Turkey A VAT Guide

December 2004

A GUIDE TO VAT IN TURKEY This guide has been prepared by PricewaterhouseCoopers to provide a summary of the VAT law in Turkey. It reflects the current tax law as at December 2004. This booklet is not intended as definitive advice, but merely as an explanatory guide, and we would strongly recommend that readers who have specific queries regarding the VAT system in Turkey seek professional advice. For further information, please contact the PricewaterhouseCoopers office in Turkey (see Appendix).

TABLE OF CONTENTS 1. GENERAL OVERVIEW 2.VAT TAXPAYERS 2.1.General 2.2.Taxpayers 2.3.VAT responsibility and reverse charge VAT 3.TAXABLE TRANSACTIONS 3.1.General 3.2.Special types of tax bases 4.FOREIGN TRADE: IMPORTS AND EXPORTS 4.1.General 4.2.Importation of goods and services 4.2.1.Taxpayer for imported goods 4.2.2.Tax responsibility for importation of services 4.2.3.Inward processing 4.2.4.Outward processing (temporary exportation for re-importation) 4.2.5.Temporary importation 4.3.Exportation of goods and services 4.3.1.Normal exportation 4.3.1.1.Export delivery and exportation of services 4.3.2.Sales of goods destined for export 4.3.3.Supplies to non-residents and refunding 5.EXEMPTIONS 5.1.Exemption without credit for previously paid VAT 5.1.1.General 5.1.2.Other exemptions 5.1.2.1.Immovable property 5.1.2.2.Financial transactions 5.1.2.3.Transportation and communication 5.1.2.4.Education and training 5.1.2.5 Other 5.1.3.The transactions of transfer (merge) and de-merge 5.2.Exemption with credit for previously paid VAT 5.2.1.General 5.3.Exemptions on importation of goods 5.3.1.Normal importation of goods 5.3.2.Inward processing 5.3.3.Outward processing (temporary exportation for re-importation) 5.3.4.Temporary importation

6.TAXATION 6.1.General 6.2.Taxable base 6.2.1.Exclusions from the taxable base 6.3.Tax rates 6.3.1.Standard rate 6.3.2.Special rates 6.4.The credit mechanism 6.5.Non-deductible VAT (cost or non-deductible item or capitalised) 6.6.VAT refund 7.VAT REGISTRATION AND RECORDS 7.1.Registration 7.2.Records 7.3.Invoices 8.VAT RETURN, TAXABLE PERIOD AND PAYMENT 8.1.Taxable period and submission of VAT return 8.2.Payment 9.GLOBAL VAT ON-LINE SERVICES (GVOL) 10.OTHER INDIRECT TAXES APPENDIX PricewaterhouseCoopers Turkey offices and contacts

GENERAL OVERVIEW The Turkish tax system levies value added tax on the supply and the importation of goods and services. The Turkish name for Value Added Tax is Katma Deer Vergisi, abbreviated to KDV. Liability for VAT arises: (a) When a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey, and (b) When goods or services are imported into Turkey. VAT is levied at each stage of the production and the distribution process. Although liability for the tax falls on the person who supplies or imports the goods or services, the real burden of VAT is borne by the final consumer. This result is achieved by a tax-credit method where the computation of the VAT liability is based on the difference between the VAT liability of a person on his sales (output VAT) and the amount of VAT he has already paid on his purchases (input VAT). The Turkish VAT system employs multiple rates and the Council of Ministers is authorised to change the VAT rates within certain limits.

2. 2.1.

VAT TAXPAYERS General

VAT taxpayers are defined in the VAT Law as those engaged in taxable transactions, irrespective of their legal status or nature and their position with regard to other taxes. 2.2. Taxpayers

The following people or entities are liable to VAT: Those supplying goods and services, Those importing goods or services, Those required to complete customs formalities in case of transit of goods through Turkey, General Directorates of the Authorised Public Lotteries, including SporToto and National Lottery, General Directorates of Postal Services (PT and Telecom) and radio and television corporations, Organisers of horse races and other betting activities, Organisers of shows, concerts and sporting events with the participation of professional artists and professional sportsmen, Lessors of goods and rights stated in Article 70 of the Income Tax Law, Those voluntarily registered with the tax authorities.

Goods and rights set out in Article 70 of the Income Tax Law including immovable property such as land, buildings, mines and rights which are in the nature of immovable property, and other goods and rights such as all types of motor vehicles, machines and equipment, ships, literary, artistic and commercial copyrights, commercial or industrial know-how, patents, trademarks, licences and similar intangible properties and rights. 2.3. VAT responsibility and reverse charge VAT

In the event that the taxpayer is not resident or does not have a place of business in Turkey, a legal head office or place of management in Turkey, or in other cases deemed necessary, the Ministry of Finance is authorised to hold any one of the people involved in a taxable transaction responsible for the payment of tax. According to the Turkish VAT law, there is a so-called reverse charge VAT mechanism, which requires the calculation of VAT by resident companies over payments to abroad. Under this mechanism, VAT is calculated and paid to the related tax office by the Turkish company or customers on behalf of the non-resident company (foreign company). On the other hand, the local company treats this VAT as input VAT and offsets it in the same month.

