Is Digital Service Tax Dead Already? Legal Barriers in the Way of Collecting Digital Service Tax in 2020

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New taxes entered into our lives with the Act numbered 7194 which was published in the Official Gazette on 7 December 2019. One of these taxes is Digital Service Tax. The law provides that digital service providers are liable for this tax at a ratio of 7,5% over the revenue they generate from their digital services. The examples of such digital services include games, software, applications, music, video, online advertisement and online market place services. If tax payers are not resident in Turkey -which is the case for many conglomerates engaged in online services- and in other necessary cases (?), the Ministry of Treasury and Finance may hold related parties liable for paying the tax. The related parties are those who are party to the taxable transaction (i.e. consumers) and those that act as intermediary for the payment (i.e. banks offering virtual pos services and other online service providers). Having said that, it is also regulated that Digital Service Tax are not going to be itemized separately in the invoices or other payment receipts. In other words, consumers -who could be held liable for paying the tax- will not be able to acknowledge even the existence of such tax in the first place. If the digital service providers fail to fulfil their tax obligations, the access to their digital services in Turkey could be banned by Information and Communication Technologies Authority.

As per Article 73 of the Turkish Constitution, taxes, fees, duties, and other financial obligations shall be imposed, amended, or revoked by law. This is called the legality principle of taxes in Turkey (akin to “no taxation without representation”). The security measures for the collection of Digital Service Tax leaves several question marks considering the constitutional principle, i.e. the legality principle of taxes. For instance, it is not provided in the Act, under which circumstances will the Ministry of Treasury and Finance hold the related parties liable for the tax, i.e. the consumers or the companies intermediating for payment. It seems that it is up to the public authority’s mercy to decide on the tax liability of such consumers and companies. In the same vein, destruction of the tax payer’s economic activities by means of blocking the access to its digital services in order to secure the tax receivable is not a proportional measure and it is primarily against the constitutional principle of freedom of contract.

The constitutionality of Digital Service Tax raises many questions each of which could be the subject of separate articles. This article on the other hand, deals with another subject: We will seek to find an answer to the question of whether it is legally possible to collect Digital Service Tax in 2020, due to the tax not having recognized in Table C of the Government Budget for 2020 as government’s income (The Act numbered 7197 on Central Government Budget for 2020, “the Budget Act”). In other words, our purpose is to challenge the legal compliance of the Digital-Service-Tax-related administrative actions of tax offices and the Ministry of Treasury and Finance. These actions could include collecting tax forms, conducting tax assessments, accruing and collecting the tax.

What is the function of Table C in the budget laws?

The Turkish tax scholars argue that a prior permission must be granted in the budget in order to impose a particular tax in any fiscal year. As per this principle, it is not possible to collect a tax that is not specified as an income item for the government or any other relevant authority in the budget law. From a high level, there should generally be two criteria that are met for any particular tax to be collected in a given fiscal year: First, the tax must be levied based on law (the legality principle of taxes). Second, the authority that will collect the tax (be it a central government or an administrative body which is a separate public entity) must be authorized as per the budget law to collect the tax. Related to this second criterion: Such authorization is granted by the Budget Act which lists the taxes and the corresponding authorizations in its table C.

The very first legal grounds of this principle could be found in Article 39 of the General Accounting Act numbered 1050, which was repealed by the Act numbered 5018 on Public Financial Management and Control. According to the former legal source, “No taxes or fees shall be imposed, allocated, or collected unless permitted by law” and “General Budget Act allows the collection of taxes and fees each year”. When these two are read together, one can draw this conclusion: No tax shall be collected unless permitted by the budget law. With the abolition of the Act numbered 1050 by the Act numbered 5018 in 2004, it is asserted that the same conclusion must be drawn today as well. Advocates of this view refer to Article 37 of the Act numbered 5018 which has the following provision: “Legal grounds for the incomes of the public authorities that fall under general management are shown in their budgets. Incomes that are included in the budgets shall be imposed, accrued, and collected pursuant to the procedures specified in the relevant laws.” All considered, it is still generally accepted that the prior permission principle is applicable even in Act numbered 5018 era.

So we should decide on which public authority shall collect Digital Services Tax. Is it the “general management” public authorities which would trigger prior permission principle as per Article 37 of the Act numbered 5018? Or is it some other authority?

The tax offices that will collect Digital Service Tax are organized under the Revenue Administration, which is a subsidiary institution of the Ministry of Treasury and Finance. The Ministry of Treasury and Finance is sorted as one of the “Public Authorities subject to General Budget” in row 13 of the Table (I) affixed to the Act numbered 5018. List of fundamental provisions that constitute the grounds for the incomes of the public authorities subject to general budget for the year of 2020 is included in Table C of the Budget Act. Therefore, it is clear that Digital Service Tax cannot be collected unless included in Table C of the budget for 2020 as per the prior permission principle.

What are the legal consequences of Digital Service Tax not being included in Table C of the Budget Act?

In cases of violation of the prior permission principle, the general understanding is that the relevant tax cannot be collected in the given fiscal year. However, this principle is based on Act numbered 5018 and not on the constitution. Therefore, in order to for the prior permission principle to be applied over another norm, the latter must be at a lower rank than the act (in which the prior principle finds is based on, for example a regulation or administrative communique) according to the constitutional principle of hierarchy of norms. However, the act imposing Digital Services Tax is the superior norm as the chronologically subsequent law. Therefore, the act imposing Digital Services Tax overcomes the Act numbered 5018, and the prior permission principle is not applicable in this case.

A very similar discussion happened at the time of Act numbered 3986 imposing the Economic Balance Tax. A legal dispute arose out of the discussion eventually and led to a decision by the Constitutional Court (Decision of the Constitutional Court, 1995/6 E., 1995/29 K., T. 6.7.1995). Act numbered 3986 was appealed by Gaziantep Tax Court on grounds of constitutional violation and brought before the Constitutional Court. In the application, it was argued particularly that Act numbered 3986 was not included in Table B and Table C affixed to the Budget Act numbered 3941 for the Fiscal Year of 1994, and therefore the prior permission principle was not complied with. Nonetheless, it was stated in the Constitutional Court decision that there are no hierarchical differences between the acts. And the acts do not have to comply with other acts; and the subsequent Act numbered 3986, imposing the tax shall replace the contradicting provisions of the former act (Act numbered 1050, i.e. the prior permission principle). In other words, the lack of constitutional grounds for the prior permission principle turned the principle into a mere wish.


Tax payers are only able to plan the following fiscal years, if they are aware of the taxes they are going to pay. In this context, the function of the prior permission principle should not be neglected. However, it is clear that there are difficulties in the application of this principle because it is based on a parliamentary act rather than the constitution. Therefore, the absence of Digital Services Tax on Table C of the Budget Act does not constitute any legal barriers for the collection of Digital Service Tax in 2020. Having said that, in the event that tax security measures are taken (such as blocking the access to digital services), the market actors’ constitutional rights -notably their freedom of contract and freedom of communication- will possibly be violated.

First published by Gün + Partners in Mar 19, 2020.

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