The Tax Procedure Law No. 213 ("Law") regulated as "Inflation Adjustment", but recently referred to as "Inflation Accounting", has recently come to the fore again as of 31.12.2023. As a matter of fact, the conditions of this system, which was last applied in 2004 in accounting terms, have re-emerged as a result of the financial data in 2023, paving the way for the implementation of the obligations within the scope of inflation accounting.

Inflation accounting is essentially the process of correcting financial statements that do not reflect the current situation as a result of ongoing changes in the value and purchasing power of the country's currency in inflationary economies. The purpose of this process is to revalue the non-monetary assets included in the financial statements of the companies and to calculate their adjusted current values. As a matter of fact, since the unadjusted assets will be considerably lower than the current values, there will be unfavorable consequences for companies in the calculation of tax and other liabilities.

In this context, due to the fact that the price index has exceeded the specified thresholds in the last three accounting periods, the Ministry of Treasury and Finance Revenue Administration published the "General Communiqué on Tax Procedure Law" in the Official Gazette dated December 30, 2023 and numbered 32415 (2nd duplicate) and announced the necessity to make an adjustment in accordance with Article 298/A of the Tax Procedure Law as of the 2023 accounting period.

Income or corporate taxpayers who determine their earnings on the balance sheet basis are liable for inflation accounting, and since joint stock and limited liability companies are also within this scope, companies should revalue their non-monetary assets and ensure that the financial statements reflect the current situation.

Non-monetary assets of companies subject to revaluation can be listed as follows;

• Share certificates (not traded on the stock exchange)

• Inventories

• Annual construction and repair costs

• Expenses for the coming months/years

• Financial fixed assets

• Property, plant and equipment

• Intangible assets

• Assets subject to special depletion

• Construction and repair progress payments over the years

• Paid-in capital

• Share premium

• Gain on cancellation of share certificates

• Legal reserves

• Other profit reserves

In this bulletin, in light of the information we have provided above, we will make explanations regarding the status of companies' paid-in capital subject to adjustment.

The dates to be taken as basis for the calculation of the current values of the assets subject to adjustment also differ. As a matter of fact; the value of the capital paid in cash will be based on the date of collection, and the capital paid in rem will be based on the date of transfer of ownership.

The transactions to be made at this stage will remain within the accounting scope, and the main issue of discussion is how the inflation adjustment difference arising after the restatement should be reflected to the company.

Since the inflation adjustment difference resulting from the adjustment to paid-in capital is considered as an appreciation of an asset in the assets of the company, this difference will need to be accounted for in one of the following ways;

• Set off against retained profits,

• Capitalization,

• Dividend distribution to shareholders in proportion to their shares.

 As a matter of fact, an asset that has appreciated as a result of inflation in the fixed assets of the company should either be distributed to the shareholders of the capital company whose purpose is to generate profit, or it should be utilized by adding it to the equity of the company. Otherwise, the current equivalent of an appreciated asset in the assets of the company will be ignored.

From a tax perspective, these transactions will be revalued tax-free since the assets already in the assets of the companies are revalued. The differences arising as a result of this revaluation;

• If the differences arising from this revaluation are added to the capital or offset against retained profits, the transaction will not be considered as profit distribution and will not be subject to tax,

• If distributed to shareholders as profit, it will be subject to tax.

However, since the differences arising as a result of the adjustment is not a profit obtained as a result of commercial activity, it would be a more reasonable approach to increase the capital of the company by adding these difference values to the capital.

At the same time, some changes will also occur in the shares of the companies as a result of capital increase as a result of inflation adjustment. As a matter of fact, if the number of shares or the nominal value of the shares of a company whose capital is increased remains the same, the share certificates will also need to be updated since this will create a mismatch with the capital.

As a result, due to the economic inconsistency created by inflation, inflation accounting will be applied starting from the 2023 accounting period, and since it is not an optional procedure for joint stock and limited liability companies, it is necessary to plan the actions to be taken after the adjustments to be made.

Corporate Counsel
Elvin OZAN

Corporate Counsel