TAX NEWS NO: 2019/1
February 18, 2019
Subject: Introduction of New Withholding Tax Liability on On-Line Advertising Services and Clarification of Its Implementation Through Corporate Tax Law General Communiqué No. 17 announced on 15 February 2019
1. Background
A new provision had been added (with effect from 7 September 2016) to Article 11 of the Turkish Tax Procedures Code governing “withholding tax liability” (paragraph 7 of Article 11) that authorises the President of the Republic of Turkey to determine the extent of withholding tax to be applied by the parties or the parties acting as intermediaries in taxable transactions, regardless of whether (i) the recipient of the payment is a taxpayer or not, (ii) the party making the payment or the party acting as the intermediary for the payment has the obligation to withhold tax or not, (iii) the payment relates to the trading of goods or services, or not, (iv) the transaction is realized through internet/on-line, or not; and (v) the payment is deducted from tax base, or not. Accordingly, the President had been authorized to determine the rate of withholding tax (within the minimum and maximum limits as specified by the relevant Tax Codes) which may vary depending on business groups, types of transactions, types of sectors and commodity groups.
The determination of withholding tax rates based on Article 11/7 of the Turkish Tax Procedures Code (explained above) has not been made since 7 September 2016 until the announcement of the Presidential Decree No. 476 in the Official Gazette dated 19 December 2018. According to the Presidential Decree No. 476, payments to be made for advertising services provided through internet (on-line advertising services) to the providers of such services or those who act as an intermediary for the provision of such services have been included within the scope of the withholding tax liability based on Paragraph 7 of Article 11 of the Turkish Tax Procedures Code.
The Presidential Decree no. 476 entered into force as of the announcement date (19 December 2018) to be applicable to the payments made starting from 1 January 2019.
2. Withholding Tax Rates Applicable for On-Line Advertising Services
According to Articles 2, 3 and 4 of the Presidential Decree No. 476; payments to be made for on-line advertising services shall be subject to withholding tax rates at the following rates (with effect from 1 January 2019):
a) 15% shall be applied on the payments to be made to real persons regardless of their tax residential status (within the scope of Article 94 of the Turkish Income Tax Law);
b) 15% shall be applied on the payments to be made to non-resident entities (within the scope of Article 30 of the Turkish Corporate Income Tax Law);
c) 0% shall be applicable on the payments to be made to corporate taxpayers resident in Turkey (within the scope of Article 15 of Turkish Corporate Income Tax Law)
3. Further Explanations Made Through Corporate Income Tax Law General Communiqué No. 17
Corporate Income Tax (CIT) Law General Communiqué No. 17 (amending the CIT Law General Communiqué No. 1) was announced in the Official Gazette on 15 February 2019. The Communiqué has introduced further explanations about the implementation of the withholding tax imposed on the payments with regard to on-line advertising services. In principle, payments to be made to those parties providing on-line advertising services through internet (service providers) or those parties who act as an intermediary for provision of such on-line advertising services (intermediaries) shall be made subject to withholding tax regardless of the fact whether such service providers or intermediaries are taxpayers or not.
3.1. Clarifications About the Determination of Withholding Tax Rate
According to the CIT Law General Communiqué no. 17, the following clarifications have been made (examples are also provided)
a) Service Provider and Intermediary are Resident Entities in Turkey:Those parties who are held responsible to apply withholding tax in Turkey (as enumerated in Article 15 of the Turkish CIT Law) shall apply withholding tax at 0% on the amounts to be paid for on-line advertising services if the service provider or the party acting as an intermediary for provision of such on-line advertising through internet (i.e. the party to whom the payment is made) is a resident corporate taxpayer in Turkey. Those parties who are not held responsible to withhold tax according to Article 15 of the Turkish CIT Law shall not have any obligation to withhold tax on payments for such services.
Example 1:
Service Provider: ABC A.Ş. resident in Turkey
Buyer (payer): XYZ Ltd. Şti in Turkey
Withholding Tax Rate: 0%
Example 2:
Service Provider: ABC A.Ş. resident in Turkey
Buyer (payer): A professional service provider having the responsibility to withhold tax (e.g. a lawyer, a tax consultant, an engineer working independently etc.)
