Turkey: Transfer Pricing Under Turkish Tax Law from the Perspective of International Applications

Last Updated: 28 July 2010
Article by Ömer Gündogdu


The importance of economic relations between the countries has increased with the ever-growing mobility of capital in the globalised world. In the current conditions, where international investments significantly rise, companies wish to maximize their profits. For this aim, companies try to transfer their returns to associated companies so as to evade their tax burdens. This has entailed the need for a regulation in tax law of distribution of hidden income by way of transfer pricing. Countries have adopted similar regulations so as to minimize unfair gains and tax loses and this application has been already disseminated to a wide range of areas. Regulations regarding the transfer pricing have been firstly established in the USA where the judicial precedence and legislative experience has a deep-rooted history. Hitherto more than 50 countries have adopted the application.

Transfer pricing is briefly defined as the price level at which merchandise is sold between related firms, i.e a subsidiary company to parent company. Survey results have shown that the matter of transfer pricing is the primary problem in the international tax law including but not limited to double taxation.

Regulation Under Turkish Law

Turkish transfer pricing rules were introduced by the Corporate Income Tax Code numbered 5520 and effective from 1 January 2007 ("Corporate Income Tax Code"). In the former Corporate Income Tax Code numbered 5422 ("Former Code"), the issue was held rather indirectly rather than giving a clear definition or provisions setting out the lines and consequences. The regulation has become ineffective not only due to some existing ambiguities but also because it was not fully in parallel with the international rules and it lacks guiding feature.

In the Former Code, if transactions were carried out between the shareholders or affiliated companies of corporations and the companies themselves at a price which is "outstandingly low or high compared to the arm's length price", then such gains were deemed to have been distributed in a disguised manner. However the Corporate Income Tax Code requires companies to determine the prices in accordance with the arm's length principle, to select a specific method whilst pricing, and to record such transactions with certain required documents. Pursuant to the arms' length principle, price of the transactions between related persons must be determined according to normal price applied to third parties.

In the Article 13 of the Corporate Income Tax Code, it is stated that income shall be deemed to have been distributed in a disguised manner if the companies engage in related party transactions at prices which are not in line with the arm's length principle. In general, Turkish transfer pricing rules are based on the OECD Transfer Pricing Guidelines. The new code has enabled us to evaluate the subject with more objective criteria.

The Corporate Income Tax Code defines the concept of "related person" very broadly. Whereas the issue of transfer pricing comes up at the transactions made between multinational companies, therefore it concerns multiple countries; Turkish Corporate Income Tax Code does not differentiate domestic transactions from international ones with regard to the transactions between associated companies. Pursuant to the Article 13, "related person" is a real or legal person who has a direct or indirect adherence to the companies (which include the shareholders of companies) or who is under control of such companies in terms of management, auditing or capital. Spouses of shareholders, relatives of the shareholders or shareholders' spouses who are in the linear kinship including up to the third degree relatives in the horizontal kinship as well as kin in laws are accepted as "related persons". Thus, for instance, when a company trades with another company which belongs to one of the above-mentioned related persons, it is obliged to apply the arm's length price and to document the transaction appropriately.

Moreover, all transactions carried out among the people residing in certain countries or regions are considered as transactions made with "related persons". Such countries and regions are determined by the Council of Ministers by taking into consideration whether the country's tax system of, which the income has been generated, provides the same level of taxing opportunity as Turkish tax system. One of the innovations of the Corporate Income Tax Code is that, thirty percent of tax cuts shall be applied to all payments made to or by the related persons, no matter whether the transaction is taxable or whether the party making tax payment is a tax payer. Thus, a person who makes payment for actual goods or services in cash or via bank accounts to the institutions which reside or operate in tax heaven countries, shall make tax deduction at the ratio of thirty percent ignoring the taxability of the transaction or the tax payer status of the institution. The Code also stipulates its exceptions, though the Council of Ministers has not settled the issue yet.

How to Determine the Arm's Length Price

Non-public companies do not provide their financial data to any institutions or persons except tax offices in Turkey. Only public companies which are subject to the regulations of Capital Markets Board are required to disclose their financial statements. Given that there is no local database in Turkey, many hard problems arise when determining the arm's length price. However, both in Europe and the USA, there are many remarkable data banks in which companies submit their data. By way of these data banks, arm's length prices can be controlled, hence companies take seriously the arm's length principle. Whereas in Turkey, in many sectors, it is almost impossible to obtain information about the market shares of companies, let alone the issue of non-existence of the data banks. In this respect, considering it as its legal duty, the tax administration should set up a data bank with respect to each sector and make the available information accessible to public. This would be in line with the basic principle of OECD and the principle of 'not levying tax for the companies before obtaining the information thereof'.

In order to determine the arm's length price, the Corporate Income Tax Code proposes three main methods:

  1. Comparable Uncontrolled Price Method
  2. Cost Plus Method
  3. Re-sale Method

Pursuant to the Corporate Income Tax Code, if the arm's length price cannot be determined by applying any of such methods (also known as "traditional methods") and if documented, a different method may be adopted. In other words, companies are free to adopt the most appropriate method to find the arm's length price.

If the tax payer cannot reach the arm's length price by using either of these traditional methods, then resort to the other methods described in the General Communiqué numbered 1 and dated December 6, 2007 regarding the Distribution of Hidden Incomes by way of Transfer Pricing ("Communiqué no.1"). According to the General Communiqué, beside the traditional methods, the method of net profit margin based on processing and the profit split method may be used by the tax payer.

If the taxpayers believe that they will not be able to determine the arm's length price by means of any of the above mentioned methods, it is also possible for taxpayers to use a transfer pricing method agreed with the Ministry of Finance through a Cash Pricing Agreement ("CPA"). Pursuant to the Communiqué no.1 and Decree dated April 13, 2008 and numbered 26846, the scope of CPA is limited to cross-border related party transactions of corporate taxpayers. Applications for unilateral, bilateral and multilateral CPAs are allowed. CPA can only be executed for a maximum period of three years.

The Corporate Income Tax Code requires companies to keep their records, charts and other documents used in the calculation of the arm's length price as a documentary evidence. Taxpayers have the primary obligation to prove that they applied arm's length price. If the taxpayer prepares the required documentation and submits it to the tax office on time, then the burden of proof is shifted to the one who claims that the arm's length price was not applied.

In order to supervise the transfer pricing, countries have adopted several applications such as detecting the inconsistencies and making certain comparisons. In many countries, particularly in Britain, auditing the transfer pricing mechanism is increasing day by day, and revenue authorities are taking a stricter stance on this issue. In France, an additional tax base has emerged as a result of transfer pricing adjustments for an average amount of 1 million Euro each year since 1999. The establishment of special inspection teams in France and the formation of a group of transfer pricing Coordination in Holland are a few examples showing the future place of transfer pricing auditing.


Turkish tax regulation does not impose a special penalty in case of a violation of the arm's length principle. In this case, general punitive terms of the Tax Procedural Law shall be applied.

The Corporate Income Tax Code necessitates the transparency of the price of transactions between related corporations. The essential point is that the prices determined in transactions concerning related corporations must be reasonable, logical and explainable. Documentation of such transactions constitutes the main backbone of transfer pricing.

As the administrative and judicial precedence is developed, the newly introduced components of transfer pricing and distribution of disguised profit in the Turkish tax legislation will gain a stronger and well-established place in practice.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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