Turkey issues guidance on controversial digital tax

By Ramazan Biçer, Centrum, Turkey

The Turkish government on 15 February published in the Official Gazette Communiqué No. 17 which provides further clarifications regarding withholding tax liabilities for cross-border online advertising services.

Turkey’s digital tax

Turkey has recently introduced a digital tax on cross-border online advertising services. Presidential Decree No. 476, published in the Official Gazette dated 19 December 2018, adds a withholding tax liability for payments made for cross-border online advertising services regardless of whether the payee is a resident or non-resident taxpayer.

It is clear that new digital tax is a unilateral action taken by Turkish government. Although Turkey is a G20/OECD country and a part of the OECD Inclusive Framework, it has not awaited the conclusion of ongoing work at the international level as observed in some other developing countries.

With the introduction of the new digital tax, Turkey is actually trying to tax economic activities in the digital economy as it observes tax losses in that economy.

This has been also observed in Turkey during recent tax audits of large multinationals such as Google, Apple, and Samsung. In that regard, the new regulation brings a withholding tax only on cross-border advertising services but does not cover other business activities in the digital economy.

Turkey’s new Communiqué No. 17

Newly released Communiqué No. 17 provides that the parties obliged to apply withholding tax on the payments for cross-border advertising services are those listed in Article 94 of the Individual Income Tax and Article 15 of Corporate Income Tax.

Others are not obliged to withhold tax even if they receive cross-border advertising services.

Under the new regulation, a 15% withholding tax must be applied to the payments made to non-resident online advertising service providers or intermediaries. The 15% withholding tax rate does not change if the payee is a resident or non-resident or if the payee is a taxpayer or not.

If payments are made to resident taxpayer intermediaries in Turkey, 0% withholding tax will be applied. If resident intermediaries make payments to resident taxpayer service providers in Turkey, again, 0% withholding tax will be applied.

However, a resident taxpayer intermediary (e.g., a Turkish advertising agency) is required to apply 15% withholding tax to the payments made to non-resident service providers (e.g., Google) regarding the provision of related services.

The 15% withholding tax will be applied to payments made to real persons regardless of whether the real person is a resident or non-resident taxpayer. This means that payments to be made to the individuals who are involving advertising activities (e.g. YouTubers) will be also subject to 15% withholding tax.

As previously mentioned, the Presidential Decree No. 476 entered into force on the date of its publication 19 December 2018  for payments made after 1 January 2019. In this sense, withholding tax must be applied to all payments including for services provided before 19 December 2018, but paid after January 1, 2019.

However, if cash payments and payments on account were made before 19 December 2018 to online advertising services providers and intermediaries, there will be no withholding tax even if the payments are made after 1 January 2019 related to aforementioned services.

In this sense, an example is provided in the Communique as follows:

A resident company, (Z) A.Ş., received online advertising services from a non-resident taxpayer, (B) Advertising Co. Ltd., in October 2018 and recorded the invoice issued by (B) Advertising Co. Ltd. in November 2018 in its legal books. Based on the agreement, (Z) A.Ş. will make the payment of the advertising service on 15 January 2019. In this case, it is not required to apply withholding tax by (Z) A.Ş. on the cash payment to be made on 15 January 2019 to (B) Advertising Co. Ltd.

Legality of Turkey’s new digital tax

For countries with which Turkey has no tax treaty, it is clear that Turkey has the right to apply withholding taxes on cross-border advertising services under the domestic legislation. Accordingly, there is no disagreement and 15% withholding tax will be applicable.

However, it is my opinion that new legislation is of questionable legality for non-resident taxpayers that do not have a fixed place of business or a permanent representative in Turkey, especially for those who reside in a country that Turkey signed a double tax treaty with.

Under the tax treaties between Turkey and other countries, non-resident taxpayers can only be taxed by Turkey if they obtained Turkey-sourced income through a fixed place of business or a permanent representative in Turkey. Also, Turkey’s tax treaties do not cover a definition for a virtual permanent establishment.

The communiqué does not mention tax treaties nor does it mention that there will be a tax refund if unfair taxation occurs and it is claimable by a non-resident taxpayer. On the contrary, the communiqué gives an example of cross-border advertising service provided by a resident of Ireland.  Ireland and Turkey have a tax treaty that is in effect.

The example shows that the new digital tax will apply to payments made to residents of treaty countries of Turkey even if it is highly controversial. Thus, it is important to note that non-resident taxpayers will be likely subject to withholding taxes in Turkey due to arguable new legislation.

There is ongoing work initiated by OECD on the taxation of the digital economy, including cross-border advertising services. As Turkey is a G20 and OECD country, Turkey may potentially amend its legislation if international consensus is reached on the taxation of the digital economy by 2020.

However, until an international consensus is reached, and as Turkey has adopted these rules into its domestic legislation, it seems 15% withholding tax on cross-border advertising services will unilaterally be applied by Turkey.

For that reason, I highly advise the respected non-resident taxpayers providing advertising services to consider the new regulation and take necessary actions in that sense. 

Ramazan Biçer

Ramazan is a partner leading international tax transfer pricing services at Centrum.

He has 11 years Turkish Tax Authorities experience as a senior tax advisor. In that experience, he took the role of leading transfer pricing teams and advising large taxpayers. Ramazan was involved in the drafting of the Turkish TP legislation.

He joined a Big 4 firm in 2013 and worked as senior manager for three years.

In his current role, Ramazan manages a wide range of international tax and transfer pricing projects and serves Turkish and foreign multinationals.

He has published many articles in the field of international tax and transfer pricing both in Turkish and internationally well-known publications.

Ramazan holds an Advanced LL.M. Degree in International Tax Law from Leiden University.

Ramazan Biçer

Phone : +90 (212) 267 21 00

Fax : +90 (212) 267 10 67

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