In the case of the transactions listed below, only 10% of the VAT is paid to the seller by the purchaser. Therefore, the purchaser will be responsible for paying 90% of the VAT to the tax office directly. The deliveries of the petroleum products by the sellers, excluding the importers, refineries, oil distribution companies and oil agents. In the case of the toll-manufacturing and ready-made materials (textiles), only 1/3 of the VAT is paid to the seller by the purchaser. Therefore, the purchaser will be responsible for paying 2/3 of the VAT directly to the tax office. In the case of the purchase of construction contract works, repair and maintenance services related to the machinery, equipment and fixed assets, catering services for the personnel, public offices that have a general or supplementary budget, private provincial administrations, municipalities, villages, and corporations established by them, universities (except those built by foundations), organisations with revolving funds, public institutions and establishments founded by law, professional associations with the nature of a public establishment, retirement and assistance funds founded by law or having legal status, banks, enterprises where 51% or more of shares are publicly owned and establishments due for privatisation, will be responsible for paying 1/3 of the VAT directly to the tax office. Only 2/3 of the total VAT amount is payable to the seller. In addition, in the case of the purchase of special security services, cleansing services and consultancy and audit services, they will be also responsible for paying 50% of the VAT directly to the tax office. The other 50% of the VAT is payable to the seller. 3. 3.1. TAXABLE TRANSACTIONS General

Taxable transactions defined in VAT Law include the supply of goods and services, importation of goods and services and other activities. The following transactions carried out in Turkey are subject to VAT: (a) Supply of goods and services within the scope of commercial, industrial, agricultural or independent professional activities, (b) Importation of all kinds of goods and services, (c) Other activities; Postal, telephone, telegram, telex and other similar services; radio and television services, Organisation of all kinds of betting, gaming and lotteries including authorised public lotteries (Spor Toto and Milli Piyango), Organisation of shows, concerts and sporting events with the participation of independent professional artists and professional sportsmen, Sales at customs bonded warehouses and in auctions, Transportation of petroleum and gas and their products through pipelines, Leasing of the goods and rights stated in Article 70 of the Individual Income Tax Law,

Deliveries and services of a commercial, industrial, agricultural or professional nature performed by enterprises that belong to national and local government agencies and establishments, universities, associations, foundations and all kinds of professional organisations, Deliveries and services deemed to be taxable upon voluntary registration with the tax authorities, to avoid uncompetitive pricing.

Any real person or legal entity, resident or non-resident, private or public, engaged in the above transactions is subject to tax. Exemptions granted under other tax laws are not valid for VAT purposes if they concern an activity that falls within the scope of the VAT Law. 3.2. Special types of tax bases

Special types of tax bases are as follows: Fees paid for participation in soccer games (SPOR-TOTO) and in all types of lotteries including the authorised National Lottery, In cases of horse races, parti-mutuel and games of chance, the price charged for the participation in such activities, as well as the price paid for entrance into the places where such games and races are held, In the case of shows and concerts in which professional artists take part and sporting activities, races, and the organisation and showing of competitions in which professional sportsmen participate, entry fee to the places where these activities are performed and the price of deliveries and services performed in these places, The final sale price of sales made in customs warehouses and auction halls, In the delivery and importation of gold products, jewellery containing gold and gold coins, the tax base is the amount remaining after the price of the lump (unprocessed) gold bullion is deducted, The sale of the tickets and cards by the sellers (agents) used in-city passenger transportation operated by the municipalities, The sale of tobacco products, The sale of telephone cards including the prepaid cards for mobile phones and slugs.

4. 4.1.

FOREIGN TRADE: IMPORTS AND EXPORTS General

Importation of goods and services is a taxable transaction, whether or not the importation is made for business purposes. Export transactions are exempt from VAT and credit and refund is available for input VAT for the export goods.

4.2.

