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Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

The tax authorities will review transfer pricing as a part of a taxpayer’s tax audit or risk review. In general, any multinational conducting cross-border related-party transactions and incurring losses or low profits can expect to be scrutinised by the tax authorities. Taxpayers should therefore keep relevant statutory books and accounting records. In addition, all transfer pricing-related documents and information should be submitted by the taxpayers upon request by the tax authorities. Hence, the burden of proof lies on the taxpayers in terms of compliance.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

The Turkish tax authorities have a risk analysis system to identify the taxpayers to be audited. In this sense, transfer pricing forms and corporate income tax declarations are analysed. If a taxpayer has incurred losses, low profits, related-party transactions (eg, management fees, royalties, intra-group financing etc) that bear risk, it may be subject to a transfer pricing audit. The tax authorities may also choose a specific taxpayer to audit. In addition, the tax authorities frequently conduct industry-specific transfer pricing audits, for instance in the automotive, pharmaceutical and energy sectors.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

There are no specific penalties applicable for transfer pricing issues. However, business owners or corporates that have bought or sold goods or services below arm’s-length price entirely or partly with related parties are liable to penalties under the Turkish Tax Procedure Code. Also, any party that is required by the law to submit transfer pricing documentation to the Turkish tax authorities but fails to do so is subject to the same penalties under the Turkish Tax Procedure Code.

In this sense, corporations may be subject to a tax loss penalty due to the purchase or sale of goods or services below arm’s-length price. However, taxpayers that fulfil their transfer pricing documentation obligations completely and on time are subject to tax penalties at a reduced rate of 50%, even if they are subject to a tax loss penalty.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

There are no regulations or restrictions for transfer pricing adjustments. In practice, the Turkish tax authorities may adjust prices for or against taxpayers during a transfer pricing audit. Accordingly, upward or downward transfer pricing adjustment might be carried out by the Turkish tax authorities. However, if treasury losses do not occur due to the taxpayer’s domestic related-party transactions, the Turkish tax authorities will not make any transfer pricing adjustments.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

A taxpayer may indicate in the transfer pricing audit report that it does not accept the auditor’s view in terms of transfer pricing adjustment. A taxpayer may also state that the adjustment made by the tax auditor is inaccurate, and request a session before the Report Evaluation Commission at the Turkish Tax Audit Board. A taxpayer has the right to explain its transfer pricing position if it receives an invitation from the Turkish tax authorities for a potential transfer pricing adjustment. Furthermore, a taxpayer may appeal the decision of the Turkish tax authorities and request the court to remove the transfer pricing adjustment.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Taxpayers may request a mutual agreement procedure (MAP) related to transfer pricing cases. If the dispute is not settled through the conciliation or audit settlement, the taxpayer can avail of a MAP or seek a judicial review within the legal timeframe. If the taxpayer seeks a judicial remedy first, there will be no access to a MAP, unless the dispute is withdrawn by the taxpayer during the judicial process. As Turkish law does not allow a MAP process to run concurrently with a judicial process, both the tax administration and the taxpayer are bound by the court decision. In addition to a MAP, Turkish law provides for other remedies for taxpayers to resolve tax disputes through an administrative or statutory dispute settlement or resolution process independent from the audit and examination functions, which can be accessed only on request by the taxpayer. Audit settlement (conciliation before imposition) is available to taxpayers as an administrative remedy. Taxpayers can choose a MAP or audit settlement as their first option. If no agreement is reached, the taxpayer still has the right to litigate in court or to initiate a MAP under a double tax agreement.

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