As a discussion topic that continuously arises in tax law, “retroactivity” is at our agenda again with Law no. 7440 after the earthquake disaster. Article 10/(27) of the Law imposed additional taxes at the rate of 10% and 5% for some corporate taxpayers. The issue of how and under which conditions tax laws may or may not be retroactive is one of the long-standing debates in academia and practice. My findings specific to the law are as follows:

1. Scope of additional tax

Corporate taxpayers will pay additional taxes at the rate of 10% over their exemption and discount amounts deductible from corporate profits pursuant to the provisions in Corporate Tax Law and other laws, as well as their tax bases subject to discounted corporate tax under Article 32/A of the same Law, and at the rate of 5% over exemption for profits of participation regulated in subclause (a) of the first paragraph of Article 5 of Corporate Tax Law as well as exceptional profits earned from abroad and documented to have tax burden of at least 15%.

2. How does retroactivity occur?

a- Tax burden is increased retroactively, or b- A new tax is imposed.

3. What should be the criteria for evaluation?

Retroactive tax laws should be evaluated together with the concepts of state of law/legal security/predictability.

4. Typical case law of the Constitutional Court

The typical approach of the Constitutional Court for retroaction arguments in the norm inspections is real/unreal retroaction. Real retroaction is not accepted, while unreal retroaction is possible.

5. Is the distinction in typical case law sufficient for additional tax discussions?

In a decision on Economic Balance Tax, the Constitutional Court determined that retroaction is not possible as this was a new tax, and stated that the imposition of an additional tax liability of 10% on income tax could not be construed to have brought a burden in a way that prevents the exercise of fundamental rights and freedoms and exceeds the person’s ability to pay (in terms of the Constitution 2; Constitutional Court, E.95/6, K.95/29, 6.7.1995). However, the retroactivity test initiated with real and unreal retroaction criteria in the field of taxation should be completed with the legitimate test of legal purpose-reasonable instrument (excessive and heavy burden) (See YALTI/ÖZGENÇ, Vergi Hukuku Pratik Çalışma El Kitabı).

6. The Constitutional Court’s decision on individual application no. 2019/26345 dated 22/9/2022 is important

In this decision, the Constitutional Court’s evaluation on legal purpose is important in completing the typical test discussed in the norm inspections. “...Applicants complained that the reduction of the lump sum expense rate [retroactively] could not meet the legitimacy criteria; however, they did not complain about anything on proportionality. Considering that the applicants’ profits subject to tax increased by around 10% did not impose any excessive burden on them, it was concluded that the intervention in the right of ownership through taxation was proportional. Therefore, it was evaluated that the fair balance between the applicants’ right of ownership and public interest was not disturbed, and the intervention was proportional.” The imposition of the new earthquake tax only on corporate taxpayers who benefit from exemptions/incentives cannot be considered as balanced as the burden is not distributed evenly.

7. This issue can evolve into equality discussions

The distinction between legal exemption/incentive amounts to be applied throughout the country does not seem to pass the test of legal reason, which is the most important aspect of the equality principle.

8. National and supranational case law in terms of comparative law

According to the opinion of the US Supreme Court, the retroactive application should not bring heavy and excessive burden contrary to constitutional limits in order for a retroactive tax legislation to be valid. (United States v. Carlton, 512 U.S. 26 (1994))