Importation of goods and services

For VAT purposes, any importation of goods or services into Turkey is a taxable transaction, regardless of the status of the importer or the nature of the transaction. To equalise the tax burden on importation and domestic supply of goods and services, VAT is levied only on the importation of goods and services that are liable to tax within Turkey. Accordingly, any transaction exempt in Turkey is also exempt on import. The VAT on importation is imposed at the same rates applicable to the domestic supply of goods and services. In the case of importation, the taxable event occurs at the time of actual importation. Importation of machinery and equipment under an investment incentive certificate (IIC) are exempt from VAT. 4.2.1. Taxpayer for imported goods The VAT on importation of goods is assessed by the customs authorities on each individual import and is payable together with customs duty. Where the transaction is exempt from customs duty or in the case of international transportation, VAT is assessed upon a special declaration made at the customs territory and is payable at the time the taxable event occurs. The taxpayer is the individual or entity who has the title of the imported goods. 4.2.2. Tax responsibility for importation of services Services rendered abroad (i.e. reports written abroad) are taxable only if utilised in Turkey. Therefore, an importer in Turkey is required to declare and pay the VAT as the withholding agent. 4.2.3. Inward processing The aim of the inward processing system is to enable exporters to supply materials for the production of their exports, without being subject to customs taxes, including VAT. The VAT and customs taxes are secured by a bank letter at the time of importation, and as the goods are processed and exported these bank letters are released. 4.2.4. Outward processing (temporary exportation for re-importation) The main principle of outward processing is to allow goods that are in free-circulation to be exported out of Turkey for a processing operation. When the goods return to Turkey, they are released for free circulation with total or partial relief from import duties. If the goods are processed when they are temporarily exported, then customs duties and VAT is charged for the processed portion of the goods.

4.2.5. Temporary importation The main principle of the temporary importation regime is to allow the goods to be used in Turkey for a certain time period and then re-export them. The goods shall not be subject to any changes, except for the normal depreciation. According to the new Turkish Customs Code (4458), with the exception of certain goods, 3% of the customs taxes (including VAT) that should be paid in the case of a normal importation is charged for each month in which the goods stay in Turkey. The tax is payable at the time of actual importation and the tax is calculated on the basis of the estimated stay time of the goods in Turkey. The remaining customs duties are secured by the customs administration with a bank guarantee letter. 4.3. Exportation of goods and services

4.3.1. Normal exportation Export deliveries of goods and services related to such deliveries are exempt from VAT. 4.3.1.1. Export delivery and exportation of services An export delivery is exempt from VAT if the following conditions are met: The delivery must be made to a customer (foreign recipient) outside the domestic territory of Turkey or to a purchaser in a Free Trade Zone or to an authorised customs warehouse operator, The goods to be delivered must leave Turkish customs territory and reach a foreign country or Free Trade Zone or must be placed in authorised customs warehouses to be sent to a foreign customer. In order to benefit from the export exemption for the services, the following four conditions should be met: The services must be performed for a customer who is resident abroad (out of Turkey), Invoices and other documents must be issued in the name of the foreign customer, Fee for the services must be brought into Turkey as a foreign currency, Services must be utilised abroad.

The VAT burden on exports is completely relieved by the credit and refund mechanism. Export deliveries are not only exempt from VAT, but also the input VAT paid is credited and the excess amount is refunded.

4.3.2. Sales of goods destined for export Where goods are sold by their producer to an exporter, subject to the condition that they are to be exported, the exporter will pay no VAT. The producer will include the VAT in his periodic returns. However, the VAT will be computed and assessed but deferred. If the goods are exported within three months from the beginning of the month following the date of the delivery to the exporter, the deferred VAT will be cancelled. If the export is not realised, the deferred VAT will be collected together with delay interest applicable to public receivables (the normal rate is currently 4% monthly). 4.3.3. Supplies to non-residents and refunding There are two groups of non-residents that are entitled to get refund: 1) Refunding to non-resident travellers VAT on goods purchased by non-resident travellers is payable at the time of supply. However, a refund is available when they are cleared through customs upon presenting the relevant invoice or similar document. VAT exemption on the deliveries of goods to non-resident travellers is carried out in line with two different methods. This exemption is not applied to services in either method. The basic points of these two methods are as follows: a. The method in which the VAT is first collected, then refunded Both Turks and foreigners who are not resident in Turkey can benefit from this exemption when taking goods purchased in Turkey abroad. A letter of permission is required. It is required that the total price of the goods on an invoice exceeds TL100 million excluding VAT. A special type of invoice and foreign currency purchase receipt is not required. The invoice is issued stating a VAT amount. The goods sold should be taken out of the country within three months of the selling date. The copy of the invoice approved at customs is sent to the seller within three months. The approval of the invoice can be made at all exit points (customs). The approval of the invoice by a customs officer is sufficient. The purchaser of the goods gets the invoice approved.

