The transfer pricing rules in Turkey were first introduced in 2007, with the provisioning of Article 13 Disguised Profit Distribution through Transfer Pricing’ in the Corporate Income Tax Law (CITL). It is based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines), by stipulating both articles 9 and 13.
Arm’s Length Principle
The Arm’s Length Principle in Turkey as stipulated in Article 13 of the CITL, follows Article 9 of the OECD TP Guidelines. It states that transactions between associated parties are to be priced as though such transactions have been executed between independent parties. The arm’s length principle has the objective of preventing profit shifting by requiring sales or purchases of goods and services to be established on the premise of market rates, eliminating the privilege or bias resulting from relatedness between parties. With the adherence to OECD guidelines, Turkey implements this provision to prevent unequal taxation, and tax evasion, and to secure the distribution of taxable profit in MNEs.
Related Party Definition
In the context of Turkish law, a related party is broadly defined to include shareholders, entities related to the corporation or its shareholders, and entities that directly or indirectly control or are controlled by the corporation in terms of management, supervision, or capital. The definition extends to transactions with entities in specific jurisdictions, as determined by the President of Turkey, treating them as related parties based on taxation capacity and information exchange considerations.
For transfer pricing purposes, a minimum 10% shareholding threshold applies to determine related-party status. This includes cases where an entity holds at least 10% of voting or dividend rights, even if no direct shareholding exists.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Turkey are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
Turkish law does not provide a hierarchy on the methods, rather is based on the most appropriate method. Also, in cases where it is not possible to determine the arm’s length price by using any of the above methods, taxpayers are allowed to use other methods that are appropriate to the nature of the transactions.
Comparability Analysis
In Turkey, taxpayers can use both internal and external comparables for transfer pricing, though access to local data is limited, as only publicly held companies are required to disclose financial information. Turkish transfer pricing rules do not provide specific benchmarking guidelines, nor do they prohibit the use of foreign comparables, as long as geographic market differences are adjusted accordingly.
A key issue for taxpayers is the Turkish tax authorities’ reliance on “secret comparables”, which are not publicly accessible and contradict OECD principles. Taxpayers should be prepared to challenge such assessments. When determining arm’s length pricing, internal comparables take precedence if available; otherwise, external comparables should be used. Adjustments must be made for differences in product characteristics, agreement terms, functions, risks, market conditions, business strategies, and intangible assets, ensuring reliable comparisons.
Documentation Requirements
Transfer pricing documentation requirements in Turkey are based on the three-tiered approach set forth by the OECD, including:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master File: In Turkey companies required to prepare a Master File must be part of a multinational business group and meet the threshold of at least 500 million lira in both total assets (as stated in the balance sheet) and turnover (as recorded in the income statement) for the previous accounting period. The Master File must include basic information on the organizational structure, business activities, intangible assets, intra-group financing transactions, and financial and tax information.
Local File: In Turkey, companies required to prepare a Local File include corporate taxpayers registered with the Large Taxpayers Tax Office for both domestic and foreign related-party transactions, as well as other corporate taxpayers for their foreign-related-party transactions. The Local File must include detailed information about the taxpayer, related-party transactions, and financial and economic data. This document must be prepared by the corporate tax return filing deadline and should be readily available for submission upon request from the Tax Office or relevant authorities.
Country-by-Country Reporting: In Turkey, Country-by-Country (CbC) reporting applies to multinational groups with income exceeding €750 million. If the ultimate parent entity (UPE) is a tax resident in Turkey, it must file the CbC report within 12 months after the fiscal year-end. The report includes income, profit or loss, taxes paid, capital, employees, and key business activities for each country where the group operates.
From September 1, 2024, notifications must be made within six months after the fiscal year-end. Turkey is a signatory to the Multilateral Competent Authority Agreement, ensuring automatic CbC report exchanges.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Turkey’s Advance Pricing Agreement program allows for unilateral, bilateral, and multilateral APAs with a maximum duration of five years. There are no fixed timelines for filing an APA request, and bilateral APAs can be rolled back to open fiscal years if conditions remain unchanged.
While APAs have been available since 2008, few companies use them due to long approval times. However, the Turkish Revenue Administration is working to speed up the process, making APAs a useful tool for businesses to avoid tax disputes and ensure compliance.
Turkey’s Mutual Agreement Procedure (MAP) allows taxpayers to tackle cross-border tax disputes based on tax treaties. The rules were updated in 2022, clarifying that MAP applications must be filed within the period specified in the relevant tax treaty or, if no timeframe is given, within three years from the official tax notification. A MAP application does not suspend tax collection or penalties, and if a taxpayer initiates both MAP and court proceedings, the court must wait for the MAP to conclude.
Approach to Transfer Pricing Audits
The tax audit system in Turkey has recently been restructured, classifying taxpayers into large-scale and small-scale categories. Businesses registered with the Large Taxpayers Tax Office are under continuous monitoring by tax inspectors. Additionally, a specialized Transfer Pricing Audit Department has been established to focus exclusively on transfer pricing investigations, ensuring compliance with pricing regulations in related-party transactions.
Penalties
In Turkey, if a company manipulates transfer prices to shift profits, the tax authorities treat the amount as distributed profit or, for foreign companies, as a transfer to their head office at the end of the tax year. This leads to extra taxes and penalties, including corporate income tax, VAT (if applicable), withholding tax on profits, and income tax for shareholders receiving the funds. However, if a company properly maintains transfer pricing documentation, it can get a 50% reduction in penalties, encouraging businesses to stay compliant and transparent.
Taxation at a Glance
Turkey, given its geographic cross-road location between Europe and Asia, is of strategic importance in trade relations and from the perspective of tax policies. The official currency is Turkish Lira, and the official name of the Turkish tax authority is the Turkish Revenue Administration.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 25%, 30% |
VAT | 20% |
Withholding tax on dividends to non-residents | 15% |
Withholding tax on interest to non-residents | 10% |
Withholding tax on royalties to non-residents | 20% |
Our firm provides our clients with comprehensive assistance in their transfer pricing needs globally. To contact a team member, please click here.
