Transfer Pricing

With the new Turkish Corporate Income Tax Law, considerable amendments are made to transfer pricing regulations by taking OECD transfer pricing guideline as a basis. If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set in accordance with arm’s length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. The expression “purchase or sale of goods or services” is used in a broad sense and includes all economic, commercial or financial transactions and employment relations between related parties.

In the text of the new law, related parties are defined as:

o Companies’ own shareholders and corporations and individuals that are related with those shareholders;
and,

· Corporations and individuals who are directly or indirectly controls or controlled by the company via management, supervision or capital.

Additionally, spouses of the shareholders, siblings and ancestors of the shareholders and upto third decree (inclusive) natural and in-law relatives of the shareholders are considered as related parties in the new law.

The arm’s length principle is defined as applying the same prices for the purchase or sale of goods or services between related parties as the prices that would be determined had the same transactions were carried out between unrelated enterprises. Corporations are free to determine their transfer prices by applying one of the methods stated in the law, which is most suitable for their transactions.

Prescribed methods in the law are the traditional transactions methods described in the OECD transfer pricing guideline. These are:

o Comparable Uncontrolled Price Method:

Arm’s length price should be determined by comparing the price charged for goods or services transferred among related parties to the price charged for comparable goods or services transferred in a comparable transaction among unrelated parties.

o Cost-Plus Method:

Arm’s length price shall be calculated by increasing the relevant costs of goods and services with a reasonable rate of gross margin.

o Resale Price Method:

Arm’s length price shall be calculated by deducting an appropriate rate of gross margin from the price that is to be applied in the event of resale of the goods or services in the market to third parties.
Companies can also use methods to be determined by themselves, other than those cited in the new law, if it is not possible to apply the methods stated therein.

There is no priority among the methods, thus whichever method that is best suitable to any given transaction should be used.

With the introduction of the new regulation, the importance of documentation of transfer pricing policies increases.

It is possible to have an advance pricing agreement with the Ministry of Finance regarding transfer pricing policies of a corporation, at the discretion of the taxpayer. If the relevant conditions do not change, then the agreement will be in effect for a maximum period of three years. The agreement will be binding for both the tax administration and the taxpayer and thereby will provide certainty for both parties.
The profit distributed in a disguised manner through transfer pricing will be reclassified as dividends distributed and necessary adjustments on taxes will be made at the hands of the party receiving the deemed dividends. In order to make adjustments in this respect, the taxes assessed in the name of the company distributing dividends in a disguised manner must be finalised and paid.

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Transfer Pricing