Receivables with Doubtful Collection and the Situation Regarding Taxation

Difficulties in economic life and irregularities in the course of trade, increasing competitive conditions, and financing difficulties arising from the economic conjuncture force businesses that supply goods and services to make deferred sales.

In order to compete with other businesses in their sector and to increase the demand for their products, companies choose to make deferred sales as well as cash sales. In parallel with the course of general economic life, maturities also become longer and shorter.

However, as a wholesaler or retailer, forward sales may come with some risks. Economic crises and financial difficulties increase the risk of not being able to receive their receivables. It may be inevitable to take legal action to solve the problem before the inability to collect receivables on time or at all threatens the continuity of the company.

Today, large enterprises follow economic developments more closely, examine the collectability of their receivables, evaluate their collection ability after maturity, and allocate provisions by taking international standards into account. Seeing the real profitability of the business helps managers make the right decisions. The consideration of the allocated provisions as expenses in determining the tax base is determined according to tax laws.

Within the framework of the Tax Laws, setting aside provisions for receivables whose collection has become doubtful and recording them as expenses in determining the tax base is subject to the conditions specified in these laws. In our country, the conditions for making provision for doubtful receivables are stipulated in the Tax Procedure Law.

Doubtful Receivables – Bad Receivables

When the collection of the receivable becomes impossible, it means that the receivable turns into a worthless receivable. Doubtful receivables occur when the receivable cannot be collected even though it is due. The longer the non-collection period, the less likely it is that the receivable will be collected.

In addition, disagreements may arise between the creditor and the debtor regarding the amount of the receivable, its maturity and who the real debtor is. For a solution, a lawsuit must be filed.

Tax Procedure Law Provision

Regulations have been made in Article 323 of the Law regarding the nature of doubtful receivables and the transactions to be carried out. The provision of the article is as follows.

”Provided that it is related to obtaining and maintaining commercial and agricultural income,

-Receivables in the litigation or enforcement phase,

-Receivables that have not been paid by the debtor despite the protest made or requested in writing more than once and do not exceed 3000 (8,900 as of 01.01.2023; 14,000 as of 01.01.2024) Turkish Liras,

It is considered a doubtful receivable.

For the doubtful receivables written above, a provision can be made in the liabilities according to the savings value of the valuation day.

The receivables to which this provision belongs are shown in the provision account. For secured receivables, this provision is limited to the remaining amount of the collateral.

Subsequently collected amounts of doubtful receivables are transferred to the profit and loss account in the period in which they are collected.

Taxpayers who keep books in their business accounts record the doubtful receivables determined within the scope of the above paragraphs in the expense section of their books, and the amounts subsequently collected from them in the income section of their books in the period in which they are collected, showing which receivables they belong to.”

Whether a receivable can be considered as a doubtful receivable and whether a provision is made and recorded as an expense will be determined based on the legal provision we mentioned above.

-The receivable must be related to the acquisition and maintenance of commercial or agricultural income.

In order to say that the collection of the receivable has become doubtful, there must first be a causal link between this receivable and the commercial or agricultural profit that the business expects to achieve. Even if there is difficulty in collecting receivables that are outside the main activity of the business, that are not recorded as revenue or are not related to the cost of the goods to be traded, produced or services to be performed, it is not possible to consider them as doubtful and write off provisions and write them off as expenses. If a loan is given to third parties unrelated to the business and the collection of this receivable becomes doubtful, it is not possible to make a provision and write it off as an expense.

Although it has been a matter of debate whether a provision can be made for this receivable in case it is not possible to purchase goods or services from the order advances given and there is a high probability that the advance given will not be refunded, it has been accepted by the tax administration that a provision can be made for such doubtful receivables if the conditions in the law are met.

-Receivables in litigation or enforcement phase

It is important to show with convincing evidence that the receivable, which cannot be collected even though it is due and whose collection is delayed, is seriously pursued by the creditor. For this, enforcement proceedings must be initiated. If there are disputes regarding the receivable, a lawsuit must be filed. Even if a provision is made for receivables that are not in the litigation or enforcement phase, it is not legally accepted to write off this provision as an expense.

The provision must be set aside and recorded as an expense in the year and period in which a lawsuit is filed or enforcement proceedings are initiated for the collection of the receivable. Although there are different opinions on this issue, caution should be exercised.

-Delay in the collection of small receivables and making provisions

In order for receivables with an amount up to 3,000 Turkish lira (9,800 for 2023, 14,000 for 2024) to be recorded as an expense by making a provision, it must not be paid by the debtor despite the protest made or requested in writing more than once. Provisions can be made for receivables that have reached this situation and written off as expenses.

-The effect of keeping books on a balance sheet or operating account basis on provisioning

Previously, only tradesmen and agriculturalists who kept books on a balance sheet basis could allocate provisions for their doubtful receivables. Article 35 of Law No. 7338 and VUK Article 323 have been amended, and as of 26.10.2021, taxpayers who keep books on a business account basis can also make provision for their doubtful receivables. They can allocate provisions by complying with other conditions.

Due to the nature of the business account basis, they should record the doubtful receivables provisions they have set aside in the expense section of their books, and what they can collect from these receivables should be recorded in the income section of their books in the period when they collect, showing which receivables they are related to.

-No provision is made for secured receivables

The receivable that cannot be collected on maturity may be partially or fully secured. In this case, provision can be set aside for the unsecured part of the receivable. After the collateral of the receivable is converted into cash, it is possible to pursue prosecution for the remaining receivable.

-Setting provisions for receivables from public institutions

It is thought that due to the citizens’ trust in public institutions and organizations, no provision can be made for receivables that are not paid on maturity. However, the Law does not specify the identity of the debtor in allocating a provision for doubtful receivables. Therefore, there is no obstacle to making a provision when the conditions specified in the article are met.

-Uncollectible Value Added Tax

As stated in the Tax Procedure Law General Communiqué No. 334, value added tax is a receivable arising directly from the delivery of goods or services that arises as a natural result of economic activities and constitutes an element of business receivables that the business pays during its purchases, as stated in Article 323 of the TPL. Provided that the conditions are met, a provision can be made if it is entered in the relevant period records and declared in the VAT declarations.