Under the regulation introduced with the Circular, the following information and documents related with refund requests that arise from:

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1 English translation Electronic declaration in VAT refunds 1. Introduction The VAT circular no. (53) has been promulgated on 27 January According to the Circular, taxpayers who request VAT refund shall submit some of the information and documents in electronic form, which were previously submitted manually and in paper. 2. Scope of the regulations 2.1 Types of refund covered in the scope of regulations Under the regulation introduced with the Circular, the following information and documents related with refund requests that arise from: Taxes paid excessively and unnecessarily under the article (8/2) of the VAT Code no Liability (VAT withholding) applications introduced in the scope of the authorization granted to the Ministry of Finance under the article (9/1) of the VAT Code no Transactions subject to reduced rate under the article (29/2) of the VAT Code no Transactions in the scope of full exemption which are listed in the Code, under the article (32) of the Code (exempted transactions under the articles 11, 13, 14 and 15 of the VAT Code) shall be submitted in electronic form as from 2010/January period. 2.2 Documents that must be submitted in electronic form Documents asked in refund requests in cash or through credit mechanism are listed one by one in the VAT General Communiqué no. (84) and the VAT General Communiqués promulgated specifically for the transaction giving rise to the refund right. In refund requests, different information and documents are required depending on the type of transaction. The Circular prescribes that some of the documents required under the relevant Communiqués are submitted in electronic form. The documents that must be submitted in electronic form by taxpayers requesting VAT refund as of 2010/January period are: Input VAT List Incurred VAT List Sales Invoices List Customs (Clearance) Declarations (In export works) List The documents listed above would naturally not be sufficient for refund requests to be made in relation with many refund types. Other documents that must be present under the relevant communiqués shall be submitted manually and in paper form as before. For instance, for refund requests related with the exempted transactions under the article 13/a of the VAT Code, refund requests will not be valid if the taxpayer does not submit the Exemption Letter which is listed among the documents required. Similarly, in transactions with investment incentive certificate, the investment incentive certificate must be submitted as specified in the relevant communiqué. Or, if there is a cash refund request, the guarantee letter of the bank must be submitted manually. Information that must be included in these lists which are required to be submitted in electronic form is regulated in the VAT General Communiqué no. (84). So far, the lists have been submitted after being prepared to include the information specified in the Communiqué. However, the Circular states that an announcement will be made at the internet tax office regarding the rules to be followed while filling in these lists. No such announcements have been made yet as of the date and time when the article has been prepared. It is unclear whether there is a change in the content or format of the lists. In terms of preparation of the lists, the Circular takes the announcements to be made as reference, rather than the Communiqué no. (84). Therefore, taxpayers who want to make corrections regarding the preparation of these lists in their accounting entry systems had better wait for the announcements to be made at the internet tax office. 2.3 Effective date of the new application According to the wording in the second paragraph of the Introduction section of the Circular, the new application will be applicable for refund requests arising from transactions giving the refund right, which are realized as of 2010/January period (including this period). In terms of effectiveness, the period when the transactions giving the refund right are realized is taken as basis rather than the period when the refund request is filed. Accordingly, the former principles and procedures will be applicable for refund requests to be made through correction in 2010 with respect to the 2009/December period and previous periods.

2 At this point, a special situation arises regarding annual refund requests pertaining to transactions subject to reduced rate. As is known, annual refund requests arising from transactions subject to reduced rate are filed in the year following the year when the transaction is carried out. For instance, the refund request pertaining to transactions subject to reduced rate which are conducted in 2009 will be filed in It is uncertain whether the new application will be applicable in the refund requests of these taxpayers. In our opinion, taxpayers in this situation should submit their input VAT lists and incurred VAT lists in accordance with the former principles and procedures, since taxpayers have new additional liabilities regarding specifically the preparation of the Input VAT List (all documents must be listed without any limitations), as we have explained below. There is no doubt that taxpayers will take the necessary measures for new periods. However, it is obvious that this application will bring about a significant burden with respect to previous periods. 3. Evaluation Regulations introduced with the Circular do not lead to a fundamental change in the basic notion and applications introduced with the VAT General Communiqué no. (84), which can be considered as the constitution of the current VAT refund system. Regulations of the current communiqués are still applicable. New regulations simply prescribe that certain information and documents which were previously submitted manually in paper form shall now be submitted in electronic form. It is certain that these rules are introduced for a specific purpose and will eventually lead to significant consequences. The consequences of the new system are evaluated below in terms of tax offices and taxpayers. 3.1 In terms of tax offices The purpose of new regulations is explained in the section titled A. Introduction of the Circular. Accordingly, new regulations aim at; Acceleration of refund processes Ensuring minimum standardization in VAT refund processes Ensuring unity in practice. In order to achieve these purposes, the controls which were previously made by each tax office manually in VEDOP form, will be made in electronic form hereafter, based on the same criteria. The system will work as follows: Lists submitted by the taxpayer requesting VAT refund will be controlled in electronic form in the scope of VAT Refund Risk Analysis Project, which is prepared by the Ministry but whose content is not announced yet to the public. VAT Refund Control Reports which will be prepared in electronic form at the end of these controls will be sent to the relevant tax offices. These reports will include negative and positive issues regarding the refund request. The taxpayer will be required to provide explanation on negative and problematic issues. If the taxpayer s explanation is considered adequate by the tax office, the refund request will be fulfilled, on the condition that other documents which must be submitted manually are submitted as well. If the taxpayer s explanation is deemed inadequate and if there is a dispute, the issue will probably be inspected. Although there is no certain information about the content of the Risk Analysis Project and the VAT Refund Control Report, it is certain that both the taxpayer who request VAT refund and the first and second degree sub companies in the VAT chain will be questioned in terms of whether they are involved in the action of issuing and using false and misleading documents. This is because of the fact that the Tax Authority still adopts the notion Taxes not included in the Treasury shall not be refunded. In this context, it is not likely that the Code lists (list of negative taxpayers) will be eliminated at this point (However, we hear that there are studies on changing the name of these lists, simplifying the lists and making them more purposeful). On the other hand, whether the VAT declarations of sub companies meet the base specified in the input VAT list of the taxpayer requesting refund and whether the BA and BS forms are compatible will also be controlled. During these controls, problems to arise from period shifts will turn out to be the reasons to conceive. It will be important that each invoice is recorded in the relevant period by companies. As another consequence of these explanations, each taxpayer will be rated in the scope of the risk analysis project. 3.2 In terms of taxpayers In addition to the important and positive consequences of the new regulations we tried to explain above, these regulations also impose certain burdens on the taxpayers.

