Tax Procedure Law Article 278 and Law No. 7103: Tax Treatment of Destroyed Goods

Goods that are destroyed are dealt with in tax law under three separate provisions: Article 278 of Tax Procedure Law No. 213 (VUK), Article 278/A added by Article 10 of Law No. 7103 of 21 March 2018, and Article 30(c) of Value Added Tax Law No. 3065. Law No. 7103 was published in the Official Gazette dated 27 March 2018, No. 30373 (2nd Repeated). The procedure for applying it was set by Tax Procedure Law General Communiqué (Series No: 496), published in the Official Gazette dated 25 May 2018, No. 30431. This page summarises what the three provisions do and when each applies.

What does VUK Article 278 provide for destroyed goods?

Under VUK Article 278, goods whose value has fallen significantly because of disasters such as fire, earthquake or flooding, or because of spoilage, rotting, breakage, cracking or rusting, are valued at fair market value. Where the real value is not known, this value is determined by the pricing commission (Article 267 and Communiqué Article 4). The assessed value is entered in the records; the difference between cost and fair market value is taken into account as an expense in the period in which the commission decision or record is served (Communiqué Article 8).

If destruction must be carried out urgently and the pricing commission cannot decide within a given time, the goods may be destroyed, by record, before a commission that includes officials of the relevant ministry or authority, a representative of the destruction facility and representatives of the taxpayer; in that case no separate pricing commission decision is required (Communiqué Article 5).

What does VUK Article 278/A add?

For goods that must be destroyed because of spoilage, rotting or expiry and whose destruction is continuous, Article 278/A allows, on application, the fair market value to be treated as zero within a destruction rate set by mutual agreement between the Revenue Administration and the taxpayer. Destruction above that rate is valued under Article 278 (Communiqué Article 20).

The system is not open to everyone. Only taxpayers whose profits are determined on the balance-sheet basis may apply; under the 2018 text of the Communiqué, the arithmetic average of net sales and asset size in the balance sheet for the last accounting period before the application must exceed TL 10,000,000, or equity must exceed TL 5,000,000 (Article 11). The goods in scope are meat and meat products, milk and dairy products, eggs, fresh fruit and vegetables, bakery products, and licensed medicines and similar goods (Article 10). The application goes through a Tax Inspection Board report and a three-member commission assessment (Articles 12 to 14); the rate set is valid until the end of the fifth accounting period after the one in which acceptance falls and is reported each year in the annual tracking report (Articles 14 and 16).

Which provision applies when?

The practical distinction can be summarised as follows:

• One-off or non-continuous destruction, disaster losses, and product groups or taxpayers outside Article 278/A: VUK Article 278 and the first part of the Communiqué.
• Continuous destruction of the specified product groups, for balance-sheet taxpayers above the threshold, where a destruction rate has been set: VUK Article 278/A and the second part of the Communiqué.
• Goods destroyed abroad: outside Article 278/A; a pricing commission decision based on the documents of the country concerned is required (Communiqué Article 6).
• VAT: whichever destruction route is used, the deduction of VAT on goods that are lost is assessed separately under VAT Law Article 30(c).

How is VAT on destroyed goods treated?

Article 30(c) of the VAT Law provides that VAT on goods that are lost cannot be deducted, except for losses caused by earthquake, flood and fire in areas the Ministry of Finance has declared force majeure areas. The VAT General Implementation Communiqué (Official Gazette 26.04.2014, No. 28983) states that VAT on goods whose use-by period has passed or that have become unusable cannot be deducted even if they are destroyed before official commissions or the pricing commission, and that VAT previously deducted must be added to the “VAT to be added” line of the return for the period containing the destruction date (section C-2.4).

What should be checked in practice?

The most frequent risk is destruction without documents, or failing to keep them. The Communiqué requires all records and documents on destruction to be kept and produced on request (Article 19); under Article 278/A, failing to follow the documentation procedures, giving incomplete or misleading information, or not filing the annual report on time may lead to cancellation of the rate (Article 18).

Which provision can be used, and to what extent, depends on the taxpayer’s financial structure, the product group and the way destruction is carried out; each case must be assessed against the relevant article and Communiqué provisions.