According to Article 13 of the Corporate Tax Law, if the corporations purchase or sell goods or services at the cost or price they have determined with related parties in violation of the arm’s length principle, the earning will be deemed to be distributed in whole or in part through transfer pricing implicitly.
Buying or selling goods or services refers to the transactions of buying, selling, manufacturing and construction, leasing and renting, borrowing and giving money, and other transactions that require bonuses, fees and similar payments.
- Related person concept and arm’s length principle
Related person refers to the real person or corporation to which the corporations or their partners are related, and the real person or corporation to which they are directly or indirectly affiliated or under their influence in terms of administration, control or capital. The spouses of the partners, the descendants and descendants of the partners or their spouses, and the third-degree minor relatives and in-law relatives are also considered related persons. The spouses of the partners, lineal kinship of the partners or their spouses, third-degree relatives and collateral relatives are also considered related persons.
Whether the tax system of the country where the income is obtained provides a taxation opportunity at the same level as the taxation capacity created by the Turkish tax system and considering the information exchange or not, all transactions made with persons in the countries or regions declared by the Council of Ministers will be deemed to have been made with related persons.
The arm’s length principle means that the price or cost applied in the purchase or sale of goods or services with related parties is in accordance with the price or cost that would occur in the absence of such a relationship.
It is obligatory to keep the records, tables and documents of the calculations regarding the price or prices determined in accordance with the arm’s length principle as proof papers.
- The methods to be applied in determining the arm’s length price or cost
Corporations will determine the price or cost to be applied in transactions with related parties by using the most appropriate method for the nature of the transaction among the following methods.
1) Comparable price method: means the determination of the arm’s length sale price to be applied by a taxpayer by comparing it with the market price to be applied by real or legal persons who purchase or sell comparable goods or services and are not related in any way.
In order for this method to be applied, the transaction with related parties must be comparable to the transactions made by persons who are not related to each other. The concept of comparable quality means that the goods or services subject to the transaction and the conditions of the transaction are similar both in transactions between related parties and between persons who are not related.
2) Cost-plus method: refers to the calculation of the arm’s length price by increasing the costs of related goods and services by a reasonable gross profit rate.
The appropriate gross profit rate refers to the profit rate reflecting the price to be applied if the goods or services in question are sold to unrelated persons at the time of purchase or sale. If the conditions are suitable, the general gross profit margin applied by the taxpayer in the transactions with unrelated persons regarding these goods or services will be the ideal rate. If the number of transactions required for comparison is insufficient, the appropriate gross profit rate criterion will be taken into account as the profit rate reflecting the price applicable if the good or service in question were sold to unrelated persons. It is foreseen that this method will find an application area especially in the transactions related to raw materials, semi-finished products and manufactured goods.
3) Resale price method: means that the arm’s length price is calculated by deducting a reasonable gross sales profit from the price to be applied in case the goods or services that are the subject of the transaction are resold to real or legal persons who are not related in any way.
In this method, the basis for reaching the comparable price or value is the probable sale to be made to real or legal persons who have no connection between them, and the price or price to be applied in this sale. An appropriate gross sales profit will be deducted from the said price or price determined based on assumptions, to arrive at an arm’s length price for the relevant transaction. The appropriate gross sales profit here refers to the profit that can be applied for the said goods or services at the time of the transaction, determined or determined by an objective rate that can be determined according to the market conditions. After this profit is deducted, the comparable price that can be applied in the sale of the good or service to the related parties will be reached.
4) Other methods: If it is not possible to reach any of the above methods at an affordable price, the taxpayer can use other methods to be determined by himself/herself in accordance with the nature of the transactions.
In order to reach the comparable price or value, in choosing the most appropriate method among the above-mentioned methods, first of all, the price or cost used by the taxpayer in the transactions with unrelated persons will be taken as the basis for comparison as an internal precedent. In case the price or price used in this way is not available or unreliable, the transactions of taxpayers or institutions that are directly similar can be taken as a basis as an external precedent. Moreover, the important thing here is to determine the price or cost in the most accurate and reliable way, and it is possible to use domestic and foreign counterparts together.
13.3. Counting the implicit earnings distributed through transfer pricing as dividends and the adjustments to be made
Income, which is deemed to be distributed implicitly through transfer pricing in whole or in part, is considered as the distributed profit share or the amount transferred to the head office for limited taxpayer taxpayers as of the last day of the accounting period in which the conditions in this article are fulfilled, in the application of the Income and Corporate Tax Laws. However, the taxes levied on behalf of the implicit profit distribution made in institution must be finalized and paid in order for this adjustment to be made in the institutions with which implicit profit distribution is made.
In case the said profit share has been transferred to another institution, this income will be considered as participation income. In case the profit share is transferred to a limited taxpayer institution, natural persons, any person or institution that is not subject to tax or exempt from tax, it will be necessary to withhold tax based on the profit distribution over the amount found as a result of the net profit share of this profit share and the completion of this amount to the gross.
13.4. Treasury loss in implicit profit distribution through transfer pricing
With the Law No. 5766, the following seventh paragraph has been added to the 13th article of the Corporate Tax Law, which regulates the issue of “implicit profit distribution through transfer pricing”, and the current seventh paragraph has been supplemented as the eighth paragraph.
(7) The acceptance that the income is distributed implicitly due to the domestic transactions between the full taxpayer corporations and the foreign corporations’ workplaces or permanent representatives within the scope of the related person is conditional on the occurrence of a treasury loss. What is meant by treasury loss is the incomplete or late accrual of all kinds of taxes that must be accrued on behalf of the institution and related persons due to the prices and costs determined in violation of the arm’s length principle.
Source: Revenue Administration of Republic of Turkey – Translated by Karen Audit – The rights of this translation belong to KarenAudit and unauthorized use is prohibited.
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