Tax Procedure Law Article 278 — Valuation of Goods That Have Lost Value

What does Article 278 of the Tax Procedure Law regulate?

Article 278 of the Tax Procedure Law No. 213 (published in the Official Gazette issues 10703, 10704 and 10705 of 10, 11 and 12 January 1961) is titled "Goods that have lost value" and sits among the valuation provisions. It provides that goods whose economic value has fallen significantly because of disasters such as fire, earthquake and flooding, or because of conditions such as spoilage, rotting, breakage, cracking and rusting, are valued at their comparable value (emsal bedel).

The same rule applies to scrap, residues, waste material, remnants and rejects whose cost is not normally calculated. In other words, the article calls for a damaged good to be valued at its comparable value rather than at its original cost.

When does Article 278 apply?

Because the law requires a "significant decrease", ordinary price fluctuations are not enough; there must be a loss of value that directly affects the goods. The cause must be a disaster or a condition such as spoilage, rotting, breakage, cracking or rusting, and whether the decrease is significant is judged case by case.

Examples include products damaged in a flooded warehouse, spoiled food stock or rusted metal materials. Such goods often have to be destroyed or sold as scrap, which is why the article frequently comes up in the tax treatment of destruction and recycling.

How is the comparable value determined?

Comparable value is defined in Article 267: the value a good with no real, known or correctly determinable price would have if it were sold on the valuation date, compared with similar goods. The law determines it in three successive steps:

• Average price method: if goods of the same kind were sold in the month of valuation or in the previous two months, the average selling price calculated by the taxpayer is used, provided that monthly sales are at least 25% of the quantity of the good being valued.
• Cost method: if the cost is known or can be derived, the comparable value is found by adding 5% for wholesale sales or 10% for retail sales.
• Appraisal method: where the value cannot be found by the steps above, it is appraised by the appraisal commission on the taxpayer's application, by examining cost and market values and, for used goods, the degree of wear. The taxpayer keeps the right to sue in the tax court.

If the taxpayer calculates the comparable value itself, the records and schedules behind the calculation must be kept as evidence.

What does destruction mean for tax purposes?

The application rules for Article 278 are explained in Tax Procedure Law General Communiqué (Series No. 496), published in the Official Gazette of 25 May 2018 (issue 30431). Under it, the loss of value is determined by an appraisal commission decision; where goods are destroyed before a commission that includes officials of the relevant ministry or authority and a record is drawn up, no separate appraisal commission decision is required.

Under Article 8 of the Communiqué, the difference between the cost and the comparable value is recognised as an expense in the period in which the commission decision or the record is notified to the taxpayer. For destruction carried out abroad, documents issued under the foreign country's legislation are relied upon. Packaging material included in the cost of a product and destroyed together with it is valued under Article 278 as well, while packaging kept separately requires its own comparable value assessment and record tracking.

VAT is a separate matter: the valuation rule in the Tax Procedure Law and Article 30/c of the VAT Law are different provisions and must be assessed separately.

What should be kept in mind in practice?

• Document the cause and the date of the loss of value (disaster, spoilage and so on).
• Keep the calculation schedules and note which step of Article 267 was used to find the comparable value.
• If goods are to be destroyed, clarify in advance which commission and authority will draw up the record.
• Remember that the period in which the expense is recognised depends on the notification date of the decision or record.
• Carry out and document the recycling or disposal of destroyed goods in line with waste legislation.