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, arm’s length principle is one of the essential criteria to be taken into consideration.
What is 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.
According to the Guide on Disguised Profit Distribution Through Transfer Pricing prepared by the Revenue Administration, firstly, the internal precedent comparison method will be applied as the main criteria in order to reach the precedent price. Internal precedent refers to the price used by the taxpayer in transactions with unrelated persons. If there is no internal precedent; evaluation can also be made according to the external equivalent. External precedent refers to the price used by unrelated persons in comparable transactions among themselves. In practice; in cases where internal precedent exists, considering external precedent is not a frequently used evaluation method.
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. There is no hierarchy of methods as to which should be considered first. In addition, according to sub-clause (d) of paragraph 4 of Article 13 of the CTL, if the appropriate amount cannot be determined using any of the specified methods, a method to be determined by the taxpayer can be applied to reach the equivalent value.
At this point, it would be appropriate to elaborate on the comparable uncontrolled price method and the cost-plus method, which are the two most preferred methods in practice, while briefly mentioning other methods.
What is Comparable Uncontrolled Price Method?
It is regulated under subparagraph (a) of paragraph 4 of Article 13 of the CTL that “Comparable uncontrolled price method refers to the determination of the sales price to be applied by a taxpayer by comparing it with the market price that the real or legal persons who purchase or sell comparable goods or services and who do not have any relationship with each other.“
In Article 5.1 of the General Communiqué on Disguised Profit Distribution Through Transfer Pricing with Serial No. 1 (“Communiqué”) of the Revenue Administration, it is stated that, in order to apply this method, the transaction made with the related parties should be comparable with the transactions made by the persons who are not related to each other. In addition, if the price in transactions with related parties is different from the prices in transactions with unrelated persons; considering that transactions between related parties are not carried out in line with precedents, the price in transactions with unrelated parties will be substituted for the price in transactions with related parties.
Although this is the case; as explained above, in cases where there is no internal precedent, it is not possible to consider the external precedent, since, in order to be able to make an evaluation by considering the external precedent, all conditions regarding the sale must be equal. However; it will be very difficult to make an assessment in this context in line with the usual flow of life. When an evaluation is made in this context, it will be necessary to make adjustments in prices. In practice, when an evaluation cannot be made with the comparable uncontrolled price method within the framework of internal precedent, the cost-plus method is generally used.
What is Cost-Plus Method?
It is stated under subparagraph (b) of paragraph 4 of Article 13 of CTL, “Cost plus method refers to the calculation of the equivalent price by increasing the costs of the relevant goods or services by a reasonable gross profit rate.”
Article 5.2 of the Communiqué contains the same definition as in the CTL and it is stated that the reasonable gross profit rate in the definition will be the gross profit rate applied by the taxpayer in transactions with unrelated persons regarding these goods or services. Accordingly, the amount found by increasing the costs of the relevant goods and services by a reasonable gross profit rate by taking into account the market conditions and the transactions carried out, will be the equivalent price or value in transactions with related parties. Subsequently, it is regulated that in cases where such a profit margin is not available or the number of transactions required for comparison is insufficient, external precedent can also be used provided that it is comparable under the same conditions.
In addition, in the mentioned article of the Communiqué, it is stated that this method finds an application area in transactions related to goods manufactured with raw materials and semi-finished products, sub-production and service procurement.
What is Resale Minus Method?
It is regulated under subparagraph (c) of paragraph 4 of Article 13 of the CTL that “Resale minus method refers to the determination of the precedent price by deducting the reasonable gross sales profit from the price to be applied in case the goods or services subject to the transaction are resold to real persons or legal entities with no relationship in any way.”
It is stated in article 5.3 of the Communiqué that, this method is based on the price applied in case of resale to an unrelated natural or legal person of a product purchased from a related person. According to this; a reasonable gross profit will be deducted from that price, i.e. the resale price. Also; while calculating the aforementioned reasonable gross sales profit, the sales and other operating expenses of the resale seller and the risks undertaken and the assets used will also be taken into account. In addition; it is stated that this method is also applicable for processes involving different products.
What is Transactional Profit Method?
Transactional profit methods, which are regulated in subparagraph (ç) of paragraph 4 of article 13 of CTL, consist of transactional net margin method and profit split method.
Transactional Net Margin Method
Transactional net profit margin method is based on the examination of net profit margin to be determined for a transaction under the control of the taxpayer by applying relevant and appropriate basis such as costs, sales or assets.
According to Article 5.5 of the Communiqué; the application of this method is similar to the cost plus and resale price method. The difference between the transactional net profit margin method and these methods is that the gross profit margin is calculated in the other two methods, whereas the net operating profit margin is calculated in this method.
Profit Split Method
Profit split method is based on the principle of dividing the total operating profit or loss of related persons related to one or more controlled transactions among the related persons in accordance with the precedents in proportion to the functions and risks they undertake.
According to Article 5.4 of the Communiqué; in case of using the profit distribution method, the following factors are taken into account:
(a) expenditure on the acquisition, production or sale of a product or for the provision of services,
(b) the capital required or assets used or the degree of risk undertaken during the development of a product or service provision,
(c) the relative importance of the functions performed at each stage of the process,
(d) Other measurable factors.
In addition; it is also stated that this method should be used if comparable uncontrolled price method, cost plus method and resale minus method cannot be used and especially when there are no comparable transactions and transactions between related parties are in integral nature.
How to Apply Arm’s Length Principle for Intra-Group Services?
Under Article 11.3 of the Communiqué, it is stated that compliance with the arm’s length principle should be evaluated for the intra-group service fee by taking into consideration of both the service recipient and the service provider separately. In other words, it is not sufficient that the intra-group service fee is complying with the precedent prices only to the service recipient; at the same time, it must be suitable for the service provider.
Besides, according to Article 11.4 of the Communiqué; the application of “Comparable Uncontrolled Price Method” or “Cost Plus Method” may be preferred to other methods in pricing intra-group services. Nevertheless, it is understood from the regulation in the continuation of the article that this is not held as an obligation, and stipulates that other methods specified in the Communiqué can be used in cases where it is not possible to apply these two methods.
What is Advance Pricing Agreement?
In the 5th paragraph of Article 13 of the CTL, it is regulated that the methods for determining the precedent price can be determined by agreement with the Ministry of Finance (“Ministry”) upon the request of the taxpayer. This contract between the taxpayer and the Ministry is called an advance pricing agreement. According to the Guide, the main purpose of these agreements is to prevent possible tax disputes that may be encountered with respect to transfer pricing that taxpayers will apply in purchasing or selling goods or services with related parties.
According to paragraph 5 of Article 13 of the CTL, the method determined in line with the advance pricing agreement between the taxpayer and the Ministry will be definite within the period and conditions specified in the agreement, not exceeding three years. The Council of Ministers has been authorized to increase this three-year period up to five years. At the same time, the method determined within the scope of the advance pricing agreement signed between the taxpayer and the Ministry can be applied to the taxation periods that have not expired within the framework of the repentance and adjustment provisions of the Tax Procedure Law, provided that the terms of the agreement are also valid in this period.
Although the advance pricing agreement is definite for three years, it is regulated in Article 7.8 of the Guide that the advance pricing agreement can be revised under certain conditions. These conditions are as follows:
– Failure to realize a critical assumption in the agreement,
– A change in the major terms of the agreement or the invalidity of the conditions set out in the agreement,
– Changes in legal regulations, including double taxation avoidance agreements, that will affect the agreement,
– In bilateral or multilateral advance pricing agreements; revision, termination or cancellation of the agreement by the administration/administrations of the other country.
However; advance pricing agreement is not a commonly applied in practice.
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