Reproduced with permission from BNAI European TaxService Monthly Digest, 18 ETS 13, 11/30/16. Copyright �2016 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

NOVEMBER 2016

RevolutionaryAmendments in theTransfer PricingWorld of Turkey afterBEPSAbdulkadir KahramanKPMG Turkey

This article discusses recent transfer pricing amendments made inTurkish tax laws pertaining to ‘‘disguised income distributionachieved by transfer pricing.’’

I. Introduction

The amendments passed by the Turkish Grand

National Assembly on July 15, 2016 (‘‘Law No.

6728’’) emerged through ‘‘the Law number

6728 on Making Amendments in Certain Laws with

the Purpose of Improving the Investment Environ-

ment.’’ The Law was published in the Official Gazette

(No. 29796) on August 9, 2016. When the reasoning of

the Law is examined, it is seen that the legal arrange-

ment has as its aim to enhance the applicability and

effectiveness of the 10th Development Plan.

II. Have ‘‘Revolutionary Amendments’’ Been Made?

A. Value Added Tax Law

The following parenthetical provision ‘‘pertaining to

differences that occur against business in connection

with corrections made due to transfer pricing’’ has

been inserted in Article 30, which arranges the provi-

sions pertaining to ‘‘VAT not to be made subject of re-

duction’’ of the VAT Law. With this amendment,

reduction has been allowed from output VAT sums

calculated with transactions subject to VAT of taxpay-

ers of input VAT sums paid by VAT taxpayer busi-

nesses during imports or as reverse charge with

regards to non-deductible expenses pursuant to trans-

fer pricing provisions. In other words, pursuant to

both Income Tax Law as well as Corporate Tax Law

provisions, the correction of the part that is made the

subject of ‘‘reduction of value added tax sums with re-

gards to non-deductible expenses paid by VAT tax-

payer businesses during imports or as reverse charge

with regards to non-deductible expenses’’ has been

averted.

Prior to the Law No. 6728, the communique con-

taining statements regarding; ‘‘Refund of Excess Tax

Paid’’ of VAT General Application Communique Serial

No. 1 and VAT General Application Communique

Serial No 6, published in the Official Gazette (No.

297186, May 21, 2016) were amended. In case the dis-

guised income distribution by transfer pricing is in

question with the subject matter amendment, then

‘‘fined VAT assessments due to any correction made in

reduction accounts with regards to these taxes paid as

over or undue tax during imports’’ has been removed.

In a similar manner the practice in question also

Abdulkadir Kahra-man is Partner andHead of Tax atKPMG Turkey

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covers taxes paid declared as associated reverse

charge VAT with regards to ‘‘services procured from

overseas’’ (including intangible right payments).

Law No. 6728 has reinforced the arrangement made

by the Communique in question by making it more

legal with the amendment in the VAT Law.

B. Corporate Tax Law

Law No. 6728 and Article 13 of Corporate Tax Law re-

garding ‘‘disguised income distribution by way of

transfer pricing’’, important amendments have been

made ‘‘in order to eliminate issues encountered in

practice and with the aim of harmonization with in-

ternational arrangement and practices pertaining to

transfer pricing’’ as follows:

s Definition of associated person to be restricted by arate of 10 percent: Associated person transactionshave been made conditional on partnership orprofit share of a minimum rate of 10 percent beingpresent. In case voting or profit share right is eitherdirectly or indirectly above this rate, even thoughthere may not be a partnership relation, the factthat transactions executed shall be related with re-spect to parties has been clarified. Even if there isno partnership relationship, grant of control in themanagement shall be deemed to fall within thescope of related transaction. These ratios shall betaken into consideration from the perspective of‘‘associated persons.’’ Moreover, partnership in theratio of 10 percent or more shall be taken into con-sideration in related transactions with the amend-ment. Thus, it can be said that taxpayers are moreat ease in the subject of reporting.

s Update regarding TP methods to be used: The Ar-ticle, which entered into effect in 2007 with the Cor-porate Tax Law No. 5520, was drafted based onOECD Transfer Pricing Guideline. As the Guidelinein question was updated in 2010, harmonizationhas been ensured in the lifting-off of hierarchy inmethods to be used in related transactions with theaim of achieving harmony with the said update. Assuch, taxpayers shall be able to determine a methodin transfer pricing from among transactional profitmethods and conventional methods regardless ofany hierarchy.

s The legal amendment passed is stating the obvious.This is due to the fact that in the preamble of the ar-ticle that entered into effect in 2007, as it was alsoaccepted that it had been drafted based on theTransfer Pricing Guideline of OECD, the practicehas only been clarified with the amendment made.

s The application of the Agreement to the past: Incase ‘‘advance pricing agreement’’ (‘‘APA’’) isachieved, the application of the Agreement to thepast is found in tax regulations with regards to tax-payers executing APA with revenue office in order torealize the transactions they would execute with as-sociated persons in a secure manner and to preventpossible tax disputes in the implementation oftransfer pricing. One of the reasons why APA appli-cations are few in number in Turkey, is that tax shel-ter was not extended to taxation periods that havenot lapsed in the method agreed upon in case of an

agreement. With the amendment made in para-graph 5 of Article 13 of the Corporate Tax Law, it isensured that applying the method in the agreementto the taxation periods that have not lapsed is madepossible. According to the application in question,the agreement signed within the framework of‘‘rated tax and amendment of pleading provisions’’in Article 371 of Tax Procedure Law shall be con-strued as ‘‘automatic notification of the revenueoffice’’ and no ‘‘loss of tax fine’’ shall be imposed.However, a sum at the rate of late fee and tax calcu-lated according to the method in the agreementshall be paid.

