Inflation Accounting in Turkey
Inflation, which can be defined as the continuous increase in the general price level and the decrease in purchasing power, affected the Turkish economy for many years until the 2000s. Although inflation dropped to single digits in the 2000s, it has become a serious problem again in Turkey, especially as of 2021. While inflation, on the one hand, constitutes an obstacle to ensuring social justice, on the other hand, it negatively affects the amount of investment and savings in countries. In economies with high inflation, the information in financial statements obtained from accounting systems based on historical cost does not accurately and realistically reflect the financial situation and operating results of businesses. In inflationary periods, since taxes on earnings are actually calculated on fictitious profits, not on the real profits of businesses, the nature of the tax changes and the taxes thought to be collected on earnings turn into a tax on capital. It is very important for institutions to update their records by applying inflation correction, in order to measure their activities accurately and to determine the tax base correctly. In periods of inflation, businesses can continue their operations efficiently and profitably by eliminating the negative effects of price changes on business results and rearranging financial statements according to price movements.
In order to eliminate these negative consequences of high inflation to some extent, Turkey made a regulation in the Tax Procedure Law with Law No. 5024 on 17.12.2003. Accordingly, companies corrected their records by accounting for inflation as of 31.12.2003. However, since the inflation adjustment conditions specified in the law were not met in the periods following 2004, the practice continued for only one year. Inflation rose to very high levels again at the end of 2021, necessitating companies to update their records by making inflation adjustments. In accordance with the regulation in Article 298/A of the Tax Procedure Law, balance sheets dated 31 December 2023 must be subject to inflation correction.
According to the Tax Procedure Law General Communiqué No. 555, the conditions required for the application of inflation adjustment are as follows:
1 - The cumulative D-PPI increase of the last 3 accounting periods, including the current accounting period, is more than 100%,
2 - If it is more than 10% in the current accounting period,
3 - These two conditions are fulfilled together.
According to the 2023 year-end D-PPI index, inflation in Turkey was 64.77% and the necessary conditions were met. For this reason, all taxpayers who keep books according to the balance sheet method must subject their balance sheets dated December 31, 2023, to inflation correction.
The fiscal profit (corporate tax base) for 2023 will be determined according to the pre-adjustment balance sheet figures. In other words, inflation adjustment differences that will arise as a result of the application are not subject to tax for 2023. However, starting from 2024, the differences that will arise as a result of the inflation adjustment application of institutions will be within the scope of corporate tax.
Inflation adjustment will be included in the declaration that institutions will submit their 2023 corporate tax returns. The application will continue to be made in every provisional tax period starting from 2024. Provisional Tax Declarations are submitted in the first three quarters in Turkey.
In inflation adjustment, companies must update their records by performing the following operations:
- Separating the assets included in the balance sheet into monetary and non-monetary values,
- Finding the corrective values of non-monetary assets to be taken into account in inflation adjustment,
- Determining the dates for correction of non-monetary assets,
- For economic assets that have been revalued within the scope of temporary articles 31 and 32 of the Tax Procedure Law or Repeated Article 298/Ç, post-revaluation values are taken into account,
- Determining the correction coefficients based on the dates of correction, taking into account the Domestic PPI index values announced by the Turkish Statistical Institute,
- Finding the corrected amounts of non-monetary assets by multiplying the correction coefficient by the value based on correction.
- Detecting correction differences,
- Making accounting records (Inflation Difference Account - Inflation Adjustment Account).
- Expressing the balance sheet with its new adjusted values.
Andersen Turkey serves its customers with its experienced staff in inflation correction. In this context, Andersen Turkey executives held a seminar open to everyone at Medeniyet University on December 9, 2023, in order to inform those interested in the subject and raise awareness.