Furthermore, there is more than one option for refunding VAT to the buyer by the seller. These can be listed as follows: Refund at customs. After leaving customs. By hand. Refund in advance. Refund by authorised intermediaries.

b. The method in which the price is collected in foreign currency and no VAT is imposed The taxpayer, who has a letter of permission and sells in return for foreign currency to those who are not resident in Turkey, having met the other related conditions, may not collect VAT. Special type of invoice is needed for this exemption. Special invoice is prepared in 5 copies. VAT is not shown on the special invoice. Foreign currency purchase receipt should be obtained to benefit from the exemption within the same month in which the sale is made. One foreign currency purchase receipt for more than one invoice may be used. The sale price excluding VAT on the invoice should be over TL1 billion which is applicable to 31.12.2004. The goods should be taken out of the country within three months of the selling date. The copy of the special invoice approved at customs is sent to the seller within one month. (This approval can only be made at customs points determined by the Ministry of Finance and Customs Directorate.) 2) Refunding to some businesses In cases where there is no legal residence, place of business, legal headquarters or centre of business in Turkey, VAT paid for the purchase of goods and services regarding transportation activities and, the purchase of goods and services regarding participation in fairs and exhibitions is refunded according to the reciprocity principle. The Ministry of Finance is authorised to determine the goods and services that are in the scope of the refund and the principles and procedures of the refund mechanism. The Ministry of Finance determines goods and services that are in the scope of the refund and the principles and procedures of the refund mechanism with a VAT General Communiqu. 5. EXEMPTIONS

There are two basic forms of exemption under the Turkish VAT Law.

5.1.

Exemption without credit for previously paid VAT

5.1.1. General In this form, the input VAT cannot be deducted or reclaimed but can only be recorded as a cost or an expense. Transactions that are subject to exemption without credit for previously paid VAT are the supply of goods and services for cultural, educational, recreational, scientific, social and military objectives and certain other categories. The following goods and services supplied by national and local public institutions, universities, political parties, trade unions, non-profit organisations, agricultural and co-operative societies, social security institutions and other officially qualifying organisations, in the performance of their regular activities, are exempt from VAT: Goods and services supplied at hospitals, clinics, dispensaries, human blood and organ banks, public parks, monuments, botanical and zoological gardens, veterinary bacteriological, serological and similar laboratories, school dormitories, orphanages and homes for the elderly; Goods and services supplied at theatres, concert halls, libraries, sport facilities, reading rooms and conference halls; All kinds of supplies free of charge to the above organisations; Goods and services supplied for the purpose of promoting and encouraging scientific, artistic and agricultural activities; Licence, permission, approval and similar services performed by professional associations in the character of a public organisation in line with the purpose of their incorporation and their duties given by laws and also the deliveries of printed paper by these associations; Services and deliveries given for the restoration, surveying and restitution projects for the immovable properties defined in the Protection of the Cultural and Natural Assets Law;

are exempt from VAT. On the other hand, supplies of goods and services to diplomatic representations, consulates and foreign charity foundations related to their free of charge supplies to the above organisations, are exempt from VAT. 5.1.2. Other exemptions 5.1.2.1. Immovable property Supply of land and workplaces by business enterprises within small industrial sites and organised industrial regions is exempt from VAT. Supply of houses/buildings to members of housing construction co-operatives is exempt from VAT.

The leasing/hiring of immovable property is exempt from VAT except for the immovables included in the business assets of an enterprise. The sale of immovable properties by the State is exempt from VAT. The sales of immovable properties by the Treasury and General Directorate of Plant Office and the delivery of the right of access by the Treasury.

5.1.2.2. Financial transactions Transactions carried out by banks and insurance companies that fall within the scope of banking and insurance transaction tax are exempt without credit from VAT to avoid double taxation.

Services rendered by banks, bankers and insurance companies are subject to banking and insurance transaction tax. Supply of unprocessed gold and silver, foreign exchange, money, tax and duty stamps, negotiable instruments, vehicle tax stamps, stocks and bonds are exempt from VAT. Supply by public institutions of banknotes, coins and official stamps and papers are exempt from VAT. According to the decrees of the Banks Law, the delivery of goods and rights to the Savings Deposit Insurance Fund (SDIF) and the delivery of them by the Savings Deposit Insurance Fund (including sales at auctions), for the purpose of collecting the claims transferred to SDIF, the delivery of goods and rights (including auctions) which are the guarantee of these claims. Deliveries within the context of Temporary Article 28 and Temporary Article 29/1 (paragraph 6 and 7) of the Corporate Tax Law are also exempted without credit if only the input VAT related to the purchase of the assets is still not deducted until the month in which the sale is realised.

Temporary Article 28 of the Corporate Tax Law (valid until 31.12.2004) states that the capital gains of full liable taxpayers derived from the sale of shares and immovable properties are exempt from corporate tax on condition that the shares and immovable properties are held for over two years and gains are added to the paid-up capital in the year of sale. This article also states that the capital gains derived from the contribution of the production facilities in a company as a capital in kind is exempt from corporate tax. These deliveries with in the context of Temporary Article 28 of the Corporate Tax Law are also exempt from VAT.

