An analysis and evaluation on taxation of sales profits from securities under the framework of capital gains

Today, most of the developed countries operate powerful capitalmarkets and the income derived from the taxation of capital marketinstruments plays an increasingly significant role for financing publicexpenditures in those countries.Apart from their comercial income, these securities bring mainly twotypes of revenues for their investors. The periodic interest and dividendrevenues derived from these securities are accepted to be returns (annuity)on stocks and bonds whereas the revenues derived from the differencebetwen the acquisition and disposal of these securities are classified ascapital gains. Generally speaking, there are differences in the taxation ofthese two types of revenues.When the different taxation practices being applied by diferentcountries are reviewed, it can be concluded that there has not been a singleand generally accepted unique taxation system brought by the governments.The law-makers differentiate their respective taxation rules and proceduresaccording to the type of securities, according to the period of possession ofsecurities and according to the status of taxpayer (full fledged taxpayer vs.others). The governments either apply a flat rate taxation or an increasingmarginal rate taxation for such revenues. In most of the cases, there hasbeen several exceptions and exemptions to the general rules and principles.The similiar practices also apply in Turkey and there are several tax rates,exemptions and exceptions determined mainly by the date of issuance andby the date of disposal of those securities.This study aims at revealing the taxation principles of capital gains inTurkey with specific emphasis to the most recent developments in the pastfew years by referring to the Turkish legislation -following the explanation ofconceptual framework for the securities and capital gains derived from theselling of such securities. Following a systematical and integral analysis forthe review of capital gains derived from the disposal of various types ofsecurities and after a comprehensive assessment for such capital gains asper the generally accepted taxation principles and as per the fiscal andextrafiscal goals of taxation, the followings can be concluded ;• Though not enough, the new legislation on the taxation of capitalgains brings positive aspects in terms of certainty principle oftaxation.• The flat witholding tax rate of 15 % is not compatible with theequality principle of taxation.• The new legislation also has some defects in terms of generalityprinciple of taxation, especially when it is considered that the newsystem accepts the same exceptions and exemptions that were inforce on the date of 31st December 2005 for the taxation of capitalgains derived from the disposal of those securities before 1stJanuary 2006.• The new legislation is in contradiction with the annuality principle oftaxation since it does not allow the offsetting of capital lossesincurred in the last 3-month period of the year from either previouscapital gains in the same year or the following period of theconsecutive year.• In terms of the fiscal goals of taxation, the new legislation iscompletely succesful since the collected tax revenues may increasedue to withholding at the source and therefore the rate of tax exilesmay be lowered.• In terms of extrafiscal goals of taxation, the new legislation has verylimited relevance as per the regulatory role of taxation on fairincome distribution and even may have negative effects due to flattax rate.• Since the new legislation foresees a minimum period of 2 years forthe possession of securities instead of 3 months and since thewithholding tax system is applied instead of declaration, someinvestors may decide not to invest in securities.• Turkish legislation is not an exception to the other taxation practicesover the world which also lack full uniformity and uniqueness at all.