Recently, the Turkish Constitutional Court decided with a majority and a counter vote that municipalities should not receive consumption tax from companies that generate their own energy (self-generators) for their energy usage because it was considered an intervention against the applicant’s right to property warranted by the rules of the Constitution. The decision was published in the Official Gazette on 25 December 2018, numbered 30636.[1]

Factual background and prehistory of the case

In brief, a steel producing company named İskenderun Demir ve Çelik Anonim Şirketi ("Company") filed a lawsuit against its local municipality (“Municipality”) at the tax court (“Court of First Instance”) because the Municipality charged consumption tax (tüketim vergisi) for the energy the Company itself generated. The Court of First Instance ruled in favour of the Municipality, finding that even self-generated energy is subject to taxation. As a steel producer, the Company was producing steel from iron ore, a process that requires imported hard coal, which first must be turned into coke coal. The Company uses the coke gas generated during this processing for other purposes such asgenerating electricity and gas. In this way, the Company meets its electricity and gas needs through its own efforts. The Company has submitted several tax assessments to the Municipality and paid consumption taxes for the self-generated electricity and gas, but still applied to the Court of First Instance to grant it immunity from such a tax and a refund for the consumption taxes already paid. After hearing both parties, the Court of First Instance ruled in favour of the Municipality. The Company then filed an appeal to the Council of State (Danıstay), which upheld the decision of the Court of First Instance. Finally, in response to the decision of the Council of State, the Company made an individual application at the Constitutional Court claiming that the Company was not consuming electricity and gas like other consumers, who purchase it from third parties such as production and distribution establishments.

The Decision and the Reasoning of the Turkish Constitutional Court

The Constitutional Court found that electricity and gas consumption in municipality territories and adjacent areas are subject to electricity and gas taxation according to the Law on Municipal Revenues (“Law”), and that tax assessment (vergi matrahı) is accepted as part of the sale price of the electricity consumed.

In principle natural persons and legal entities who consume electricity and gas are obligated to pay tax. Moreover, according to the same Law, establishments that distribute electricity or gas are responsible for collecting the tax together with the sale price and must then pay the said tax to the concerned Municipality. However, there is no piece of legislation with respect to the taxation for the independent energy producers, which consume energy to satisfy their own needs without selling it to third parties.

The Constitutional Court has ruled that the claim is acceptable, just because taxation breaches the property right in the present case and stated that the property right can only be restricted for reasons stated under the related Articles of the Constitution, and solely by law. Such restriction must be statutory, made for the public interest and according to the principle of proportionality. Additionally, the Constitution stipulates that taxes, official fees and similar dues must be imposed, amended or remitted solely by law. In order to prevent arbitrary treatment in Turkey, a statutory tax system has been established. Taxes and other fees imposed by the municipalities must be regulated by law. Although the Constitutional Court has no duty for tax assessment, it ruled in the present case that there is an intervention against the applicant’s right to property warranted by the rules of the Constitution.

The Constitutional Court stated that in the present case, the applicant generates its own energy rather than sourcing it from third parties such as production and distribution establishments. In other words, there is no purchase price or sale-purchase relation in the present case so a tax assessment cannot be made based on a sale price. The Council of State has ruled that the tax assessment must be made based on the sale price for independent energy producers, which is determined by the Ministry of Energy and Natural Resources. On the other hand, such interpretative application (keyfi uygulama) reveals that there is a legal gap since the Constitution doesn’t permit such interpretative applications.

According to the ruling of the Constitutional Court, if there is no supplier who is liable to pay tax, it is uncertain how the tax should be determined and collected and whether the tax should be declared by the taxpayer (mükellef). However, the essential components of the consumption tax must be statutory and predictable by law. On these grounds, the Constitutional Court has ruled that this intervention against the right of property is in violation of the principle of legality and such unpredictable and unclear restrictions against the Company’s property rights to the electricity and gas it generates itself contradict the Constitution, since the essential aspects of the taxation procedure have not been followed and a fundamental right has been restricted without complying with the legality principle or conforming with the relevant Articles of the Constitution.

Future Impact of the Decision

The Turkish Constitutional Court decision sets a precedent not only for self-generating industrial companies, but also for energy-generating natural persons. It is obvious that this decision, because the principle of legality was being violated, will result in a new legislation. In the coming days, legislation both on how consumption tax on self-generated energy will be determined and on how tax assessment will be calculated may be published. Additionally, this Constitutional Court decision is significant for the energy sector and of concern to citizens who generate their own energy.