Temporary Article 29/1 of the Corporate Tax Law (valid until 31.12.2004) states that capital gains derived from the sale of shares and real estate of banks operating in Turkey and also capital gains derived from the sale of shares and real estate of full liable stock companies holding shares of those banks, directly or indirectly, are exempt from corporate tax on condition that these gains are added to the capital of those banks in the year of sale. This regulation also applies to financial institutions operating in Turkey. Deliveries within this article are also exempt from VAT. 5.1.2.3. Transportation and communication Transportation of foreign crude oil, gas and their products through pipelines is exempt from VAT.

5.1.2.4. Education and Training Free of charge education services not exceeding 10% of their capacities in the relevant period, performed by universities, institutions of higher education and private schools are exempt from VAT.

5.1.2. 5. Other Deliveries of retail drinking water for non-commercial purposes by juristic (legal) persons of villages to the persons who are resident in villages and deliveries of water for agricultural purposes and land improvement services rendered by public institutions, agricultural co-operative societies and farmers unions. Goods which are donated to the aid banks. Warehousing charge, storage and terminal services rendered in the customs warehouses, temporary storage places and customs places in which the customs services are fulfilled, for the goods which are subject to exportation and importation procedures. Also rent of free-shops and rent of warehouses related to these free-shops. Supplies by military factories, shipyards and workshops, in accordance with their statutory objectives. Playing or arranging of the lottery and similar games by the National Lottery Administration. Deliveries of rubber scrap and wastes and ingots made of scrap metal. The delivery of precious jewellery (diamond, brilliant of a diamond, ruby, emerald, sapphire, chrysolite, pearl) and the delivery of junk and waste rubber and natural rubber. Deliveries and services rendered to those organising conferences to be held in Turkey within the framework of international agreements to which Turkey is a party; lodging of participant foreign delegations and deliveries and services rendered in the scope of fulfilment of their tasks have been exempted from VAT until 31.12.2005.

According to the law No: 4691 related to the Technology Developing Zones, the incomes derived from the production based on software and R&D by the taxpayers stated in these zones are exempt from income and corporate tax for 5 years starting from the commencement of business. The Ministry of Finance has authorisation to extend the period up to 10 years for some special products and zones. With law No: 5035, the delivery of the goods and services related to the products which are produced in these zones and related to the system management, data management, business applications, internet and mobile and military control application software are exempt from VAT for the periods in which entrepreneurs income for the activities rendered in these zones is exempt from income tax and corporate tax.

5.1.3. The transactions of transfer (merge) and de-merge The transactions of transfer (merge) and de-merge made within the context of the Corporate Tax Law are exempt from VAT. However, the input VAT of these transactions is deductible; even though the general rule is that the input VAT of exemptions is non-deductible. 5.2. Exemption with credit for previously paid VAT

5.2.1. General Certain transactions are not taxable and at the same time the taxpayer has the right to claim a credit and a refund. This mechanism operates under the name exemption with credit for previously paid VAT and is issued principally for exports. Supply of the following goods and services is exempt from VAT with credit for previously paid VAT: Export supplies, Roaming services rendered in Turkey for customers outside Turkey (foreign customers) in line with the international roaming agreements, with the condition of reciprocity, Supply of sea, air and railway transportation for business purposes and supplies related to maintenance and repair of such, Supplies to people engaged in petroleum exploration activities within the scope of the Petroleum Law, Deliveries of goods and services to those engaged in exploration, operation, productiveness and refining activities related to gold, silver and platinum, Services supplied at harbours and airports for vessels and aircraft; loading, unloading, and similar services rendered for loads and passengers are also included in the services rendered for vessels and aircraft, Deliveries of goods and construction contract works to those who engage in the construction, renovation and widening of harbours and airports or to those who contract these works to a third party, Supplies to embassies, consulates and diplomatic and consular agents subject to the condition of reciprocity,

Supplies to international institutions and foreign agents connected with such institutions, to the extent that the exemption is granted by an international agreement, Delivery of planes, helicopters, vessels, submarines, tanks, armoured personnel carriers, rockets, missiles and similar vehicles, revolvers, military supplies, equipment and deliveries related to their R&D, production, software, fitting, spare parts, maintenance and renovation to the Ministry of Defence, Gendarme Commandership, Undersecretariat of Defence Industry, National Intelligence Organisation for the purpose of national defence and domestic security and also deliveries of goods and services to those who perform the above deliveries and services, Supplies of machinery and equipment to those who have an investment incentive certificate and who are VAT tax payer, International and transit transportation is exempt from tax.

5.3.

Exemptions on importation of goods

5.3.1. Normal importation of goods Exemptions on importation granted under VAT Law are set out below: (a) Importation of goods and services that is exempt from VAT, if supplied in Turkey (e.g. importation of unprocessed gold and silver; importation of machinery and equipment under IIC). (b) Importation of certain goods that are exempt from customs duties, with reference to the Customs Law (e.g. samples and models of products that are of no commercial value),). (c) Goods to which transit, bonded warehouse, temporary storage and free zone regimes are applied. 5.3.2. Inward processing Inward processing enables exporters to import raw materials without paying VAT or customs taxes. 5.3.3. Outward processing (temporary exportation for re-importation) The goods may be sent abroad for repair purposes and if the goods are repaired within the warranty period, then there will be no customs tax or VAT applicable at the time of re-importation. 5.3.4 Temporary importation The main principle of the temporary importation regime is to allow the stay of the goods in Turkey only for a certain period of time.

