ABOUT THE PROVISIONS FOR THE DOUBTFUL OR BAD DEBTS IN THE COMPOSITION PROCESS

The provision for doubtful or bad debts according to Law of Tax Procedures in Turkey (VUK, Law No. 213) are allowed on certain conditions written in the Law.

In Turkey, announcements of bankruptcy are banned with a presidential decree. Yet, a new regulation called composition (concordatum) has taken into effect instead. As it is popular because of the financial crisis happening since august 2018, most companies have suffered from debts unpaid according to the regulations on composition.

Finally, Government broke its silence and declared a new regulation about keeping records of provisions for doubtful debts, and bad debts. A new Circular No. 112 issued by the Revenue Administration explains how companies could have provisions for doubtful or bad debts during the composition process.

Article 322 of the Law No. 213 defines as below;

“Receivables which are no longer collectible according to a court decision or a decisive document are bad debts.

Bad debts lose their disposal value on the date they gain this nature and are written off by being recorded as loss over their registered values.

Taxpayers who keep books according to the operation account principle shall write off their bad debts in the scope of this article by booking them as expense.”

Article 323 of the Law No. 213 defines as below;

“Provided that it is related to the earning and maintaning of business income and agricultural income;

1. Debts which has become an issue of a court case, or an enforcement,

2. Small amount debts that are not paid despite being requested by protest or by a letter more than once; hence not worthy to file a lawsuit,

are considered as doubtful debts.

For those doubtful debts mentioned above, the provision can be set aside with the actual value on the valuation day. The amount of this provision is shown in the provision account.

In case of assurance bounded to the debt, this provision can be set aside on the amount remaining from the assurance. The amount that are paid later, is considered as income of the year of payment.”

Circular No. 112 issued by the Revenue Administration explains how the provisions are set during the composition process. Those explanations are listed and summarized below.

1- There is no need to make any corrections to the provisions before temporary court verdict on composition

2- For the debts that have not become an issue of a court case, or an enforcement yet, the provision can be considered as expense of the year of the announcement of temporary court verdict on composition.

3- In case the court declines the request of composition, there is no need to make any corrections to the provisions before the temporary court verdict on composition. But the provisions recorded during the temporary court verdict should be corrected by considering the same amount as income.

4- In case the court declines the request of composition and have a verdict for bankruptcy, the provisions remain because the doubtfulness continues.

5- In the event that the composition project is approved by the court and the court gives a definite verdict, the amounts that have been decided by the verdict not to be paid to the debtee can be considered as bad debt and written off in the year of announcement of approval verdict.