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- The regulations under Article 13 follow the arm’s-length principle, established by the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), and are applicable to all financial, economic, commercial transactions and employment relations between related parties. Details on the application of Article 13 are provided in a communiqué regarding disguised profit distribution through transfer pricing.
- The Turkish TP legislation is part of the Turkish CITL. The arm’s-length principle, which is defined in line with OECD Guidelines and Article 9 of the OECD Model Tax Convention, is enacted in Article 13 of the CITL along with a detailed definition of related parties, as well as the introduction of methods to be applied in the determination of the arm’s-length price. According to the law, related parties must set the transfer prices for the purchase and sales of goods and services as they would have been agreed between unrelated parties.
- Annual Transfer Pricing Report (Local File) must be submitted to Tax authorities within 15 days upon request.
- The OECD’s Master File and Local File concept is being implemented together with Turkish Tax Procedural Law in Turkey. Taxpayers who have both net sales amount in the income statement and size of assets in the balance sheet equal to or over 500 million TRY, have to prepare a General Report. Country by Country Report is prepared by the Turkish resident ultimate parent company of the Multi-National Enterprise group (on behalf of others if there is more than one business in Turkey) which has a total of consolidated group revenues of 750 million euros or more.
- With the Presidential Decision, No. 2151, published on February 25, 2020, Turkey is going to comply with the transfer pricing reporting standards arranged in the action plan no. 13 of OECD’s Tax Base Erosion and Profit Transfer (BEPS).
- Although OECD guidance base is applied in local transfer pricing reports in general, local TP legislation base must be taken into consideration. Especially in some key topics Turkish Revenue Administration has different perspective then OECD guidance. For this reason, it is extremely important to revise TP reports which will be prepared according to OECD guidance.
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- General Report/Master File: It is a report that covers global information about the Multi-National Enterprises (MNEs) group including specific information such as intangible rights, commercial activities, intra-group financial transactions, financial and tax status.
- Annual Transfer Pricing Report/Local File: A report containing detailed information about within-group transactions made with the resident company in Turkey.
- Country by Country Report: It is a report that includes the income, pre-tax profit/loss, paid/accrued income / corporate tax, capital and various commercial activity criteria related to each country in which the group operates.
- All information including functions performed, risks undertaken and assets used, related information on the description of the taxpayer's activities, organizational structure (center, branch) and partners, brief information about the capital structure, its sector, its economic and legal history, the definition of the related persons (tax identification numbers, addresses, telephone numbers, etc.) and property relations between them, general information about product price-lists for the year of the transaction, all examples of contracts made with the relevant persons during the year of the transaction, summary financial statements of related persons, information on the ownership of the intangible assets and the royalties received or paid, information and documents regarding the reason and application of the transfer pricing method used (internal and/or external precedents, comparability analysis) and more detailed information should be presented if requested.
- Any documentation must be prepared in Turkish.
- Especially in some key topics Turkish Revenue Administration has different perspective then OECD guidance. For this reason, it is extremely important to revise TP reports which will be prepared according to OECD guidance.
- Corporate Income Taxpayers residing in Turkey, who are under the scope of Multi-National Enterprises and who have both net sales amount in the income statement and size of assets in the balance sheet equal to or over 500 million TRY, have to prepare a General Report to submit to the Financial Administration for the accounting periods starting from the fiscal period of 2019 and for the accounting periods afterwards. The General Report should be prepared by the end of the accounting period following the relevant accounting period. For example, businesses following the calendar year are required to prepare the first General Report for the fiscal year 2021 until December 31, 2022. After the preparation period has ended, it is obligatory to submit the General Report to the Financial Administration or to those authorized to conduct tax examinations.
- The legislation requires documentation as part of the transfer pricing rules wherein Turkish taxpayers should keep documented evidence within the company in case of any request by the tax authorities. The documentation must represent how the arm’s length price has been determined and the methodology that has been selected and applied through the use of any fiscal records and calculations, and charts available at the taxpayer.
- The annual transfer pricing report should be prepared until the filing of the corporate tax return (until the end of April of the following year for annual accounting periods). After this period expires, it is obligatory to submit to the Financial Administration or to those authorized to conduct tax examinations, if requested within 15 days.
- Corporate income taxpayers that are operating in free trade zones (FTZ) in Turkey, taxpayers who have related party transactions with related parties abroad (not taxpayers in Turkey), and taxpayers who are affiliated with the İstanbul Büyük Mükellefler Tax Office are required to prepare a local transfer pricing documentation report with respect to their transactions with their related parties in Turkey (i.e., domestic related party transactions and international related party transactions).
- Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.
- Market risk refers to the potential of profits to fall if demand for its products or services declines. The change in demand may be due to many factors, such as increased competition in the marketplace, a downturn in the economy, or derivation of income from a limited number of customers’ accounts, products, markets, delivery channels, or salespeople.
