A- Transfer Pricing Regulations in Turkey

The transfer pricing regulations, which existed in US financial legislation since 1962, has started to be considered by OECD after 1974, which eventually has been improved and evolved to an international model.

In Turkey, the concept of ‘disguised profit' which existed in Corporate Tax Law No 5422, has been re-defined by Corporate Tax Law No. 5520, clause 13, under the name of ‘Disguised profit distribution by means of transfer pricing', by referring to OECD regulations, and by law no 5615, similar provisions have been added to Income Tax Law, with clause 41; as a result of these changes, ‘Transfer Pricing Application' became effective as of 01.01.2007.

With above mentioned regulations, if entities have product or service trade with related parties over the values and prices that are set in contradiction with the arm's length principle, those earnings, totally or partially, will be considered as disguised profit distribution by means of transfer pricing. Purchase and sales, production and construction, renting and leasing, lending and borrowing money, transactions that require bonus, salary and similar payments, in all cases, will be considered as trade of products and services.

Disguised profit distribution, totally or partially, by means of transfer pricing, will be considered as distributed profit or, for non resident taxpayers as transferred value to head-office on the last day of the related taxation period. Thus, previous taxation assessments fot such taxpayers will be revised accordingly.

Finally, over the value of distributed disguised profit by means of transfer pricing, it will be possible for the Tax Authorities to impose Corporate / Income Tax (and VAT, wherever applicable) with related penalties, Withholding Tax with related penalties due to profit distribution, and finally, for the shareholder who received distributed profit, to impose Income Tax with related penalties.

B-The Requirements of Transfer Pricing Application

• Primarily, by analyzing their processes and economic results, the taxpayers should perform studies to determine equivalent prices and profit margins, and adapt their global transfer pricing models to the affiliates and branches located in Turkey and in this way, should establish their appropriate transfer pricing structure.

Creating a relation between the establishment process of transfer pricing structure and strategy with the “Strategy Establishment Report for Transfer Pricing”, and performing a periodic revision of this report in line with commercial structural changes in accordance with changing market conditions or changing functional or organisational company structure, will be very useful for the taxpayer to prove that trade with related parties are performed in line with arm's length principle and profit rates prevailing in the market.

• For the product and service trade, performed in a certain period with related parties, corporate taxpayers need to fill in a “TRANSFER PRICING, CONTROLLED FOREIGN COMPANY AND DISGUISED CAPITAL FORM” and send it to the related tax office as an attachment to their Corporate Tax Declaration.

• Taxpayers who are registered at Major Taxpayers Tax Office, for all local and foreign transactions with related parties in a certain period and other taxpayers, for all foreign transactions with related parties, are obliged to prepare “ANNUAL TRANSFER PRICING REPORT” until the deadline of Corporate Tax declaration period and after this deadline, to keep it ready for submission upon demand of Tax office or related tax authorities.

C. Our Services for Transfer Pricing

“Transfer Pricing Team” of Mazars / Denge, consisting of specialists experienced on Operational Assessment and Tax Legislation, are well organized and structured to respond all of your company's needs related to transfer pricing.

Mazars / Denge provides below services for determining the “Best” transfer pricing strategy which will minimize risks and disputes that your company may encounter.

• Establishment of company's transfer pricing strategy by using methods such as company process and functional analysis, comparability studies; and preparation of “Strategy Establishment Report for Transfer Pricing”.

• Revision and update of “Strategy Establishment Report for Transfer Pricing” in line with fundamental changes in the market and changes in the company's functional and organisational structure.

• In case of the presence of a transfer pricing strategy established by the head office abroad, performing the work or providing support for adaptation of this strategy and related methods to Turkey.

• Service to review, analyse and to determine the risks at the companies' existing transfer pricing applications, group transfer pricing documentation process.

• For taxpayers who are uncertain which method to apply, managing the “Advance Pricing Agreement” process to apply the Tax Office, with necessary information and documents and to request the determination of the appropriate method for a certain period.

• In case of all kinds of transfer pricing disputes, provide necessary support at tax office and judicial stages.

• Upon request, preparation of “Annual Transfer Pricing Report” for submission to tax office and tax authorities.

The international press group, International Tax Review, located at London, has awarded Mazars / Denge as “THE BEST TRANSFER PRICING FIRM OF TURKEY” at the “2009 European Tax Awards Contest”.

Please click here to see Transfer Pricing Brochure.

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