was deferred to the end of 2023 with a legal regulation."

“IT WAS NOT APPLIED DESPITE HYPERINFLATION”

At that time, TÜRMOB had requested a postponement for the implementation on the grounds that professional members were not yet ready. While the CHP submitted a legislative proposal for a 1-year postponement, the proposal was rejected by the votes of the AK Party and MHP. Subsequently, this time the AK Party submitted a legislative proposal extending the postponement period to 2 years, and the regulation was accepted as Law No. 7352 on January 20, 2022, despite the opposition of the İYİ Party.

Nazmi Karyağdı stated that with this postponement decision, the years 2022 and 2023 were not subjected to inflation adjustment despite hyperinflation.

Here are the answers given by Nazmi Karyağdı to all the curious questions about 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 subjected to inflation adjustment regardless of whether the conditions for inflation adjustment are met.

- What is inflation adjustment?

It is the process of subjecting a balance sheet, which does not reflect the true situation due to the erosion of money's purchasing power, to an adjustment process in terms of current purchasing power.

In other words, inflation adjustment is the process of bringing non-monetary assets and resources (e.g., raw materials, supplies, commercial goods, prepaid expenses, participations, subsidiaries, land and plots, buildings, machinery, facilities and equipment, vehicles, intangible rights, special cost values, equity items, debts, adjusted profit/loss, funds in liabilities, provisions...) to their current values.

- What is inflation adjustment not?

It is not the process of calculating the real profit or loss by clearing the commercial profit or loss calculated at the end of the year from inflation with the help of a coefficient.

It does not mean that all businesses will pay less tax. Depending on the structure of their balance sheets, they may pay less or more tax as a result of inflation adjustment.

- Can all taxpayers perform inflation adjustment?

The basic condition for a business to perform inflation adjustment is to be an income or corporate taxpayer and to keep books based on the balance sheet method.

Commercial profit taxpayers who keep books based on the business account method, self-employed professionals such as lawyers, doctors, SMMM (Certified Public Accountants), YMM (Sworn-in Certified Public Accountants), those earning agricultural income, those earning rental income, those earning interest, dividends, etc. capital investment income, and those earning wage income are not covered by inflation adjustment.

On the other hand, in the 2004 inflation adjustment application, businesses whose total net sales or asset size exceeded a certain amount were made mandatory.

Therefore, the Ministry of Treasury and Finance will make a determination in this direction in 2024 as well. In this case, businesses of a certain size will be covered by inflation adjustment.

- Will subjecting balance sheets prepared as of the end of 2023 to inflation adjustment change the tax to be paid?

Taxpayers covered will in any case subject the 2023 balance sheet to adjustment. However, tax declarations will be made based on the profits/losses determined before the adjustment.

The profit/loss difference arising from the 2023 inflation adjustment 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 taken into account as a loss.

- How many types of balance sheets will businesses prepare at the end of 2023?

Businesses covered by 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 performed in every temporary tax period starting from 2024?

According to the current PPI rates; due to the provision in the Tax Procedure Law that inflation adjustment will be performed if the producer price index (PPI) exceeds 10% in the current year and 100% in the last three years, it appears that inflation adjustment with tax consequences will be performed starting from the 2024/1st temporary tax period.

Because as of September 2023, the three-year PPI increase is at the level of 433.84 percent, and the annual PPI increase is at 47.44 percent. Whenever the conditions for inflation adjustment disappear as of the temporary tax period, inflation adjustment will also end.

- Does inflation adjustment produce the same result for every business?

It would not be correct to say that inflation adjustment produces the same result for all businesses. Inflation adjustment has an effect according to the balance sheet structure of businesses. Therefore, it leads to different tax results for each business.

In which direction inflation adjustment will result in a business can be determined as a result of multiple valuations such as the fixed asset structure of the company, equity/indebtedness status, and the entry dates of fixed assets into the assets. For this reason, it is most accurate to evaluate each business on its own rather than making generalizations. Any kind of generalization made in the market is misleading.

