Turkish banks call for inflation adjustment to cut 2025 tax bill

Turkish banks have asked for a change that would allow them to pay lower taxes in 2025 as part of their expected inclusion in a new "inflation-adjusted accounting" regime, two banking sources said.

Turkey, which is grappling with soaring inflation, this year began requiring all non-financial companies to adjust their balance sheets to take inflation into account.

Banks and other financial institutions are as of next year also expected to apply inflation-adjusted balance sheets, which leads to reduced profits and as a result lower taxes.

The banks asked the Turkish Treasury to change the rules before year-end so that the inflation adjustment applies not only to distributed profits, but also taxable profits, the two sources, who requested anonymity, told Reuters.

They conveyed the request to Turkish Finance Minister Mehmet Simsek last month, the sources added.

Turkey's Treasury and Finance Ministry and the country's banking watchdog did not respond to requests for comment.

The Turkish government rejected an earlier request by banks to use inflation accounting over concerns it would result in 2023 tax revenue losses of 70-80 billion lira.

Analysts forecast Turkish banks will pay more than 100 billion liras ($2.9 billion) in taxes for 2024.

Current inflation accounting rules require banks to pay taxes based on unadjusted, or nominal, profit, which means they will face the same high tax burden even as they distribute an inflation-adjusted smaller profit, one of the sources said.

The Treasury's thinking is not yet clear on the issue, the sources said, raising the possibility that it postpones inflation accounting for banks or makes no changes at all.

One source said bank shareholders pay tax on "artificial profits" in the absence of inflation accounting and that lenders wanted it to be included to reveal the "real picture".

The other said that economic conditions made it hard for the Treasury to waive the tax on banks' profit. As part of its drive to tame inflation, which was above 48% last month, the government is also looking to raise revenues.