Security Requirement Envisaged for Tax Refund Cases in order to Claim Suspension of Execution

Introduction

Through the promulgation of the Law No. 7351, published in the Official Gazette dated 22.01.2022 and no. 31727, essential amendments are introduced to Turkish tax legislation. Apart from the tax amendments, a new provision has been added to Article 27 of the Administrative Jurisdiction Procedure Law no. 2577 (“AJPL”) titled as “Stay of Execution”. According to the newly added provision to the AJPL, taxpayers must deposit 50% of the actual tax amount in dispute as security in order to claim a stay of execution decisions during the tax cases initiated with the refund claim of the paid taxes. The above-mentioned security requirement should be analyzed in terms of the stay of execution institution envisaged for tax litigation procedure and constitutional rights.

Suspension of Execution Regime in terms of Tax Litigation Procedure

As per Article 27/1 of AJPL, initiation of a lawsuit at the Council of State or the administrative courts shall not prevent the execution of the administrative procedure in dispute. The Council of State or the administrative courts may decide to suspend the execution by showing justification if (i) the implementation of the administrative procedure both results in damage that are hard to recover or impossible to recover and (ii) the administrative procedure is expressly in contradiction to the law. According to Article 27/6 of AJPL, the stay of execution order shall be given after a financial guarantee is deposited. However, deposit of financial guarantee might not be sought, according to the requirements of the situation. This is the general rule for the “suspension of execution” in administrative jurisdiction.

On the other, Article 27/4 of AJPL stipulates an exemption of the above-mentioned general rule in terms of tax litigation cases. According to the referred provision, filing a tax lawsuit arising from tax disputes at the tax courts shall suspend the collection procedures of the part of the levied taxes, duties, charges and similar financial liabilities and the increases and penalties thereof which is the subject of the case.

However, as per the same Article 27/4 of AJPL, taxpayers shall claim a suspension of execution decision during the tax cases where (i) taxpayer submit their tax declaration with reservation and (ii) file a tax lawsuit with the refund claim of the excessively paid taxes within the scope of the referred tax declaration. In these cases, the general rule stipulated under Article 27/2 will be applied.^[1]

Amendments Introduced Through the Law no. 7351

Through the promulgation of the Law no. 7351, a new provision has been added to Article 27/4 of the AJPL. According to the newly added provision, taxpayers must deposit 50% of the actual tax amount in dispute as security in order to claim a stay of execution decisions during the tax cases initiated with the refund claim of the paid taxes.

According to the preamble the Law No. 7351, the aim of the law is to prevent unfair refunds in tax lawsuits and any potential Treasury Loss. The Preamble states that in cases where a suspension of execution is decided by the court, if the court decides that the refund is unfair after the examination on the merits, there may be problems in the recovery of the refunded amounts due to reasons such as the destruction of the taxpayer's assets.

Therefore, from now onward, taxpayers must deposit 50% of the actual tax amount in dispute as security in order to claim a stay of execution decisions during the tax cases initiated with the refund claim of the taxes paid upon the tax declarations submitted with reservation.

Analysis Requirement Regarding the Security Obligation in terms of the Constitutional Rights

The principle of the rule of law requires the activities of the administration to be subject to judicial review in terms of their lawfulness. Therefore, the realization of this principle depends on the effective implementation of administrative judicial review.

Additionally, the principle of proportionality constitutes a sub-principle of the rule of law. Pursuant to the said principle, fundamental rights and freedoms can only be restricted under the conditions specified in Article 13 and 15 of Turkish Constitution and as long as the restriction is “proportionate”.^[2] Therefore, it is disputable whether the security requirement introduced by the Law no. 7351 and amounting to 50% of the tax amount in dispute is "proportionate" and “lawful” in this sense.

Moreover, as per Article 36 of the Turkish Constitution, everyone has the right to a "fair trial" by claiming and defending as plaintiff or defendant before the judicial authorities by making use of legitimate methods and means. It is foreseen that stipulating such a high amount of security in tax refund cases will deter taxpayers from filing a lawsuit. In this sense, the regulation in question should be also discussed in terms of the “right for a fair trial”.

Finally, Article 35 of Turkish Constitution regulates that the right to property may be restricted only by Law and in conformity with the public interest. Therefore, any restriction on the right to property must also be proportionate as per the rule of law summarized above. In this context, it should also be evaluated whether the security obligation introduced by the Law No. 7351, which will essentially decrease the taxpayer's assets, infringes the essence of the right to property.

Conclusion

Through the amendment introduced by the Law no. 7351, taxpayers must deposit 50% of the actual tax amount in dispute as security in order to claim a stay of execution decisions during the tax cases initiated with the refund claim. This newly introduced security requirement would be very crucial for the cases initiated with the refund claim of the taxes excessively paid upon the submission of the relevant tax declarations with reservation.

We believe that the new security requirement is legally “discussable” in terms of the rule of law & proportionality principles. Therefore, hesitations occur on the fact whether this new security requirement breaches or not the proprietary right & the right to a fair trail regulated within the scope of the Constitution and European Convention on Human Rights.