COUNSIL OF MINISTER DESICION ABOUT DISGUISED PROFIT DISTRIBUTION VIA TRANSFER PRICING. SECTION ONE CONTENT, OBJECTIVE and DEFINITIONS

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1 6 December 2007 Official Gazette Official Gazette No : Decree No : 2007/12888 COUNSIL OF MINISTER DESICION ABOUT DISGUISED PROFIT DISTRIBUTION VIA TRANSFER PRICING SECTION ONE CONTENT, OBJECTIVE and DEFINITIONS Content Article 1- (1) With this decision in which resident and non resident corporations or persons in Turkey are in the scope, the methods related with the application of disguised profit distribution via transfer pricing defined in article 13 of the Corporate Tax Law numbered 5520 have been arranged. Objective Article 2- (1) The objective of this regulation is to provide corporations and real persons who deal with good or service transactions with related party to declare their incomes exact and accurate and to prevent tax base corrosion via transfer pricing. Definition Article 3- (1) Main definitions included in this regulation are as below. a) Transfer Pricing: Represents the price or amount at which goods or services are transferred between related parties. b) Related Party: According to Corporate Tax Law; Companies own shareholders, individuals or companies which are related with companies or its shareholders, individuals or shareholders that the companies are directly or indirectly dependent or that are controlled by companies, via management, auditing/supervision or capital, spouses of shareholders, lineal ancestors of shareholders and relatives( including third degree).according to Income Tax Law; spouses of the shareholders of the enterprises, lineal ancestors of shareholders and relatives (including third degree) and individuals or shareholders that the companies are directly or indirectly dependent or that are controlled by companies, via management, auditing/supervision or capital are considered as related party. Both for income tax or corporate taxpayers, all transactions carried out with the persons resident in the countries or the regions which are announced as causing unfair tax competition by the Council of Ministers treated as the transaction carried out with the related persons. c) Arms Length Principle: Setting prices or amounts for purchase or sale of the goods or services between the related parties as the prices or amounts would be charged for the same transactions carried out with unrelated parties. ç) Traditional Transaction Methods: Includes Comparable Uncontrolled Price Method, Cost Plus Method and Resale Price Method. d) Transactional Profit Methods: Includes Profit Split Method and Transactional Net Margin Method e) Advance Pricing Arrangement: An arrangement made with Ministry of Finance, Revenue Administration on demand of the taxpayer (hereinafter called as administration ) is called Advance Pricing Arrangement. With this agreement an appropriate method for the transfer prices related with transactions made with related parties are determined with the negotiation of the tax payer and the tax administration. Advance Pricing Arrangement explains determination of the transfer pricing for transactions with related parties with an agreement made between taxpayer and administration over a fixed period of time. The method determined between administration and the taxpayer becomes definite within the conditions and period determined under the agreement with no more than three years. f) Controlled Transaction: Transactions made between related parties. g) Uncontrolled Transaction: Transactions made between unrelated parties. ğ) Internal Comparable: Price or amount for the transactions made between the taxpayer and an independent party. h) External Comparable: Price or amount for the comparable transactions made between independent parties. ı) Comparability Analysis: Means comparability of the controlled transactions and the uncontrolled transactions. Comparison is accepted as comparable if none of the differences between the situations being compared could materially affect the condition or reasonably accurate adjustments can be made to eliminate the effect of any such differences. i) Functional Analysis: Refers to analysis based on functions performed, assets and risks assumed determine whether controlled and uncontrolled transactions are comparable j) Transactional Adjustments: Refers to adjustments made in case material differences are detected between controlled and uncontrolled transaction and these differences materially affect the accuracy of comparability. k) Documentation: All the records and documents kept by the taxpayer to prove that Arm s Length Principle is taken into account in all stages of transfer pricing.

