Turkey: Special Communication Taxes In Turkish Pay TV Markets: An Illustration Of Legal Uncertainty

Last Updated: 13 July 2015
Article by Şahin Ardiyok and Barış Yüksel

The Pay TV market in Turkey is dominated by the satellite platform operator Digitürk. Digitürk has been holding the exclusive rights to broadcast Turkish Football Super League matches for a period of 15 years and it has a stable market share above 60%. Digitürk has been under the control of Saving Deposit Insurance Fund (SDIF) since 2013 due to its controlling shareholders commitments based on Banking Law. Providence Equity Partners has also 47% shares.

The most significant competitor of Digitürk in the pay TV market is D-Smart, which is also a satellite platform operator. The current market share of D-Smart is close to 25%. Other players in the market are not satellite platform operators (one of them is a state-owned cable TV operator and the others are IPTV platforms).

The Tax Regime for Satellite Platforms

The Expenditure Taxes Law no. 6802 imposes a special communication tax (SCT) on all electronic communication services. The law specifies that the services concerning the transmission of radio and television broadcasting over satellite platforms and cable are subject to a SCT of 15%.

The rule seems to be simple and one may think that it hardly requires any interpretation. Unfortunately, this is not the case in Turkey. This simple-looking provision caused endless debates for a long time. It is now one of the most fundamental evils of the Pay TV operators. It creates a significant amount of legal ambiguity in the market and negatively affects the investment incentives of the operators. Moreover, it is now seen as one of the major reasons why SIDF is still unable to sell Digitürk.

The impediment related to that provision is with regard to its scope. Basically, there are different arguments concerning the meaning of the phrase: "transmission of television broadcasting over satellite platforms". We need to revisit the historical roots of the dispute in order to clarify the arguments.

The Background

Digitürk was authorized as a satellite platform operator in 2002. The full name of the authorized company was "Digital Platform İletişim Hizmetleri A.Ş. (DPİ)". Up until 2004, DPİ provided content-based services (e.g. provision of own content, gathering of content from third parties etc.) along with transmission services.

On 26.08.2004, a secondary legislation was passed by the Telecommunications Authority (TA) and it held that an authorized operator shall not provide any services, which are not qualified as "electronic communication services". Three months later, the TA notified DPİ that it shall immediately cease to provide content based services. In order to comply with this request, DPİ formed another company called Digital Platform Teknoloji Hizmetleri (DPT) and transferred the transmission services and the authorization license to DPT. The transaction was approved by the TA and DPİ, which continued to provide content based services, was no longer an authorized operator.

After the transaction, DPİ asserted that it was no longer subject to SCT as it ceased the provision of all electronic communication services and that only DPT was responsible for these taxes. The problem here was that transmission services amounted to a negligible amount of the total income since the actual money cow in the business was the content. DPİ was paying approximately €1 to DPT for the transmission services for each subscriber whereby the subscription fees that it received were as high as €70-80.

The tax authority claimed that the entire subscription fees shall be taxed but DPİ refused to pay SCTs. The authority imposed significant monetary fines on DPİ and DPİ objected before the administrative courts. The case was brought before the administrative courts in 2007.

D-Smart also applied for authorization to TA in 2007. D-Smart was authorized but TA ensured that the authorized company were to provide the whole package of services (i.e. both the transmission services and the content based services). The tax authority assumed that all of the services that are provided by D-Smart are electronic communication services and the SCT was calculated based on the entire subscription fee revenues of D-Smart (hence D-Smart paid SCT for content based services as well).

D-Smart claimed that the SCT shall be calculated based on the transmission revenues but the tax authority did not accept. As a result, D-Smart started paying SCTs for all its revenues but it retained its right to recover the SCT payments for the content services if DPİ were to win the case before the administrative courts.