- Research and development risk is the possibility that future revenues and profitability may fail to increase in response to a current investment in research or product development. This may be due to an inability to develop products within a specified timeframe, to the necessary quality standards, or in line with targeted cost structures.
- Inventory risk relates to the possibility that some event such as price change, product defect, market change, or product obsolescence will cause the value of a company’s currently held inventory to fall. This can negatively affect both the profitability and the balance sheet of the company.
- Foreign exchange risk is related to the possibility that fluctuations in foreign exchange rates affect an enterprise’s results when its transactions are in currencies that are different from the one ordinarily used.
- Benchmarking risk is the possibility to not find relevant databases from Turkish companies. Very few of the companies established in Turkey are obliged to disclose their financial data to the public. Therefore, it is very difficult to find the peers of the researched company in Turkey. Besides, it is easy for the tax inspectors of the Ministry of Finance to provide this with the power in their own hands.
Failure to submit the annual transfer pricing report to the tax office and / or if it is not submitted to those authorized to tax inspection, if requested, it will result in a special irregularity penalty.
However, the failure to fulfill the certification obligation has another and important consequence. As per paragraph (8) of Article 13 of the Corporate Tax Law No.5520, provided that the documentation obligations regarding transfer pricing are fulfilled fully and on time, the tax loss penalty for taxes that have not been accrued on time or incompletely accrued due to disguised earnings is applied with a 50% discount, except in the event that the acts written in article 359 of the Law cause tax loss.
Within the scope of this provision, if the annual transfer pricing report is not prepared on time and / or cannot be submitted to the tax office or those authorized to tax inspection on time, in a possible assessment related to disguised profit distribution through transfer pricing, the taxpayer's right to deduct 50% for the tax loss penalty is in question.
The following general penalty provisions in the Turkish Tax Procedures Code apply:
Tax loss penalty of 100% of the additional tax assessment; and
Monthly delay interest rate, applied on the additional tax assessment for the period between the normal due date of the additional tax assessed and the date of assessment.
However, a taxpayer may get partial penalty protection and be able to deduct 50% of the tax loss penalty amount imposed as a result of a transfer pricing adjustment, as long as all transfer pricing documentation obligations are prepared fully and on a timely basis. The latter condition is deemed to have been satisfied when all of the following five documentation obligations are met fully and on a timely basis, as required by the relevant legislation:
Annual transfer pricing documentation report;
Country-by country report;
Country-by-country report notification form; and
Form in the Corporate Income Tax Return regarding Transfer Pricing, Controlled Foreign Corporation and Thin Capitalization.
A minimum of TRY 30,000 also has been introduced as from 1 September 2020 when preparing the “Form relating to Transfer Pricing, Controlled Foreign Corporation and Thin Capitalisation,” which is to be attached to the annual corporate income tax return. If the amounts of annual net sales or purchases of goods or services with a related party are lower than TRY 30,000, it is no longer necessary to declare the amounts of the related party transactions and the name of the related party on the form.
- Taxpayers may use both internal and external comparables. However, available local data in Turkey is limited because only publicly held companies are obliged to declare their financial data. Turkish transfer pricing legislation neither provides a clear guidance on benchmarking studies nor prohibits the use of databases. Therefore, it might be inferred that foreign comparables should be acceptable, provided that differences in geographic markets (if any) can be eliminated through appropriate adjustments and/or analyses. Besides, comparable company sets should be updated on an annual basis according to the most recently available data.
An important point to be considered for Turkish taxpayers regarding the use of ‘publicly available comparable data’ for the purpose of benchmarking (which is an OECD principle) is when determining transfer-pricing-related assessments Turkish tax auditors would highly tend to use their own ‘secret comparables’ to which only they have access, by virtue of their public authority. Turkish taxpayers are advised to be ready to challenge this approach, which is contrary to the relevant OECD principles.
To achieve the arm’s length price or cost, firstly an internal precedent should be used (if there is any) and in cases where such prices or costs do not exist to be used in this manner or in case these are not reliable, then the external precedent should be taken as the basis in the comparison.
The application of this principle depends on the comparability of the transactions between the related persons and the transactions between unrelated persons. While doing a comparability analysis, if there are differences caused by the characteristics of the products or services, terms of the agreement, functions carried out by related and unrelated persons and the risks they have undertaken, the market structure where the transactions take place and the economic conditions in the market, the business strategies of the establishments and the value of non-material assets, then these differences should be corrected.
- Methods to be used in determining the price regarding purchases or sales of goods or services with related parties may be agreed with the Ministry of Finance upon taxpayer’s request. This approved method will be certain for a maximum period of three years within the terms and conditions of the agreement. If the administration identifies that the demand for the agreement interests more than one country and if there are already APAs considering the other county/countries, the administration may consider the possibility of a bilateral or multilateral agreement.
