2023-002

INFLATION ADJUSTMENT (IN TERMS OF TAXATION) WILL BE APPLIED FOR THE FINANCIAL STATEMENTS OF FY2023[1]

As per Repeated Article 298 of the Tax Procedure Law (TPL), income and corporate taxpayers shall apply inflation adjustment if the increase in the domestic producer price index is more than 100% in the last three accounting periods, and more than 10% in the current accounting period. The inflation adjustment application ends if both conditions are not met.

Such conditions were met as of 31.12.2021. However, with Law no 7352 Inflation Adjustment was postponed to 31.12.2023 regardless of the inflation rates on that date. Therefore, inflation adjustment did not apply in 2021, 2022 and the 1st, 2nd, and 3rd quarterly Corporate Income Tax (CIT) periods of 2023.

Therefore, taxpayers will apply inflation adjustment for their financial statements of FY2023 and following periods until the inflation rate decreases to below the thresholds.

In this context, taxpayers subject to the special accounting period will not apply inflation adjustment for the financial periods ending in 2022 and 2023 but will apply inflation adjustment for the financial period ending in 2024. 

What is an Inflation Adjustment?

Inflation adjustment is the adjustment of financial statements that do not express the real situation due to changes in the purchasing power of money (inflation).

Accordingly, inflation adjustment is a process that consists of increasing the Turkish Lira value of the assets to the value on the date of financial statements. The adjustment will be made by multiplying the amounts of non-monetary assets with the adjustment coefficients.

Which Taxpayers Will Make Inflation Adjustment?

Income and corporate taxpayers who determine their earnings on the basis of balance sheet are obliged to apply inflation adjustment according to TPL and the General Communiques published by Ministry of Finance if the relevant conditions are met.

Which Financial Statements Will be Adjusted within the Scope of Inflation Adjustment?

As per TPL and other secondary legislation, only the balance sheet will be subject to inflation adjustment. Profit loss table or other financial statements will not be adjusted.

Which Items in the Balance Sheet Will be Adjusted?

Considering the relationship between purchasing power and changes in the value of national currency, the assets included in the financial statements can be categorized into two groups:

a) Monetary Items: Items whose nominal values remain the same as the value of the national currency, however whose purchasing power changes in the opposite direction according to price movements.

b) Non-monetary Items: It refers to items other than Monetary Items.

Monetary items (monetary assets and monetary liabilities) are not subject to inflation adjustment. Because the value of the monetary asset appearing on the balance sheet also shows the purchasing power of that item as of the balance sheet date.

However, since the values of non-monetary assets (non-monetary assets and non-monetary liabilities) appearing in the balance sheet are not values that show the purchasing power of these assets as of the balance sheet date, non-monetary assets are subject to inflation adjustment in order to purify the balance sheet from the effects of inflation.

Monetary and non-monetary assets by type are included in the annex of the Communiqué to be published by the Ministry of Finance.

Unless otherwise stated, equity items are considered "non-monetary assets".