07.02.2023/28
Tax Aspects of Donations and Aid Made Due to Natural Disasters
Introduction
In response to the urgent needs arising from natural disasters, donations and aids are made in kind or cash. As donations and aids are not related to business activities, they are generally not deductible from commercial income. However, donations and aids made under the conditions specified in the relevant legislation can be deducted from commercial income, and if there is a profit, they can also be deducted on the tax return.
1. In-Kind Donations and Aid to Those Engaged in Food Banking Activities
Under Article 40 of the Income Tax Law, donations of food, cleaning products, clothing, and fuel made to associations and foundations engaged in food banking for the purpose of helping the poor can be deducted as expenses, based on the cost price, within the framework of the procedures and principles determined by the Ministry of Finance.
These donations must be made to associations or foundations engaged in food banking, and must consist of food, cleaning products, clothing, or fuel.
The delivery of such in-kind donations is exempt from Value Added Tax (VAT) according to the VAT Law. VAT is not calculated on these deliveries. Even if the amount donated is below the invoicing threshold for the relevant year, an invoice must be issued, with the statement “Since this donation is made to help those in need, VAT is not calculated.” included on the invoice. Additionally, VAT incurred on exempt transactions can be deducted, but VAT that cannot be offset via deduction is not refundable. Therefore, there is no need for a further correction for amounts recorded in the 191-Offsettable VAT Account related to the donated goods.
If goods included in a commercial business are donated, the cost price of those goods is recorded as an expense. This process is carried out by recording the invoice as both income and expense.
It is not necessary for corporate profit to exist in order to deduct donations and aid under this framework. The cost price of the donations can directly be deducted as an expense, and if there is a loss, it can increase the loss.
2. Donations and Aid That Can Be Deducted on the Tax Return
In order for donations and aid to be deductible in the determination of corporate income on the tax return, there must be taxable income for the relevant period. Such donations and aid cannot increase losses and do not carry forward to the next period if there is no profit.
Donations and aid made in kind or cash by corporate taxpayers can be considered as deductions if they are made in exchange for a receipt. However, cash donations can only be deducted if they are documented by bank receipts showing that they have been deposited into accounts opened for this purpose.
On the other hand, VAT exemptions apply to in-kind donations made to the following institutions:
General and special budgetary public administrations, provincial administrations, municipalities, villages, public institutions and organizations established by law or Presidential Decrees, associations serving public interests, and foundations exempted from tax by the President.
VAT incurred on exempt deliveries can be deducted, but VAT that cannot be offset via deduction is not refundable. Therefore, there is no need for a further correction for amounts recorded in the 191-Offsettable VAT Account related to the donated goods.
2.1 Donations and Aid Limited to 5% of Income Made to Certain Institutions and Organizations
Donations and aid made to general and special budgetary public institutions, provincial administrations, municipalities, villages, foundations exempted from taxes by the Council of Ministers, and associations working for the public good, in exchange for a receipt, can be deducted up to 5% of the corporate income for the relevant year, provided that they are shown separately on the corporate tax return.
Such donations can be made in kind or cash.
The amount of donations and aid that can be deducted in the determination of corporate tax liability is limited to 5% of the corporate income for the year.
The corporate income considered in determining the deductible amount of donations and aid is the [Commercial balance profit – (participation income exemptions + previous year’s losses)], before deductions and exemptions.
2.2 Cash Donations to the Red Crescent Association
Cash donations or aid made to the Turkish Red Crescent Association in exchange for a receipt can be fully deducted from corporate income on the corporate tax return.
The same rules apply to in-kind donations.
Donations to the Red Crescent’s economic enterprises cannot be deducted.
2.3 In-Kind and Cash Donations Made in Exchange for Receipts to Help Campaigns Initiated by the President
In-kind and cash donations made within the scope of aid campaigns initiated by the President can be fully deducted from corporate income on the tax return.
In this context, in-kind and cash donations made to AFAD (Disaster and Emergency Management Authority) can be deducted from the tax return without any limit.
3. Donations and Aid Made Under the Law on Measures and Assistance for Publicly Affected Disasters
Donations and aid made to the National Aid Committee and local aid committees in exchange for a receipt are exempt from all taxes, fees, and duties. Additionally, all donations to these committees can be deducted as expenses.
So far, no announcement has been made regarding the Kahramanmaraş earthquake in this regard. However, it is expected that the region will soon be declared a publicly affected disaster area.
Conclusion
It is possible to deduct donations made to address urgent needs in disaster-stricken areas from corporate income. We recommend adhering to the procedures and principles outlined above.
Best regards,
BİLGENER
