Turkish Court of
REVENUE AUDIT IN TURKEY
Printed in ASOSAI Research Project Publication ( September 1997 )
I - INTRODUCTION
1. The SAIs, throughout the world, are paying more and more attention to revenue auditing in parallel with the expectations of the people and consequently of the legislature SAIs are also re-arranging their priorities and diverting resources from other activities towards revenue auditing. The exchange of information accomplished through professional meetings and other forums have contributed and will continue to contribute a great deal to the SAIs in their endeavours to develop their revenue auditing.
2. In Turkey, as in many other countries, revenue auditing has been given less weight than the expenditure auditing. Nevertheless TCA ,with its limited resources, is in the preparation of re-designing its policies for revenue auditing.
3. At present Turkish tax administration is undergoing an organisational and functional change within the framework of reform project which is partly financed by the World Bank. These changes will undoubtedly affect the formulation of TCA’s new revenue auditing policies and approaches.
4. This paper focuses on two major subjects. The first, broadly covers a brief account of the current taxation and tax administration in Turkey while the second describes the position of the TCA in revenue auditing. This part is mainly based on a paper presented at the International Revenue Auditing Seminar held in Pakistan in 1993. However , the section related to new horizons in the audit of revenues is composed for the present ASOSAI Research Project.
II- TAXATION SYSTEM AND TAX ADMINISTRATION IN TURKEY
Legal Basis of Taxation
5. Article 73 of the Constitution of Turkish Republic stipulates under the heading
“ Obligation to pay Taxes” the following:
“Everyone is under the obligation to pay taxes according to his financial resources, in order to meet public expenditures.
An equitable and balanced distribution of the tax burden is the social objective of the fiscal policy.
Taxes, fees, duties, and other such financial impositions shall be imposed, amended, or revoked by law.
The Council of Ministers may be empowered to amend the percentages of exemption, exceptions and reductions in taxes, fees, duties and other such financial impositions, within the minimum and maximum limits prescribed by law.”
6. The Constitution also stipulates that there should be a provision of law to impose any kind of taxation. The main taxation laws are ; Income Tax Law , Corporate Tax Law, Motor Vehicles Tax Law, Inheritance and Gift Tax law, Value Added Tax Law, Motor Vehicle Purchasing Tax Law, Petroleum Consumption Tax Law, Banking and Insurance Transaction Tax Law and Stamp Duties Law. The general procedures covering all kinds of taxes are governed by a specific law titled “Law of Taxation Procedures”. Ministry of Finance issues circulars to define detailed administrative and operational directives based both on this procedure law and on specific law related to the relevant tax.
Structure and Performance of Taxation in Turkey
7. The ratio of tax revenues to Gross Domestic Product ( GDP) averaged 18%. Tax revenues of the consolidated budget (i.e. the incorporated totals of the so- called annexed budgets and the general budget) amounts to 13 percent of GDP: The main taxes are: personal income (40 % of revenues), value added tax ( 30%) and corporate income ( 7%). Taxes directly collected by the local governments is not included in these ratios. Currently about 11% of tax revenue collection is transferred to local governments. In recent years, there has been a growing reliance on specific levies imposed through extra budgetary funds which amounts to - 3% of GDP.
8. Distribution of the consolidated budget tax revenues according to the subject is shown below:
(i) Taxes on income 48.6
Personal income tax 40.4
Corporate income tax 7.2
(ii) Taxes on wealth 1.0
(iii) Taxes on goods and services 45.7
Value added tax 31.0
(iv) Taxes on foreign trade 5.8
9. It would be beneficial to give some brief information on the main taxes.
The Personal Income Tax ( PIT) is obtained through annual income tax returns, withholding and lump -sum methods. Marginal tax rate range from 25% to 55%. Withholding taxes amounts to 84% of total PIT revenues. The main element of withholdings is wage and salary income, which currently corresponds to 55% of total PIT: Taxes are withheld for around 5.5 million wage earners, of which 1.7 million are in public sector.
A relatively small part of government’s revenue is derived from the Corporate Income Tax ( CIT). There are about 230 thousand corporations subject to this tax, most of which (190.000) are joint stock companies, including state economic enterprises. Despite high nominal tax rate, the share of the CIT in budget tax revenues is low.(7% ) .
The Value Added Tax ( VAT) is broad based , covers both goods and services and has relatively few exemptions. Turkish VAT rates and schedules are roughly in line with European Union practice. There are two low rates ( 1% and 8%) for basic foodstuffs, a base rate ( 15%) and a luxury goods rate ( 23%).
10. The General Directorate of Revenues ( GDR)of the Ministry of Finance is responsible for the tax administration. GDR is staffed with more than 55.000 personnel the vast majority of which is located in about 900 local tax offices. GDR is also responsible for advising the government on tax policy., interpreting the tax laws and producing statistics Finance Provincial Administrator, controls the local office network in a province..
