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However, some degree of tax planning is usually a good idea and it can, surprisingly often, allow you to make substantial savings in tax by making some relatively small adjustments to the ways in which you might otherwise have organised your affairs.
What is tax planning?
Tax planning is the analysis of your financial situation – or your proposed plans of action – from a tax perspective. Its purpose is to ensure tax efficiency. Ideally, it is part of a broader financial or business plan which works to deliver what you want to do in the most tax-efficient way possible. It is about arranging your affairs to produce the smallest amount of tax liability.
In a way, you can think of tax planning as being a means of avoiding tax wastage. Governments intentionally create many legitimate opportunities for you to reduce the amount that you pay in tax. They may give you incentives to make investments of certain types or they may allow you to claim allowances for doing things that align with their policy – for example, giving to charity, research and development in a company or educating your children.
Two examples applicable to Turkey, at the opposite ends of the tax planning spectrum, would be:
• Opting for a small engine in a car to avoid paying more car tax
• Investing millions in a government-supported industry for big tax exemptions
In every country, even local people are not familiar with these quite legitimate opportunities. For example, in the UK in 2016 official estimates indicated that about €5billion of tax was paid to the government by people who didn’t need to pay it or who wouldn’t have had to pay it if they’d known about all the allowances they could have claimed.
The position is even worse for people who have moved to a new country. They will very rarely know about all the opportunities that exist in that new country and they will usually not be familiar with the other opportunities (often just as big) that exist because of the interaction between the tax rules in their new country and those in the place where they used to live.
Some of these tax planning opportunities arising because of the interaction of tax systems are transient: they may only be available for a short period as you make your move from your original country to Turkey, so to take advantage of these it is important to take prompt advice.
So, tax planning is about arranging or rearranging your affairs to take advantage of all these things.
What tax planning is NOT
Tax planning is not about concealing your activity from the tax authorities. Nor is it about lying to the tax authorities about your affairs. Both are illegal and can be heavily punished.
Tax avoidance vs tax evasion
Tax avoidance is arranging your affairs to reduce the amount of tax that you must pay. Extreme examples would be choosing to have more children to reduce the overall inheritance tax payable or paying your employees more to reduce your profit and so your taxes. There are countless examples of tax avoidance used on a day-to-day basis.
In Turkey, as in most other countries, tax avoidance – more sensibly called tax reduction through planning – is perfectly legal and considered to be part of good business planning.
Recently, politicians around the world have started to talk about ‘aggressive tax avoidance’. This is pushing the existing rules up to their very limit and sometimes beyond. The Turkish Tax Department is concerned about this and spends some time trying to clamp down on it.
Generally, with the relatively simple tax regime in Turkey and the relatively low rates of tax payable, aggressive tax avoidance should not be necessary.
Tax evasion is not paying the taxes that the law requires you to pay.
This might be by not declaring part of your income. It might be by claiming more expenses than your business legitimately incurred. It might be failing to tell the Tax Department when you sell your Picasso for a large profit or when you win a lot of money at the casino.
Tax evasion is illegal.
The enforcement division at the Turkish Tax Department employs many people checking people’s tax returns and chasing tax evasion. For foreigners, they also work closely with the tax departments in the foreigner’s own country.
If you are caught trying to evade your taxes, then the following will happen:
1. You will have to pay double the tax originally due.
2. You will have to pay interest at 16.8% per year from the date when the tax should have been paid to the date when it actually was paid.
3. If the issue is considered an organised tax fraud by the tax inspector, the case will be taken to the local criminal court for sentencing, which is likely to result in imprisonment.
When you first arrive in Turkey and you start talking to all the ‘old hands’ – particularly, the old hands who you meet in bars or at the golf club – they will probably tell you that you don’t need to bother with the tax man. They will tell you that they have lived in Turkey for 20/30/40 years, that they’ve worked illegally for much of that time, and that they don’t tell the tax man about any of their earnings, at home or abroad.
They will tell you that there is no way that the tax man can know how much time you’ve spent in Turkey or what you have earned whilst you’ve been there.
This might have been true 20 years ago, but it is definitely not true today.
The advent of the computer and a greater emphasis on collecting tax has changed everything. The Tax Department is under great political pressure to collect the taxes due from foreigners. Remember that no politician ever lost votes by taxing foreigners!
It is now very simple for the tax man to know whether you are in the country or not. Your mobile phone record will disclose this in a few minutes. The tax department also has the power to require you to produce your bank account and credit cards records, which will also show where and when you have withdrawn money.
Turkey has a sophisticated tax computer system so that the information received from businesses and individuals on the island is collated and any discrepancies identified.
It is simply not worth taking the risk of evading paying the taxes that you owe, particularly when the tax system is so generous and the taxes due so small.
Remember that the difference between tax avoidance (legal tax planning) and tax evasion is the thickness of a prison wall.
Do not underestimate the amount of money that can be saved by simple but effective tax planning. Private individuals can often save hundreds of thousands by minor adjustments to their plans and the savings for companies could easily run into millions. This is why tax advisers are well-paid!
Tax planning is a part, and a very important part, of financial planning – but financial planning is a much broader subject. For example, your financial plan would deal with things such as making sure that you are likely to have enough in the way of savings to see you through your retirement and investing your savings in ways that reflect your personal attitude to risk and reward.
Your tax advice should complement your financial plan but it should not dominate it. In other words, your broader financial objectives must take priority and the purpose of the tax planning is to tweak those objectives and the ways of delivering them to make sure that you do not pay more tax than is absolutely necessary – either in Turkey or in any other country.
Some businesses operate as sole traders. These businesses are not taxed separately as businesses (but do have to account for VAT). The profits that they make are simply treated as the income of the sole trader.
These are seldom used by foreigners.