Author: Ozge Kisacik
Disguised profit distribution through transfer pricing is one of the tax security methods regulated under Article 13 of Corporate Tax Law No. 5520 (“CTL”). Pursuant to this article, if corporations purchase or sell goods or services with related parties at prices determined contrary to the arm’s length principle, the profit is deemed to have been distributed implicitly through transfer pricing in whole or in part. In the event that the disguised profit distribution is determined through transfer pricing, many consequences such as refusal of deduction, correction, and dividend assessment occur for taxpayers.
In addition, if the transaction subject to disguised profit distribution through transfer pricing is also subject to value added tax (“VAT”), the VAT aspect of transfer pricing should be examined. The controversial issue in the relationship between disguised profit distribution through transfer pricing and VAT is whether the VAT calculated for the disguised profit distributed can be deducted or not. In this article, the relationship between disguised profit distribution and VAT is examined in the light of current law amendments, the dominant view in practice, and the decisions of the Council of State.
Disguised Profit Distribution Through Transfer Pricing Pursuant to the CTL
In accordance with Article 13 of CTL, in case corporations engage in purchase or sales of goods or services with related parties at prices determined contrary to the arm’s length principle, it is stipulated that the income will be deemed to have been distributed in a disguised manner through TP. The purchase or sale of goods or services means purchase, sale, manufacturing and construction, leasing and renting transactions, borrowing and lending, and all kinds of transactions which imply wage, salary, premium and other. In this context, in the event that corporations sell goods or services to related parties at a value below a valid price in accordance with the arm's length principle, or purchase goods or services from related parties with a value above the arm's length principle, the difference between the actual price and the arm's length price represents the profit distributed through transfer pricing.[1] In other words, disguised profit distribution through transfer pricing is possible if the income is either less than it should be or if the expense is more than it should be.[2]
The purpose of transfer pricing is to prevent the treasury loss. Also, in case the price applied in the purchase and sale of goods and services between institutions and real persons is different from the price applied in transactions with unrelated parties, the use of this difference in bad faith is prevented by transfer pricing.[3]
Besides, if it is determined that there is a disguised profit distribution through transfer pricing, this situation has some consequences for the taxpayers: (i) refusal of the deduction, (ii) determining the distributed earnings as dividends and (iii) correction.
Pursuant to Article 11/1 (c) of the CTL, in cases where goods or services are sold and purchased by related parties at prices in contrary to the arm's length principle, the difference between the price actually applied and the precedent value, the amount of disguised earnings distributed through transfer pricing, are not taken into account as a discount in the determination of corporate income.
The Situation of Disguised Profit Distribution Through Transfer Pricing Under Value Added Tax Law No. 3065
In accordance with Article 1/1 of Value Added Tax Law No. 3065 (“VATL”), commercial, industrial, agricultural and professional deliveries and services made in Turkey are subject to VAT. In this context, if the purchase and sale of goods between related parties falls under Article 1 of the VATL, the purchase and sale of goods is also subject to VAT.
However, considering the new rules created when the CTL entered into force, some discussions have arisen regarding VAT in cases where the transfer pricing regulations have to be put into practice, since the necessary explanations are not made in the VATL.
Namely, as stated in the section above, the deduction of the disguised profit distributed through transfer pricing is not allowed in the determination of corporate income under Article 11/1 (c). On the other hand, in the old version of Article 30 of the VATL, there was a clause which stated that VAT paid “due to expenses whose deductions are not accepted in the determination of income according to Income and Corporate Tax laws.” Under this version of the law, since the disguised profit distribution was an expense that was not accepted by law, the deduction of the VAT paid was not accepted. For this reason, many problems occurred in practice.
The legislature, which was not indifferent to this problem, made changes in related communiqués and the VATL in successive years. The relevant changes are as follows:[4]
The Communiqué (Serial No: 6) on the Amendment to the Communiqué on Value Added Tax General Application
This Communiqué has eliminated the need to make any adjustments in the deduction accounts regarding the taxes that are paid excessively or improperly due to the deductions in the import base of taxpayers who have the right to deduction (including the cases where it is determined that disguised profits are distributed through transfer pricing).
The Law Making Amendments on Certain Laws Aiming to Improve the Investment Environment Law No. 6728 (“Law No.6728”)
Law No. 6728[5] states that the VAT deduction prohibition regarding expenses will not be applied to disguised profit distributed through transfer pricing, VAT paid on imports related to the differences against the corporations, and VAT paid by responsible in accordance with Article 41/1 (5) of Income Tax Law No.193.
Law No. 7104 Amending Value Added Tax Law and Some Laws and Decree Law No. 178 (“Law No. 7104”)
VAT deduction pertaining to VAT paid in import or paid as a tax responsible relating to disguised income distributed through transfer pricing and also VAT deduction declared and paid on time by taxpayers who deliver goods or perform services in domestic transactions has been accepted. As a result, the deduction of VAT, which is an unaccepted expense and calculated over the disguised income, has been accepted.
Although these amendments[6] have resolved the VAT deduction problem, the effective date of the last revision, 06.04.2018, is very crucial. In this context, the aforementioned confusion continues in terms of tax inspections before 06.08.2018 and disputes at the litigation stage...
[1] Onay, İsmail: “Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımına Konu İşlemlerin Katma Değer Vergisi Boyutu”, Vergi Dünyası Dergisi, Year: 39, Number: 460, December 2019, p.99.
[2] Softa, Murat; Taşkesen, Naciye: “Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımında KDV Kargaşası”, Vergi Sorunları Dergisi, Number: 320, May 2015.
[3] Özer, Umut: “Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımı Hakkında Bilinmesi Gerekenler(E-Yaklaşım)”, E-Yaklaşım, Number 280, April 2016.
[4] Çelik, Tolga: “Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımının Katma Değer Vergisi Kanunu Karşısındaki Durumu”, Vergi Dünyası Dergisi, Year: 39, Number: 459, November.
[5] Official Gazette dated 09.08.2016 and numbered 29796.
[6] Official Gazette dated 06.04.2018 and numbered 30383.
[7] Softa, Taşkesen, p. 75.
[8] The Decision of 4th Chamber of Council of State, dated 26.12.2017 tarih numbered 2016/13841 E., 2017/9030 K., Lexpera, https://www.lexpera.com.tr/ictihat/danistay/e-2016-13841-k-2017-9030-t-26-12-2017, Access Date: 21.10.2021.
