Revaluation of Repeated 298/Ç and Provisional Article 32 of TPL
It is known that inflation has many negative effects on individuals and businesses. One of the most important effects on businesses is the inability to show the current value of assets in the financial statements. Due to the fact that especially immovable and depreciable assets are recorded at their cost values, businesses are in a difficult situation in terms of obtaining financing on the one hand, and on the other hand, they have to cope with the constraints brought by regulations such as implicit capital, financing expense restriction and technical bankruptcy.
Inflation Adjustment and Continuous Revaluation
The Tax Procedure Law (TPL) provides for an inflation adjustment that can mitigate such negative effects. According to the provisions of the repeated Article 298 of the TPL, 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 accounting period, inflation adjustment can be made by taxpayers who keep books on the balance sheet basis. However, if these conditions are not met, inflation adjustment cannot be made.
In Turkey, inflation adjustment was last applied in the 2004 accounting period. Although it is not at a level that requires inflation adjustment, the inflation experienced since this period has caused deterioration in the balance sheets of the enterprises. For this reason, inflation adjustment conditions are not met In such cases, a revaluation institution, which allows businesses to bring the carrying values of their assets closer to their current values, entered into force with paragraph (Ç) added to the aforementioned article with the Law No. 7338 published in the Official Gazette on 26.10.2021. This regulation is a “continuous revaluation” practice that can be repeated every year.
Despite the introduction of continuous revaluation, the conditions for inflation adjustment occurred at the end of the 2021 accounting period. While the enterprises were planning inflation adjustment instead of revaluation, with the provisional article 33 added to the TPL with the Law No. 7352 published in the Official Gazette on 29.01.2022, it was ruled that the financial statements of the 2021 and 2022 accounting periods and the 2023 accounting period provisional tax periods will not be subject to inflation adjustment regardless of whether the conditions within the scope of repeated Article 298 are met. According to the aforementioned article, in terms of the application of paragraph (Ç) of the repeated Article 298 (continuous revaluation), these periods will be considered as the period in which the conditions for inflation adjustment are not met. As a result, the aforementioned regulations prevent inflation adjustment even if the conditions are present, but make revaluation possible.
One-off and Continuous Revaluation
In the revaluation application in the repeated article 298/Ç, the values of the economic assets and their depreciation determined according to the valuation provisions in the TPL and included in the legal book records as of the end of the accounting period in which the valuation will be made are taken into consideration. These values are the revaluation rate for the year of revaluation and the updated value of the economic assets is calculated.
As will be noted, in continuous revaluation, the revaluation rate for the year in which the revaluation is to be made is used. Since this rate will have an effect for one year, it is unlikely that it will be able to approximate the current value of the economic assets that have been taken into assets in the past periods and recorded in the records with their cost value.
With the 61 numbered Corporate Tax Law Circular, the revaluation rate to be applied in the third provisional taxation period was announced as 92.93%. Accordingly, it is estimated that the revaluation rate will be at least 100% as of the end of the 2022 accounting period.
Under these conditions; let’s assume that an enterprise will revalue a factory building, which was purchased for 50.000,00.-TL in cash in October/2006, at the end of the 2022 accounting period in accordance with Article 298/Ç and that the revaluation rate for this period is 100%. Under this assumption, the value of the factory building will be 50.000x(2) = 100.000,00-TL as a result of one-year revaluation. It is clear that this value will be far away from the current value of the factory building.
In order to eliminate this problem, a provisional article 32 was added to the TPL by Law No. 7338 in parallel with the duplicate article 298/Ç. According to the provisional Article 32, the taxpayers who can make revaluation within the scope of paragraph (Ç) added to the repeated Article 298 the end of the accounting period preceding the accounting period in which they will revalue for the first time revalue their immovable properties and other economic assets subject to depreciation, which are registered in their balance sheets as of the date of acquisition.
The revaluation rate to be taken into account in the valuation to be made; dividing the D-PPI value for the last month of the accounting period preceding the accounting period to be revalued by the D-PPI value for the month following the month in which the assets were acquired (for the balance sheets subject to inflation adjustment, the D-PPI value for the month following the month to which the balance sheet belongs will be taken into consideration).
With this arrangement, which can be called “one-time revaluation”, taxpayers have the opportunity to bring their economic assets recorded at cost in their assets a little closer to their current values before revaluation according to repeated Article 298/Ç. For this reason, it would be appropriate for taxpayers to first subject their assets to one-time revaluation in accordance with the provisional Article 32 and then apply the repeated Article 298/Ç.
This issue can be explained as follows through the example above: In the 2022 accounting period, the revaluation coefficient to be applied according to provisional 32 for the factory building in question, which is included in the records as of the end of the 2021 accounting period, will be found by the ratio of 2021/December D-PPI (1022,25) and 2006/November D-PPI (135,33). In this case, the revaluation coefficient is (1022,25/135,33) = 7,55375. Accordingly, the revalued value of a building purchased in November 2006/November 2006 for 50.000,00.-TL will be (50.000,00×7,55375) = 377.685,00.-TL.