The Computerised System in Tax Administration
11. Computerisation of taxation operations have been going on for some twenty years. Most of the operations in tax offices, ( including taxpayer identification numbers registrations, assessment transactions, and payment transactions) have been computerised. However at present only a limited number of computerised local tax offices are connected on-line to one of three regional computer centers which are located in Ankara, Ýstanbul and Ýzmir. The regional computer centers possess state of the art IBM mainframe systems. It is aimed to accomplish by computerisation :
( a) classification and selection of returns by sector, size, norms, past audit results, third party information, general profiles or screening functions, with a view to selecting those returns for audit and compliance checks; and (b) a management system that monitors the tax system and through a scientific method targets areas of non-compliance or systemic problems based on factual data or interference.
Internal Audit Function
12. Audit function in tax administration is carried out by four groups within the Ministry of Finance namely Board of Specialised Accountants, Finance Inspectors Board, Revenue Controllers’ Board and Tax Control Officers .The Specialised Accountants and the Finance Inspectors directly report to the Ministry of Finance and traditionally they audit the larger and more complex cases. The Board of Specialised Accountants allocates most of the time of its 325 staff to the tax activity. The Finance Inspectors Board , with 120 staff, concerns itself with tax audits only as a spillover of its mandate to review the management of government resources. The Finance Inspectors spend most of their time on internal audit functions other than tax audits. A third group, the Revenue Controllers’ Board, with 470 staff, carries out both internal audits and tax audits and reports to the General Director of Revenues. Finally, there are 2100 Tax Control Officers deployed at the provincial and local levels, who carry out “ compliance checks” and assist other central audit groups with their field work. The Tax Control Officers are GDR staff, but their day to day activities, including audit programs, are determined by the Finance Provincial Administrator.
Settlement of Tax Disputes
13. In Turkey tax disputes are settled in a two echelon administrative court system. The first objection is made. to relevant Tax Court. Upon the decision of this Court, parties who oppose to this decision, if any, apply in some cases to the Regional Administrative Court and in other cases to Supreme Administrative Court called State Council.
Tax Administration Reform on the Agenda
14. The Ministry of Finance recently have embarked upon a program to revitalise the tax administration system. The basic thrust of the program is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. The tax administration reform program will also seek to ensure the sustainability and predictability of the expected revenue increases through the modernisation of organisational arrangements, procedures and computer based systems. The elements of this reform are given below:
* Restructuring of the General Directorate of the Revenues
* Develop and implement modern automated systems for core tax administration and
* Develop enhancements for compliance enforcement capability
* Improve tax payer service
* Strengthen human resources in the GDR
All of these require to be supported by technology transfer and investment in IT environment for tax administration processing to be put into effect.
III - REVENUE AUDITING IN TCA
Main Features of Turkish Court of Accounts
15. Before taking up the subject it would be useful to give some information on Turkish Court of Accounts (TCA) .
TCA is a constitutional establishment and is entrusted with task of auditing on behalf of the Grand National Assembly
The TCA is an independent body and not subject to political or administrative supervision. The TCA is a sui- generis institution which cannot be placed in any one of the three branches of Government. It enjoys financial independence by preparing its own budget, which it submits to Parliament without intervention of executive. President of the Court is the sole authority to authorise expenditures from TCA’s budget which leaves no room for both the legislative and the executive bodies to interfere in the TCA’s budgetary spending. TCA has complete discretion in deciding what accounts and subjects to look at and how and when to examine them; also in deciding whether reporting the matter in question to Parliament is necessary.
The Organizational Structure of the TCA.
16. The TCA is a collegiate body which includes elected President and elected members and appointed audit staff. The TCA is an institution which also exercises judicial power.
While the auditors carry out audit function the colleges namely Chambers and Board of Appeals perform the judicial function.
Professional staff of TCA includes president, members and the auditors. Presently there are 670 professional staff of which 46 are judicial staff and 624 are auditors.
17. Present audit mandate of the TCA is delineated in the Constitution and in the Law of the Turkish Court of Accounts. Constitutionally and by virtue of law the TCA is empowered to audit all the revenues, expenditures and property of the governmental departments and agencies under its jurisdiction. Likewise, it is authorised to have access to and examine the ledgers, records and all the justifying documents which are considered as pertinent to the conduct of the audit. It should be noted that the records , ledgers and documents mentioned here cover those related to the assessment and collection processes as well as those which are in the possession of the third parties..
Scope of Revenue Audit
18. The scope of TCA’s revenue auditing has been determined by the Constitution and its Law. According to these legislation the scope is: all the revenues of the governmental departments and agencies that are subject to TCA’s audit.
