In this article, we explore the professionalisation of transfer pricing and tax collection in Turkey, and how specialist legal firms, such as NAZALI Attorney Partnership, are leading the way in helping companies manage these transitions.
Transfer pricing is one of the core topics of the OECD’s BEPS (Base Erosion and Profit Shifting) action plan of 2013. It is also becoming a much more important issue in Turkey. As a country aiming to become a member of the European Union and attract foreign investors’ attention, the Turkish Ministry of Finance is making efforts to align domestic policy and practice with the OECD’s requirements to eliminate inter-company profit distribution through transfer pricing, as much as it can.
In this article, we discuss new laws and policy on transfer pricing regulations in Turkey, and how practices are evolving in the Turkish context.
Transfer pricing In Turkey – how it works
Turkey’s transfer pricing rules are generally in line with OECD transfer pricing guidelines. Transfer pricing is the price set for the transfer of goods or services within related companies (for example multinationals) or departments within a company. Transfer pricing, in most international trading contexts, is governed by the ‘arms length principle.’ This principle states that transfer pricing should closely match the market price – the price that ordinarily governs two entities operating an ‘arms length’ (that is, unrelated). If any part of a company sought to lower or raise the transfer price, it would be viewed as adversely affecting the profits and performance of that part of the company.
In Turkey, transfer price is regulated through the Corporate Tax Law No. 5520, which came into force June 21, 2006, and the General Communiqué on Disguised Profit Distribution through Transfer Pricing (the “TP Communiqué”) effective as of November 18, 2007. Before Law no.5520, there was no regulation on disguised profit distribution or transfer pricing.
Under these new regulations, if a Turkish entity engages in the delivery of goods and services with its related parties at prices which they determine contrary to the arm’s length principle, then the profit arising from these transactions shall be considered to have been wholly or partially distributed in a disguised manner. Accordingly, the profit distributed in a disguised manner will be regarded as distributed dividend and for the non-resident entities, the amount transferred overseas (so dividend withholding tax applies to the amounts deemed to be transferred to abroad). This regulation, put simply, prevents the transfer of profit generated through overpriced transactions (sale/purchases) without taxation to any overseas body (especially foreign group companies).
Recent changes to transfer pricing in Turkey
The Turkish Grand National Assembly has recently legislated a new law, passed on August 8, 2016, entitled “Amendments to Certain Laws for the Purpose of Recovering Investment Environment,” which has significantly tightened up legal definitions of the Corporate Tax Law for the purpose of building a more trustworthy environment for investors.
For instance, before the Amendments, the concept of a ‘related party’ was interpreted very loosely by the Tax Authority, as it offered no minimum shareholding ratio. This meant that even .001% affiliate or a subsidiary of a company were deemed as related parties, and all transactions concluded with those had to be in accordance with the arm’s length principle. As such, the loose interpretation made business difficult for global investors with affiliates.
The Amendments state that there should be a minimum of 10% shareholding ratio (direct and indirect) limit to be deemed as a ‘related party.’ The transactions conducted with direct/indirect affiliates with less than a 10% ratio will not be challenged as disguised profit distribution anymore.
Further, the Corporate Tax Law and the TP Communiqué sets out the comparable price method, the cost-plus method and the resale price method for calculating prices/values to be applied to the transactions carried out with related parties. Although these methods are not limited by the Law or the TP Communiqué, they are the most common ones in practice.
The Amendments introduced another method entitled the ‘transactional profit method,’ which was already applied by Turkish entities (joint stock or limited liable companies) for their transactions concluded with their foreign parent companies or other affiliates through grounding on the net profit margin and profit split. Even though the Law and the TP Communiqué used the other methods as long as they were justifiable, the entities hesitated about the accuracy of using the profit margin/split method. This hesitation no longer exists.
Also, under the TP Communiqué, taxpayers have to keep all books, records, documents, and so on, as substantiating instruments related to calculations and the methods to prove that the transactions are conducted in line with the arm’s length principle. Not only that, all corporate taxpayers have to fill the form ‘The form Regarding Transfer Pricing, Controlled Foreign Entity and Thin Capital’ (or in the short version, ‘The Form’) for all their sale & purchase transactions conducted with related parties. They have to fill out this form within one fiscal year and submit it to the Tax Office with their corporate tax returns as an attachment.
The good news is that to motivate taxpayers to fulfil all mentioned requirements, the new Law provides a 50% discount on tax loss penalty imposed in the event taxpayers are accused of disguised profit distribution through transfer pricing. As long as taxpayers abide by transfer pricing documentation rules, they will be charged 50% less tax loss penalty when they do business contrary to the arms’ length principle.
The role of NAZALI in Turkish Tax Inspections
In the last ten years, the Turkish Tax Authority has inspected several companies’ (especially pharmaceutical companies) transactions over transfer pricing and have challenged the overpriced purchases made from group companies abroad. In some of these inspections, the Tax Authority could not manage to undertake a successful analysis of ‘comparable’ transactions and claimed that the purchases from abroad group companies were considerably higher than its precedents.
During the tax litigation process, the courts examined whether the tax authority carried out a proper inspection of the comparable companies and the reason for the high prices. The courts annulled the assessments/penalties where the Tax Authority did not make a proper inspection. Now, however, the transfer pricing documentation requirements and taxpayer’s declarations are expanding exponentially, so the Tax Authority has much more data to support its arguments for their upcoming inspections.
This is where the NAZALI Attorney Partnership can play an important role. NAZALI is an established Law Firm providing a wide range of Consultancy and Litigation Services to National and International clients. It specialises in Tax Law, Corporate Law (Company Tax-Free Restructurings), Social Security Law, White Collar Crimes and Customs Law. It employs staff with extensive knowledge and experience in commercial and fiscal law.
Working with independent experts, such as the NAZALI Attorney Partnership, greatly assists companies to collect data in the proper fashion, reducing or preventing risks to those companies. Within this scope, NAZALI supports its clients during the whole procedure by communicating with the tax inspectors and preparing the submission of testimonies to the minutes. Following the inspection, NAZALI represents its clients before the Commission of Report Evaluation, where the taxpayers are listened and prejudged, and also before tax courts if it gets to this stage.
At a time when governments are attempting to clean up, and the Tax Authority is getting organised, experienced law firms like NAZALI Attorney Partnership will be essential to negotiate the complexities of the new regulatory environment.
Nazali Attorney Partnership is Business Worldwide Magazine’s winner of the Global Corporate Excellence Awards in the categories of ‘Best Tax Firm, Turkey 2016’, &, ‘Best Transfer Pricing Firm Turkey 2016.