Withholding Tax Rate: 0%
Example 3:
Service Provider: ABC A.Ş. resident in Turkey
Buyer: A Turkish student studying in a College
Withholding Tax: No obligation to withhold tax
a) Service Provider and Intermediary (if any) are non-resident entitities: Those parties who are held responsible to apply withholding tax in Turkey (as enumerated in Article 15 of the Turkish CIT Law) shall apply withholding tax at 15% on the amounts to be paid for on-line advertising services if the service provider or the party acting as an intermediary for provision of such on-line advertising through internet (i.e. the party to whom the payment is made) is a non-resident entity. Those parties who are not held responsible to withhold tax according to Article 15 of the Turkish CIT Law shall not have any obligation to withhold tax on payments for such services.
Example 4:
Actual Service Provider: A non-resident entity
Intermediary in Turkey: ABC A.Ş. resident in Turkey
Buyer (party making the payment to the intermediary):XYZ Ltd. Şti in Turkey
Withholding Tax Rate on the payment by the Buyer to the Intermediary in Turkey: 0%
Withholding Tax Rate on the payment by the Intermediary in Turkey to the non-resident Actual Service Provider: 15%
Example 5:
Service Provider: A non-resident entity
Buyer: A Turkish student studying in a College
Withholding Tax: No obligation to withhold tax
Example 6:
Actual Service Provider: A non-resident entity
Intermediary in Turkey: ABC A.Ş. resident in Turkey
Buyer (party making the payment to the intermediary): A Turkish student studying in a College
Withholding Tax Rate on the payment by the Buyer to the Intermediary in Turkey: No obligation to withhold tax
Withholding Tax Rate on the payment by the Intermediary in Turkey to the non-resident Actual Service Provider: 15%
Example 7:
Actual Service Provider: DEF Ltd. Şti resident in Turkey
Intermediary in Turkey: ABC A.Ş. resident in Turkey
Buyer (party making the payment to the intermediary): A Turkish student studying in a College
Withholding Tax Rate on the payment by the Buyer to the Intermediary in Turkey: No obligation to withhold tax
Withholding Tax Rate on the payment by the Intermediary in Turkey to the actual Service Provider entity resident in Turkey: 0%
As can be seen from the examples 6 and 7 above, in cases where the payment by the buyer of the on-line advertising service is made to an intermediary who is a resident entity in Turkey, withholding tax rate shall be 0%. However, if the intermediary who is a resident entity makes the payment to the actual service provider who is resident outside Turkey, 15% withholding tax shall then be applied on such payment. However, in cases where both the actual service provider and the intermediary are resident entities in Turkey, then the withholding tax to be applied on the payment by the intermediary to the actual service provider shall be 0%.
a) Service Provider and intermediary are real persons (either resident or non-resident): The withholding tax rate shall be applied at 15% if the service provider or the intermediary (if any) are the real persons, regardless of whether the real person is resident or non-resident in Turkey.
Example 8:
Service Provider: A real person (resident or non-resident)
Buyer: XYZ Ltd. Şti in Turkey
Withholding Tax: 15%
Example 9:
Service Provider: A real person (resident or non-resident)
Buyer: A Turkish student studying in a College (who does not have withholding tax responsibility)
Withholding Tax: No obligation to withhold tax
3.2.Timing for the Provision of the On-line Advertising Service and Its Payment
The withholding tax introduced through the Presidential Decree No. 476 (announced on 19 December 2018) shall be applied to the payments to be made with effect from 1 January 2019 (including this date). As long as the payment for such service is made after 1 January 2019, the withholding tax shall be applicable even if the on-line advertising services were provided before 19 December 2018.
In case a payment is made in cash or accrued in the statutory accounts of the Buyer before the date of entry into effect of the Presidential Decree (19 December 2018) to the service providers or those who act as intermediary for provision of the services, no withholidng tax shall be applied on the payments made after 1 January 2019.
Example 10 (provided in the Communiqué)
Service Provider: B Reklamcılık Ltd. Şti. (resident in Turkey)
Buyer: Z A.Ş.
Date of Provision of the Services: October 2018
Date of invoicing of the services by the service provider: November 2018
Date of recording of the Service Provider’s invoice by the Buyer in their statutory records: November 2018
Date of payment by the Buyer to the service provider (as agreed between the parties) : 15 January 2019
In this example; since the Buyer already accrued for the payment and recorded this accrual in their statutory books in November 2018, the payment will be deemed to have been made on accrual basis prior to 1 January 2019 and therefore the cash payment made on 15 January 2019 shall not be subject to withholding tax.