The administrative proceedings that were initiated by the DPİ finally came to an end on 13.12.2013 and the Council of State (CoS), which reviews the decisions of the administrative courts as an appeal body, held that the DPİ was right in its claims. However, the CoS did not expressly hold that the DPİ was exempt from taxes because it was not providing electronic communications services. Rather than that, CoS held that a company, which is not authorized by the Information Communications and Technologies Authority (ICTA – the successor of TA), may not be subjected to SCT. This was because; under Turkish legislations, all companies that provide electronic communications services had to be authorized and only authorized companies were responsible for paying SCTs.

Current Situation

After the decision, the tax authority had to accept that only DPT was responsible for paying SCTs. However, it did not accept that the revenues that are generated from the content based services would be exempted from SCTs. The tax authority claimed that DPT (which is an authorized company) is responsible for paying SCTs for the revenues that are generated by DPİ. It further argued that it was illegal for DPİ to provide content-based services without proper authorization.

These claims of the tax authority were also supported by the ICTA. ICTA stated that DPİ shall transfer all its assets, operations and subscriptions to DPT. ICTA further argued that DPİ was in violation of the current regulations as it was providing electronic communications services without proper authorization. ICTA and has been imposing fines on DPİ ever since and DPİ is challenging all these fines before the administrative courts. Similarly, the tax authority claims that DPT and DPİ are avoiding SCTs. These disputes are also being seen before administrative courts.

For now, a final court decision to clarify these issues has not been rendered. Thus, at the moment, DPİ does not pay any SCTs and the DPT pays these taxes only for the transmission revenues which are close to €1 per subscriber (Digitürk has approximately 3 million subscribers). If the administrative courts find that the ICTA and tax authority are right in their claims, DPİ and DPT will be facing enormous amounts of tax fines. It is clear why the SDIF has not been able to find any willing buyers for the Digitürk.

In light of these developments, D-Smart also requested that its revenues from the content-based services should be exempt from SCT. However, as D-Smart was a single company that provides both content based and transmission services (unlike the dual structure of DPİ and DPT), the tax authority insisted that all revenues should be subjected to SCT. D-Smart tried to solve this problem by forming another company and transferring the license and the transmission services to that company (just like DPİ did back in 2004). D-Smart managed to form two separate legal entities in 2014 and now the content based services are provided by Mozaik İletişim Hizmetleri A.Ş. (Mozaik), which is not an authorized operator, whereas the transmission services are being provided by the Doğan Digital Platform Hizmetleri A.Ş. (DDPH).

D-Smart's move triggered a lot of opposition from the tax authority and the ICTA. They imposed similar fines to DDPH and Mozaik. However, the ICTA also tried to took further steps and it tried to cease the activities of Mozaik via a decision that is rendered solely by the president of the Authority. Although the administrative court immediately suspended the execution of the decision as it was not a proper Board decision, D-Smart is still facing significant uncertainty and it is also under the threat of tax fines.

EU's Approach

Under the EU regulatory framework, content-based services are explicitly exempted from the scope of electronic communications services. TA's approach in 2004 was actually in parallel with that of EU. Actually, ICTA is committed to follow the EU approach in the best way that it can. It seems that the current divergence between the approaches of the EU and ICTA stems from the state's reluctance to lose tax revenues.

We remind here that the harmonization of regulatory frameworks in electronic communications markets is important for Turkey's accession to EU. These issues are examined under Chapter 10 of Turkey's Progress Reports titled "Information Society and Media". ICTA's persistence on including content-based services within the scope of electronic communications services might negatively affect the accession process.

Moreover, if the content-based services are defined as electronic communications services, significant jurisdictional conflicts may arise between ICTA and the Radio and Television Supreme Council (RTSC). Currently, the content based services falls under the exclusive jurisdiction of RTSC and the electronic communications services falls under the exclusive jurisdiction of RTSC. However, if the boundaries between these services are blurred due to tax-related issues, the overall regulatory framework could be distorted and the legal uncertainty may increase even more.

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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Şahin Ardiyok
Barış Yüksel
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