Since its launch in 2015, the Turkish Tax Authority has taken several steps to implement the regulations of the OECD’s BEPS Action Plan in Turkey (to avoid Base Erosion and Profit Shifting). In our article we summarize the current and recently introduced legislation with respect to domestic implementation.
Legislation of taxation of the digital economy
As the implementation of Action 1 of the BEPS Action Plan in Turkey (Addressing the Tax Challenges of the Digital Economy) and in accordance with the country’s VAT legislation enacted in September 2016, the services provided by means of digital economy are included in service transactions which are subject to the VAT withholding mechanism in order to keep track of transactions carried out on the Internet. Non-resident businesses providing services to non-taxpayer real persons in Turkey by means of digital economy were made responsible for declaration and payment of the VAT stemming from electronically provided services through VAT Return No. 3 in January 2018. Furthermore, in January 2019, cross-border online advertising services became subject to 15% and 0% withholding tax under certain conditions.
Controlled Foreign Corporation rules
As the implementation of Action 3 of the BEPS Action Plan in Turkey, Turkish resident companies and real persons who have invested in foreign subsidiaries might be subject to CIT in accordance with the Controlled Foreign Corporation (CFC) regime, as stated in Article 7 CIT Law.
In connection to Action 4, companies’ interest deductions had been restricted in Turkey in 2013 under certain conditions, in order to encourage companies to choose equity financing over debt financing in case of financial need. However, the regulation has not yet come into effect since it remains to be confirmed by the Council of Ministers.
Current transfer pricing regulations set out by CIT Law regulate the preparation of annual TP reports and the submission of annual TP forms. In addition, a draft CIT General Communiqué, regulating mandatory three-tier documentation – Master File, Local File and CbCR – was published in March 2016. This Communiqué also includes several amendments and definitions of new concepts in order to harmonise transfer pricing rules with the guidelines related to Actions 8–10 of the BEPS Action Plan in Turkey. However, the draft Communiqué still awaits approval and is thus not yet effective.
Law no. 6728 entered into force in Turkey in December 2017, making the APA mechanism more attractive. It also made several major amendments to Turkish TP regulations, such as introducing new TP methods, amending the “related party” definition, reducing the tax penalty for taxpayers under certain conditions, and enabling retroactive application of APA etc.
The Multilateral Instrument (MLI), which came into force in March 2018, was signed by Turkey in June 2017. Turkey has reservations with regard to Articles 4, 5, 6, 8, 9, 10, 11 and 14 of MLI. The MLI is not effective in Turkey since the process of approval by the local executive authority is not yet complete. Approval of Turkey’s signing of the MCAA was given in November 2017, and Turkey then passed a law ratifying the Convention on Mutual Administrative Assistance in Tax Matters, effective as of July 2018. A draft Communiqué regarding CRS was also prepared in 2018. Furthermore, Turkey signed a bilateral automatic exchange of information agreement on the financial accounts with Latvia and Norway; this entered into force as of December 2018. However, the MCAA regarding CbC Reports is as yet unsigned, since CbC Reporting is not yet mandatory.
If you would like to know more about the current status of the implementation of the BEPS Action Plan in Turkey, please visit the homepage of WTS Turkey!