Example 11 (provided in the Communiqué)
Actual Service Provider: L Ltd. (resident in Ireland, i.e. non-resident in Turkey)
Intermediary in Turkey: Mr. E (a real person resident in Turkey)
Buyer : C A.Ş. (a company resident in Turkey)
Date of Provision of the service: In November 2018
Total Amount of service fee: USD 100,000
Advance payment (25%) made by C A.Ş. to Mr. E in November 2018 : USD 25,000
Issuance of the invoice by L Ltd. To Mr. E : December 2018
Recording of the invoice of L Ltd. in the statutory books of Mr. E : December 2018
Issuance of the invoice by Mr. E to C A.Ş.: December 2018
Recording of the invoice of Mr. E in the statutory books of C A.Ş.: December 2018
Remaining payment (75%) made by C A.Ş. to Mr. E: 20 January 2019
Payment of the whole amount by Mr. E in Turkey to L Ltd in Ireland: 31 January 2019
Withholding Tax Status for C A.Ş. (Buyer in Turkey): Since 25% of the amount was paid by C A.Ş. (buyer) in November 2018 and the whole amount was recorded in the statutory books of C A.Ş. in December 2018 (i.e. prior to 1 January 2019); the remaining 75% payment made by C A.Ş. to Mr. E on 20 January 2019 shall not be subject to withholding tax.
Withholding Tax Status for Mr. E. (Intermediary – real person in Turkey): Since Mr. E recorded all the invoice amount issued by L Ltd (actual service provider resident in Ireland) in December 2018 (i.e. prior to 1 January 2019), payment shall be deemed to have been made on accrual basis before 1 January 2019 and therefore the cash payment made by Mr. E (real person intermediary) to L td. (actual service provider) on 31 January 2019 shall not be subject to withholding tax.
4. Considerations About the Relevant Provisions of Double Tax Treaties
Considering the provisions of Article 7 (Taxation of Business Profits) and Article 5 (Permanent Establishments) of the Double Tax Treaties Turkey has signed with about 85 countries; the income derived from provision of advertising services or the intermediation for such advertising services should normally be classified as business income and therefore taxed based on Article 7 of the Double Tax Treaties. Accordingly, business profits to be derived by non-residents are normally subject to tax in Turkey if business income is generated through a fixed place of business or a permanent representative in Turkey.
According to the OECD Commentary on Article 5 of the Double Tax Treaties concerning the definition of permanent establishment (paragraphs 123, 124), “an internet web site, which is a combination of software and electronic data, does not in itself constitute a tangible property. It therefore does not have a location that can constitute a place of business as there is no facility such as premises or machinery or equipment. Even if an enterprise is able to determine that its web site should be hosted on a particular server at a particular location, the enterprise does not even have a physical presence at that location since the web site is not tangible.”
Given the above-mentioned provisions; the new withholding tax liability introduced for on-line advertising services should normally not cover the advertising services provided by non-resident entities and individuals who are resident in a country with which Turkey has a double tax treaty in effect and operate in Turkey without having a permanent establishment.
However, it should be noted that, in an example provided at the end of the CIT Law General Communiqué no. 17 (please refer to Example 11, above), whereby the on-line advertising service provider is resident in Ireland, there is no reference to the provisions of the Double Tax Treaty between Turkey and Ireland which is in effect since 1 January 2011. Omission of the relevant provisions of the Double Tax Treaty with Ireland in this example provided in the Communiqué implies a kind of a unilateral action taken to address the challenges of the digital economy.
5. Concluding Remarks
The introduction of a withholding tax on sales of digital goods and services (including on-line advertising actitivities provided through internet) is, in fact, one of the options discussed by the Task Force formed to work on the “OECD BEPS Action 1: Addressing the Tax Challenges of the Digital Economy” to address to the taxation challenges arising from the digital economy. The imposition of this withholding tax appears to be in line with that approach.
However, considering the current provisions of Article 5 and Article 7 of the Double Tax Treaties in effect governing “permanent establishments” and taxation of “business profits”, respectively as well as the discussion papers and reports about the OECD BEPS Action 1; the imposition of this withholding tax might be regarded as a unilateral action and it would certainly lead to further discussions, conflicts and disputes in implementation in the case of on-line advertising service payments to be made to non-residents who are resident in Treaty countries and who do not have a permanent establishment in Turkey.
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