A New Era in Tax Collection: The Role of Withholding Invoices

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What is a Withholding Invoice?

A withholding invoice is a payment and tax collection method applied in the Turkish tax system among certain sectors and public institutions. Before understanding this concept, it is important to explain the term "withholding." Withholding refers to the deduction of a tax liability at the source and the direct payment of this deducted tax to the government. In other words, the tax is paid by the buyer or the recipient of the service instead of the seller. This method is implemented to prevent tax loss and evasion and to make tax collection more secure and effective.Withholding invoices are particularly encountered in Value Added Tax (VAT) applications. In this type of invoice, a portion of the VAT is paid by the buyer, while the remaining part is paid by the seller. Thus, the VAT amount is not directly reflected on the invoice; instead, a certain portion is deducted and declared by both the buyer and the seller to the tax office. This system ensures that both parties share the tax responsibility.

Tax collection plays a critical role in the sustainability of a country's financial structure. Various methods have been developed to prevent tax losses and evasion, manage public finances effectively, and ensure the security and accuracy of the tax system. One such method is the withholding system. As of 2023, withholding invoice regulations have emerged as an effective tool in combating the informal economy, which is one of the major causes of tax losses in Turkey. According to data from the Revenue Administration, deducting payments such as VAT and income tax at the source has led to a 15% increase in tax payments to the government. This percentage demonstrates how well tax collection is safeguarded and how effective withholding practices are.Withholding practices not only ensure the secure collection of tax revenues but also facilitate tax audits by distributing tax responsibility between the buyer and the seller.

Objectives of Withholding Invoices

The withholding system is a method developed to enhance the efficiency of public finance and prevent tax loss. The primary objectives of this system include:

Securing Tax Collection: Failure or delay in tax collection can cause disruptions in public finance. The withholding system ensures tax collection at the payment stage, allowing tax revenues to be collected regularly and on time. This guarantees a continuous flow of tax income, maintaining financial stability.

Preventing Tax Losses: Tax evasion and losses are common in free markets. The withholding method helps combat the informal economy, especially in sectors with high cash transactions. By deducting the tax directly at the source, the system prevents businesses from underreporting or avoiding tax payments. Additionally, it establishes a more effective control mechanism for identifying and preventing sector-based tax losses.

Combating the Informal Economy: Minimizing the informal economy is crucial for enhancing the efficiency of the tax system. The withholding application makes business processes more transparent and encourages transactions to be recorded officially. It strengthens tax audit mechanisms, making it harder for businesses to conduct unregistered transactions.

Regulating Government Cash Flow: Regular and timely collection of government revenues is essential for the sustainability of public expenditures. Since withholding enables instant tax collection, it allows for a healthier structure in public finance planning. This ensures uninterrupted public investments, smooth operation of social services, and maintenance of fiscal discipline.

Expanding Tax Responsibility: Under normal circumstances, only the seller or service provider is required to declare taxes. However, the withholding system includes buyers in tax responsibility. This leads to a more balanced distribution of the tax burden and increases tax compliance. Spreading tax obligations across multiple actors rather than a single party broadens the tax revenue base.

Facilitating Tax Audits: Withholding practices make tax administration processes easier to track and audit. Since tax deductions are directly declared and paid, audit procedures become faster and more efficient. This allows for quicker detection and correction of tax non-compliance, enhancing the efficiency of tax audits.

Areas of Withholding Application

Withholding can be applied to various types of taxes. The most common types of withholding in Turkey include:

• VAT Withholding: Applied when the buyer pays a portion of the VAT directly to the tax office instead of the seller.

• Income Tax Withholding: Employers deduct income tax from employee salaries.

• Corporate Tax Withholding: Applied to payments made to foreign companies operating in Turkey.

• Withholding on Rent and Professional Services: Deductions made from various types of income, such as rent and professional service fees.

How to Issue a Withholding Invoice?

The process of issuing a withholding invoice is largely similar to other invoice types. However, the key difference is that the VAT payable is shared between the buyer and the seller at specific rates. The following steps should be followed when issuing a withholding invoice:

Standard Invoice Information:

• Invoice number

• Invoice date

• Seller and buyer details (Company name, tax number, address, etc.)

• Description of goods or services, quantity, unit price

• Subtotal (excluding tax)

Withholding Information:

• VAT rate applied to the total amount

• Withholding rate and amount

• VAT amounts payable by the buyer and seller

Ensuring that these details are correctly and completely stated on the invoice is essential for legal compliance and accurate financial transactions.

Which Institutions Can Apply Withholding?

According to current legal regulations, only certain institutions and businesses operating in specific sectors can apply withholding. The authorities responsible for withholding are determined by the Revenue Administration and include:

• General budget institutions:

  • Special budget offices

  • Provincial administrations

  • Municipalities

  • Villages and related unions

• Publicly Traded Companies:

  • Companies listed on the Istanbul Stock Exchange (BIST)

  • Revolving fund organizations

  • Organized industrial zones and all stock exchange institutions

  • Professional organizations with public legal status

  • Public economic enterprises in the privatization process

These institutions are required to apply withholding for specific goods and service procurements.

How to Create a Withholding Invoice?

The process of creating a withholding invoice is similar to issuing a standard invoice. However, the key point to consider is the allocation of total VAT between the buyer and seller according to specified rates.

Steps to Create a Withholding Invoice:

Enter Invoice Details:

• Description, quantity, and unit price of goods or services

• Subtotal (excluding tax)

• General VAT rate (e.g., 18%)

Determine the Withholding Rate:

• Use the latest withholding rates set by the Revenue Administration.

• For example, if the withholding rate is 90-10, 90% of the VAT is paid by the buyer, while 10% is paid by the seller.

Calculate the VAT Payable:

• Determine the total VAT amount.

• Split it according to the withholding rate.

• Include the VAT amounts payable by both parties on the invoice.

Clearly Indicate Withholding on the Invoice:

• The statement "This is a withholding invoice" should be included.

• The VAT amounts payable by the buyer and seller should be listed separately.

Conclusion

Withholding is a crucial mechanism that enhances tax security and compliance. By applying withholding to taxes such as VAT and income tax, the government ensures regular and timely revenue collection while preventing tax losses. Withholding invoice applications are particularly effective in combating the informal economy and making tax audits more transparent. Expanding and effectively implementing withholding invoice practices will contribute to increased tax revenues and a stronger national economy.