Türkçe
Transfer pricing means the pricing applied by companies that are directly or indirectly related to each other in the purchase and sale of goods or services. The types of transactions which are accepted to be within the scope of disguised profit distribution through transfer pricing are indicated under 1st paragraph of Article 13 of the Corporate Tax Law No. 5520 (“CTL”). According to such article; “If the corporations purchase or sell goods or services from/to related parties over the price determined in violation of the arm’s length principle, the profit is deemed to be disguised profit partly or wholly distributed through transfer pricing.
In accordance with this definition, in evaluating whether a commercial transaction fall within the scope of disguised profit distribution through transfer pricing, it is important to first analyze the related person concept within the framework of the concrete situation.
What is the Concept of Related Person?
Related person is defined as follows in paragraph 2 of Article 13 of the CTL:
“Related person means the shareholders of the institutions, the real person or institution to which the institutions or their partners are related, and the real person or institutions that are directly or indirectly affiliated or under their influence in terms of management, control or capital. The spouses of the partners, the lineal kinships and descendants of the partners or their spouses as well as the third-degree relatives and in-law relatives are also considered as related persons. Considering whether the tax system of the country where the profit is made provides a taxation opportunity at the same level as the taxation capacity created by the Turkish tax system, and considering the issue of information exchange, all transactions made with persons located in the countries or regions announced by the President are deemed to have been made with related persons. In order to count the situations in which the relationship occurs directly or indirectly through the partnership channel within the scope of disguised profit distribution, it is required to have at least 10% partnership, voting or dividend right. Parties are deemed to be related persons, even if they have a voting or dividend right of at least 10% directly or indirectly without a partnership relationship. These rates are taken into account collectively in terms of related persons.”.
In accordance with this definition; In cases where the relationship is formed directly or indirectly through the partnership, it is required to have at least 10% partnership, voting or dividend right in order to be considered within the scope of disguised profit distribution. If there is such a partnership in terms of group companies subject to commercial activities; regulations on transfer pricing should be taken into account.
What are the Conditions for Disguised Profit Distribution Through Transfer Pricing?
1. General Conditions
i. Treasury Loss
It is stated under 7th paragraph of Article 13 of CTL that; “In order to accept the existence of disguised profit distribution through transfer pricing in the commercial transactions performed between the related persons and the Full taxpayers and workplaces or permanent representatives of foreign institutions in Turkey there should be emergence of the treasury loss. Treasury loss means incomplete or late accrual of any tax total that should be accrued on behalf of the corporation and related persons due to prices determined in violation of the arm’s length principle.”
Under Article 10.2 of the Guide on Disguised Profit Distribution Through Transfer Pricing (“Guide”) prepared by the Revenue Administration (“RA”), an explanation is included about the circumstances in which the treasury loss exists. According to this article; disguised profit distribution through transfer pricing will not exist if there is no treasury loss in the domestic transactions which are performed between the following within the scope of the related person:
– two fully liable institutions,
– workplace or permanent representative of a foreign institution in Turkey and workplace or permanent representative of another foreign institution of in Turkey,
– fully liable institution and workplace or permanent representative of a foreign institution in Turkey.
Based on the aforementioned provision and the explanations included under the Guide; if it is not reached the conclusion that treasury loss has arisen as a result of the transactions between the related parties, the existence of disguised profit distribution through transfer pricing cannot be mentioned.
Therefore; the most important criterion to be taken into account in the evaluation of the activities of fully liable companies affiliated with each other within the scope of disguised profit distribution through transfer pricing is gathered at the point of whether there is a treasury loss.
The determination of whether there is a treasury loss will only be possible by examining the transactions made with the related companies separately during the fiscal year subject to examination. Treasury loss is defined under the 7th paragraph of Article 13 of the CTL as incomplete or late accrual of any tax total that should be accrued on behalf of the corporation and related persons due to prices determined in violation of the arm’s length principle. The “tax” mentioned in this definition is not only corporate tax, but also includes all types taxes. In addition; while investigating the determination of treasury losses, it will be taken into account whether there is a tax exemption or release for companies.
ii. Arm’s Length Principle
The arm’s length principle is defined under the third paragraph of Article 13 of the CTL as the compliance between the price applied in the purchase or sale of goods or services made with related parties and the price that would be applied in the absence of such a relationship. In other words, there should be no difference between the price applied in the purchase or sale of goods or services with unrelated persons and the price applied in the purchase or sale of goods or services with related persons.