2 SECTION TWO ARM S LENGTH PRINCIPLE The Objective of Arm s Length Principle Article 4- (1) The main objective of Arm s Length Principle is to equalize price or amounts for the purchase or the sale of the goods or services between the related persons as the prices or amounts would be charged for the same transactions carried out with unrelated parties. Comparability Analysis Article 5- (1) Comparability Analysis is based on the comparison of the conditions of controlled transactions and uncontrolled transactions. For this reason, comparability means that the differences between the situations being compared should not materially affect the condition or reasonably accurate adjustments can be made to eliminate the effect of any such differences. (2) Main elements for the comparability analysis are as follow: a) Characteristics of property or services. b) Functional Analysis c) Economic Circumstances ç) Business Strategies. Arm s Length Range Article 6- (1) The most reliable consequence in the aspect of arm s length principle is there will be one price or cost at the end of comparison. However, as a result of comparisons and applied methods, it can be determined price or cost range included more than one result which are close to each other, instead of single price or cost. (2) Arm s length range is a set of price consist of variable arm s length prices by applying the single method to different comparable uncontrolled transactions or different methods to the same data. SECTION THREE METHODS AT TRANSFER PRICING Objectives Expected From Methods Article 7- (1) Taxpayers have to show that the prices or cost imposed in the goods or services purchase or sale between related parties are consistent with the arm's length principle by applying the best method taking into account the facts and circumstances of the case. Comparable Uncontrolled Price (CUP) Method Article 8- (1) This transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. Cost Plus Method Article 9- (1) This method express estimation of the arm s length price by adding appropriate gross profit margin on the cost of property transferred or services provided by related party. (2) Gross profit margin is estimated as below: Sales - Cost = Gross profit margin Cost (3) The appropriate gross profit margin of the supplier in the controlled transaction should ideally be established by reference to the gross profit margin that the same supplier earns in comparable uncontrolled transactions. If appropriate gross profit margin does not exist or transaction count is not sufficient for comparison, the gross profit margin occurred from comparable transaction of an independent enterprise can be used in the circumstance of none differences between the transactions being compared or between the enterprises undertaking those transactions materially affect the gross profit margin in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. Resale Price Method

3 Article 10- (1) Resale price method express estimation of the arm s length price by reducing the appropriate gross profit from the price determined by reselling the goods or services to an independent enterprise. (2) This estimation will be made by using below formula: Resale Price = Arm s length price or cost 1 + Gross Profit Margin (3)Appropriate gross profit refers to the profit amount required by transactions taking into account undertaken risks and used assets with sales and other operational expenses while reselling these goods and services. Other Methods Article 11- (1) If there is no possibility of achieving arm s length price by using traditional transaction methods, taxpayers can use the other methods determined by themselves taking into account the facts and circumstances of the case. Nevertheless, in case transactional profit methods named other methods does not allow determining price or cost consistently with arm s length principle, taxpayers can also use any other methods determined by themselves and believed it gives more accurate consequences. Identifying this method of which procedures to be determined by taxpayers according to the arm s length principle is an obligation. Profit split method Article 12- (1) It is a method based on splitting total operational profits or losses acquired from one or more controlled transactions among related parties consistent with arm s length principle in relative to functional analysis. Transactional net margin method Article 13- (1) It is a method that based on comparison of net margin of a controlled transaction with an uncontrolled comparable transaction by using an indicator (e.g. costs, sales, assets). SECTION FOUR ADVANCE PRICING ARRANGEMENTS (APA) The Objective of APA Article 14- (1) The main objective of APA is preventing likely tax disputes related to transfer pricing which taxpayers faced during goods or services purchase or sale with related parties. The Scope of APA Article 15- (1) The scope of the APA rules is all corporate taxpayers. Taxpayers subject to the jurisdiction of the tax administration s large corporation tax office (known in English, as VIP tax-office taxpayers ) can apply to the tax administration beginning 1 January 2008 for APA guidance; other corporate taxpayers can apply to the tax administration beginning 1 January 2009 with respect to the appropriate method determined relative to a controlled international transaction. APA Process Article 16- (1) The process of APA starts with a written application of taxpayer to the administration. Taxpayer should also submit the administration minimum information and documentation mentioned in article 17th of this decision with this written application. (2) Pre-evaluation: Application are subject to a pre-evaluation with submitted information and documentation by the administration.

