Turkey proposes 7.5 percent digital services tax on large multinationals

By Ramazan Biçer, Partner, Centrum, Istanbul

Turkey’s Ministry of Treasury and Finance on 23 October released a draft law introducing a digital services tax, sending it to the Turkish Parliament for ratification.

Turkey’s digital services tax is highly similar to the European Commission’s digital tax proposal. It would be applicable to companies with revenues in Turkey of 2 million TRY (Approximately 3.125 million euros) and with 750 million euros or more in consolidated group revenue.

The rate of digital services tax is proposed as 7.5% of gross revenue from Turkey sales – much higher than the proposed tax rate in many other countries. For example, the tax rate is 3% in France and 2% in the UK. Hungary has also proposed a digital services tax with a rate of 7.5%.

Importantly, the draft law provides that the Turkish Ministry of Treasury and Finance will warn companies and their representatives that if they do not register for the digital services tax, the ministry will request the Turkish Information Technologies and Communication Authority ban the electronic activities of the respective companies.

Note also that this new proposed tax would be in addition to a digital tax that Turkey already imposed on cross-border online advertising services by a Presidential Decree. The tax on advertising services tax, enacted by Presidential Decree in December 2018, is discussed in my earlier MNE Tax article. It brought a withholding tax liability for payments made for cross-border online advertising services regardless of whether the payee is a taxpayer.

Turkey’s digital services tax – the details

Turkey’s latest action against digital companies is still a draft law, and I expect changes (e.g., the tax rate) during the ratification process at the Turkish Parliament.

Based on the draft law, income from following services provided to parties in Turkey would be subject to digital service tax:

• Online advertising services (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,
• 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),
• Intermediary services performed in the digital environment in relation to the aforementioned services.

Taxpayers subject to the digital service tax can be Turkish resident or non-resident taxpayers providing digital goods and services. The draft law also mentions that the residency of the taxpayer is not relevant to the liability for digital services tax.

Accordingly, whether a taxpayer is a resident or non-resident taxpayer, or carries out business activities in Turkey through a permanent establishment or representative is irrelevant. 

Also, the Turkish Ministry of Treasury and Finance is authorized to hold responsible the parties involved in transactions with such parties to secure the taxes in the cases where the taxpayer has no residency, workplace, or legal or business center in Turkey.

The following services are specifically exempt from the digital service tax: services subject to Treasury share payment; services subject to the Special Communication Tax; services provided under the banking law; sales of content and services developed in the R&D centers in Turkey; and services provided under the Law on Digital Payment and Electronic Money Institutions.

The tax period of the digital services tax will be monthly. Taxpayers and those responsible for withholding digital services tax will declare and remit such taxes to the Turkish tax authorities on the last day of the following month.

The digital services tax will be declared to the tax office of the taxpayer that registered for VAT purposes whereas it will be declared to tax office to be determined by the Ministry of Treasury and Finance in the case no VAT registration was made in Turkey by the respected taxpayer.

Is digital services tax covered by Turkish tax treaties?

Digital services tax is proposed as part of the “Expenditure Taxes Law” under the Turkish tax legislation. At first, it seems it is not an income tax and thus is not covered by Turkish tax treaties. This is also observed in many other countries where digital services tax is generally categorized as an expenditure tax. I believe this is because countries envisage potential international tax controversies if they define it as an income tax which is mostly covered by tax treaties.

Even though the draft law states that revenues derived from the respective services will be subject to digital services tax, it is my opinion that this is not certain and might be also categorized as an income tax. For that reason, I believe that resident countries of digital economy companies could raise objections to such taxes similar to what recently occurred between France and the US.

That means such taxes as in many countries have potential risks for cross-border tax controversies under the current international tax law. This may also arise between Turkey and its contracting states if it introduces a digital services tax.

Double taxation risk for cross-border online advertising services

As discussed above, Turkey introduced a digital 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 (if no change is made at the Parliament). This tax is a corporate withholding tax obligation whereas the digital services tax is regulated as part of expenditure taxes under the Turkish tax legislation.

An important question is whether these two taxes are simultaneously applicable for cross-border online advertising services. If so, there would be significant taxation of the same income for non-resident multinationals that do not have a presence in Turkey.

That means that 15% withholding tax will be initially applied by responsible parties in Turkey to payments for cross-border online advertising services and such services providers will have to pay 7.5% digital services tax, as well.

It is clear that the provision of music, video, games, and other digital content; social media services; and any other digital intermediary services are not within the scope of the 15% withholding tax but are only subject to digital services tax. However, when I evaluate both regulations, I do not see any exemption for cross-border online advertising services provided by non-resident companies.

In my opinion, only the 7.5% digital services tax should be applied to cross-border online advertising services provided by non-resident taxpayers because Turkish tax treaties do not allow Turkey to tax such Turkey sourced income. Thus, a 15% withholding tax should not be simultaneously applied alongside the digital services tax.

Nevertheless, the proposed law silent on such situations and, for that reason, there is a potential double taxation risk for multinationals that are not resident taxpayers in Turkey that provide cross-border online advertising services to Turkey-based customers.

Evaluation and recommendations

This is a unilateral action taken by Turkey for taxation of digital economy companies. In the preamble of the draft law, it is explained that there has been no international consensus on the taxation of companies active in the digital economy yet and certain countries have already taken unilateral actions. It is also expressed that Turkey considered other countries’ practices on the taxation of the digital economy.

As far as I can determine, no company headquartered in Turkey will be within the scope of the new digital services tax. Accordingly, only large foreign multinationals providing digital services will be subject to digital services tax. As discussed, there is potential double taxation risk for multinationals that are not resident taxpayers in Turkey because the 15% withholding tax and 7.5% digital services tax could be simultaneously be applied under two different tax laws.

Nevertheless, the Ministry of Treasury and Finance is authorized to determine the procedures of a digital services tax and I expect that Turkish tax authorities will clarify how to apply both laws to prevent double taxation risk on the same advertising services income derived from Turkey.

On the other hand, the digital services tax, if passed by the Turkish Parliament, will be applicable for the companies with Turkey revenues of 20 million TRY (Approx. 3.125 million euros) and 750 million euro consolidated group revenues before international consensus is achieved in 2020.

Although it will be likely applicable on the first day of the third month following the release date of the law in the official gazette, Turkey may revise its tax legislation if an international consensus is achieved in 2020, based on the OECD’s ongoing work.

Consequently, I highly advise multinationals to monitor tax developments in Turkey as it is expected that draft legislation will be enacted by the Turkish Parliament before the end of this year.