19. In Turkey revenues and expenditures are administrated under three kinds of budgets, namely:
- The General Budget which comprises of revenues and expenditures of the central governmental administrations and agencies ( mainly Ministries and their branch offices)
- Annexed Budgets ( General Directorates like State Hydraulic Works , State
Highways, and Universities etc.) and
- Special Budgets ( Municipalities and other Local Administrations)
20. In implementation of these budgets, the expenditures are made and the revenues are collected in accountancies which have been established within the organisational structures of the departments or agencies. Each accountancy operates under the responsibility of an accountant.
21. In Turkish financial system financial responsibility in carrying out operations related to the implementation of the budget lies with two officers: the accountant and the assessment officer. Instances of non compliance encountered during audits are included in the audit report by the auditor and are mainly addressed to these two officers.
22. In Turkey there are three kinds of accountants accountable to the TCA :
a) Revenue accountants;
b) Expenditure accountants
c) Property accountants
23. Revenues are broadly distinguished as “tax revenues” and “ non- tax revenues”, and most of the revenue accountants deal with both. On the other hand, the expenditure accountant should also be taken into consideration in the context of revenue audit, because a goodly number of expenditure transactions entail tax withholding. Furthermore, in some cases an accountant may be charged with payment of expenditures and collection of revenues, for instance a tax office director who is the accountable officer of the tax office is both a revenue accountant and the expenditure accountant.
24. One of the features of the Turkish Financial System is that administrations and agencies which fall under above mentioned budget categories due to economic, administrative or other reasons are permitted to establish, outside their relevant budgets, special or revolving funds. These special financial arrangements are mostly directed to the production of goods or provision of services. Since these are usually business oriented establishments their importance from stand point of revenue audit is obvious.
25. In line with its mandate the TCA has a two - fold objective in conducting revenue audits: to help to assure regularity and good governance in government revenues.
In regularity audits related to tax revenues, the objectives are whether or not:
* the revenues have been accrued, assessed and collected ; and
* the tax receivables have been followed up
according to the laws, regulations and to their appropriations in the related budget.
As for the non - tax revenues, the auditors examine the transactions and operations of the establishments which produce goods or provide services, since they are regarded as the source of revenue. In this case, the objective of audit shifts to the scrutiny of the effectiveness, productivity and profitability of the establishment in question.
26. Reports to the Parliament are mainly based on material obtained in the course of audits.
When the auditors during an audit, observe that the provisions of statutes, regulations, by- laws and government decrees are jeopardising the interests of the Treasury in respect of their application and consequences report the matter to the President of TCA. Eventually, the issues which have been regarded to be appropriate by the General Assembly, which is one of the colleges of TCA , are reported to the Parliament.
Auditors may also be given specific audit assignments in the context of revenue audit objectives. One such audit assignment is explicitly cited in the law. This assignment that the law requires the TCA to submit report on to the Parliament is concerned with the evaluation of revenue assessment systems.
27. Observations and findings of the auditors are reported mainly in two categories
* Judiciary ( Internal) Reports
* Parliamentary ( External) Reports
Internal reports after being presented to the President of the Court are examined
( tried) in a relevant chamber of the TCA. At the end of a trial “ Chamber Decision” is issued. In this decision responsible officers are either acquitted or held liable to pay back the amount to the treasury involved in a noncompliance case. Since the Chamber Decision is self enforceable there is no need to submit the related audit report to the Parliament.
On the other hand, as explained below, the so- called external reports which do not concern a specific noncompliance instance but are about findings and observations of a general nature, after being studied at the General Assembly are submitted to the Parliament.
Supreme Audit versus Internal Audit
28. As explained above ( Para. 12 ) in Turkey , tax audit is the responsibility of the Ministry of Finance. In auditing assignments carried out by the Finance Inspectors, Specialised Accountants, Revenue Controllers and Tax Control Officers the main objective is to ascertain that tax returns, filed by corporations or individuals, fairly represent the results of transactions which are subject to tax. In order to enable the tax auditor to accomplish this objective all tax auditors are entitled to have access to taxpayers’ own records as well as the records of the related third parties.
In addition to tax examinations the above mentioned tax auditors with the exception of the Specialised Accountants, are also authorised to determine whether the tax assessments and collections are made in accordance with the laws and regulations. One may assert that, in this respect, their objective is not very much different from the objective of the TCA auditor mentioned above. ( Para 22 ) However we think that here there is not an overlap since:
* the revenue auditing of TCA is usually of a more general nature.
* audit findings of the TCA auditor are of a specific nature and in most cases entail a judicial decision which is self enforceable.
