To get around this problem, most countries in the world enter into treaties with other countries to make it clear who pays what, where and in which circumstances. These are usually bilateral treaties: treaties between country A and country B. They only affect citizens of those countries.
These double taxation treaties should, more properly, be called treaties for the avoidance of double taxation.
They differ in scope: some may just cover income and corporate taxes, some may cover income taxes and capital gains taxes, some may also cover inheritance taxes.
Double Taxation Treaties in Turkey
Turkey has signed Double Taxation Treaties with 78 countries around the world. They are:
Albania, Algeria, Australia, Azerbaijan, Austria, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Germany, Greece, Hungary, India, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Moldova, Mongolia, Montenegro, Morocco, the Netherlands, New Zealand, Northern Cyprus, Norway, Oman, Pakistan, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, South Africa, Singapore, Slovakia, Slovenia, Spain, Sudan, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, the United Arab Emirates, the United Kingdom, the United States of America, Uzbekistan and Yemen.
It means that – if you are tax resident in or have to pay taxes in any of those countries and, under the rules of those countries, you are due to pay tax on any particular item of income, gain etc. in that country – where and how much you will actually end up paying and in which country will be decided by the treaty.
Let us use an example of a person who is not resident in Turkey and who earns some income from renting out their home in Turkey.
If they are resident in (say) the US, that income will form part of their worldwide income and so it will (on the face of it) be taxable in the US.
However, under the law of Turkey, income generated by a non-resident from letting a house in Turkey is taxable in Turkey.
This could give rise to them having to pay tax twice on the same income. This is clearly unfair. This is where the Double Taxation Treaty helps.
Under the US-Turkey Double Taxation Treaty, it is agreed that any income arising from renting out real estate (a house or apartment) in Turkey is to be taxed first and foremost in Turkey.
Let’s say that the tax you had to pay in Turkey was TRY3,000 (US$850). You would pay that tax to the Government of Turkey.
If the tax you would have owed in the US on the same income was, say, US$2,000 you will then be able to deduct the dollar equivalent of the tax you’ve already paid in Turkey from your tax obligation in the US. In this case, you would therefore have to pay a further US$1,150 of tax to the US Government.
In some cases, it could be that the tax you have to pay in Turkey is greater than the tax you would have to pay back home on the same item of income. In this case, you would pay the full amount of tax due in Turkey and this would eliminate your tax obligation in the other country. It would not usually mean that you would be entitled to a tax refund in that other country.
Although most of the Double Taxation Treaties contain similar provisions, there are a large number of detail variations between them and so you need to study the treaties concerned in any particular case to determine your tax liability.
Copies of the Double Taxation Treaties can be downloaded from the Turkey Tax Department website. In every case, they are available in both Turkish and the language of the country concerned.
Although I have used the example of someone renting out a property in Turkey, the Double Taxation Treaty (in almost all cases) will apply to all types of tax. In each case, it will tell you where any tax due will be payable.
The numbers I have used are purely to illustrate the point, not a real-world example of what might be payable.
Video guides to tax in Turkey
You can learn about taxes and taxation in Turkey by watching our series of video interviews with Turkish accountant Burak Orkun. You can also read our other tax guides for Turkey.