3 The first regulation increasing the workload on taxpayers is related with the preparation of the Input VAT List. Regulations on the content of the Input VAT List are included in the VAT General Communiqué no. (84). Accordingly, documents below the limit of issuing invoice can be collectively shown in one line. The regulation introduced with the Circular eliminated this possibility provided to taxpayers. As of 2010/January period, all documents will be written in this list one by one. Companies who do not keep their accounting records for this purpose will later have to complete this process by referring to their files and documents. Therefore, companies will have to perform the necessary works to receive this list from their accounting records on computer. The second regulation that would increase the workload on companies is related with the Incurred VAT List. The Incurred VAT List is a list which indicates the invoices giving rise to the value added tax subject to the refund request and which includes a breakdown of these invoices or documents. The list is prepared in the same format as the Input VAT List. Value added taxes to be refunded have been being substantiated with these lists until the date when the Communiqué no. (84) came into force. Considering the difficulties encountered in practice, the Input VAT List practice was abandoned with the General Communiqué no. (84) and the VAT Refund Calculation Table began to be used. After this regulation, taxpayers began to prepare tables which indicate and explain how they calculated the refundable value added tax in the transactions giving rise to the refund right and which inputs these incurred taxes result from. With the new regulation, the Tax Authority began to re-apply the practice effective before the communiqué no. (84). In other words, hereafter taxpayers who request VAT refund will prepare Incurred VAT List in the format of Input VAT List. In our opinion, the important point is to calculate the amount of the value added tax to be refunded, under an accurate, reasonable and controllable method based on cost accounting entries. Companies should be allowed to demonstrate this calculation at their own initiative. The invoice associated with the refund amount has no significance, since the invoice details will be included in the Input VAT List. In cases where the refund amount requested by taxpayers who file refund requests for the first time or for a single period is arising from the inventories of the previous period, this problem may be solved by submitting input VAT lists for the several periods prior to the refund period. Taxpayers who have filed refund requests using the Refundable VAT Calculation Table up to date must detect the invoices which give rise to the raw material, supplementary material and general manufacturing expenses constituting the cost of goods sold (pertaining to the transactions giving rise to the refund right) from now on. 4. Conclusion As we have mentioned above, under the VAT Circular no. 53, the input VAT lists, incurred VAT lists, sales invoices lists and customs clearance declarations in necessary cases must be submitted in electronic form in VAT refund requests, starting from 2010/January period. Thus, some of the refund controls carried out by tax offices will be performed in electronic form. In order to ensure rapid and effective conclusion of refund processes, taxpayers must quickly adapt to the rules prescribed in the new system, while the tax authority tries to improve the new system s aspects that are considered incomplete and/or faulty. Principle and outcome of non-retroactivity in annulment decisions rendered by constitutional court I. Introduction As can be remembered, decisions rendered at the end of annulment actions initiated at the Constitutional Court related to various tax practices were announced to the public as a result of the Supreme Court meeting on 15 October Effective dates of these decisions, which were promulgated in the Official Gazette dated 8 January 2010 with their statement of justifications and which are closely related to many people in our country from foreign portfolio investors to employees, were determined as future dates by using the power granted with Article 153 of the Constitution. This situation raised a discussion on whether decisions of Constitutional Court can be implemented for the issues that happened in the past or not; in other words, whether the Court decisions may be applied as retroactively or not. II. Principle of non-retroactivity of annulment decisions rendered by the Constitutional Court

