Turkey enacts 7.5 percent digital service tax

By Ramazan Biçer, Partner, Centrum, Istanbul

Turkey has enacted its digital service tax, together with an accommodation tax, luxury residence tax and other important tax amendments under law No. 7194, published on the Official Gazette dated December 7.

To be subject to Turkey’s digital service tax, a company must have revenues in Turkey of 20 million TRY (approximately 3.125 million Euros) and have consolidated group revenue of 750 million Euros or more. Both conditions must simultaneously be satisfied for the digital service tax to apply.

The tax rate is 7.5% of the gross revenue from Turkish sales. However, the President is authorized to reduce this rate downward to 1% and to increase the rate of up to two times the applicable rate of 7.5%. These changes can be made for all services or to only certain service types.

The tax rate is 7.5% of the gross revenue from Turkish sales. However, the President is authorized to reduce this rate downward to 1% and to increase the rate of up to two times the applicable rate of 7.5%. These changes can be made for all services or to only certain service types.

Scope of Turkey’s digital service tax

Turkey’s digital service tax was introduced as part of the “Expenditure Taxes law” under the Turkish tax legislation. Income from only specified services provided to parties in Turkey will be subject to the digital service.

These services include online advertising services offered in the digital environment (including advertising controlling, and performance measurement services; services relating to the transmission and management of user data; technical services relating to the presentation of the advertisement), the sale of audio, video, or any digital content through the digital environment; or any services performed in the digital environment that enable such content to be listened, watched, or played in the digital environment or recorded or used in the electronic devices.

Also covered by the new tax is the provision and conducting services through the digital environment, allowing the users to interact with each other (including the services performed to allow or facilitate the sales of goods or services among the users) and intermediary services performed in the digital environment in relation to the aforementioned services.

Under the new law, there are also certain exemptions applicable to the services. These exemptions include services for which treasury shares are paid by mobile phone operators, services that are subject to special communication tax, services provided in the scope of banking law, the sale of products produced by a research and development activity in R&D centers, and services subject to the payment services and the Electronic Money Institutions Law.

Application of Turkey’s digital service tax

According to the new law, the digital service tax will be applicable as of 1 April 2020, and the tax period of the digital service tax will be monthly.

Taxpayers and those responsible for withholding digital service tax will declare and remit such taxes to the Turkish tax authorities on the last day of the following month. As a side note, the Ministry of Treasury and Finance is authorized to determine a quarterly taxation period instead of a one-month taxation period.

Turkey’s digital service tax will be declared to the tax office of the taxpayer that registered for VAT purposes, or it will be declared to a tax office to be determined by the Ministry of Treasury and Finance if no VAT registration was made in Turkey by the taxpayer.

The law also authorizes the Ministry of Treasury and Finance to determine the procedures of the digital service tax and I expect that Turkish tax authorities will clarify application procedures of the digital service tax with a general communique before the law becomes effective.

Impact on large multinationals

In my opinion, large multinationals will likely comply with the law as the law authorizes the Turkish Ministry of Treasury and Finance to warn companies that if they do not register for the digital service tax, the Ministry can request the Turkish Information Technologies and Communication Authority to ban the companies’ electronic activities.

There is a possibility that the Turkish President will use his authority to reduce the 7.5% tax rate to a lower rate. For this, a Presidential Decree is required, and it would likely be released before the law enters into force on the date of April 1, 2020.

It is clear that the digital service tax will apply to companies like Google, Facebook, Twitter, and Netflix as we considered the law’s thresholds. Some of these companies use Turkish subsidiaries whereas some do not.

If a service provider does not have a fixed place of business or permanent representative in Turkey, the digital service tax will be declared and paid by the parties who act as an intermediary for the service provider. Accordingly, the law may force these companies to establish a Turkish entity and there could also be other tax issues (e.g., transfer pricing issues) that should be considered.

Final evaluations

Currently, France, Hungary, and Turkey have implemented a digital service tax. A considerable number of other countries (the UK, Spain, Italy, Belgium, Austria, Czech Republic) may introduce a similar tax shortly. This again shows that there will be further unilateral action if no consensus is reached at the international level for the taxation of the digital economy.

I am of the opinion that Turkey will remove the digital service tax once consensus is reached among countries on the taxation of the digital economy through updated international tax and transfer pricing rules.

Turkey also introduced a 15% withholding tax only on cross-border online advertising services by a Presidential Decree in 2018. The tax covers online advertisement services and such services will be also subject to a 7.5% tax.  https://mnetax.com/turkey-issues-guidance-on-controversial-digital-tax-32638

This creates uncertainty for the respected companies, but I expect Turkish tax authorities will clarify how the digital service tax will be applied alongside the 15% withholding tax.

It is advisable that all digital service providers review their new obligations and take the necessary actions to continue to provide services in Turkey.