In accordance with the Presidential Decree no. 2151 which became effective as of 25 February 2020, several amendments were made on Article 13 of Corporate Income Tax Code numbered 5520. These amendments which mainly include regulations regarding the OECD BEPS Action – 13 TP Documentation are as follows:
- Update of “related party” definition
- Definition of several new concepts
- Regulating Country-by-Country Report (CbCR) and Master File (MF) within the scope of the TP documentation requirement
- Revision of Advance Pricing Agreement (APA) mechanism
- 50% discount on tax penalties with respect to the disguised profit distribution through transfer pricing
- Other amendments
“Related Party” Definition
A 10% threshold condition will be applied for the real or legal persons who directly or indirectly hold the shares, voting rights or dividend rights of a company in order to be considered within the scope of the disguised profit distribution. While the spouses of the shareholders, siblings and ancestors of the shareholders and up to third decree (inclusive) natural and in-law relatives of the shareholders are still considered as related parties, the “related party” definition has also been updated by taking into consideration the real persons and real persons definition from the perspective of income tax law.
Definition of Several New Concepts
Definition of several new concepts that are introduced are as follows;
- Group
- Multinational Corporation (MNC)
- Entity
- Reporting Entity
- Ultimate Parent Company
- Surrogate Entity
- Authority Agreement
- International Agreement
- Systemic Failure
Master File (MF), Local Report and Country-by-Country Report (CbCR)
The new documentation requirements are introduced. In this respect; the three-stage documentation which consists of;
- Master File (MF)
- Local report
- Country-by-Country Report (CbCR)
has been made compulsory.
Accordingly, in addition to the current annual TP documentation report (local file) requirement, “MF” and “CbCR” preparations must also be realised by the corporate income taxpayers which fall within the scope of the current local TP documentation rules starting from FY19.
Master File (MF)
MF preparation requirement will be applicable for Turkish corporate income taxpayers which are members of an MNC and which have an asset value and net sales revenue income amounting to TL 500 million and above on the previous year-end balance sheet and income statement respectively.
Preparation of the MF should be completed by the following year end, and the MF should be kept ready to submit if requested by the Tax Authority.
The first MF preparation obligation will be realised for FY19. However, the first MF preparation obligation by the companies which are subject to the special accounting period will be realised for the accounting period starting after 1 January 2019.
MF will have five main categories which can be seen below:
- Organisational structure of MNC
- MNC’s description of operating activities
- Intangibles owned by MNC
- Intercompany financial transactions of MNC
- Financial and tax position of MNC
CbCR
The CbCR preparation requirement will be applicable for the Turkish-resident ultimate parent company of an MNC that do have total consolidated annual revenue amounting to EUR 750 million or above in the previous fiscal year.
Submission of the CbCR must be made electronically within 12 months following the end of the relevant fiscal period. In this respect, the first CbCR preparation obligation will be realised for FY19 and this CbCR must be submitted by 31 December 2020. However, the first CbCR preparation obligation by the Turkish-resident ultimate parent company of an MNC which is subject to a special accounting period that begins after 1 January 2019 will be filed electronically to the Turkish Revenue Authority (TRA) by the end of the following special accounting period.
CbCR should include the following information which can be seen below:
- The information below for each country that the MNC operates:
- Revenue
- Profit/loss before tax
- Corporate income tax / income tax paid
- Corporate income tax / income tax accrued
- Share capital
- Previous year’s profits
- Number of employees
- Tangible assets other than cash and cash equivalents
- The information below for each MNC group member company on a country basis:
- Legal title of each company resident in the corresponding country
- The name of the country where the company was established and name of business activities that are carried out in this country by each MNC group member company if the country where the company was established and the country where the company is tax resident are different
The Turkish resident MNC group member company (or one of the Turkish resident MNC group member companies on behalf of the others if there are more than one) should submit the CbCR electronically to TRA by the end of the 12th month of the following relevant fiscal year if the MNC has a total consolidated annual revenue amounting to EUR 750 million or above in the previous fiscal year if one of the three conditions below are satisfied:
- The country where the ultimate parent company is resident does not require CbCR
- Turkey has an effective bilateral tax agreement but does not have an effective competent authority agreement with the country where ultimate parent company is resident and
- There is a systemic failure with the exchange of information
Turkish resident members of the MNC that meet the CbCR requirements will notify the Turkish tax administration on behalf of the MNC regarding which country the CbCR will be submitted in and by which entity. Notifications for FY2019 must be submitted by the end of August 2020, whilst notifications shall be submitted annually by the end of June of the relevant year for following years.
Furthermore, if the consolidated financial statements are not prepared in EUR, the average foreign exchange buying rate of the Central Bank of the Republic of Turkey with respect to the financial year prior to the reporting period should be taken into consideration for the calculation of the abovementioned EUR 750 million threshold.
APA Mechanism
The APA mechanism is revised by making the changes mentioned below:
- The effective period for APAs is increased from 3 to 5 years.
- Submission of the renewal request for APA should be realised at least 6 months (instead of 9 months) before the APA expires.
The retroactive application of the APA implementation is also enabled under certain conditions stated in the legislation.
Application of 50% Discount on Tax Penalties
50% discount on tax penalties for late accrued or incompletely accrued taxes with respect to the disguised profit distribution through transfer pricing will be applicable for those taxpayers that fulfil their TP documentation obligations fully on time.
Other Amendments
The section regarding “Transactional Net Margin Methods” is revised in line with the amendments made in the relevant OECD guidelines in 2010. Two different alternative methods in this respect are recognised in the law.
These methods are:
- Transactional Net Margin Method
- Profit Split Method
With the amendment cited above, the priority of traditional methods (CUP, cost +, resale minus) in comparison to transactional net margin methods and profit split methods has been terminated. Nevertheless, traditional methods must still be preferred in cases where both traditional and transactional methods are applicable in line with the explanations given in the OECD TP guidelines.
