KPMG Turkey Advance Pricing Agreement in Turkey June 2013 kpmg.com.tr © 2013 Yetkin Yeminli Mali Müşavirlik A.Ş., a Turkish corporation and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in Turkey. Introduction Dear Readers, Governments are facing much more pressure due to their public finance issues since the last economic crises. Therefore, governments are focusing on how to expand their tax base. Taxes are still the solid source of income for governments. Recently, OECD prepared a new report announced as “Step Change in Tax Transparency”.The aim of the report is quote “to put in place a global, secure and cost effective model of automatic exchange of information. The four steps in the report are described below: i) enacting broad framework legislation to facilitate the expansion of a country’s network of partner jurisdictions; ii) selecting the legal basis for the exchange of information; iii)adapting the scope of reporting and due diligence requirements and coordinating guidance, and iv)developing common or compatible IT standards. Moreover, the G8 Summit will also provide additional impetus for OECD’s work on addressing base erosion and profit shifting (BEPS) by multinational enterprises (MNEs). According to the OECD’s BEPS report, one of the key pressure areas is related to “transfer pricing”, in particular regarding the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents. In addition to international developments, transfer pricing has also been one of the significant topics of discussion for tax matters in Turkey since the inception of the regulations in 2007 and it continues to remain as a hot topic both for corporate taxpayers and tax authorities. Advance Pricing Agreement (APA), being an important part of the transfer pricing regulations in the country, is considered a valuable solution and a proactive approach to eliminate transfer pricing risks. As the global trends show that increasing number of countries are establishing and executing APAs, it has also emerged as an efficient way of managing transfer pricing risk for corporate taxpayers in Turkey. MNEs possibly face more risk of disputes with Turkish authorities over their transfer pricing practices as there is a level of comfort for local related party transactions (no TP risk unless there is treasury loss). Therefore, in order to mitigate the risk, MNEs started to consider entering APAs with the Turkish tax authorities and other tax authorities in the form of unilateral and/ or bilateral and multilateral APAs. In this publication, we are pleased to share APA processes in Turkey. We hope that the information is of use. Best regards, Abdulkadir Kahraman Head of Tax, Partner KPMG Turkey Contents Introduction1 Transfer Pricing in Turkey 3 Global APA Trend 3 Opportunities that APA Offers 4 When Should You Pursue an APA? 4 APA Process in Turkey 5 How Can We Help? 8 Advance Pricing Agreement in Turkey | 3 Transfer Pricing in Turkey Transfer pricing regulations were introduced in Turkey under Article 13 of the Corporate Income Tax Law and are effective for taxable periods, starting from 1st of January 2007. It has become more and more important in the recent years as the Turkish economy started attracting large amounts of foreign direct investment from the multinational enterprises (MNE). As Turkish tax authorities see transfer pricing and tax planning for the reason of ongoing shift of revenue to abroad, they have been putting more pressure on Turkish companies to enhance their tax transparency and transfer pricing implementation. The structural change in the tax audit organization of the Ministry of Finance contributed to the increased number of transfer pricing audits. In July 2011, tax auditors were reorganized and merged under a single Board, Turkish Tax Inspection Board. Four sub-groups were formed under this Board, one of which was organized to perform transfer pricing investigations as a special department. Even though there is no specific transfer pricing related tax audit procedures in the Turkish tax regulations, the recent amendment in the government audit staff structure have changed the audit approach for transfer pricing matters. The new formation in the audit board shows that transfer pricing is started being regarded as a special field in tax audits. Additionally, the draft code on the new income tax law which has been presented to the Parliament in June 2013 also covers provision pertaining to transfer pricing documentation requirements. Changes regarding the organizational structure of the audit staff and the income tax law will substantially continue to increase the scrutiny for transfer pricing matters. In order to meet the increasing transfer pricing requirements, Turkish corporate taxpayers have come to the realization that timely preparation of transfer pricing documentation does not always lessen the exposure to the risk of transfer pricing adjustments and penalties. Therefore, corporations in Turkey started seeking new ways to settle conflicts and disputes over the transfer pricing arrangements. In this respect, APA arises as a valuable solution and a proactive approach to eliminate transfer pricing risks that might rise in the future. Global APA Trend 1 According to the survey from KPMG which determined key global APA trends, APAs continue to provide an effective means to manage transfer pricing risk in many foreign jurisdictions. In 2007, the European Union (EU) Council accepted common guidelines for APAs within the EU. EU member states committed to implement the guidelines in their national administrative practices as far as legally possible, which several European countries have done since then. More countries inside and outside the EU plan to follow suit, and existing programs are being upgraded. For example: • China re-introduced its APA program in 2009 and is giving APAs greater emphasis. • Thailand upgraded its APA program with its release of new guidance for taxpayers on procedures, timing and application documents. • Vietnam and Malaysia have announced the introduction of new APA programs. • India announced in its March 2012 budget that it will soon introduce a new APA program. • Hong Kong released guidance to establish an APA program in March 2012. 