This is the English version of an article originally published in Turkish: KDV İadesi Ret Sebepleri ve En Etkili İtiraz Yolları.
For exporters and companies making VAT-exempt or reduced-rate supplies in Turkey, the VAT refund (KDV iadesi) is often a significant part of working capital. Tax offices, however, examine refund files closely and reject or suspend claims on a range of grounds. A rejection is not the end of the matter. The taxpayer can respond administratively and, if necessary, bring an action before the tax court. This article outlines the most common grounds for rejection and the remedies available.
Legal basis of the right to a VAT refund
The right to a refund is grounded in the Value Added Tax Law (No. 3065, “KDV Law”). Article 32 provides that VAT shown on invoices and similar documents relating to transactions exempted under Articles 11, 13, 14 and 15, and under sub-paragraph (s) of paragraph (4) of Article 17, is deducted from the VAT calculated on the taxpayer’s taxable transactions. Where there are no taxable transactions, or the calculated tax is lower than the deductible tax, the VAT that cannot be deducted is refunded to the persons carrying out those transactions in accordance with principles set by the Ministry of Treasury and Finance.
The refund is therefore a right conferred by statute. The procedural rules issued by the Ministry must remain within the limits of the law, and a rejection that has no basis in the law can be challenged on that ground.
Fake or misleading invoices (SMİYB)
The most serious obstacle in practice is an allegation that the taxpayer has used a fake document or a document that is misleading as to its content (sahte veya muhteviyatı itibariyle yanıltıcı belge, “SMİYB”). When the tax office identifies suspicious invoices, it usually stops the refund process and a tax inspection may follow. The administration generally asks for the suspicious invoices to be removed from the refund calculation, regardless of whether the taxpayer knew of the problem, and warns that a tax assessment with penalties will follow if they are not removed.
The taxpayer may nevertheless show that the invoice reflects a genuine commercial transaction. Useful evidence includes:
- bank payment records showing the price was paid through the banking system;
- delivery notes and transport documents;
- weighbridge tickets;
- warehouse and stock records;
- commercial correspondence with the supplier.
Letters from the tax office should be read carefully and answered with concrete evidence. Selecting suppliers with care is the best preventive measure.
Problems with suppliers
A company’s own transactions may be entirely lawful and its refund may still be blocked because of its suppliers. A frequent ground for rejection is that a supplier has been placed on the tax administration’s risk list (commonly referred to as being “coded”) or made subject to special rules (özel esaslar). In such cases the tax office tends to reject the VAT on purchases from that supplier and expects the problem at the supplier’s level to be resolved first.
According to the Council of State (Danıştay) case law relied on in the original article, a taxpayer cannot be held responsible for the supplier’s own tax debts, and extending liability along the supply chain without limit is unlawful. Tax courts also tend to find that the administration may not act on assumptions alone. If the taxpayer can prove that the purchase actually took place, there are good grounds to challenge such a rejection.
Missed deadlines and incomplete documents
Refund claims must be filed within the periods set by the legislation. Claims filed late are rejected outright, and the right to the refund may be lost. Particular care is needed for reduced-rate transactions, where time limits are strictly applied.
Where documents are missing, the tax office grants a period to complete them. If the deficiencies are not remedied within that period, the file is removed from processing. The format and consistency of the documents also matter: for example, the list of deductible VAT and the list of VAT incurred must match. Technical errors arising from the electronic system should be reported to the tax office.
Reduced-rate supplies
In sectors such as textiles, food and construction, reduced VAT rates are common and refund balances can be large. The administration scrutinises the calculation of VAT incurred very closely. Typical problem areas are:
- the allocation of general overheads to the refundable transactions;
- the separation of direct costs from general costs;
- the share attributed to depreciable fixed assets;
- in construction projects, the nature of deliveries made to the landowner;
- the comparison between cost price and sale price.
Calculations that do not follow the legislation can delay the file or lead to its full rejection. The calculation tables should be prepared together with a qualified financial adviser.
Cash refunds and offset refunds
A refund may be claimed in cash or by offset against tax or social security (SGK) debts. Cash claims are examined more strictly: the administration usually requires a report from a sworn financial adviser (Yeminli Mali Müşavir, “YMM”) or a bank guarantee. Above certain amounts, a YMM report is mandatory for a cash refund, although the taxpayer can alternatively obtain the refund by providing a letter of guarantee. Even formal errors in a guarantee letter can lead to rejection, and deficiencies in a YMM report must be corrected within the time allowed.
For offset claims, the due date of the debt and the offset date must be consistent. Incorrect offset requests can expose the taxpayer to late payment interest (gecikme zammı). Because the administration is generally reluctant to pay cash before an inspection report is completed, many companies prefer the offset route.
Administrative remedies
It is not always necessary to go to court immediately. After the rejection is served, the taxpayer can file a detailed petition with the tax office and, for clerical or calculation errors, request administrative correction. Evidence relating to the suspicious invoices, such as bank payment records, should be attached. An application can also be made to the higher authority, the Tax Office Directorate (Vergi Dairesi Başkanlığı). Strong evidence at this stage can lead the tax office to change its decision.
If the administration maintains its position, an action must be filed within the statutory period. The taxpayer should check carefully whether the time spent on administrative applications interrupts the time limit for bringing an action, since this is not always the case.
Action before the tax court
Where administrative steps do not resolve the matter, the taxpayer can bring an action for annulment of the rejection before the tax court. As a rule, the time limit for filing an action before the tax courts is 30 days from service of the rejection. An action filed out of time is dismissed on that ground alone. The petition should set out the legal arguments and refer to relevant Council of State case law. If the court annuls the rejection, the administration is obliged to make the refund.
Stay of execution
Filing an action does not by itself suspend the administration’s decision. A request for a stay of execution (yürütmenin durdurulması) should therefore be included in the petition. The court grants a stay where two conditions are met: the act is manifestly unlawful, and its implementation would cause damage that is difficult or impossible to repair. The interruption of a company’s cash flow is a typical example of such damage. Once a stay is granted, the tax office cannot implement the rejection, and, for example, an offset of the refund against the taxpayer’s tax debts can proceed. The request should be supported by strong evidence.
Frequently asked questions
What should be done first after a rejection? File a detailed explanatory petition with the tax office and complete any missing documents and evidence within the time allowed.
Does a supplier’s tax debt prevent my refund? The administration tends to reject on this basis, but according to Council of State case law the obstacle can be overcome by proving that the purchase was genuine.
What is the time limit for a tax court action? 30 days. If it is missed, the right to bring the action is lost.
Is a YMM report required for a cash refund? Above certain amounts, yes. Alternatively, a letter of guarantee can be provided.
More information for foreign clients: English-speaking lawyer in Ankara.
This article provides general information on Turkish law and is not legal advice. Outcomes depend on the facts of each case.
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