In commercial activities, the loss or destruction of goods can lead to significant financial burdens for businesses, with substantial implications for tax legislation. Specifically, current regulations surrounding VAT refunds for goods lost in disasters such as fires highlight the need for a fairer and more comprehensive system.
Definition of Loss and Its Place in Legislation
The term “loss” refers to the disappearance or destruction of an object. Article 30 of the Turkish VAT Law states that VAT on lost goods cannot be deducted. However, the law makes exceptions for certain force majeure events, such as earthquakes and floods, allowing VAT deductions for goods lost under these circumstances. Fires, on the other hand, are only considered within this scope if officially declared as force majeure by the Ministry of Finance.
Isolated Fires and Limitations of Current Regulations
In recent years, large-scale fires in Turkey have been declared as force majeure, enabling businesses in affected areas to claim VAT deductions for lost goods. However, isolated incidents have not been granted the same treatment. For instance, on December 9, 2023, fires in two warehouses in Gebze resulted in the total destruction of goods belonging to 46 businesses. These incidents were not classified as force majeure, leaving businesses unable to claim VAT deductions. Importantly, the law does not differentiate between isolated and collective incidents, yet such distinctions are made in practice, leaving businesses vulnerable in the face of unforeseen disasters.
Challenges in the VAT System
The VAT system is based on taxing the added value of goods at the point of sale. Lost goods, however, cannot be sold, effectively creating a double financial burden for businesses when VAT on such goods cannot be deducted. The current legislation does not provide sufficient flexibility to mitigate the adverse effects on businesses in these situations.
The Need for Legislative Changes
To establish a fairer taxation system, amendments to the VAT Law are necessary. The following changes are recommended:
- Expanding the Definition of Force Majeure: Clearly define and include isolated fire incidents within the scope of force majeure.
- Special Support Mechanisms for SMEs: Exempt small and medium-sized enterprises (SMEs) from the VAT burden on lost goods to enhance their financial resilience.
- Simplifying the Process: Streamline VAT refund procedures for lost goods and expedite application processes to reduce administrative burdens.
Conclusion
The inability to claim VAT refunds for goods lost due to fires places an unfair financial strain on businesses, particularly SMEs, and negatively impacts the broader economy. Updating the legislation to align with contemporary commercial needs and account for unexpected disasters would enhance business resilience and economic stability. More flexible and equitable regulations, particularly for small and medium-sized enterprises, are no longer an option but a necessity.