1 “Navigating APAs” prepared by KPMG International; http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/apa/Pages/report.aspx 4 | Advance Pricing Agreement in Turkey Opportunities that APA Offers Provides tax certainty The most important factor that serves an advantage in applying for an APA is to gain some degree of tax certainty by determining the arm’s length prices for the intercompany transactions based on agreed terms with the tax authority. Mitigates the risk of audit and double taxation Corporate taxpayers are provided with the opportunity to negotiate and conclude a binding agreement with the Turkish Revenue Administration (TRA) and the foreign tax authority(ies) on their related party transactions. Facilitates transfer pricing planning APA process requires a comprehensive and detailed assessment of a taxpayer’s intercompany transactions and transfer pricing methodologies. Even though certain transactions are evaluated in the scope of an APA, during the course of an APA process, corporations conduct a full review of their current transfer pricing policies and also consider planning for future transactions. Offers time-efficient solution Compared to the time and effort spent in litigation, APA negotiation time is shorter and more predictable and the taxpayer has more control over timetable and resource commitments. Additionally APA renewals are usually less time consuming. Strengthens the relationship with the tax authority A mechanism of cooperation and negotiation between the taxpayer and the authority is created through an APA procedure. This process strengthens the working relations with the tax administration and provides an opportunity to solve tax issues directly with them. When Should You Pursue an APA? Taxpayers highly tend to apply for APAs for transactions that are large in scale and complex in nature, critical to business or have a high risk of audit. Based on our experience related to current transfer pricing audits in Turkey, below are transactions that are being scrutinized by the tax authorities and therefore would be more likely to be considered for an APA application: • Sales and purchases of goods, services and assets • Transfer and use of know-how, copyrights and trademarks • Management and administrative fees (cost allocation methodologies) • Intra-group borrowings • Guarantee fees and mark-ups Advance Pricing Agreement in Turkey | 5 APA Process in Turkey Turkey’s APA system is still in its beginning stage as only three unilateral APAs were officially signed between taxpayers and TRA. The first unilateral APA was concluded in July 2011 and the other two agreements were signed as of December 2012. However, corporations in Turkey are becoming more aware of its advantages as APA is regarded as a major means of resolving transfer pricing disputes globally. Details on the application of APA process are provided in Transfer Pricing Communiqué No. 1 on disguised profit distribution via transfer pricing. There are various factors that contribute to the fact that taxpayers prefer to apply for unilateral APAs in Turkey. They are easier to coordinate and complete than bilateral and multilateral APAs and less time, effort and expense are required to process them. Most importantly, as the APA concept is newly developing in Turkey, both taxpayers and tax authority are rather inexperienced in managing and processing APAs. However, unilateral APAs might create exposure to the risk of double taxation. Global trends show that bilateral and multilateral APAs are more acceptable by most of the foreign jurisdictions. For instance, Germany only considers unilateral APAs in cases where no tax treaty applies whereas in Hong Kong, the APA program is currently open only to bilateral and multilateral APA applications. We expect that the demand for unilateral APA applications would continue and taxpayers would also be more inclined to consider bilateral and multilateral APAs to mitigate the risk of double taxation. Turkish regulations define APA as an agreement between the corporate taxpayer and TRA on an appropriate transfer pricing methodology(s) for certain set of transaction(s) within the time and conditions set in the agreement, not exceeding three years. An APA can be unilateral (between a Turkish corporate taxpayer and TRA), bilateral (involving a Turkish corporate taxpayer, TRA and a tax authority in a foreign jurisdiction), or multilateral (involving a Turkish corporate taxpayer, TRA and more than one tax authority in other foreign jurisdictions). Who can apply for an APA? All corporate taxpayers (resident and non-resident taxpayers) are eligible to apply for APA. Which types of APAs are accepted in Turkey? Corporate taxpayers applying for an APA may request unilateral, bilateral or multilateral APA. Which transactions are in the scope of APA? There is no minimum threshold requirement for the size of transactions to be filed for an APA in Turkey. All intercompany transactions described below regardless of their size could be included in the APA process. • Corporate taxpayers’ transactions with international related companies • Corporate taxpayers’ transactions with related companies that operate in Free Trade Zones in Turkey • Transactions of corporate taxpayers that operate in Free Trade Zones in Turkey with related companies operate outside of Free Trade Zones. 6 | Advance Pricing Agreement in Turkey What is the application fee for an APA? APA application and renewal fees are 43.869,35 TL and 35.095,40 TL, respectively for the fiscal year 2013. What is the maximum duration time for APAs? APAs are valid for a maximum of three years after the tax year in which the APA is agreed. What is the APA processing time? The KPMG Survey reports that while completion times vary by country, the average time to process and complete APAs typically runs from 10 to 20 months2. Completion time of the unilateral APAs that were concluded in Turkey was approximately 8 to 12 months. Can TRA audit the intercompany transactions covered by APA? TRA can audit the intercompany transactions which are covered by APA. TRA has the right to audit the implementation of transfer pricing policy which is agreed upon APA. On the other hand, TRA cannot challenge the transfer pricing method which is agreed within the scope of APA. Does APA cover indirect taxes related to transfer pricing? APA does not cover indirect taxes related to transfer pricing; however it may serve as a guideline for solving related issues. 