s Reduced fine practice to those who comply withcertification liabilities regarding transfer pricing:The loss of tax fine applicable to the taxes that ‘‘havenot been accrued on time’’ or ‘‘under-assessed’’ dueto the distribution of concealed earnings regardingthe taxpayers that perform their documentation ob-ligations without any deficiencies and on time, shallbe implemented at a 50 percent discounted rate. Al-though the subject matter application is favorable,we are of the opinion that it would be more appro-priate for this arrangement to be made in the TaxProcedure Law instead of the Corporate Tax LawNo. 5520 ‘‘in terms of the law making technique.’’

s Authorizing of the Cabinet of Ministers in TransferPricing practice: As the pre-amendment state of theparagraph in question is taken into consideration,the power of the Cabinet of Ministers has beenelaborated upon. Elaborating upon the amendmentin question is rather important from the aspect of‘‘legality and predictability of the tax.’’

s Broad authorities have been given to the Cabinet ofMinisters with the amendment made due to domes-tic and international developments. These are re-spectively: ‘‘reducing the associated person rate to 1percent, increasing it to 25 percent, removing thecondition of a rate’’, ‘‘increasing the 3-year advancepricing agreement terms up to 5 years,’’ ‘‘determin-ing the documentation obligations and their scope,’’‘‘requiring that information on the activities of theassociated persons abroad is included in line withthe international treaties,’’ and ‘‘determining theprocedures for mutual sharing of information onactivities of associated persons with other countrieswithin the framework of the international treaties.’’

Our comment from the aspect of ‘‘Responsible Tax’’

with regard to this arrangement that we found favor-

able, would be to point out that the authority of the

Cabinet of Ministers to remove the ‘‘required rate’’ per-

taining to the associated persons as indicated in Ar-

ticle 13, paragraph 2 of Corporate Tax Law is

contradictory to the ‘‘legality of taxation principle.’’

s Authorization of the Cabinet of Ministers and com-pliance with BEPS: The arrangement made has ac-complished the necessary changes in the ‘‘locallegislation infrastructure’’ for purposes of puttinginto action the Action Plan 13 related to the reviewof the transfer pricing documentation in the BaseErosion and Profit Shifting (‘‘BEPS’’) project ofOECD, in Turkey. Following this, we are expectingthe issuance of Transfer Pricing communique onMarch 16, 2016 by the Revenue Office that will beshared with the public. In addition to the Commu-

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nique, a Cabinet Decree may also be issued with re-gards to BEPS Action Plan 13. By means of theresolution of the Cabinet of Ministers and the Com-munique issued, it would be possible to achieve‘‘country by country reporting,’’ ‘‘master file,’’ ‘‘localfile’’ reporting and ‘‘local level documentation obli-gation and scope determination’’ capability.

The inclusion of the arrangements made within the

scope of BEPS in the local legislation by Turkey is

quite significant and it is our opinion that this is es-

sential for the reporting of the Turkish multinational

companies with subsidiaries abroad.

III. Are the Amendments Applicable to PreviousDisputes?

The answer to this question is ‘‘yes’’ for the VAT Law.The reason being, the amendment regarding the‘‘return of taxes paid excessively or unnecessarily’’ asper VAT General Application Communique No. 6 andthe amendment of Law No. 6728 are announcementsof this fact and set the best examples of the ‘‘predict-ability’’ principle that the Constitutional Court hasbased its decisions in recent periods. This is why tax-payers should consult with their attorneys whethersuch change should be included in the case files withthe additional petition they will prepare for ongoingtax disputes.

On the other hand, we are of the opinion that

amendments pertaining to the Corporate Tax Law

(such as partnership at the rate of 10 percent) are not

applicable to past disputes. As amendments made in

the Corporate Tax Law entered into effect as of August

9, 2016, which was the publication date of the Law,

they may be applied to transactions executed after the

aforementioned date.

This amendment is a praiseworthy arrangement in

the name of ‘‘Responsible Tax Approach.’’ These ar-

rangements are of a revolutionary nature, and thanks

to this an important step has been taken in the subject

of forming an environment in which: ‘‘predictability

in taxation is enhanced and harmonization costs are

reduced.’’

IV. Will the Reporting within the Scope of BEPScover 2016?

The publishing of the resolution of the Cabinet andthe Communique has become possible in the after-math of the changes made regarding the ‘‘legal infra-structure’’ pertaining to the implementation of theAction Plan 13 for transfer pricing documentation asindicated in the BEPS project. Therefore, although weexpect the subject matter arrangement to be appli-cable in 2016, it would not be possible to give a defini-tive answer prior to the publication of thearrangement as indicated herein.

Abdulkadir Kahraman is Partner and Head of Tax at KPMGTurkey.

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