TAX NEWS
 
NO: 2007/2
 
Subject:Turkish Transfer Pricing Documentation Rules Based on Draft Transfer Pricing Communiqué No. 1
  
Turkish Transfer Pricing (TP) documentation rules have been recently announced by the Ministry of Finance through a Draft TP Communiqué No. 1. The TP Communiqué No. 1 is still in draft form and subject to discussion and change depending on the comments to be made by the professionals as well as taxpayers.
 
 According to the draft rules, there are three types of obligations regarding documentation :
 
1. Completion of a Specific Form (compulsory to be submitted to tax office together with the corporation tax return)
 
There will be a specific form that only corporation taxpayers shall be required to complete. This is a form about Transfer Pricing, Controlled Foreign Corporation (CFC) and Thin Capitalization, which is intended to provide information about the related party transactions within the calendar year concerned. The form is required to be completed and  submitted to the tax office together with the annual corporation tax return. Considering that the draft TP Communiqué is expected to be officially announced by the end of this year, at the latest ; the form which will be completed for the calendar year 2007 shall be submitted to the tax office by 25 April 2008 together with the corporation tax return of 2007 (the form is attached to the Draft TP Communiqué No. 1 as Appendix 2 and its unofficial English translation is also attached to this guide).
 
2. Annual TP Documentation Report  
 
Both income and corporation taxpayers are required to prepare an annual report, the format of  which is specified in Appendix 3 of the Draft TP Communiqué No. 1  to provide information about the related parties and this report must be ready to be presented  to the Tax Authorities whenever requested in addition to the folloiwng information and documents upon any request by tax inspectors and/or the Tax Authorities :
   
            1- Information about the activities, organization chart, definition of related parties (including tax office registration numbers, addresses, telephone numbers) shareholder relationships among the related parties
            2- Information about functions and risks
            3- Price lists applied for the year concerned
            4- Information about cost of production for the year concerned
            5- Information about the volume of transactions with related and unrelated parties as well as the relevant invoices for the year
            6- Samples for the agreements concluded with the related parties in the calendar year concerned,
            7- Summary financial statements of the related parties,
            8- Company pricing policy applied in transactions made with related parties,
            9- Information about the differences in terms of the accounting standards and methods (if any) used by related parties.
            10-  Information regarding ownership of intangible assets/rights or payments for the use or acquisition of intangible rights,
            11- Reason for the selection of the transfer pricing method used currently, information and documents regarding the application of the TP method (internal comparables, external comparables, benchmarking/economic analyses)
            12- Information regarding  the assumptions made and the calculations used in determination of the arm’s length price or profit margin,
            13- The method used in determination of the arm’s length price range in case such a range is specified.
            14- Other documents necessary for the determination of the arm’s length price.
 
It should be noted that the Turkish Tax Athorities are authorized to request other additional information and documents as deemed necessary. In case the supporting documents are originally in English, the Turkish translations of such documents shall also be required by the Turkish Tax Authorities.
 
3. Documentation Required for Application of Advance Pricing Agreements (APAs)
 
The following documents shall be  required in application to the Tax Authorities for conclusion of an APA to agree on the TP method used :
 
            1 – Application petition
            2 – Information about the functions performed/risks assumed
            3 - Price lists for the products (for the current year in which application is made)
            4 – Information about the cost of production of goods / services (for the current year in which application is made)
            5 – Amount of transaction volumes with related parties versus unrelated parties as well as the information about the invoices.
            6 – Copies of financial statements, corporation tax returns of the related parties as well as the agreements with foreign related parties (for the last three years)
            7- Information about different accounting standards/methods (if any) used by the related parties and comparable companies.
            8- Information about the TP method proposed to be agreed through APA process, conditions and assumptions on the basis of which the TP method proposed to be agreed has been selected, supporting economic analyses as well as supporting documents including business information about comparable companies, marketing information, court decisions (if any), scientific/professional research and studies (if any).
            9- Financial data for the last three years supporting the proposed TP Method for the APA.
            10- Information about the determination of the arm’s length range.
            11- Economic assumptions and forecasts which could affect the financial position (forecast profits, exchange rates, interest rates etc.)
            12- Other documentation / information as deemed necessary by the Tax Authorities to process the APA application.
 
4. Penalties for Failure To Provide Documentation On a Timely Basis
 
In the draft TP Communiqué No. 1, it is pointed out that the general penalty rules indicated in the Turkish Tax Procedures Code shall be applied in case of failure of presentation of the information and documents required within the period as specified in the  draft TP Communiqué.  Accordingly, the specific form mentioned in Section 1. above (and also attached to this brief guide) shall be completed by corporation taxpayers for the year 2007 and submitted to the tax office together with the corporation tax return of 2007 by the end of  25 April 2008.
 