4 (3) Analysis: After required data is completed, selection and evaluation of comparable transactions, used assets, other corrections, practical methods, conditions of arrangement and other main terms will be done. (4) Acceptation or rejection of arrangements: After the analysis, the administration may accept the application of taxpayer exactly or accept with the condition of the required changes made or reject the application. In case the administration accepts the application, advance pricing arrangements are signed between taxpayer and tax administration. (5) The duration of APA is maximum three years period and begins by the date APA is signed. (6) In every stage of advance pricing arrangements procedure, mutual negotiations made between the taxpayer and the administration in order to exchange information and share their point of view. The APA is peculiar to the tax-payer and only related with this taxpayer s transactions. Therefore, it is impossible for the other tax-payers to take this arrangement as an example and submit as evidence. (7) The administration follows up the accordance of taxpayer with arrangements conditions and/or continuance of conditions validity by annual reports issued by taxpayer during the period mentioned at the arrangements. It is compulsory to submit the mentioned report to the administration every year during the period of the APA before the corporate tax return declaration date (8) Renewal of the Arrangements: The tax-payer could demand the renewal of APA. In that case, the tax-payer should apply to the administration 9 months before the end of APA. The tax payer should submit the necessary information and documents stating that the transactions covered in the APA are in line with the Arms Length Principle. On the other hand, if there is a change in the conditions and assumptions of the existing APA and if there is a need for amendment after the renewal, the taxpayer is responsible to state these issues at the application to the Administration (9) After the evaluation of the application for renewal, if the administration decides upon that the conditions and assumptions stated in the existing APA is still continuing and the determined method fulfills the Arms Length Principle, administration could accept the continuation of the former APA for one more period. On the contrary, if the Administration decides upon that the conditions and assumptions have changed and there is a need for the determination of a new method, the tax-payer should apply for a new APA (10) Revision of the Arrangement: An existing APA between the Administration and the tax-payer is revised under the circumstances listed below: a) If a critical assumption which took place in the APA is unrealized. b) Occurrence of a material change in the arrangement conditions and discontinuance in the validity of the conditions stated in the APA c) Changes in laws and regulations, including Double Taxation Avoidance Treaties, which will affect the APA ç) In bilateral or multilateral APAs, the revision, abolition or cancellation of these arrangements by the administrations of other countries. (11) The tax-payer can apply to the Administration for the revision of the APA. In the mentioned application, the tax-payer should submit the necessary information and documents including the reason of the request for revision. In case the Administration accepts the revision of the APA, new conditions will be effective from the date of the revision till the end of the existing arrangement period. If the Administration does not accept the revision, the existing APA will continue the same. The tax-payer can demand the cancellation of the arrangement by claiming the reasons above. In that case, the Administration may cancel the APA. (12) The conditions for the revision of an APA can be determined by the Administration. If the parties agree upon the revision of the APA, new conditions will be effective from the date of the revision till the end of the existing arrangement period. If the tax-payer does not accept the revision of the arrangement, the administration may cancel the APA unilaterally. (13) In the case of cancellation of an arrangement, the provisions of the APA will not be effective from the date of the cancellation decision. (14) Cancellation of the Arrangement: The Administration can cancel an existing Advance Pricing Arrangement unilaterally and the provisions of the APA will not be effective from the signing date and it can induce the tax payer to the tax scrutiny by regarding as the arrangement was never signed a) If the tax payer does not obey the conditions mentioned in the Advance Pricing Arrangements, b) If the information and documents provided by the taxpayer during the application and subsequent periods (including annual reports) are determined as missing, wrong or misleading, (15) In addition, if the annual report which must be sent to the Administration every year before the corporate tax return declaration date is not presented on time; existing arrangement can be cancelled from the start of the related fiscal year in which the report is prepared.

