EVALUATION OF EXPORT REGISTERED SALES WITHIN THE SCOPE OF EMPLOYMENT SUPPORT IN FREE ZONES

Arif Şahin YALÇI
Customs Consultant

Free zones are places that are located within the political borders of the country but are considered to be outside the customs line, where the legal and administrative regulations of the countries in which they are located regarding commercial, financial, and economic fields are not implemented or partially implemented, where broader incentives are provided and where they are physically separated from other parts of the country. Free zones constitute more supported areas than other areas of the country in which they are located. Free Zones Law No. 3218 has been implemented in our country for free zones situated in political borders but outside the customs area regarding customs practices. With the law's entry into force, free zones began to be established and operated within the scope of this law. The same law supported the companies in the free zones, encouraging their establishments and activities. According to the Free Zones Law, the primary objectives of establishing free zones are to promote export-oriented investment and production, to accelerate foreign direct investments and technology entry, and to develop international trade by directing businesses to export. Although in the first period of Law No. 3218, when Law No. 3218 was published, the phrase "increasing the competitiveness of domestic producers worldwide by enabling them to obtain inputs at a price in the world markets" was among the purposes of establishing free zones, this phrase was removed from the text of the article after the amendment made at the end of 2018. When this old provision is examined, it is observed that the establishment philosophy of free zones includes supporting and encouraging investments for export-oriented production. After this change, which has been in effect, especially since 2009, it is seen that various tax advantages are granted to companies engaged in production activities with Law No. 3218 until the end of the taxation period of the year, including the date of our country's full membership in the European Union.

Free zones offer significant tax benefits for those involved in production-oriented activities, providing a competitive edge in the global market.

Companies operating in free zones enjoy a unique tax advantage. Their earnings from product sales are exempt from income or corporate taxes. For those exporting at least 85% of the FOB value of their products, the income tax is calculated based on the withholding tax return, which can be canceled by deducting it from the accrued tax.

It is understood that the transactions made and the papers issued regarding the activities carried out are exempt from stamp duty and fees. The tax-mentioned regulations, implemented since the beginning of 2009, have significantly contributed to highlighting export-oriented production and prioritizing investments in this direction. The main subject of this article is the application of "cancellation of income tax calculated on the wages paid to the personnel employed by taxpayers who export at least 85% of the FOB price of manufactured products abroad", which is among the tax supports provided. This practice has become a basis for highlighting export-oriented production and creating employment. In subparagraph (b) of the second paragraph of the Provisional Article 3 of the Free Zones Law No. 3218, "Until the end of the taxation period of the year that includes the date of full membership to the European Union, the income tax calculated after applying the minimum subsistence discount on the wages paid to the personnel employed by taxpayers who export at least 85% of the FOB value of the products produced in the free zones abroad will be calculated based on the withholding tax return to be submitted. It is stated that it will be canceled by deducting from the accrued tax. (Due to the pandemic epidemic conditions experienced by Presidential Decree No. 3516, it was decided to apply this rate as 80% for 2020.) The specified provision provides a significant cost advantage for companies that engage in production activities in free zones and export a large part of the products they produce. It offers additional opportunities to reach a qualified workforce.

The Ministry of Finance is authorized by the same Law to implement this provision, which is contained in the second paragraph of Provisional Article 3 of Law No. 3218.

Within the framework of this authority, the Ministry of Finance published the General Communiqué on the Free Zones Law, Serial No. 1, No. 3218, in the Official Gazette No. 27167, dated 12.03.2009. With this communiqué, it directed the implementation of the exemption of the wages of the personnel employed in the free zones from income tax. Has been given.

 According to the said Communiqué,

*Wages paid by taxpayers engaged in production activities within the region to all production personnel will be exempt from income tax

*The wages of all personnel employed by taxpayers operating in the free zone and those engaged in production activities and the income tax withholding amount benefited within the scope of the exemption must be submitted to the competent tax office electronically by those who submit e-declaration, and in paper format by other taxpayers, within the submission period of each month's withholding tax return. Income tax withholding amounts used by the relevant tax office are assessed, accrued, and postponed.

*The employers in question will declare information regarding the withholdings they made during that year to the relevant tax office within the submission period of the withholding declaration for December. The relevant tax office will consider the income tax withholding amounts for the wages calculated and paid on the withholding returns submitted during the year.

*If it is determined by the CPA (Sworn Certified Public Accountant) activity report that the ratio of the foreign export amount of the taxpayers benefiting from the exemption to the total sales amount is 85% or more, the tax-deferred by the tax office will be canceled.