2 “Navigating APAs” prepared by KPMG International; http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/apa/Pages/report.aspx Advance Pricing Agreement in Turkey | 7 Process for reaching an APA The process for applying, negotiating and completing APAs is very similar among the jurisdictions that offer them. Below diagram summarizes the process in Turkey to reach an APA. Internal desicion to pursue APA (sometimes in consultation with third-party consultant) Expression of interest or pre-filing meetings with tax authorities (sometimes in consultation with third-party consultant) Submit APA application and provide documentation Due diligence and fact-finding by tax authorities Negotiations with and/or between tax authorities (as needed) APA NOT REACHED: Arbitration, informal agreement Drafting APA APPROVED: Renewal process begins almost immediataly Implementation 8 | Advance Pricing Agreement in Turkey How Can We Help? KPMG Turkey’s extensive skill and knowledge in tax and transfer pricing areas including past governmental experience to work closely with tax authorities will help our clients negotiate APAs more effectively and efficiently. Our negotiation experience in the audit process and strong working relationships with the tax authorities will resolve issues as quickly and favorably as possible. As a member firm in the KPMG International global network, we have ready access to the services of skilled professionals with in-depth knowledge of taxation regulations and significant contacts in most local tax authorities around the world. As we progress through the APA process with you, we could add value by being in close contact with the tax authorities and providing you with regular updates on your APA application, including updates on the perspectives and responses from the tax authority as they develop. What Can KPMG Turkey Do During the APA Process? KPMG Turkey assists the taxpayer in the following phases of an APA process. Phase I (Feasibility analysis before APA Application) During this step, KPMG Turkey will also seek to identify relevant noncovered intercompany transactions and discuss potential transfer pricing treatment for these transactions. • Perform function and risk analysis of the entrty(s) in relation to the transaction(s) under consideration. • Review available financial data. • Evaluate transfer pricing methods, key issues, and high-level strategy for the APA. Phase II (Pre-filing) Phase III (Conduct Function, Risk and Economic Analysis) • Provide assistance with collecting and reviewing any information and data that is needed for the pre-filing stage. • Hold post-conference meetings or conference calls with the taxpayer to discuss the outcome of the prefiling meeting. • Conduct a pre-filing session with the TRA. • Assist in developing and collecting information that is necessary for the taxpayer. • Discuss the proposed APA with the TRA on a more informal basis. This provides an opportunity for KPMG and the taxpayer to address particular areas of interest identified by the TRA in the final APA submission. • Prepare a pre-filing conference memorandum to be submitted to the TRA prior to the pre-filing conference. • Assess functions, risks, and assets of the tested party to characterize. • Perform economic analyses of the intercompany transactions and prepare other documentation required for the submission in context of APA objectives (including pertaining to any issue raised in the pre-filing meeting as being required for submission) Represent the taxpayer and attend any pre-filing conferences with the TRA APA staff. • Debrief from pre-file meeting and finalize meeting notes (to be shared with TRA upon request). • Agree and finalize detailed APA strategy. Phase IV (Preparation APA Submission) • Consolidate all the information and analyses from Phase 1 through Phase 3 for preparation of the APA submission for the taxpayer’s review and approval. • Prepare and submit a formal APA application to the TRA, including all information requirements pursuant to the applicable TRA APA procedures. Phase V (Negotiation with the TRA) • Assist the taxpayer to work through the APA process with the TRA. • Prepare for and attend at meetings with the TRA. • Respond timely to requests and questions from the TRA APA team. • Review the terms and conditions of the APA Agreement and work with the TRA and the taxpayer to finalize the APA. Phase VI (Separation of Annual Reports) • After the APA is finalized, KPMG Turkey will prepare Annual Reports each year for the duration of the APA in accordance with applicable TRA procedures. kpmg.com.tr kpmgvergi.com Contacts Abdulkadir Kahraman Tax Partner, Head of Tax Services T: +90 216 681 90 00 - 9004 E: [email protected] Timur Çakmak Tax Partner, Tax Compliance Services T: +90 216 681 90 00 - 9151 E: [email protected] Offices KPMG İstanbul Kavacık Rüzgarlı Bahçe Mah. Kavak Sok. No:29 Beykoz 34805 İSTANBUL T: +90 216 681 90 00 F: +90 216 681 90 90 KPMG Ankara Turan Güneş Bulvarı, Galip Erdem Cad. No: 41 Yıldızevler - Çankaya 06650 ANKARA T: + 90 312 491 72 31 F: + 90 312 491 71 31 KPMG İzmir Heris Tower, Akdeniz Mah. Şehit Fethi Bey Cad. No: 55 Kat: 21 D: 34 Alsancak - Konak 35210 İZMİR T: + 90 232 464 20 45 F: + 90 232 464 21 45 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International Cooperative, a Swiss entity. Member firms of independent firms are affiliated with KPMG International Cooperative. KPMG International Cooperative provides no clientservices. No member firm has any authority to obligate or bind KPMG International Cooperative orany other member firm vis-à-vis third parties, nor does KPMG International Cooperative have anysuch authority or bind any member firm. © 2013 Yetkin Yeminli Mali Müşavirlik A.Ş., a Turkish corporation and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in Turkey.