5 SECTION FIVE DOCUMENTATION OF ADVANCE PRICING ARRANGEMENTS Article 17- (1) The basic information and documents that should be presented to the administration by taxpayers who make application are as follows: a) Written application (the requested period of arrangement; names, Republic of Turkey ID numbers, addresses and telephone numbers of taxpayers or their representatives who will involve to arrangement process, taxpayers line of business, structure of organization (headquarter and branches), shareholders, capital structure, sector, summaries of economic and legal background, definitions of related parties and ownership relations of related parties should be stated in written application) b) All information related to the functions, risks of corporation and assets that are used, c) Documents and reasons related to critical assumptions (suggested transfer pricing method and explanations, analysis and other works based on the choice and application of this method) ç) The information related to intangible property ownership and payments of royalty or intangible rights d) If the related parties use different accounting standards and methods, the information related to these standards and methods e) The price list at the fiscal period which involves application date, f) The cost of production at the fiscal period which involves application date, g) The inter company pricing policy applied to transactions between related parties, ğ) The information about the volumes of controlled and uncontrolled transactions at the fiscal period which involves transaction date and invoices, bank slips and similar documents h) Related parties financial statements related to the last three years, copies of Income or Corporate tax returns and copies of agreements about foreign transactions, ı) The financial data and documents of last three years supporting the suggested transfer pricing method, i) In case that there are two or more comparable transactions, the arm's length range and the method used in the determination of that range, j) Other documents that is required to determine the arm s length price. (2) The Administration may ask for additional information and documentation from the taxpayer if it is considered necessary. If the related information and documents are written in a foreign language, it is compulsory to present Turkish translation of that information and documents. SECTION FIVE DOCUMENTATION OF TRANSFER PRICING Objective Article 18- (1) The objective of documentation is to understand the transfer pricing process and show the details of calculations. Therefore, it is compulsory to prepare and present documents and information in order to show that transactions made by the tax payers satisfy the arm s length principle. In addition, it is compulsory to present that documents in case that there is an inquiry by the administration or tax scrutiny authorities Annual Documentation Article 19- (1) VIP tax-office taxpayers have to prepare annual transfer pricing report that includes information and documents that are stated below related to their domestic and international transactions with related parties in a fiscal year until the end of the corporate tax declaration period and present it to the Tax Office or to the tax scrutiny authorities if it is requested. Corporate taxpayers other than those registered with the VIP tax office only need to prepare an annual report related to their international transactions with related parties. (2) Corporate taxpayers other than those registered with the VIP tax office are not required to prepare a transfer pricing

6 report for their domestic transactions with related parties and Income taxpayers are not required to prepare a transfer pricing report for their domestic and international transactions with related parties but must prepare information and documents which are stated below for these controlled transactions. Information and documents: a) Summary information about description of the activities, form of the organization (headquarter and branches), shareholders, form of capital, sector, economic, legal background of the tax-payer and description of the related parties ( tax ID number, address and telephone numbers etc.) and information about ownership relations between these parties, b) All information related to the functions, risks and assets that are used, c) The price list at the year transaction occurred, ç) The cost of production at the year transaction occurred, d) Information about the volumes of controlled and uncontrolled transactions at the fiscal period which involves transaction date and invoices, bank slips and similar documents e) The copies of agreements issued between related parties at the fiscal period of transaction, f) Summaries of financial statements of related parties, g) The inter company pricing policy applied to transactions between related parties, ğ) If the related parties use different accounting standards and methods, the information related to these standards and methods, h)the information related to intangible property ownership and payments of intangible rights, ı) Information and documents (internal and/or external benchmarks, comparability analysis) related to choice and application of transfer pricing method used, i) Detailed information related to calculation and assumptions to determine arms length price or profit margin, j) If arm's length range is determined, the method used in the determination of that range, k) Other documents that is required to determine the arm s length price, (3) The Administration may ask for additional information and documentation from the taxpayer if it is considered necessary. If the related information and documents are written in a foreign language, it is compulsory to present Turkish translation of that information and documents SECTION SIX EFFECTIVENESS AND EXECUTION Effectiveness Article 20- This ruling will be enacted on date of publication with effect from Execution Article 21- The Ministry of Finance executes the provisions of this ruling