*Samples of the Customs Exit Declaration, Operating License, and Capacity Report will also be added to the CPA activity report to be prepared in the exemption application.

*Manufacturers operating in the free zone will also be considered sales abroad if they deliver their products to exporters operating in the same or another free zone, provided they are sold abroad.

*The goods in question must be exported within three months following the delivery date to the exporter. If not exported within this period, these goods' foreign sales will be considered unrealized. Those who sell goods for export, in whole or in part, must submit the activity report to the relevant tax office, including the documents proving that the export has been carried out, by adding an annex to the CPA report and specifying the details in the CPA report.

According to the provisions in the communiqué, a company located in a free zone and making production has two options to benefit from this support: to have its sales counted as exports.

One of the options is to directly export the products they obtain as a result of production activities, and the other is to sell them to exporters operating in the same or another free zone, provided that the same products are exported. In the second case, the goods must be delivered on condition that they are sold abroad, and these delivered goods must be exported within three months from the beginning of the month following the delivery date to the exporter.

In both cases, the fact that 85% of exports are made must be determined by the Free Zone Activity Certification Report prepared by the CPA, and the report must be submitted to the relevant tax office.

As can be seen, the submission of the CPA report is the basic condition for the tax office to cancel the deferred tax, which we can describe as the "85% export condition." Regarding the CPA Report, the procedures and principles regarding regulating the "Free Zone Activity Certification Report" are also determined in the General Communiqué of the Free Zones Law No. 3218, serial number 2, published by the Ministry of Finance.

Although the principles that are implemented within the scope of Law No. 3218 and that we define as "employment support" seem to be well established in current transactions, they are not effective for companies that engage in production activities in free zones, produce input for export, and sell it to a different producer-exporter company within the zone to use it as input. The situation is slightly different. Unfortunately, these companies cannot benefit from employment support subject to the "85% export condition". This is because there are hesitations in evaluating such deliveries (exported as a different product by the manufacturer-exporter company to which the input is delivered) as export-registered sales.

This assessment may be justified for CPAs because the free zone communiqués published on the subject do not clearly regulate this issue.

However, the goods produced as input were transformed into a product by a different manufacturer, which was used in that product and exported.

General Communiqué of the Free Zones Law No. 1 Serial No. 3218 states that the products of manufacturing companies operating in the free zone can be delivered to exporters operating in the same or another free zone, provided that they are sold abroad, and if they are exported within three months following the delivery date to the exporter. Although it is stated that the product can be considered as an export, there is no separate provision in the same communiqué regarding the export of a product used as an input by converting it into another product. For this reason, such input deliveries are not considered "export registered delivery" because they are not exported as delivered as input. Companies that produce input and make intra-regional sales are excluded from the mentioned practice. However, the inputs they create are exported abroad as processed products and do not remain within the region.

 It's important to highlight that the current practice, where companies operating within the zone sell the inputs they produce to other producer-exporter companies, is in direct contradiction with the objectives of the Free Zones Law. This contradiction poses potential legal implications that need to be carefully considered.

In the same situation, a company producing input in our country can sell an input included in the processed product to a company that has an Inland Processing Permit Certificate (DİIB) in a transaction similar to sales for export purposes. For the input included in the product that is converted into a product and exported within the scope of DİIB, the VAT law applies. Can benefit from export-related supporting factors.

 Every manufacturer wants the businesses of the producer-supplier companies from which it supplies input to be close to its own business. The main reason for this is to reduce input costs, have the opportunity to access inputs at any time and minimize stock costs. The fact that the producer-supplier companies from which the companies engaged in export-oriented production activities in free zones are located in the same region helps these companies make long-term strategic decisions and allows them to make long-term export-oriented contracts.

It's worth noting that the significance of companies producing input for exporting companies located in free zones is on the rise. The increase in the number of such manufacturing companies and the encouragement to produce input in free zones align with the primary objectives of the Free Zones Law. However, the current practice, instead of fostering this growth, hinders these companies from producing in the region and employing qualified personnel for this purpose.

The application's primary purpose, expressed as employment support, is the export of products produced in the region. In intra-regional export registered sales, what must be determined by the Certified Public Accountants at the reporting stage is that the product produced is exported. Therefore, it seems necessary to make a two-stage determination: 1- Exporting the goods subject to export registered sale within three months, in other words, exporting them abroad, and 2- Making the necessary documentation to determine this issue; it will be appropriate. According to Article 11/1-c of the VAT Law No. 3065, the value-added tax on goods delivered to exporters by manufacturers on condition that they are exported is not paid by the exporters but is postponed. It is delayed if the goods are exported within three months from the beginning of the month following the delivery date to the exporter. The tax charged is canceled. The mentioned issue is defined as "export registered sales" in the VAT Law and in the relevant explanations made in the VAT General Communiqué; 

• The goods sold by the seller under export registration are final exported goods, 

• The goods delivered under export registration must be the same as the goods included in the export invoice and customs declaration, 

• The exporter must export the goods he purchased under export registration in the same way that the manufacturer delivered them, It has been stated that it is necessary. 