6. 6.1.

TAXATION General

The tax mechanism operates on the basis of tax returns filed by taxable entities within the period indicated in the VAT Law. The enterprise may credit the VAT charged to him on goods and services supplied and on importation against the VAT on the supply of goods and services effected by him and pay the difference due. If the amount of credit exceeds the amount charged by the enterprise, the excess credit is either carried forward or refunded. To be eligible to claim the credit, the invoice or similar documents must cover the VAT separately for each item and they must be recorded in the enterprises legal books. However, it is not necessary that the VAT should actually have been paid, i.e. VAT liability and deductibility is computed on an accrual basis. 6.2. Taxable base

The taxable base of a transaction is generally the total value of the consideration received, not including the VAT itself. The VAT Law deals with the taxable base under four headings, namely the taxable base on deliveries and services, importation, international transportation and special types of taxable bases. In case a consideration does not exist, is unknown or is in a form other than money, the taxable base is the market value. Market value is the average price payable in the market for similar goods and services and is determined with reference to the Tax Procedural Law. 6.2.1. Exclusions from the taxable base The taxable base for goods delivered and services rendered does not include the VAT itself or any discounts, provided that they are at a reasonable rate with regard to commercial practice and are explicitly listed in all invoices or similar documents. 6.3. Tax rates

6.3.1. Standard rate The standard rate of VAT on taxable transactions is set at 10% in the VAT Law, but this rate was increased to 18% as of 15.05.2001. 6.3.2. Special rates For the deliveries and services mentioned in List No. I .1% (e.g. agricultural products such as raw cotton, dried hazelnuts, supply and leasing of goods within the scope of the Finance Leasing Law). For the deliveries and services mentioned in List No. II......8% (e.g. basic food stuffs, books and similar publications).

6.4.

The credit mechanism

VAT is collected at every stage of the production and distribution process from the initial sale by the producer to the final sale to the consumer. At each of these stages, the amount of tax payable is the difference between the total amount of tax charged on the invoices issued by the taxpayer and the total amount of tax charged on invoices issued to the taxpayer during the same period. Thus the VAT is initially computed by applying the appropriate rate of taxation to the taxable base for goods and services supplied by the taxpayer during a taxable period. This amount is then reduced by a credit for VAT previously paid on importation and on goods and services supplied to the taxpayer. In other words, the input VAT is offset against output VAT in the VAT return. If output VAT is in excess of input VAT, the excess amount is paid to the related tax office. On the contrary, if input VAT exceeds output VAT, the balance is carried forward to the following months to be offset against future output VAT. 6.5. Non-deductible VAT (Cost or non-deductible item or capitalised)

In the following cases, VAT may not be credited from the VAT computed on taxable transactions: (a) VAT on purchases of cars (which should be recorded as an expense or cost). (b) Missing and stolen stocks (excluding those lost due to fire in places of compelling reason declared by Ministry of Finance). (c) VAT on non-deductible expenses. (d) Input VAT on exempt deliveries listed in Article 17 of the VAT Law.

6.6

VAT Refund

Value Added Tax (input VAT) shown on invoices and similar documents related to the transactions which are exempt from the tax, such as: Exportation of goods and services, Exemption for vehicles, petroleum exploration and investments made under an investment incentive certificate (IIC), Transit transportation, Diplomatic exemption,

are deducted from the Value Added Tax (output VAT) to be calculated on the transactions of the taxpayer which are subject to VAT. In the absence of transactions subject to VAT, or if the output VAT is less than the input VAT, then the input VAT which cannot be deducted is refunded to those who perform such transactions, on the basis of principles to be determined by the Ministry of Finance. Our VAT refund group in our Tax and Legal Service Department in PwC Turkey provides services to help companies with their VAT refund claims.

7. 7.1.

VAT REGISTRATION AND RECORDS Registration

Any person or entity engaged in an activity within the scope of the VAT Law must notify the local tax office where his place of business is located. If there is more than one place of business, registration is performed at the tax office that is authorised with respect to individual or corporate income tax. 7.2. Records

Taxpayers must keep records in such a way as to enable the computation and checking of VAT. 7.3. Invoices

Invoices must include the following information: (a) Serial and sequence number of invoice (b) Date of supply (i.e. the date the invoice was issued) (c) Name, address and tax registration number of the company receiving the goods (d) Name, address and tax registration number of the supplier (e) Description of goods or services supplied (f) Quantity and price (g) Date of delivery of goods and goods dispatch note number (h) VAT must be shown separately on invoices and similar documents for the purpose of the credit mechanism

8. 8.1.

