Turkey amends transfer pricing legislation

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1 19 August 2016 Global Tax Alert News from Transfer Pricing Turkey amends transfer pricing legislation EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 9 August 2016, Turkey s Law on the Amendment of Certain Laws for the Improvement of the Investment Landscape (no. 6728), 1 was published in the Official Gazette. Law no amended certain transfer pricing provisions. The transfer pricing amendments are related to recent developments regarding the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project as well as the need for new regulations. In this framework, Turkey s current transfer pricing legislation 2 has been revised and new regulations have been issued and in some cases, implemented. This Alert summarizes the key changes. Detailed discussion Related party definition Law no has amended sub-article two of article 13 of Law no to include the following provision: In order to treat the cases where the relation is created through direct or indirect shareholding as disguised profit distribution, there must be at least 10% shareholding, voting or dividend rights. In cases where there is at least 10%

2 2 Global Tax Alert Transfer Pricing voting or dividend rights directly or indirectly without any shareholding relation, parties shall still be treated as related parties. These ratios shall be considered as a whole for related parties. In the past, the definition of related party in such a comprehensive manner (without a threshold) under the Law and related Communiqués had created disputes between the Tax Authority and taxpayers. The scope of related party has been redefined with this amendment so as to eliminate the issues encountered in practice and to ensure compliance with international transfer pricing practices. Accordingly, in cases where the relation is established via direct or indirect shareholding, at least 10% shareholding, voting or dividend rights will be required to refer to any disguised profit distribution. In addition, if the voting or dividend right is directly or indirectly above 10% without any shareholding relation present, the parties will still be treated as related parties. On the other hand, regardless of whether there is any shareholding relation or shareholding ratio, the parties which the companies are directly or indirectly affiliated to or under the control of in terms of management, audit or capital will continue to be treated as related parties. The purchases or sales of goods or services with these parties will continue to be deemed as disguised profit distribution through transfer pricing. Transfer pricing methods As per sub-article four of article 13 of Law no. 5520, taxpayers could determine the prices or values in their related party transactions by using the method most appropriate to the nature of the transaction from the following methods: (i) Comparable Uncontrolled Price (CUP) Method, (ii) Cost Plus Method, or (iii) Resale Price Method. If the arm s length price could not be calculated by use of one of these methods, taxpayers could use the method they prefer, provided that it was appropriate to the nature of transactions. It was stated that the traditional methods had priority over the Transactional Profit Methods listed in the Communiqué. Under the amendment, the Transactional Profit Methods (Transactional Net Margin Method and Profit Split Method) have also been included in the Law and the Law sets forth how these methods will be applied. Therefore, the elimination of the hierarchy between transactional profit methods and the traditional methods in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Authorities for 2010 has been adopted into the Turkish local legislation. Roll-back for Advance Pricing Agreements With respect to Advance Pricing Agreements (APAs), it has been uncertain as to the actions that would be applied for previous periods outside the scope of the agreement. Although taxpayers with an APA have determined their transfer pricing methods prospectively by agreeing with the Ministry of Finance thereby eliminating the risk in this way, they would still be subject to the tax risks relating to previous periods when the method in question was not applied. The following provisions have been added to sub-article five of article 13 of Law no. 5520: The Taxpayer and Ministry can ensure the application of the designated method to previous taxation periods that have not lapsed by including the periods in the scope of the agreement provided that it is possible to apply the penalty and correction provisions of Tax Procedures Law and the conditions of the agreement are also effective in those periods. In this case, the agreement shall substitute the petition on notification mentioned in the relevant provisions, and declaration and payment transactions shall be consummated accordingly. The taxes paid previously shall not be rejected and refunded due to the application of the agreement to previous taxation periods. This amendment has allowed the application of the method determined under the agreement to be applied to the taxation periods that have not lapsed in the case of agreement between the taxpayer and Ministry of Finance. Therefore, taxpayers have been allowed to retroactively apply the relevant APA (roll-back) and hence eliminate tax risks provided they retroactively pay the tax principal and interest charge. The Council of Ministers has been authorized to increase the current three-year term for APAs up to five years. Penalty protection As per Law no. 6728, if taxpayers timely and fully meet their transfer pricing documentation requirements, the tax loss penalty shall be applied with a 50% discount for taxes which were not accrued on time or were accrued deficiently due to a disguised profit distribution.

3 Global Tax Alert Transfer Pricing 3 Therefore, the significance of transfer pricing documentation has been highlighted once again, and taxpayers who fully and timely meet their transfer pricing requirements will receive 50% tax penalty protection. Value Added Tax (VAT) adjustment As per article 11/1-c of the Corporate Tax Law, profits distributed in a disguised manner through transfer pricing may not be deducted in the determination of the corporate tax base. According to article 30/d of the VAT law, the VAT paid due to non-deductible expenses in the determination of profit under Income and Corporate Income Tax Laws also may not be deducted. As per section 6 titled VAT Paid Due to Non-Deductible Expenses in the Determination of Profit Under Income and Corporate Income Tax Laws in the VAT Circular no. 57, promulgated on 23 June 2010 providing explanations on non-deductible VAT, profits distributed in a disguised manner through transfer pricing may not be deducted during the determination of corporate profit, and the VAT paid due to such expenses may not be deducted either. The same provision was maintained in Circular 60 promulgated on 8 August This regulation in the circulars has become one of the major disputes between taxpayers and the Tax Authority recently, and each adjustment made for transfer pricing purposes has also been subjected to a VAT assessment. However, given the procedures of the VAT Law, it is observed that the VAT deduction is the general rule, while the exceptions to this rule are listed in article 30 of the VAT Law. Accordingly, as per article 30/d of the Law, it is not possible to deduct the VAT paid due to the non-deductible expenses in the determination of profit under Income and Corporate Income Tax Law. The regulation in article 30/d of VAT Law is an extension of the general rule adopted in article 40/1 of Income Tax Law, and the purpose of the regulation is to avoid the deduction of the taxes incurred for expenses that are not essentially related to the business or enterprise and are therefore deemed as private or end consumption from the added value generated in the enterprise. Considering all these matters, the following phrase has been added to clause (d) of article 30 of VAT Law by article 44 of Law no. 6728: Except for the value added tax paid on importation or through the reverse charge mechanism for the differences generated contrary to the enterprise under clause (5) of subarticle one of article 41 of Income Tax Law and the profits distributed in a disguised manner through transfer pricing under article 13 of Law no Therefore, the purpose here is to end the longtime dispute and to prevent each tax assessment made for transfer pricing purposes from also having an implication in terms of indirect taxes. Endnotes 1. It has been promulgated in the Official Gazette dated 15 July 2016, and provisions of article 59 of Law have become effective on the date of promulgation. 2. See EY Global Tax Alert, Turkish Revenue Administration implements new transfer pricing documentation approach including CbC reporting, dated 23 March 2016.

4 4 Global Tax Alert Transfer Pricing For additional information with respect to this Alert, please contact the following: Kuzey Yeminli Mali Müşavirlik A.Ş., Transfer Pricing Services, Istanbul Alper Yılmaz Serdar Sumay

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