Inflation Adjustment and Considerations Prior to Inflation Adjustment
In accordance with Article 298 of the Tax Procedure Law, financial statements are subject to inflation adjustment if the increase in the price index is more than 100% in the last three accounting periods including the current period and more than 10% in the current period.
Although the aforementioned conditions were met as of the end of the 2021 accounting period, with the provisional article 33 of the aforementioned Law, the inflation adjustment was postponed to the end of the 2023 accounting period. According to the regulation, no inflation adjustment will be made in the 2023 temporary tax periods, but the period-end financial statements will be subject to inflation adjustment.
At the end of the 2023 accounting period, the inflation adjustment will have no tax effect for the 2023 period. Accordingly, firstly, the income for the period will be calculated and declared based on the unadjusted balance sheet for the period in question. Then, inflation adjustment will be made and the differences arising from the adjusted balance sheet will be transferred to the retained earnings account.
The retained earnings or losses will be subject to adjustment together with other non-monetary resources and assets in the 2024 accounting period. This time the adjustment will have a tax effect. Retained losses will have an income effect for 2024, while retained earnings will have an expense effect.
A draft communiqué on inflation adjustment is available for comment on the website of the Revenue Administration. Although important regulations and explanations have been made in the draft communiqué, many issues have not been fully clarified. While we expect that these issues will be clarified in the final communiqué to be published, we can explain the issues that should be considered by practitioners in advance as follows:
1. With inflation adjustment, only the balance sheets of taxpayers will be subject to adjustment. Other financial statements are not subject to adjustment.
2. The adjustment shall be made on the non-monetary assets and resources of the enterprises in the balance sheet. The accounts for monetary and non-monetary assets and resources are available in the annexes of the Communiqué.
3. Advances will be subject to adjustment if they relate to inventories. Other advances will not be subject to inflation adjustment since they are monetary.
4. Active accounts to be subject to restatement will have income effect for enterprises, while passive accounts will have expense effect. Therefore, enterprises whose non-monetary passive accounts (weighted capital) to be subject to restatement are greater than their active accounts will not face tax burden as a result of inflation adjustment. Otherwise, income effect and therefore tax will arise as a result of the restatement. For this reason, enterprises with a strong capital structure are in an advantageous position.
5. As a result of the restatement, some equity accounts will be closed by crediting 698 Inflation Adjustment Account. These are;
a) Revaluation value increase fund account established pursuant to paragraph (Ç) of Repeated Article 298,
b) Revaluation value increase fund account established in accordance with the provisional 31st and provisional 32nd articles,
c)Revaluation revaluation value increase fund account arising from the value increases arising from the revaluation made within the subsidiaries and affiliates of the entity in accordance with the provisions of the Law No. 213.
The amounts in these accounts will be transferred to the retained earnings account together with 698 Inflation Adjustment Account.
There is no tax difference for the 2024 accounting period between adding the amounts in these accounts to capital before the adjustment and not adding them to capital.
6. Equity accounts;
a) Capital,
b) Positive and negative capital adjustment differences,
c) Share Premiums,
ç) Share Cancellation Gains,
d) Legal Reserves
e) Status Reserves,
f) Extraordinary Reserves,
g)Special Funds (Fixed asset renewal fund established within the scope of Articles 328 and 329 of Law No. 213 and venture capital fund allocated within the scope of Article 325/A of the same Law; funds established in accordance with paragraphs 5/1-e, j and k of Law No. 5520; Within the scope of Laws No. 6111, 6736, 7143, 7326, 7440, provision accounts established for the recording of commodities that are not included in the records although they are available in the enterprise; Fund accounts established within the scope of the additional Article 3 of the Technology Development Zones Law No. 6491 and Article 3 of the Law No. 5746 on Supporting Research, Development and Design Activities)
accounts will be included in the balance sheet at their adjusted values.
7. Prior year profit/loss accounts before restatement will be transferred to 689-Inflation Adjustment Account. In other words, as a result of the inflation adjustment to be made at the end of 2023 There will no longer be any retained earnings or losses prior to the restatement.In this case, it is a matter of debate whether the retained earnings before the inflation adjustment can be subject to distribution again for the enterprises that incurred losses as a result of the inflation adjustment to be made at the end of 2023. This issue is not clearly stated in the draft communiqué. For this reason, we believe that it may be appropriate for enterprises that distribute their profits for the period before the inflation adjustment and that are likely to incur a loss as a result of the 2023 inflation adjustment, to transfer their retained earnings to extraordinary reserves with the decision of the general assembly.
8.At the end of the 2023 accounting period businesses with high inventories 2024 and onwards will be less affected by the negative tax impact of inflation adjustment. In the 2024 accounting period, excess inventory means higher income impact and therefore higher tax.
9.Real method and aggregated method can be used for inflation adjustment of inventories. It may be more appropriate to apply the real method for enterprises that can actually track their inventories. However, if this is not possible, one of the aggregated methods can be selected according to the simple average or inventory turnover method. At this point, the decision should be made by evaluating both the tax effect of the adjustment and the effects of increasing the value of inventories together.
10. Aggregated methods only apply to inventories. Aggregated methods cannot be used to adjust other assets.
11.Financing costs recognized in the cost of acquisition of non-monetary assets (non-real financing costs-rofm) will be separated.
12. When adjusting investments in progress, the date of each item of investment expenditures will be taken into account and the adjustment coefficient will be determined accordingly.
13.Since PPEGs will also be subject to adjustment, it is useful to pay attention to generate less PPEGs in 2024 and beyond.
Prior to inflation adjustment, it is important for enterprises to first identify their monetary and non-monetary assets and resources. Afterwards, it is necessary to determine whether there are unrealized financing costs within the assets to be subject to adjustment. In addition, it would be appropriate to accurately determine the entry dates of the assets and resources to be subject to inflation adjustment, if retained earnings are to be distributed, these profits should be taken to reserves as a precautionary measure, and in general, it would be appropriate to analyze the tax effect of inflation adjustment.
Sincerely,
BİLGENER
