Transfer Pricing and Multinational Taxation in Turkey

Introduction to Transfer Pricing

Transfer pricing refers to the pricing of transactions between related parties—such as a Turkish subsidiary and its foreign parent company. When these prices differ from what would be charged between independent parties, it can result in profits being shifted to low-tax jurisdictions.

Turkish law, aligned with OECD Transfer Pricing Guidelines, requires that transactions between related parties be conducted at arm’s length prices.

Legal Framework

Corporate Tax Law Article 13

The primary transfer pricing provision is Article 13 of the Corporate Tax Law No. 5520, which establishes the arm’s length principle and defines disguised profit distribution (örtülü kazanç dağıtımı) for transactions not at arm’s length.

Transfer Pricing Regulations

Detailed rules are set out in:

• General Communiqué on Disguised Profit Distribution through Transfer Pricing (1-4 series)
• OECD Transfer Pricing Guidelines (referenced in Turkish practice)
• Various administrative rulings and interpretations

Related Party Definition

Turkish law defines “related parties” broadly:

Domestic Related Parties

• Shareholders holding 10% or more of capital
• Board members, managers, and their relatives
• Companies under common control
• Entities with commercial, organizational, or capital relationships

Foreign Related Parties

• Foreign parent companies
• Foreign subsidiaries
• Foreign branches and affiliates
• Entities in the same multinational group

Deemed Related Parties

Transactions with tax haven jurisdictions (specified in Ministry lists) are deemed related party transactions regardless of actual relationship.

The Arm’s Length Principle

Concept

The arm’s length principle requires that prices in related-party transactions should be comparable to prices that would be charged between independent parties in similar circumstances.

Comparability Factors

When assessing arm’s length pricing, the following factors are considered:

• Characteristics of the goods/services
• Contractual terms
• Economic circumstances
• Functions performed, assets used, risks assumed (FAR analysis)
• Business strategies

Transfer Pricing Methods

Turkish regulations recognize standard OECD pricing methods:

Traditional Transaction Methods

1. Comparable Uncontrolled Price (CUP) Method

• Compares prices with identical or similar transactions between unrelated parties
• Preferred method when reliable comparables exist

2. Resale Price Method

• Starts with resale price to unrelated party
• Deducts an appropriate gross margin
• Used for distribution activities

3. Cost Plus Method

• Starts with costs incurred
• Adds an appropriate markup
• Used for manufacturing and service activities

Transactional Profit Methods

4. Transactional Net Margin Method (TNMM)

• Compares net profit margin relative to an appropriate base
• Most commonly used method in practice

5. Profit Split Method

• Allocates combined profits based on relative contributions
• Used for integrated operations

Disguised Profit Distribution

When related-party transactions are not at arm’s length, the difference constitutes disguised profit distribution with significant tax consequences:

Tax Adjustment

The Turkish company’s taxable income is adjusted upward by the amount of the non-arm’s length pricing difference.

Dividend Withholding

The adjustment is treated as a deemed dividend distribution, potentially subject to:

• 15% withholding tax on deemed dividends
• Reduced rates under tax treaties (if applicable)

Penalties

• Tax loss penalty (100% of additional tax)
• Late payment interest from the original due date
• Aggravated penalties for intentional manipulation

Documentation Requirements

Annual Documentation

Companies with related-party transactions must maintain contemporaneous documentation including:

Document	Content
Organizational structure	Group structure chart, ownership percentages
Industry analysis	Business overview, competitive environment
FAR analysis	Functions, assets, risks of each party
Transaction description	Details of each related-party transaction
Method selection	Analysis of method selection and application
Comparability analysis	Benchmarking study with comparable companies
Financial statements	Relevant financial data

Transfer Pricing Declaration

Companies must file an annual Transfer Pricing Declaration (Transfer Fiyatlandırması Beyanı) by April with their corporate tax return, disclosing:

• Related parties and transaction volumes
• Methods used
• Summary of arm’s length analysis

Master File and Local File

Following BEPS recommendations, Turkey requires:

• Master File: Group-level documentation
• Local File: Country-specific documentation

Large multinationals must also submit Country-by-Country Reporting (CbCR).

Advance Pricing Agreements (APA)

Taxpayers can request Advance Pricing Agreements from the Revenue Administration to obtain certainty on transfer pricing methodology.

Types of APAs

• Unilateral APA: Agreement with Turkish tax authority only
• Bilateral/Multilateral APA: Agreement including foreign tax authorities

Benefits

• Legal certainty for 3-5 years
• Reduced audit risk
• Avoidance of double taxation disputes

Process

1. Pre-filing meetings
2. Formal application with detailed analysis
3. Negotiation and agreement
4. Annual compliance reports

Tax Treaty Considerations

Double Taxation Relief

When Turkey adjusts transfer pricing, the corresponding foreign entity may face double taxation. Relief mechanisms include:

• Correlative adjustments under tax treaties
• Mutual Agreement Procedure (MAP) to resolve disputes
• EU Arbitration Convention (for EU member state counterparties)

Permanent Establishment Risks

Improper intercompany arrangements can create deemed permanent establishment (PE) in Turkey for foreign entities, triggering additional tax obligations.

Common Transfer Pricing Issues

Intra-Group Services

Management fees, technical assistance, and other intra-group services must:

• Represent actual services provided
• Benefit the recipient
• Be priced at arm’s length

Intangible Property

Licensing of trademarks, patents, and know-how requires careful valuation and documentation.

Financing Transactions

Intercompany loans must bear arm’s length interest rates. Thin capitalization rules may also apply.

Cost Sharing Arrangements

Agreements to share R&D or other costs must allocate expenses in proportion to expected benefits.

Audit and Disputes

Transfer pricing is a priority audit area for Turkish tax authorities. During audits:

• Comprehensive documentation review
• FAR analysis verification
• Benchmarking challenges
• Secondary adjustment proposals

Legal Assistance: We advise multinationals on transfer pricing compliance, documentation, APA applications, and represent clients in transfer pricing audits and disputes. Contact us for specialized guidance.

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