However, although intra-regional sales with export registration are mentioned in the General Communiqué published within the framework of the Free Zones Law No. 3218, no detailed determination has been made regarding how the goods subject to intra-regional sale will be exported, and regulations similar to the conditions in the VAT General Communiqué above are not included in the Free Zones No. 3218. It is not included in the General Communiqué of the Law. The provisions of the General Communiqué issued within the scope of Law No. 3218 do not have detailed provisions like the VAT General Communiqué. Therefore, the Laws on which both communiqués are based are separate, and the communiqués in question are two different communiqués published for the practices within the scope of two separate laws. Although there is no explicit provision in the relevant general communiqué about the condition in which the goods subject to export-registered sale in free zones should be exported within three months, the practice taken as a precedent stating that "the export-registered goods should be exported without any changes, preserving the same status" is implemented within a different good. It causes an unfair situation in which the goods exported using this method are not counted as exports. These comments and practices do not change the fact that the goods delivered with export registration and used as input are exported within the new product and do not eliminate the fact that the "export" condition has been fulfilled. Let's consider the issue through a simple example: Companies A and B operate in production in the free zone. Company A manufactures bolts/nuts, and Company B manufactures engines. In addition to being a manufacturer, Company B is an exporter that sends the engines it produces to different countries outside Turkey. Company A delivers the bolts/nuts it produces to Company B, located within the region, through intra-regional sales; Company B uses the bolts/nuts it procures from Company A as input in engine production and, sells the produced engines to different countries and exports them abroad. The bolt/nut delivered by company A to company B as input through export-registered sales does not remain within the region; It is used within the engine and exported abroad. Although the bolts/nuts manufactured by company A were exported abroad on the engine produced by company B, the fact that they did not benefit from export registered sales opportunities just because the delivered product was used as input in a different product does not change the fact that the bolts/nuts were exported abroad. We think excluding an input delivered with export registration from this practice just because it turns into a different product would be a narrow-scope evaluation. In the General Communiqué on Free Zones, under the heading of export registered delivery, The delivery of the products of the manufacturing companies operating in the free zone to exporters operating in the same or another free zone, on the condition that they are sold abroad, will be considered as sales abroad; Although it is stated that the manufacturing companies will benefit from the exemption in deliveries made under export registration, there is no separate provision and no special regulation has been made for the goods that are used as input, converted into a different product and exported.

Based on the statements above,

* The sale of inputs manufactured by producer-supplier companies, within the region or between regions, to be used in the product to be exported by a producer-exporter company located in the free zones is also considered as export registered sales,

* The CPA determines and reports that the inputs delivered to be used within the exported product and invoiced as export registered sales are used as input by the receiving company and exported by the receiving company after turning into a processed product,

* Determining the documents that need to be documented for these transactions (production tracking form, free zone transaction form, invoice, export declaration, etc.) by a notification,

This should be sufficient without the need for any other procedure.

In case such determinations are made in the relevant implementation notification,

Inputs produced by producer-supplier companies can be delivered to producer-exporter companies located in free zones through intra-regional or inter-regional export registered sales for use in the product to be exported,

The CPA can prepare Free Zone Activity Certification Report for such export-registered products,

It is clear that after the calculation is made based on the input price written in the invoice to be issued by the Producer-Supplier companies for export-registered sales, it will be possible to determine whether the "85% export condition" is met or not based on this price.

 To put it briefly, with an amendment that can be made in just one communiqué, it will be possible for companies that produce as producer-suppliers in the free zone and supply input to producer-exporter companies located in the free zone to benefit from employment support. It is thought that this change will be in line with the objectives of "encouraging investment and production for export," "accelerating foreign direct investments and technology entry," and "improving international trade by directing businesses to export," which are among the primary objectives of the Free Zones Law.

RESOURCES

Free Zones Law No. 3218

VAT Law No. 3065

Free Zones Implementation Regulation

General Communiqué on Free Zones Law No. 3218

(Serial No: 1 and Serial No: 2) VAT General Communiqué

Revenue Administration Free Zones Law Circular (No: 1, 2, 3)