- For whom does inflation adjustment produce 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 produce negative results?

i) Businesses using foreign resources above their equity

ii) Businesses with few fixed assets and low inventory

iii) Businesses that use foreign resources and are inactive but have not entered liquidation

- Can inflation adjustment be postponed again as it was in 2021?

If a new legal regulation is made, it is of course possible. However, saying it can be postponed as of today means speculating.

- Will stock market companies also be subject to inflation adjustment?

Stock market companies will perform inflation adjustment for tax purposes.

However, it needs to be announced to the public by companies applying the Turkish Financial Reporting Standards and the Financial Reporting Standard for Large and Medium-Sized Enterprises of the Public Oversight, Accounting and Auditing Standards Authority (KGK) whether inflation adjustment will be performed in financial statements within the scope of TMS 29.

When we examine the 3-year and annual CPI rates that KGK takes into account as a criterion, we see that as of September 2023, the increase rate is 254.36 percent and 61.53 percent, respectively. In this case, it is possible to foresee that inflation adjustment will also be performed for stock market companies.

- What experiences did we gain from the inflation adjustment application that was applied once in 2004?

To be frank, the inflation adjustment application that took place in 2004 was applied incompletely, excessively, or incorrectly in many businesses. Because it was not applied again afterwards and the Finance Ministry did not conduct much inspection on this subject, corporate tax was paid incompletely or excessively by businesses.

Therefore, performing inflation adjustments correctly in the new period is of great importance;

- To avoid paying incomplete or excessive tax and

- To avoid facing criminal sanctions in a possible future tax audit.

WARNING FROM TÜRMOB ON TAXATION OF FICTITIOUS PROFITS

Evaluating the draft communiqué and the inflation adjustment application to EKONOMİ, TÜRMOB President Emre Kartaloğlu said that the draft could partially answer the business world's expectation that 'fictitious profits will not be taxed'. Kartaloğlu reported that for some businesses, the amounts of taxable earnings might increase surprisingly. Kartaloğlu underlined that the main purpose of inflation adjustment should be to ensure that fictitious profits are not taxed, in addition to updating the balance sheets of businesses from their historical value to the balance sheet day value.

“Tax burden may arise in SMEs”

In our businesses that are financing their non-monetary assets (inventories, fixtures, machinery equipment, other financial and tangible fixed assets, investments, etc.) with debts, which are monetary liabilities that will not be subject to inflation adjustment, instead of equity (we evaluate that the situation of businesses in our country, especially in the SME class, is in this direction), a tax burden will begin to arise due to inflation adjustment (which we consider fictitious and not yet realized) starting in 2024. Contrary to this picture, in our businesses where non-monetary assets are below monetary assets and which finance their monetary assets and low non-monetary assets with strong equity and have low indebtedness (we evaluate that the situation of organizations such as banks, etc., operating in the financial field may be in this direction), a loss element will arise as a result of inflation adjustment in 2024, and this may lead to a decrease in the tax bases of these businesses.

“We are ready, but is the business world ready?”

Stating that businesses have already begun to evaluate what kind of situation they will face regarding the inflation adjustment application in 2024 and subsequent periods, Emre Kartaloğlu said, "Although we, as professional members, are ready for the inflation adjustment application, which contains intense and complex calculations and has a more technical aspect, is the business world ready?"

Kartaloğlu made the following suggestions regarding the regulation:

- Since balance sheets are not provided in temporary tax declarations and inconsistencies may arise between the completion time of accounting records for transactions of the temporary tax period, the completion of legal books, and the time given to perform inflation adjustment, the obligation to perform inflation adjustment in temporary tax periods should be abolished,

- The inflation adjustment application should be made optional for businesses whose total assets or turnover remain below a certain amount,

- Self-employed professionals should also be allowed to carry their fixed asset costs to current values by subjecting their fixed assets and fixtures to inflation adjustment,

- Aggregated methods should be determined for fixed asset items, and the performance of adjustment transactions accordingly should be enabled.

News Source: 12punto