VAT RETURN, TAXABLE PERIOD AND PAYMENT Taxable period and submission of VAT returns

The Ministry of Finance has established monthly taxable periods for all taxpayers under the normal VAT regime as of 01.10.1985. Taxpayers must file and submit their returns to the local tax office within 20 days following the end of each taxable period. For taxpayers engaging in international transportation and transit transportation, the taxable period is defined as the quarterly period. The taxable period for international transportation, transit transportation and VAT on import assessed at the customs administration is the moment of entry to customs territory or exit from customs territory. 8.2. Payment

VAT payments are made 6 days after submission of VAT returns to the relevant tax office.

9.

GLOBAL VAT ON-LINE SERVICES (GVOL)

PriceWaterhouseCoopers has launched a Global VAT On-line (www.globalvatonline.com). GlobalVATOnLine offers a subscription-based web-service, GlobeSearch, which carries extensive details on VAT rules and rates in over 70 countries, including all the worlds major trading nations. The full news service available to subscribers provides coverage of important VAT developments and instant access to the database of global news items with reports and analyses of key developments. It is possible to either subscribe to this service launched at www.globalvatonline.com by following the procedures on the website or by calling our VAT group in PwC Turkey on 0212 326 60 60. 10. OTHER INDIRECT TAXES*

Special Consumption Tax Law No: 4760 related to the Special Consumption Tax (SCT) came into force as of 01.08.2002. The aim of this law is to simplify the complex indirect tax system of Turkey. In this respect, the complex indirect tax system has been changed and 16 special funds and indirect taxes have been partially or wholly abolished by this law. The goods subject to Special Consumption Tax are stated in four different lists attached to the Special Consumption Tax Law: a) List I is related to Fuel and Lube products The delivery of goods in List I by the importer or the manufacturer (including refinery) is subject to SCT once only. b) List II is related to the Motor Vehicles The initial acquisition of motor vehicles subject to official registration in List II is subject to SCT once only. The importation of motor vehicles not subject to registration in List II or delivery of those not subject to registration by producers is subject to SCT once only. c) List III is related to alcoholic beverages and tobacco products The importation of goods or the delivery of goods in List III by the manufacturers is subject to SCT once only. d) List IV is related to luxury goods (such as cosmetic products, white goodsTV, refrigerators, etc.) The importation of goods or the delivery of goods in List IV by the manufacturers is subject to SCT once only. A sale by auction before application of SCT is also subject to SCT once only. Stamp Tax Stamp tax applies to a wide range of documents, including but not limited to, contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements and payrolls. Stamp duty is levied as a percentage of the value stated on the document at rates ranging from 0.15% to 0.75% and also on a lump-sum basis. The Stamp Tax Law states that each relevant party shall be responsible for payment of the total amount of stamp tax on the agreements. Each original document is separately subject to stamp tax.

Motor Vehicle Tax (MVT) The amount of MVT for land transportation vehicles is determined according to their weight, age, cylinder capacity and the fuel used and for 2004 it ranges from TL300 million to TL9 billion for cars, TL300 million to TL1.5 billion for buses, trucks and the like, TL15 million to TL45 million for yachts and cutters, and TL5 billion to TL20 billion for airplanes and helicopters. MVT is payable in two instalments in January and July of every year. Resource Utilisation Support Fund (RUSF) Under the Decree No. 88/12944 regarding the Resource Utilisation Support Fund, foreign loans obtained by Turkish resident individuals or legal entities other than banks or financial institutions, are subject to Resource Utilisation Support Fund Levy (RUSF) at the current rate of 3% out of the principal amount, payable at the time of the transfer of the loan. RUSF levy can be avoided by setting the average maturity of the hard currency loan obtained from abroad as longer than one year. Also loans provided by banks and financial institutions to the real persons as consumer loans are subject to 15% RUSF. As well as its other applications, RUSF is also payable at the current rate of 3% for imports with credit (the import payments within a time period, not in cash) at the time of actual importation.
* funds indicated in this section are converted to be an account

Banking and Insurance Transactions Tax (BITT) Banks and insurance companies are exempt from VAT but are subject to BITT at a rate of 5%, which is due on the gains of such companies from their transactions. The purchase of goods and services by banks and insurance companies is subject to VAT but is considered as an expense or cost for recovery purposes. Foreign exchange transactions are subject to 0.1% BITT. Inheritance and Gift Tax Items acquired as gifts or through inheritance are subject to a progressive tax rate ranging from 10% to 30% and 1% to 10% of the item's appraised value. Tax paid in a foreign country on inherited property is deducted from the taxable value of the asset. Inheritance and Gift Tax is payable in biannual instalments over a period of 3 years. Property Taxes Property taxes are paid each year on the tax values of land and buildings at rates varying from 0% to 0.3%. In the case of the sale of a property a 1.5% fee is paid on the sales value by both the buyer and the seller. Property taxes are accrued every year in January and February and paid in two equal instalments, the first being in March, April or May and the second in November.

