Author: Tutku Sen
Introduction
For startup companies, adjusting technology to needs, or creating new needs, with the products and services they offer, and gearing up in our country day by day, one of the key elements is undoubtedly digital advertising activities. With the impact of the Covid-19 epidemic, being visible in digital environments has become the golden rule of being able to operate. The 64% increase in electronic commerce volume[1] may indeed be considered as an indicator of this rule.
Companies apply to digital platforms based abroad, mainly to the big three, Google, Facebook and Twitter, in order to receive advertising services. At this point, we face the issue of taxing the digital advertising revenue collected from almost all of the players in the market and that is transferred abroad.
While taxation of the digital economy is being discussed fiercely in the international arena, Turkey, through its recent legal regulations, has exhibited a stable position on the taxation of income earned through digital advertising activities in Turkey. This article examines the issue of withholding taxes in digital advertising services, which has led to many debates in terms of international tax law.
Resolution of the President No. 476
Through the amendment to Tax Procedural Law No. 213 (“TPL”) in 2016, the President has been authorized to deduct taxes from those who are parties or intermediaries of taxable transactions, regardless of whether the persons paid are taxpayers, whether the payers or intermediaries to be paid are obliged to withhold tax according to the tax laws, whether the subject of the payment is the purchase and sale of goods or services, or whether the sale or services are carried out electronically. The President, based on this authority, has included advertising services provided on the internet within the scope of income/corporate tax withholding through Resolution No. 476 (“Resolution”), dated December 18, 2018.[2] Accordingly, as of January 1, 2019, it has been decided to apply withholding tax in relation to the payments made to those who provide digital advertising services or intermediaries providing the service.
Pursuant to the Resolution, the withholding tax rate has been determined as:
- 15%, if paid to real persons under Article 94 of Income Tax Law No. 193;
- 0%, if paid to the companies established in Turkey under Article 15 of Corporate Tax Law No. 5520 (“CTL”);
- 15%, if paid to the companies that do not have a permanent establishment in Turkey (limited taxpayer) under Article 30 of the CTL.
Details of the regulation are introduced in Corporate Tax Communiqué Serial No. 17, amending Corporate Tax General Communiqué Serial No.1.
Conventions for the Avoidance of Double Taxation
The implementation of withholding taxes at the rate of 15% on the advertising fees paid to the digital advertising providers established abroad (limited taxpayer) has sparked a debate, especially regarding the Conventions on the Avoidance of Double Taxation (“CADT”). Against the rule of taxing commercial earnings only in the country of origin, the question of how the Turkish Revenue Administration will enforce the Resolution has arisen.
According to the tax agreements signed by Turkey, the profit owner must have a permanent establishment in Turkey in order to be subject to taxation in Turkey. For instance, in parallel with the OECD model agreement, the CADT concluded with Ireland where one of the digital leaders, Google Ireland Limited resides, employs a similar approach on business profits:
“The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.”[3]
In fact, prior to the effective date of the Resolution, evaluations were made in coordination with the CADT in the rulings provided by the Turkish Revenue Administration:
“If the Ireland resident company does not have a permanent establishment in Turkey in terms of Article 5 of the Convention, and does not render the advertising service through this establishment, the right to tax the business profits to be gained in return for the said advertising service belongs only to Ireland.” [4]
At this point, it is critical to examine the concept of permanent establishment. Under the CADT, a "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried out. As it is understood, the said establishment is physical and, thus, a digital establishment is out of the scope. Similarly, under Article 156 of the TPL, “The establishment of commercial, industrial, agricultural and professional activities is a place allocated to, or used for the performance of commercial, industrial, agricultural and professional activities such as shops, offices, administrative offices, clinics, branch offices, warehouses, hotels, coffee houses, entertainment and sports places, fields, vineyards, gardens, farms, livestock facilities, fishing traps and casts, mines, quarries, construction sites, and steamboats.”
Digital establishments are not included in the TPL. However, it is seen that tax administrations may interpret the concept of establishment broadly, based on the phrase “such as” in the relevant article, and incorporate digital establishment in the definition.[5] This attitude may be argued to be against both the law and international tax treaties. In fact, as explained below, there are Tax Court decisions ruling that the taxation of profits of the digital advertising service providers, which do not have an establishment in Turkey, is against the law and international tax treaties.
Rulings
As of the effective date of the Resolution, in some regulations issued by the Revenue Administration, it is stated that payments made to the digital advertising service providers resident abroad are subject to a tax deduction:
“Therefore, a tax deduction of 15% is required in accordance with the decision annexed to Resolution No. 476 over the payments to be made by your branch to the companies resident abroad as of 1/1/2019, regarding the online advertising services obtained from the companies resident abroad.”[6]
In another ruling dated August 12, 2020, the comment was left to the addressee along with explanations regarding the legislation:
“If the company resident in Ireland is not comprised of an establishment in Tıurkey, the right to tax the business profits gained through the commercial activities only belong to Ireland, Turkey has no right to tax the said profits. However, if the activities measure up to create an establishment in Turkey, Turkey has also right to tax the profits, limited to the profits earned through the establishment. In this case, taxation will be performed in accordance with our domestic law provisions, and the tax paid in Turkey may be deducted under Article 23(1/a) entitled “Elimination of Double Taxation” of the Convention.”[7]
Court Decisions
In practice, it is observed that many companies have applied to the judiciary demanding the cancellation of the withholding taxes paid with reservation. In general, it is observed that tax courts are in the tendency to cancel withholding taxes on the grounds that the workplace is defined as a fixed place in the CAPT, the establishment is physical in the TPL, and the interpretation of the establishment definition in domestic law and international tax treaties in a way so as to include the digital establishment, is against the prohibition of comparison.
Conclusion
The withholding taxes, introduced to accelerate the transition to the registered economy in digital environments, and to ensure tax security regarding digital advertising activities, is a heavy burden on companies with a high budget of digital advertising activities. This practice, whose legal basis is discussed and over which the courts and tax administrations disagree, will raise its importance gradually with the effect of the Covid-19 outbreak.
[1] E-Commerce Department of the Ministry of Commerce, E-Commerce Data of the First 6 Months of 2020 Announced, 19.08.2020, https://www.eticaret.gov.tr/haberler/10040/detay.
[2] Official Gazette dated 19.12.2018 and numbered 30630, https://www.gib.gov.tr/sites/default/files/fileadmin/user_upload/Cumhurbaskani_Karari/476_vuk_ck.pdf.
[3] Convention between Ireland and the Republic of Turkey on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, Article 7(1), https://www.gib.gov.tr/fileadmin/mevzuatek/uluslararasi_mevzuat/IRLANDA.htm
[4] General Directorate of Revenues’ (“GDR”) ruling dated 23.02.2012 and numbered B.07.1.GİB.4.34.16.01-KVK 30-701.
[5] “While making the definition of the establishment, the places used in the performance and execution of commercial, industrial, agricultural and professional activities were described and not limited to the places specified in the definition. Therefore, it is possible to consider the place used for communication purposes as an establishment for such activities carried out in electronic environment.” GDR’s ruling dated 20.03.2006 and numbered B.07.1.GİB.0.44/4402-302/019262.
[6] GDR’s ruling dated 14.08.2020 and numbered 62030549-120[94-2019/120]-E.595945.
[7] GDR’s ruling dated 12.08.2020 and numbered 50426076-130[37-2016/20-614]-59424.
