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Supreme Court Assembly of Civil Chambers: tax-related issues are part of public policy
Practical Law UK Legal Update 0-523-8186 (Approx. 4 pages)
Supreme Court Assembly of Civil Chambers: tax-related issues are part of public policy
by Professor Dr. Ziya Akinci, Akinci Law Office
| Published on 29 Jan 2013 • Turkey |
In a decision dated 8 February 2012, but only recently published, the Turkish Supreme Court Assembly of Civil Chambers held that tax-related issues are part of public order in Turkey. Therefore, a decision of the First Instance Court, which involved tax-related issues and was given without having the necessary expert reports, was contrary to Turkish law and public policy.
Background
Article 8 of the Turkish Tax Procedural Law provides that special agreements relating to the responsibility of taxpayers are not binding on tax offices, unless there are exceptional circumstances provided by tax law.
Article 24 of the Corporate Tax Law provides that corporate tax should be levied on the declaration of the tax payers. Such declarations contain the results of the related fiscal period and every taxpayer submits a declaration about their taxable income.
Article V(2) of the New York Convention provides that recognition and enforcement of an arbitral award may be refused if:
- The competent authority in the country where recognition and enforcement is sought finds that the subject matter of the dispute is not arbitrable under the law of that country.
- The recognition or enforcement of the award would be contrary to the public policy of that country.
Facts
The underlying dispute between the parties arose from a consultancy services contract, which the claimant successfully arbitrated pursuant to an arbitration clause in the contract. The claimant then initiated an action in the Turkish Court of First Instance for the recognition and enforcement of the foreign arbitral award.
The respondent sought dismissal of the action, claiming that the foreign arbitral award allowed tax evasion and was therefore contrary to Turkish law and to Turkish public policy.
The respondent claimed that the joint venture in question had a hidden income. It claimed that the two companies forming the joint venture in question, and the joint venture itself, were separate and independent tax payers according to Corporate Tax Law. Although the joint venture paid tax by declaring its taxable income at the end of the fiscal year, it shared out the income before the end of the fiscal year, thus hiding some income.
The respondent also claimed that the partner companies paid tax on their profits by claiming that, as foreign companies, they are limited taxpayers and should pay taxes by making withholding deductions. However, the parent company invoiced these withholdings to the administration. These taxes, which were the subject of the arbitration, were not being paid on the profit of the joint venture and therefore the practice was unfair. Consequently, the award should not be enforced.
First Instance decision
The First Instance Court enforced the foreign arbitral award by stating that the award was not contrary to public order.
The award was appealed.
Supreme Court decision
The Turkish Supreme Court held that tax-related issues are part of public order. Therefore, the decision of the First Instance Court, which was given without having the necessary expert reports, was contrary to Turkish law. Although the first instance court had to investigate whether the foreign arbitral award was against public order before making its decision, it made its decision without making such an investigation. Therefore, the judgment of First Instance Court had to be reversed. However, the First Instance Court insisted that the action was taken to the Supreme Court Assembly of Civil Chambers.
Decision
The Supreme Court Assembly of Civil Chambers decided that tax issues are part of public order and, therefore, on the facts of this case, the decision of the First Instance Court was contrary to law and should be reversed.
The First Instance Court had made its decision based on an incomplete examination of the facts and had failed to examine the necessary expert reports. In this respect, the First Instance Court had to abide by the Supreme Court decision which held that it would be an injustice to make such a ruling without making these necessary investigations.
Comment
An award made outside the Republic of Turkey, which is a signatory of the New York Convention, is enforced according to the applicable Turkish enforcement law.
Under the New York Convention, foreign arbitral awards will not be enforced in Turkey if they are contrary to public policy there. Although the award cannot be subject to substantial examination by the court at the enforcement stage, in some cases the basis of the dispute should be examined in order to determine whether it is contrary to public order.
In theory, and in practice, tax legislation constitutes public order in many New York Convention countries. In this respect, decisions which relate to issues that constitute evasion of tax legislation will be accepted as being contrary to public order.