Advance Pricing Agreements in Turkey, Yes, No or Maybe?

Transfer pricing regulations have been introduced in Turkey under Article 13 of the Corporate Income Tax Law. As the Tax Authorities tend to see transfer pricing for the reason of ongoing shift of revenue to abroad, they have been putting pressure on the taxpayers to enhance tax transparency for proper transfer pricing documentation and implementation.  Under increasing tax audits, taxpayers search for ways to secure their transfer pricing applications. Thus, Advance Pricing Agreement (APA) is a good instrument to mitigate transfer pricing related risks for taxpayers.

Turkish regulations define APA as an agreement between the taxpayer and Turkish Revenue Administration (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 five 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)

There are currently 19 APAs signed between the taxpayers and the TRA. The first unilateral APA was signed in 2011 and the last APA which is a bilateral APA has been signed in 2024. Taxpayers has right to apply for an APA since 2007, however despite 17 years, the number of APA cases are limited. Thanks to the economic reform package announced in 2021 which expresses APAs as an instrument to secure tax risks for foreseeable tax climate for investors, the APA processes have been accelerated with increasing demand from taxpayers.

With the encourage from government, corporations in Turkey are becoming more aware of the advantages of APA as it is regarded as a major means of resolving transfer pricing disputes globally.  Considering the global developments in the tax landscape (i.e  OECD BEPS 2.0  two pillar solution mechanism and its proposed rules), it is expected that the global and local tax implications are getting  more complex and will create more disputes and controversies. Therefore, taxpayers having a chance to at least secure their transfer pricing implications consider APA as a good tool to manage some part of their tax risks.  While the unilateral APAs are common in Turkey, they might create exposure to the risk of double taxation since they only secure Turkish part. Global trends also show that bilateral and multilateral APAs are more acceptable by most of the foreign jurisdictions.

In any case, the APA process starts with a formal application to TRA. Before formal application, taxpayers may have a pre meeting with TRA to evaluate and discuss the intercompany transactions. After the APA appeal, TRA analyses and assesses the case based on the petition and documents provided. In case APA is bilateral or multilateral, TRA and the related Revenue Administration exchange information and ideas. As a result of analysis and evaluation phase, the APA is either accepted or rejected. Taxpayers also has right to withdraw their cases.  The APA is valid for 5 years and can be rolled back to prior years which is still open.  APAs can also be renewed. There are written periods to complete a unilateral or bilateral APA in Turkish TP rules. However, in practice, the length of APA processes may extend to 1-2 years for unilateral, 2-4 years for bilateral/multilateral APAs. The length may also depend on the complexity of the case, the adequacy of the information provided and may change case by case.

Having said that, TRA gives a strategic importance to increase the number of APAs which is believed to provide a transparent and low risk tax climate for investors. We also believe that APA is a good way to mitigate transfer pricing related risks which can be at high levels for especially some Multinational Enterprises (MNEs) operating in Turkey. We think that a strong APA programme in Turkey may also help attracting foreign direct investments.

To enable this, a predictable and relatively short APA case period should be targeted and taxpayers should consider applying an APA if they enter into material cross border intercompany transactions. Companies of which shares are publicly held should also evaluate APA option to build trust for minority shareholders. The roll back mechanism is also important since taxpayers can also secure their prior years applications with one APA.

The application of Pillar 1 Amount B which will also maintain a degree of transfer pricing security for baseline distributors should also be also evaluated when an application will be made for APA. Lastly, we recommend TRA to closely work with Turkish Customs Authorities to define the effect of APAs to customs value of the products which are imported from related parties. For royalty and service transactions, it is also important to clarify whether an APA is sufficient to satisfy the benefit test or an APA clearly indicates the withholding tax application of services which depends on the nature of the services.

In an increasing complexity, taxpayers should know that APA is a strong mechanism which can secure transfer pricing risks.  APA programme can be a gold standard for a better tax environment and  increased tax transparency.