Thursday, 24 November 2016

Recent Changes to Turkey’s Transfer Pricing Landscape

A number of significant changes to Article 13 of the Turkish Corporate Tax Law governing “disguised profit distributions through transfer pricing” entered into effect on August 9, 2016. The multifaceted changes will have important consequences for the Turkish transfer pricing landscape. The most important aspects of the changes introduced are summarized below.

Related-party threshold
According to the changes introduced, for a related-party relationship to arise through direct or indirect ownership, there must be at least 10 percent ownership, voting rights, or dividend rights for a consideration of disguised income distribution. The Council of Ministers is authorized to modify this requirement and set the threshold at any point from 1 percent to 25 percent, or to completely remove this condition in the future.

Explicit recognition of transactional profit methods
Transactional profit methods (transactional net margin method and profits split) were already in use in Turkish transfer pricing practice per guidance provided by General Communiqué No:1 on transfer pricing. With the most recent changes introduced, the use of such methods, in addition to transactional methods, is explicitly added to Article 13 of the Corporate Tax Law governing “disguised profit distribution through transfer pricing.”

Advance pricing agreements (APAs)
The transfer pricing method determined under the original APA may be applied to prior open fiscal years, or roll backed, provided the regret filing clauses of the tax procedural law are applicable to the case, and that the conditions under which the APA was signed are also applicable to the prior years. In addition, the Council of Ministers is authorized to modify the term limit for APAs from three years to five years in the future. The current term limit is three years under existing regulations.

(Partial) penalty protection
Provided that transfer pricing documentation requirements are met in full and on time, the penalty on underpaid or late paid tax due to disguised profit distributions will be subject to a 50 percent reduction, except in cases when the underpayment arises from acts described in Article 359 of the tax procedural law (pertaining to tax evasion provisions).

Procedures for mutual exchange of Information
With the recent changes in effect from August 9, the authority of the Council of Ministers has been expanded.

Accordingly, the Council of Ministers has been authorized to include the obligation to provide information about the operations of cross-border related parties outside Turkey within the scope of transfer pricing documentation obligations, and determine the procedures for mutual exchange of such information with the tax administrations of other countries in accordance with international agreements.

Source: Deloitte