 
 
 
 
Truly yours,
 
DRT Yeminli Mali Müşavirlik ve
Bağımsız Denetim A.Ş
 
 
 
 
 
Tranfer Pricing Draft Communiqué- Attachment 2
 
 
 
FORM REGARDING TRANSFER PRICING, CONTROLLED FOREIGN COMPANY AND THIN CAPITALIZATION
(to be completed and submitted by corporation taxpayers)
 
(Unofficial English Translation)

GENERAL INFORMATION ABOUT THE ENTITY
 
Tax Registration Number
 
Trade Registry Number
 
Trade Name
 
Activity Code
 
Telephone and Fax Numbers
 
Taxable (Fiscal) Period
 

 

INFORMATION REGARDING RELATED PARTIES WITHIN THE SCOPE OF TRANSFER PRICING APPLICATIONS
 
 
Name/Trade Name of the Related Parties Resident in Turkey
 
 
Tax Registration Number
Name/Trade Name
of the Related Parties Who are non-residents
 
 
The country where non-resident related party is located
1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 

 

TRANSACTIONS REALIZED  WITH RELATED PARTIES WITHIN THE SCOPE OF TRANSFER PRICING
 
 
 
Purchases (YTL)
Sales (YTL)
 
Assets
 
 
1
Raw Material - work-in-process inventory
 
 
2
Finished Goods – commercial goods
 
 
3
Intangibles assets (acquired or used)
 
 
4
Leases
 
 
5
Other (please specify)
 
 
 
Services
 
 
6
Construction-Repair-Technical
 
 
7
Research and Development
 
 
8
Commission
 
 
9
Other (please specify)
 
 
 
Financial Transactions
 
 
10
Loan – interest
 
 
11
Derivative Instruments and Transactions
 
 
12
Insurance
 
 
13
Other (please specify)
 
 
 
Other Transactions
 
 
14
Bonus – Salaries & Wages
 
 
15
Intra-group services
 
 
16
Cost Contribution Arrangements
 
 
17
Other (please specify)
 
 
 
Total Value of Transactions with Related Parties
 
 

 

TRANSFER PRICING METHODS USED
 
 
Purchases (YTL)
Sales (YTL)
Comparable Uncontrolled Price (CUP)
 
 
Cost-plus
 
 
Resale Price
 
 
Profit-split
 
 
Transactional Net Margin Method (TNMM)
 
 
Specific Method Determined/Applied By Taxpayer
 
 
Total Value of Transactions (by TP method used)
 
 

 

INFORMATION ABOUT FOREIGN PARTICIPATIONS
 
 
 
 
Name of foreign participation
 
The country where legal or business center is located
Percentage of shares, voting rights or percentage of dividends
 
 
Gross revenues of foreign participation
1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 

 

INFORMATION ABOUT THIN CAPITALIZATION
 
Total Assets
 
Total Liabilities
 
Total Shareholders’ Equity
 
Total Interest Expense
 
Total Foreign Exchange Losses
 

 

INFORMATION ABOUT LOANS OBTAINED FROM RELATED PARTIES
(INCLUDING THOSE OBTAINED FROM PARTICIPATIONS)
 
 
 
 
Name of the Lender
Tax Registration Number
Date on which loan was obtained
 
Amount of Loan
 
Date on which loan was paid back
1
 
 
 
 
 
2
 
 
 
 
 
3
 
 
 
 
 
4
 
 
 
 
 
5
 
 
 
 
 
Total
 
 
 
 
 

 
EXPLANATIONS:
 
This form is to be completed and submitted by corporate taxpayers. The form includes sections regarding transfer pricing, controlled foreign company (CFC) transactions and thin capitalization. Only those sections which are relevant to the corporate taxpayer concerned shall be completed. In case there are no related party, CFC transactions or thin capitalization, then it will not be necessary to complete and submit this form to the tax office.
 
(*) The terms “purchases” and “sales” are used in the form in a broad sense to mean purchases and sales of not only goods and services but also such transactions as leasing, borrowing, lending, receiving or paying wages, salaries, bunus and the similar, as well.
Considering this broad meaning, all the purchases will be indicated in the column of “Purchases” and similarly all the sales in the column of “Sales”.
 
The term intangible rights is used to cover and include the present value of the company, concession rights (franchising), patents, formulas, designs, samples, technical knowledge (know-how), format, copyrights, licenses, the right/permission to use a right, the rights granted by the public authorities (e.g. operation rights) and the similar.
 
Intra-group services indicated in line no. 15 of the Section regarding related party transactions include those services provided by one group company for the other companies in the same group. Examples can be legal, accounting, internal audit, financing consultancy and intra-group training services.
 
The term Cost Contribution Arrangements indicated in line no. 16 of the Section regarding related party transactions is used to mean the agreements concluded among the related parties so as to share costs and risks associated with the development, production or acquisition of a tangible asset, service or an intangible right/asset and at the same time to determine the type and degree of interest of each party contributing to such activities. In other words, such agreements are made to attribute the benefit derived from the activities realized to the contributing parties fairly  in accordance with the costs contributed and/or incurred by each party.
 
 
(**) This Section is required to be completed considering the following explanations:
       
       Total Assets / Total Liabilities : The relevant figures on the balance sheet prepared at the beginning of the accounting period shall be taken into consideration.
 
       Shareholders’ Equity : To be determined and indicated considering total assets and total liabilities and also in accordance with the explanations made in Section 12.1.5. of the Corporation Tax Law General Communiqué No. 1. 
 
     Total Interest Expenses and Foreign Exchange Losses : Those interest expenses and foreign exchange losses which are recorded to cost of goods sold or directly expensed shall be indicated.
 
 
(***) Those related parties that have granted loans qualifying as thin capitalization shall be considered in completing this Section.