By Pinar Solyali, International Tax and Transfer Pricing Partner, and Serdar Aslan, Senior Transfer Pricing Consultant, NAZALI Tax & Legal, Istanbul
In accordance with the Turkish government’s objective of prioritizing economic growth and international collaboration, Turkish transfer pricing legislation and its practice have been in line with OECD rules in adapting dynamic transfer pricing practices since it entered into force. Accordingly, the Turkish legislative body has been able to implement the three-tiered transfer pricing documentation approach during recent years.
Turkish transfer pricing methodology in force is regulated under Article 13 of the Corporate Tax Law No. 5520 along with the transfer pricing communiqué entitled “General Communiqué on Disguised Profit Distribution through Transfer Pricing Serial No. 1” (Communiqué No. 1). The latter entered into force in 2007, one year after the enactment of Corporate Income Tax Law No. 5520. Article 13 provides a detailed definition of a related party, which is very broad, by covering direct or indirect involvement in the management or control in addition to the formal relationship status through shareholding or ownership. Furthermore, it sets out the transfer pricing methods to be applied in the determination of the arm’s length price. In this context, the arm’s length principle, which requires the transfer prices for the purchase and sale of goods or services to be set as they would have been conducted between unrelated parties, was fully incorporated into the legislation.
As a more recent change, Communiqué No. 1 was amended by the General Communiqué on Disguised Profit Distribution through Transfer Pricing Serial No. 4 (Communiqué No. 4) on September 1, 2020, to explain the master file, local file, and country-by-country report and notification format in detail. It is understood that applications in terms of documentation format and standardized electronic format for the exchange of country-by-country reports between jurisdictions will be based on the OECD model.
Current applications in Turkey require a number of obligations that MNEs should pay attention to, namely:
The master file should be prepared by the corporate taxpayers affiliated with an MNE group, whose asset size on the balance sheet and net sales on the income statement for the previous accounting period are both 500 million Turkish lira and above. The master file provides broad information about an MNE group’s organizational structure, definition of operations, intellectual property, intercompany transactions, and financial and tax status.
The local file should be prepared by the corporate taxpayers who have sold and purchased goods or services to or from their related parties residing abroad. The deadline to prepare such a file is the date of the corporate income tax return submission, i.e. the end of April. If the corporate taxpayer is registered in the large taxpayers office, transactions with related parties residing in Turkey should also be documented in the annual transfer pricing report in addition to the transactions that occurred with foreign-related parties. The local file provides detailed information on the functions, risks, and assets owned by the parties in the related party transactions and an economic analysis to show that the transfer prices the taxpayers applied are aligned with the prices applied in the comparable uncontrolled transactions.
The country-by-country report should be digitally prepared and submitted by the ultimate parent entity or the proxy entity of the MNE group whose revenue exceeds EUR 750 million, according to consolidated financial statements of the previous fiscal year. The country-by-country report should be prepared in the .xml format to be able to declare it through the Turkish Revenue Administration’s BTRANS system. Additionally, a member of the in-scope MNE group should notify the Turkish tax authorities by the deadline to state whether they are the ultimate parent entity or the proxy entity, which entity will submit the country-by-country report, and provide information regarding the fiscal year in question. The deadline for the notification is at the end of the June in the year following the end of the previous fiscal year.
The Appendix 3 form of the annual corporate income tax return contains information on the parties and the amount of the related-party transaction as well as the transfer pricing methods used to determine the arm’s length price.
Advantages of proper documentation
It should be noted that all documentation requirements must be fulfilled in the Turkish language and standard documentation may not automatically guarantee absolution from transfer pricing adjustment risks. In 2022, a special irregularity fine will continue to be applied according to the tax procedure law, if the transfer pricing documentation is prepared in a way that contains incomplete or misleading information or is not submitted within the given period. Provided that the documentation obligations are duly and timely fulfilled, the tax loss penalty will be applied with a 50% discount in a possible tax investigation. That is why robust transfer pricing documentation with the proper format is deemed as a significant tool during a possible transfer pricing audit.