According to Provisional Article 32, after such a one-time revaluation, a continuous revaluation can be made in accordance with repeated Article 298/Ç. Thus, it will be possible to revalue at a higher amount.
Namely, when the factory building revalued according to provisional Article 32 is also revalued according to repeated Article 298/Ç, the final revalued amount of the building will be (377.685,00×2) = 755.370,00.-TL (under the assumption that the revaluation rate is 100%).
As a result, there is a difference of (755,370.00-100,000) = 655,370.00.-TL between the revaluation of a factory building purchased in October/2006 for 50,000.00.-TL in cash in the 2022 accounting period only according to the repeated Article 298/Ç and the revaluation first according to the provisional Article 32 and then according to 298/Ç.
Comparison of Provisional 32 and Repeated 298/Ç
As can be seen, these two revaluation procedures are designed to complement each other. The higher the book value of the economic assets to be revalued before the annual revaluation according to Repeated Article 298/Ç, the higher the amount of increase to be obtained from the annual revaluation will be. For this reason, it can be said that the provisional Article 32 prepares a basis for the revaluation to be made according to bis 298/Ç. However, there are some differences between these two regulations in terms of the economic assets they cover, taxation and the status of the revaluation fund.
The first of these differences is that the revaluation to be made according to repeated Article 298/Ç can only be made for economic assets subject to depreciation. However, according to Provisional Article 32, revaluation can also be made for vacant lands and plots that are not subject to depreciation.
In addition, the net increase in value arising from the revaluation to be made in accordance with Tax Repeater 298/Ç is not taxable. However, 2% tax is payable on the net value increase arising from the application of temporary 32.
For the building in the above example, the depreciation amount that should have been booked in 16 years until the end of the 2021 accounting period is (50.000x 2,5%×16) = 20.000,00.-TL. The revalued amount of depreciation multiplied by the revaluation coefficient is (7,55375×20.000) = 151.074.00.-TL.
The difference between the previous net value of the building (50.000-20.000=30.000,00 TL) and the revalued net value (377.685-151.074=226.611,00 TL) is the tax base of the revaluation (226.611,00-30.000=196.611,00 TL) and the tax payable is calculated as 196.611,00×2%= 3.932,22 TL.
Although tax is calculated in this way on the net value increase arising according to Provisional Article 32, no tax will be paid in the revaluation to be made according to repeated Article 298/Ç.
Finally, in the case of the disposal of the revalued economic assets in the revaluation application according to the repeated 298/Ç, the revaluation fund corresponding to them is valued as depreciation and added to the sales profit. In the application of Provisional 32, in case of disposal of economic assets subject to revaluation, the value increases shown in a special fund account in the liabilities are not taken into account in the determination of the gain.
On the other hand, the taxpayers who can benefit from both applications are the same. At the same time, after the economic assets are valued, depreciation can be allocated over the new values.
Points to Consider
Such revaluation practices are left to the discretion of taxpayers. In this regard, a decision should be made by comparing the opportunities and cost that the revaluation will create. While making this decision, it is useful to think in the long term.
If taxpayers wish, they may revalue according to duplicate 298/Ç without applying the provisional Article 32. However, as stated above, in this case, the revaluation increase will also remain low since the recorded values of the economic assets are low.
Likewise, revaluation may be made according to the provisional Article 32 and repeated 298/Ç may not be applied. However, in this case, it should be kept in mind that retrospective revaluation cannot be made for the periods in which duplicate 298/Ç is not applied. For example, if revaluation is made according to provisional 32 in 2022 and then revaluation is not made according to duplicate 298/Ç, in 2023, the possibility of revaluation for 2022 will be eliminated. In this case, revaluation can only be made according to repeated 298/Ç for 2023. Likewise, since it is a one-time revaluation arrangement, revaluation cannot be made again according to provisional 32 for this period in between.
On the other hand, revaluation is also possible for temporary tax periods in accordance with Tax Law No. 298/Ç. Starting from the first provisional tax period of the 2022 accounting period, the revaluation rate to be taken as basis in the revaluation starting from November of the previous year; It will be determined by taking the average price increase rate occurring in the Domestic Producer Price Index of the Turkish Statistical Institute in the 3rd, 6th and 9th months according to the previous 3, 6 and 9-month periods.
Finally, it is possible for those who have previously revalued within the scope of provisional article 31 to revalue the same economic assets within the scope of provisional article 32 and repeated article 298/Ç. The coefficient to be applied when revaluing these economic assets according to temporary 32 will be found by proportioning the December/2021 D-PPI (1022.25) and June/2021 D-PPI (693.54) indices: (1022,25/693,54) =1,47395. By multiplying this coefficient by the revalued amounts according to the provisional article 31, revaluation will be made in 2022 according to the provisional article 32. It is possible to make revaluation over these values according to repeated 298/Ç according to the procedure mentioned above.