4 Article 153 of the Constitution regulates the principles on the enforcement of the annulment decisions rendered by the Constitutional Court. In the mentioned Article, it is stated that Law, decree having force of law, or the Rules of Procedure of the Turkish Grand National Assembly or provisions thereof, shall cease to have effect as of the date of publication in the Official Gazette of the annulment decision. It is emphasized that the effective date of the annulment decisions is the date on which the annulment decisions are promulgated in the Official Gazette. Related article of the Constitution is explicit; and annulment decisions rendered by the Supreme Court cannot be declared without a statement of justification. However, since it takes some time to issue the statement of justification, most of the time decisions are announced to public without statement of justification. In such cases, several months may pass between the date when the decision is declared and the date when the decision is published in the Official Gazette. On the other hand, as also mentioned in the previous paragraph, Supreme Court decisions enter into force on their promulgation date in the Official Gazette, but again in line with article 153 of our Constitution, the Constitutional Court may also decide on the effective dates of the annulment decisions, where necessary, in an aim to allow some time for the legislative organ to issue a new regulation on the same subject and therefore to avoid the legal gap which may occur due to the related annulment decision. The effective date shall not be more than one year from the date of publication of the decision in the Official Gazette. Regardless of whether the annulment decisions of Constitutional Court become effective on the promulgation date in the Official Gazette or on a future date in line with the decision of the court, these decisions cannot be implemented for the cases dating before the effective date; in other words, these annulment decisions will not have any effect on the mentioned cases. Annulment decisions will only have legal effect following the enforcement date. Therefore, annulment of a transaction, which was performed at a date before the enforcement date of the decision, cannot be requested based on an annulment decision rendered by the Supreme Court. In fact, if the annulment decision is implemented retroactively for those who have performed any act or action based on a legal norm that became effective duly in the past, this may lead to legal ambiguities, as well as legal results that are in conflict with justice. This practice is based on the principles of certainty and predictability of the law and especially protection of acquired rights which result from the more general principle of state of law. III. A special case regarding the execution of annulment decisions rendered by the Constitutional Court As decisions of the Constitutional Court are binding on the legislative, executive and judicial organs, the executive organ cannot perform any transaction based on the principles annulled after the effective date of the related decision upon being promulgated in the Official Gazette; and the courts cannot make any judgment in the actions they rule, according to the provisions of law which have been annulled by the Constitutional Court. Otherwise, they will be deemed to have acted in contrary to Article 153 of the Constitution, which states that decisions of the Constitutional Court shall be binding on the legislative, executive, and judicial organs and on the administrative authorities. However, the practice that we summarized above may diverse in cases where Constitutional Court decides that the decision of annulment will become effective some time after the date when the decision is promulgated in the Official Gazette. Despite this explicit provision, the mutual consensus reached in both the Constitutional law literature and various Supreme Court decisions is; the fact that it would be in conflict with justice and logic of law may occur if the mentioned rule is applied exactly, and therefore, there are some exceptional cases in which the annulment decisions may have retroactive effects. Besides, Constitutional Court also has not accepted the exact nonretroactivity of annulment decisions. Council of State has different views on the issue. Indeed, when a decision, which has been determined and announced to be in conflict with the Constitution by the Supreme Court, is used by the courts in the settlement of disputes based on the fact that the annulment decision has not become effective yet, may create controversial situations. However, the adopted opinion of the Council of State is that it would be in conflict with the justice and principle of rule of law, if courts do not take into account the provisions annulled by the Constitutional Court during the postponement period on the grounds that the annulment decision has not become effective yet. In practice, courts can also suspend the related lawsuit until the effective date of the annulment decision considering the legal disadvantages result from Article 125 of the Constitution, which states that, Judicial power is limited to the verification of the conformity of the actions and acts of the administration with law. No judicial ruling shall be rendered which restricts the exercise of the executive function in accordance with the forms and principles prescribed by law, which has the quality of an administrative action and act, or which removes discretionary powers., and they make their final judgments on the effective date of the annulment decision by also taking into account the results of this decision. IV. Conclusion As mentioned above, whereas the general rule is the non-retroactive effect of the annulment decisions rendered by the Constitutional Court, there may be some exceptional cases in practice, because exact application of this rule may result in some cases which are in conflict with justice and logic of the law. Mostly, courts suspend the lawsuits that are related to the provision of a law annulled by the Constitutional Court until the date when the related

5 annulment decision comes into force, and they make their final decisions on the enforcement date of the annulment decision by also considering the outcomes of this decision. The latest example of such case has been seen in lawsuits initiated for excess amount of withholding tax (8% income tax difference between rates 35% and 27%) applied on the employment incomes brought to court after the Constitutional Court s decision of annulment of the 35% rate in the tax tariff included under article 103 of the Income Tax Code announced to the public after the Supreme Court meeting held on 15 October Taxpayers who have declared their 2009/October period withholding tax return through reservation and brought the issue to the court will maintain their attitude until 8 July 2010, the date when the annulment decision regarding the employment incomes will come into force; therefore, the decision of the tax courts regarding the issue is highly anticipated.