Current developments
Advance pricing agreements
An advance pricing agreement (APA) option provides an alternative solution to the corporate taxpayers who are not willing to encounter any future tax disputes related to transfer pricing. Before the recent changes, the process of evaluating an APA application could take at least two to three years, depending on whether the agreement was unilateral, bilateral or multilateral and the degree of the associated transaction’s complexity. According to the Communiqué No. 3 amendment published in 2017, unilateral agreement applications should be finalized within nine months, and applications for bilateral or multilateral agreements should be concluded within eighteen months. Furthermore, the possibility of applying the APA to the past periods has been brought into the legislation if the terms of the agreement are also valid for the relevant periods.
In line with the amendments under Communiqué No. 4 published in 2020, the validity of the agreements was extended from three to five years. In addition, regarding the request for renewal of the APA, the application period of the taxpayer to the administration—which was previously determined as nine months before the end of the agreement—has been redetermined to be six months before the end of the agreement.
Country-by-country reports
Turkey is one of the 92 countries that are signatories of the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (MCAA), since December 30, 2019. As a result of Article 8 of the MCAA, Turkey must provide information to 64 jurisdictions, as well as receive information from 55 jurisdictions, as of March 2022, according to official OECD data. In this context, the arrangement between the competent authority of the United States of America and the competent authority of the Republic of Turkey on the exchange of the country-by-country report was activated on November 24, 2021 and approved by a presidential decree on February 14, 2022. In 2022, the Turkish government continues to negotiate agreements with other jurisdictions for the exchange of country-by-country reports.
Mutual agreement procedure in Turkish legislation
The first legal regulation on the mutual agreement procedure (MAP) process was made in Turkey on October 26, 2021, although the revenue administration published the MAP guidance in October 2019. In this context, a new section entitled “MAP” was added to the tax procedure law, aiming to improve tax dispute resolution mechanisms. The latest regulation defines application procedures and the effects of the application on the periods for filing lawsuits in detail to clarify uncertainties regarding MAP. It is aimed to create awareness for this rarely used dispute resolution mechanism to incentivize taxpayers to use it as a tool (instead of filing a lawsuit) and to ensure that this procedure is used effectively.
Taxpayers may apply to the Turkish tax authorities in accordance with the MAP provisions of their country’s duly enacted income tax treaty and claim that they are taxed—or are concerned they will be taxed—in violation of it. Subject to the income tax treaty’s provisions, this application may also be made through the competent authorities of the other contracting state that is a party to the agreement.
According to the new regulation, the MAP application must be made in accordance with the method and time specified in the relevant income tax treaty. If there is no time specified, the MAP application must be made within three years to the Turkish Revenue Administration starting from the date of the tax assessment notification, the date of accrual (in case a reservation is made on the declaration), and the date of withholding, as far as withholding taxes are concerned. The MAP application also suspends the time limits for filing a lawsuit.
Concluding remarks
According to the OECD’s latest statistics, the total number of open MAP cases (transfer pricing only) is approximately 3,500 and only 11 of them are connected to applications made in Turkey. As can also be seen from the numbers, this practice has not yet become widespread.
Currently, Turkey has not achieved the desired level of efficiency in the MAP and APA processes. Although major updates have been made to the transfer pricing applications to ensure full effectiveness (such as the three-tiered transfer pricing documentation approach), it is not possible to state that significant progress has been made regarding all of the BEPS Action Plans.
In the upcoming period, the Turkish government’s main transfer pricing goals are expected to be making APA and MAP applications more widespread and developing transfer pricing legislation and practice to be in parallel with the BEPS Action Plans—particularly regarding hard-to-value intangibles, DEMPE, financial transactions, and the use of the profit split method, etc.
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Pinar Solyali is an international tax and transfer pricing partner and Serdar Aslan is a senior transfer pricing consultant at NAZALI Tax & Legal, Istanbul.
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