Presidential Decree No.2151 has been issued on February 25th, 2020, outlining changes to Article 13 of the Corporate Income Tax Law (the “CITL”) No. 5520 with the title “Disguised Profit Distribution Through Transfer Pricing”.
OECD’s Base Erosion and Profit Shifting Action Plan (“BEPS Action Plan”) documentation requirements are introduced with the new Decree.
Alongside new transfer pricing documentation requirements, certain revisions have been introduced to existing transfer pricing regulations including prolonging the effectiveness period of Advance Pricing Agreements (“APA”) to 5 years instead of 3.
New transfer pricing documentation requirements
BEPS Action 13 which outlines new documentation requirements that is a part of the BEPS Action Plan was formally introduced by the OECD on July 2013 and has been finalized in August 2015.
The recommended three-layered documentation model outlined in BEPS Action 13 is being integrated to the Turkish Transfer Pricing Regulations. Accordingly, Master File preparation, annual transfer pricing report preparation and CbCR filing, which is to be submitted electronically, are now applicable for entities operating in Turkey, along with notification submissions to the Tax Authorities.
- Master File: Master File should cover five main categories including; organizational structure of the multinational group, description of business activities, intangibles owned, inter-company financial transactions, the financial and tax positions of the group.
- Annual Transfer Pricing Report: This report has been required since 2007 per Turkish Transfer Pricing Regulations and no changes have been introduced after the issuance of the new Decree.
- Country-by-Country Report: CbCR is a report covering revenues, profit/loss before tax, income/corporate taxes paid, income/corporate taxes accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash and cash equivalents as per countries where the MNE group operates.
The Decree allows the Tax Authorities to regularly or separately demand additional information/documents other than Master File, CbCR and Annual Transfer Pricing Reports. All information/documents that will be submitted to Tax Authorities must be in Turkish.
An overview of Master File and CbCR requirements are listed below.
1.1 Master File
1.1.1 Who should prepare it?
The Turkish corporate taxpayers with at least TRY 500 million in both net sales and assets as per the previous accounting period are required to prepare a Master File.
1.1.2 When should it be prepared?
Master File must be prepared by the end of the following accounting period and must be submitted to the Tax Authorities upon request.
The first Master File will be required for FY2019 and must be prepared by the end of 2020, the latest. For taxpayers with special accounting period, Master File will be prepared for the accounting period starting after January 1st, 2019.
Effect on taxpayers: Turkish corporate taxpayers may be subject to additional documentation burden in case the Ultimate Parent Entity (“UPE”) is not required to prepare a Master File in the tax jurisdiction it resides in. Otherwise, Turkish translation of the existing Masterfile would be sufficient.
1.2 Country-by-Country Reporting (CbCR)
1.2.1 Who is required to prepare it?
- In cases where the UPE of a Multinational Enterprise group is a tax resident in Turkey;
- then the UPE is required to prepare a CbCR if their consolidated group revenue exceeds EUR 750 million.
- In cases where the MNE Group’s consolidated revenue exceeds EUR 750 million and the UPE of a MNE group or the Surrogate Parent Entity (in case it is a reporting entity) is not a tax resident in Turkey then the Turkish tax resident of the MNE should file a CbCR in Turkey, if at least one of the three conditions below is met. (in cases where there are multiple entities in Turkey, a single entity will file a CbCR on behalf of the others).
- The UPE or the Surrogate Parent Entity is not obligated to file a CbCR in its jurisdiction of tax residence; or
- The jurisdiction in which the UPE or the Surrogate Parent Entity is a resident for tax purposes has a current International Agreement to which Turkey is a party but does not have a Qualifying Competent Authority Agreement in effect to which Turkey is a party; or
- There has been a Systemic Failure of the information exchange mechanism.
In addition, in situations where consolidated financial statements are prepared in a currency other than the Euro, the EUR 750 million threshold should be determined with the average foreign exchange buying rate of Central Bank of the Republic of Turkey relating to the financial year prior to the reporting period.
1.2.2 When is it required to be submitted?
Submission is required to be done electronically within 12 months after the end of the reporting period. The first CbC report, for FY2019, has to be submitted to the Turkish Tax Authorities by December 31st,2020.
The UPEs that are using a special accounting period and are tax residents of Turkey will prepare their CbC report based on the accounting period starting on January 1st,2019 and will submit their report electronically within 12 months after the end of the reporting period. Additionally, the Decree authorizes the Tax Authorities to set the first reporting period to FY2020 and for special accounting periods starting after January 1st, 2020.
1.2.3 Notification requirement:
Turkish taxpayers that are part of an MNE group which meet the CbCR requirements will notify the Tax Authorities on behalf of the MNE group regarding which country the CbCR will be submitted in and by which entity.
Notifications for FY2019 will be submitted by the end of August 2020 whereas for the following periods, notifications will be submitted annually by the end of June of the relevant year.
Effect on taxpayers: Reporting is required for entities that have an UPE that is a corporate tax resident in Turkey who have realized a consolidated group revenue of EUR 750 million or more. Even if the UPE of the MNE group is not resident in Turkey, in cases where certain circumstances that were outlined above in section 1.2.1 are not met, the Turkish Taxpayer is required to submit the CbCR to the Tax Authorities. Lastly, Turkish taxpayers that are a part of a domestic or a foreign MNE group which meets the CbCR requirements are required to file a notification regarding CbCR filing.
2. Other Important Revisions
2.1 Revisions Related to Advance Pricing Agreements
The effectiveness of APAs has been extended to 5 years from 3 years. In addition, application timeframe for renewal requests regarding APAs are lowered to “at least 6 months before the end of the agreement” from “at least 9 months in advance”.
2.2 Disclosures on the Application of 50% Penalty Protection on Transfer Pricing Documentation
With the introduction of Law No. 6728 “Law Regarding the Amendment of Certain Laws Aiming the Improvement of the Investment Environment” penalty protection has been included to Article 13th of the Corporate Tax Law. In accordance with this addition, if the transfer pricing documentation requirements are fully met on time, the tax penalty for deficient or late accrued taxes due to disguised profit distribution will be discounted by 50%.
The implication of the phrase “fully met on time” has been clarified with the Decree. The Decree states that, ‘documentation requirements must be fully met on time’ would mean the documentation requirements included in the secondary legislation must be fully met in a timely manner and in compliance with the procedure applicable in the legislation in question.
The Decree also states that errors or shortcomings that do not affect the nature of documentation requirements will not constitute an impediment to the application of penalty protection, but if the Turkish Tax Authorities or those qualified to perform tax inspections establish that the documentation requirements are not fully met on time, then the tax residents cannot benefit from the penalty protection.
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