The methods that can be applied to determine the price that complies with the arm’s length principle are indicated under Article 4 of CTL. These methods are listed as comparable uncontrolled price method, cost plus method, resale minus method and operational profit method. The method to be applied may differ depending on whether the transaction subject to examination is an intra-group service or supply of goods. You may review our related article in order to have detailed information about the methods applied in the arm’s length principle.
2. Conditions for Intra-Group Services
Whether the activities carried out between the affiliated companies are within the scope of intra-group service; it affects the parameters needed to examine whether there is a disguised profit transfer through transfer pricing. If the activity subject to examination is an intra-group service, there will be some other conditions in addition to the general conditions that will be taken into consideration in the examination of disguised profit distribution through transfer pricing.
i. Definition of Intra-Group Services
Under Article 11.1 of the General Communiqué on Disguised Profit Distribution through Transfer Pricing No.1 (“Communiqué”); services rendered between affiliated companies, usually to the affiliates of the parent company or by one of the companies affiliated to the same group, are defined as intra-group services.
Based on this definition; if it is determined that the sales transactions of a company with its affiliated group companies are within the scope of “supply of goods” rather than service; these activities will not be included in the intra-group service concept explained in the relevant article of the Communiqué. However, if the nature of the relationship in question is “service” supply, the regulations here will be applied.
ii. Conditions for Intra-Group Services
In accordance with article 11.1 of the Communiqué, three main subjects should be determined in the evaluation of whether disguised profit distribution through transfer pricing is realized for intra-group services. In that respect; the below stated issues need to be determined regarding intra-group services:
a. Whether the service is actually provided or not,
b. Whether the company / companies receiving the service need the service in question,
c. If the service has been received, whether the service fee complies with the arm’s length principle.
In addition to the arm’s length principle, which is one of the most prominent elements of the definition included in the first paragraph of Article 13 of the CTL, here we encounter different conditions regarding the terms of disguised profit distribution through transfer pricing for intra-group services. In that respect; it would be appropriate to examine whether the other conditions specified in the Communiqué are fulfilled for the services provided by each group company.
Although the proof of the actual sale of the goods can be provided easily with the proof of the delivery of the product; more detailed examination is required to determine whether a service is actually provided. Therefore, the legislator emphasized the condition of actual provision of the service within the scope of intra-group services. In that respect; in the invoices issued for the services provided between the group companies, it is necessary to specify the service provided item by item, and especially in the contracts made for these services, it is necessary to clearly indicate which service will be provided under which conditions and by which company. Otherwise; there may be various doubts about the fact that the service is provided. As indicated under the Communiqué; the fact that the payment made to the related parties for the services stated to be provided by the group company is defined as “management expense” will not indicate that the said services are actually provided.
The criterion to be taken into consideration in order to determine whether the “companies receiving the service need the service”, is whether this service would be benefited even if it was not a group company. Under Article 11.2 of the Communiqué, it is stated that if a related company receives a service that it does not need from another company that is a member of the same group, or a service is provided to a group member only because it is a group member, it will not be possible to accept that the company has obtained an intra-group service.
Conclusion
In the light of the explanations above, the most important issues to be taken into consideration to avoid the risk of evaluation of the activities carried out among the group companies within the scope of disguised profit distribution through transfer pricing, are the need for the service performed, whether there is a treasury loss and the selection of the method to be determined in line with the arm’s length principle.
Generally, the purpose of doing business with group companies is to purchase the goods and services purchased from third parties working with high profit margins by the group companies at lower prices, thereby creating a competitive advantage. Therefore; although ensuring that the price policy determined in intra-group commercial activities is the same as the services offered by third parties may prevent a possible transfer pricing claim, this will eliminate the main purpose of commercial activities with group companies and due to purchases made at the same prices as third parties, the intended competitive advantage in the prices of goods sales may be lost. Although this situation is in accordance with legal regulations, it will not be suitable for the commercial interests of the companies.
In that respect; it is of great importance to evaluate each commercial activity carried out among the group companies separately and to determine the most accurate commercial model in a way that does not violate the legislation by taking into account the above-mentioned criteria.
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