Inflation adjustment postponed to the end of 2023

Distinguished Fortune Readers, in this article, I would like to share with you our opinions about the inflation adjustment application.

Inflation adjustment is the adjustment of financial statements that cannot represent the real case due to changes in the purchasing power of money to make sure they represent the real case. The Tax Procedure Law defines it as “calculating the amount of non-monetary assets to be considered in inflation adjustment by the adjustment coefficient, in terms of the purchasing power on the date of the financial statement”. Accounts included in the financial statements in inflation adjustment are divided in two as monetary and non-monetary assets. Increases in price levels do not affect the monetary assets in the financial statements. However, since non-monetary assets are shown with their historical values in the financial statements as per the valuation provisions of the Tax Procedure Law, they do not reflect their actual values on the balance sheet date. In order to ensure that the values in these accounts are shown in the financial statements with today's prices, similar non-monetary accounts such as commodity stocks, affiliates, accumulated depreciation, capital legal reserves, extraordinary reserves and all kinds of fixed assets such as buildings, land, machinery, fixtures are subject to inflation adjustment.

Pursuant to repeated article 298 of the Tax Procedure Law, if the increase in the price index of income and corporate taxpayers, who determine their earnings on the basis of a balance sheet, is more than 100% in the last three accounting periods, including the current period, and more than 10% in the current accounting period, their financial statements shall be adjusted for inflation.

Inflation adjustment was first made in 2003 and 2004. However, in the following years, no action has been taken regarding inflation adjustment due to the failure to meet the conditions listed in the law.

As of the end of December 2021, the conditions stated in the law have been met. Therefore, it is required that the income and corporate taxpayers who determine their earnings on the basis of balance sheet should subject their financial statements to inflation adjustment in the 4^th Term provisional taxation period.

Yet, keeping in mind that inflation adjustment processes require intensive processing and time, a regulation was made with the Law No. 7352 and the inflation adjustment was postponed to 31.12.2023.

As a result, inflation adjustment will not be applied in 2021 and 2022. On the other hand, inflation adjustment will be applied only for the financial statements dated 31.12.2023, excluding the 1^st, 2^nd and 3^rd provisionary tax periods of 2023, regardless of whether the conditions are met or not.

The profit or loss difference calculated due to the inflation adjustment of the financial statements dated 31 December 2023 shall be indicated under the accounts previous years' profits or previous years' losses, and the profit or loss to be determined as such shall not be associated with the taxable income in the 2023 accounting period. However, profits and losses born of the inflation adjustment to be made in case the conditions are met in 2024 will directly affect the profit and loss of said year.