- Advance Pricing Agreement ('APA') mechanism, which is regulated under Article 13(5) of Corporate Tax Law No.5520, has been in force since 2008. Turkish Revenue Administration of Ministry of Finance ('TRA') is authorized for the execution of APA process.
- An APA provides certainty both for the taxpayer and the TRA in relation to the transfer pricing method and the transfer price (i.e. profit margin, royalty rate, interest rate, etc.) within the duration of the agreement. Thus, any corporate tax assessment related to the agreed method and the price would be prevented as long as the taxpayer follows the agreement conditions.
- In view of practices throughout the world, it is observed that APA process changes according to complexity level and type (unilateral, bilateral or multilateral) of the agreement and completion of the process cannot be completed earlier than 18 to 24 months in average.
- In October 2019, MAP guidelines were issued by the TRA. However, based on recent changes, the rules regarding implementation of MAP have been further clarified and explained through new addendum articles 14-18 added to the Turkish Tax Procedures Code. These rules apply as from 1 January 2022.
- According to new addendum article 14 of the Turkish Tax Procedures Code, a MAP application can be filed within the period specified in the relevant provisions of the tax treaty. In case there is no MAP application period specified in the relevant tax treaty or the tax treaty refers to local legislation, the MAP application must be filed within three years from the date the taxpayer is informed about the tax assessment that is deemed to be against the provisions of the tax treaty, i.e., from the date the taxpayer is officially notified in writing by the TRA as a result of a tax audit, or from the date tax is accrued on a tax return declared by the taxpayer with reservation.
- Applying for/requesting the MAP does not suspend the collection of taxes or penalties. In case there is a MAP application after a court procedure starts, the court must first wait for the MAP to be finalized. If the MAP takes longer than expected, the court process also will take longer than expected compared to a case where there was no MAP application. If the taxpayer applied for a settlement, the date of settlement also will be delayed until the MAP is finalized. However, if the taxpayer requests the MAP and then decides to settle without waiting for the MAP to be finalized, then the taxpayer will be deemed to have given up the MAP application and, if the taxpayer enters into the settlement and agrees with the amount to be settled, then the taxpayer will not be able to subsequently apply for the MAP again.
- The taxpayer may apply to the Compenent Authority within the period indicated in response to question, from the date the taxpayer is informed in writing about the tax assessment (e.g., as a result of a tax audit), or from the date the tax considered to be unfair is accrued on a tax return declared by the taxpayer with reservation. The taxpayer may, in principle, go to the component authority after being officially notified in writing by the TRA of the amount of a proposed adjustment, before paying the tax. However, it should be noted that a MAP application does not suspend the collection of taxes and penalties accrued (based on new addendum article 18 of the Turkish Tax Procedures Code).
- On 5 December 2019, the Turkish Parliament enacted Law no.7194 which provides for a Digital Services Tax (DST). This law was published in the Official Gazette on 7 December 2019 and the DST will enter into force as of 1 March 2020.
- The DST is levied at a rate of 7.5% on in-scope revenues generated in Turkey by the provision of certain digital services. It applies only to companies with global, in-scope revenues of at least €750 million and generating revenues of at least 20 million Turkish Lira (approximately $3.3 million) in Turkey from in-scope services.
- The scope of the Turkish DST is very broad, and includes the following revenues generated from the following categories of services in Turkey:
- All types of digital advertising services, including services such as advertisement control and performance measurement services, services relating to data transmission and user management (i.e., the sale of user data), and technical services relating to the display of advertisements
- The sale of audio, visual or digital content in digital format, as well as services provided in digital format for listening, viewing, playing or recording digital content or using such content in digital format (including computer programs, applications, music, video, games and in-game applications, among others)
- Digital intermediary activities that allow users to interact with other users, include digital intermediary activities that can facilitate the sale of goods and services between users
- Intermediary services provided in a digital environment for the above categories of services.
- The base of the DST is the gross revenue generated during a taxation period. If the revenue is denominated in a foreign currency, it must be converted to Turkish lira. No deduction can be made from the tax base.
- Taxpayers and those responsible for tax declarations must submit a Digital Services Tax return to the relevant tax office by the end of the month following the taxation period and pay the tax within the taxation period. In case of noncompliance, there will be a tax loss penalty in addition to the DST that is equal to the amount of DST. In other words, the tax loss penalty is applied at a rate of 100% of the DST in accordance with the Turkish Tax Procedure Law. Additionally, there will be a 1.6% late interest payment per month.
- In addition to monetary penalties, in case of failure of the digital service providers or their Turkish representatives to submit the tax return and to make a timely payment, access to the digital services provided by such digital service providers may be blocked until these obligations are fulfilled.