* audit carried out by Ministry of Finance auditors is of internal and administrative character whereas TCA’s audit is external and supreme.,
* in TCA’s revenue audit, only the revenue accountants ( tax office directors) and assessment officers are accountable to TCA and are attached to the TCA in any way whereas in the compliance testing carried out by the Ministry of Finance Auditors all officials who are instrumental in carrying out a criticised action are held responsible and are under the direct supervision of another Ministry of Finance official.
29. Hitherto the main objectives of revenue audits at the TCA have been to verify that revenues have been assessed , collected and controlled in accordance with the relevant laws and regulations, and that the revenue accounts are correctly stated. In other words the emphasis have been on the financial and compliance audit. It may safely be asserted that the preoccupation of the court chambers on judiciary powers of the TCA played a great role in placing so much importance to compliance audit.
Recent amendment to the law provides explicitly that TCA shall have the power to carry out audits of economy, efficiency and effectiveness of the departments and agencies under its jurisdiction This is of course also applicable to revenue audits. The main objectives of performance audit of revenues are wider and might include ::
* to discover whether revenues are collected at minimum cost both to the State and to the taxpayer;
* to assess whether the measures taken by the tax authorities to minimise tax evasion are effective;
* to discover whether the tax authorities could improve the relationship between the cost of administration and revenue collected;
* to assess the adequacy of the systems used by the tax authorities to identify tax sources and to maintain information on taxpayers.
30. As it was stated at the outset ,nowadays many SAIs are giving more and more importance to revenue auditing. The TCA being among these SAIs, during the reorganisation of the audit function in 1994 the President, established a new audit group to be engaged exclusively with revenue audit assignments.
The group will also make an attempt to develop new audit techniques in revenue auditing. The new provision of the TCA Law regarding performance audit, creates a new challenge for the auditors of Revenue Audit Group.
31. Since early 1990s the TCA has been spending a great effort to modernise its audit procedures and operations. Exchange of ideas in the forums of such international organisations as INTOSAI and EUROSAI was one of the main factors to kindle the motivation for reform which was deepened with bilateral relations with other SAIs. These bilateral relations have developed into cooperation and collaboration with two distinguished SAIs, namely, National Audit Office of United Kingdom and Office of the Auditor General of Pakistan.
The reform project in the Ministry of Finance , including the tax reform effort mentioned above ( para.14 ) was an impetus for taking some concrete actions for reform.
However, the new provisions of the TCA Law have become the main driving force for actualisation of the modernisation ideas. A comprehensive Modernisation Plan for the coming four years has been completed. At present negotiations are going on with the World Bank to enlist its financial support for this plan. It is hoped that full fledged
implementation of this plan will start before the end of this year.
32. One of the two features of the Modernisation Plan which directly relates to increasing audit capabilities is computer audit.
Having installed unit record equipment in 1956 to support its business applications the TCA has used computer technology for years and has developed an internal technology capacity. That capacity has until now served the automation requirements of the TCA. The future will bring changes to operation of governmental organisations of Turkey which the TCA must continue to audit and review. Of paramount importance is the changing nature of the governmental financial systems which are becoming increasingly computerised.
Taking these developments into consideration the Modernisation Plan gives a very important place to and envisages to allocate a substantial amount for computer audit.
The project goals can be summarised as follows:
* Provide improved technical tools for the audit functions by implementing computer assisted audit techniques,
* Provide improved functioning of the TCA audits by implementing Computer Based Auditing and EDP Audits,
* Improve the TCA’s operations with current , accurate and easily accessible reference information,
* Increase the efficiency and effectiveness of the TCA offices and administrative functions by implementing Office Automation throughout the TCA.
In view of the more advanced level of computerisation in tax administration compared to the level of computerisation in the budget and expenditure departments of the Ministry of Finance, it is very likely that revenue auditors will probably be the pioneers of computer audit in the TCA. It goes without saying that the expected advancement of IT technology will contribute a great deal to elevating the revenue audit capability of the TCA.
33. Another feature of the Modernisation Plan which directly relates to increasing capabilities of Revenue Audit is the four stage modus operandi conceived for embarking on new audit techniques and approaches.
According to the Modernisation Plan in order to adopt a new audit approach the following path will be followed:
1. Training of the auditors that will be engaged in the project with a mind for implying the elements of a temporary ( working ) audit methodology,
2. Experimental operation under the guidance of a consultant and development of audit methodology,
3. Writing up the manual based on the methodology developed at the previous stage
4. Promulgation of the newly developed manual .
Revenue auditing will be one of the projects. We expect to get preliminary results by the end of the year 1998.
IV- CONCLUDING REMARKS
Within the framework described in this paper TCA expects to reach important audit findings about tax and revenue collection management and to generate valuable recommendations for its improvement by intensifying its revenue audits.
It must be expressed here that the ASOSAI Research Project will be very useful in this context.