Communication Tax All types of installation, transfer and telecommunication services given by GSM mobile phone operators and all other administrators that provide telecommunication services are subject to 15%-25% special communication tax . The tax base for special communication tax is the same as the VAT base. The special communication tax returns are declared and paid by the 15th day of the following month. Support and Price Stabilisation Fund The Support and Price Stabilisation Fund was formed to ensure that foreign trade is performed according to the economic conditions. The Support and Price Stabilisation Fund is taken from the export price of every type of product according to the weight, unit or value of the good. However, export income has to be brought into Turkey and converted to TL within 180 days following the date of the export of the goods. In cases where export income is brought into Turkey after 180 days, then the foreign exchange gains occurred will be transferred to the Support and Price Stabilisation Fund. Education Contribution Fee Transactions and certain documents (i.e. tax returns, airplane tickets, GSM mobile phone services, etc) stated in the related law are subject to Education Contribution Fee in different amounts. An Education Contribution Fee is taken as a fixed levy according to the document or the transaction. An Education Contribution Fee is a temporary fee applicable until 31.12.2010. In addition it should be mentioned that there is no exemption in the application of the Education Contribution Fee. Customs Tax Please refer to our booklet regarding Customs and Foreign Trade. Free-Trade Zone Fund Please refer to our booklet regarding Free Trade Zone. Environment Pollution Prevention Fund (EPPF) The income of the fund is derived from: -The annual payments of ships that are registered in the ship register and weigh a minimum of 18 tons, -The annual payments of air transport companies regarding the transport of passenger and goods, -The penalties that are taken from companies causing environmental pollution.

Fees There are different types of fees: Judgment Fees, Notary Fees, Tax Judgment Fees, Title Deed Fees, Consulate Fees, Ship and Harbour Fees, Permit of License and Certificate Fees, Passport Fees, Visa Fees and Ministry of Foreign Affairs Certification Fees. Municipality Incomes Municipalities levy certain taxes and fees to cover their expenses. These taxes and fees are as: Advertisement Tax, Entertainment Tax, Communication Tax, Electricity and Gas Consumption Tax, Fire Insurance Tax, Environmental Cleansing Tax, Occupation Fee, Natural Resources Fee, Building Construction Fee, etc. Health Duty Ships sailing -between Turkish harbours, or -from foreign country harbours to Turkish harbours, or -from Turkish harbours to foreign country harbours, or -ships passing through the Straits in transit will pay a Health Duty (HD) calculated according to a tariff regarding the net weight (tonnage) of the ships. Ships coming from foreign territorial waters to Turkey pay the HD in the first harbour they reach in Turkey. HD regarding the ships that pass through the Turkish Straits in transit will be paid according to the decrees of the Montreux Agreement. State Share on mining income Companies contribute 2%-4% of their annual gross profit to the State earned from the ores extracted from mines. These payments are made every year in March. State Right and Share on the petroleum resources In Turkey, petroleum resources are held under the legal authority of the State. In this case, companies that are searching for petroleum will have to pay for the State right in every search area. State right is calculated annually per hectare of the search area. In addition, companies will have to pay 1/8 of the stored petrol to the State as a State Share. Competition Authority Income According to the Law on the Protection of Competition, 0.04% of the increase on paid-in capital should be paid to the Central Bank of Turkey or a bank of the State as a fund levy.

Appendix PricewaterhouseCoopers Turkey offices and Contacts Sleyman Seba Cad. No: 48 BJK Plaza B Blok K.9 34357 Beikta, Istanbul TURKEY Telephone Facsimile : : (0212) 326 60 60 (0212) 326 60 50

Bykdere Cad. Kocaba Han No: 111 Kat:3 34394 Gayrettepe, Istanbul TURKEY Telephone Facsimile : : (0212) 355 58 58 (0212) 355 58 50

Paris Cad. No: 12/4 06540 Kavakldere, Ankara TURKEY Telephone Facsimile : : (0312) 410 45 45 (0312) 410 45 50

Hrriyet Bulvar Kavala Plaza No: 4/1 Kat 6 35210 Alsancak, Izmir TURKEY Telephone Facsimile : : (0232) 497 70 70 (0232) 497 70 50 : M. Erdoan cal (TLS Partner - VAT) Tuba Gedik (TLS Manager) Murat Emirhanolu (TLS Assistant Manager) Hande Ege (TLS Supervisor) : erdogan.ocal@tr.pwcglobal.com tuba.gedik@tr.pwcglobal.com murat.emirhanoglu@tr.pwcglobal.com hande.ege@tr.pwcglobal.com

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