Recent Increases in Transfer Pricing Audits in Türkiye and Key Risk Areas

We are experiencing a significant increase in transfer pricing audits as part of a broader effort by the Turkish Revenue Administration (TRA) to enhance tax compliance and combat tax avoidance. Transfer pricing, which governs the pricing of transactions between related parties within multinational enterprises (MNEs), has become a focal point for tax authorities. Since the introduction of transfer pricing regulations under Article 13 of the Corporate Income Tax Law, this year can be called as “TP Audit Year” due to massive transfer pricing audits.

The Companies selected for transfer pricing audits are generally MNEs operating in diverse sectors, and which have material intercompany transactions. MNEs which have foreign direct investment in Türkiye and constitute an important part of Turkish’s business volume and employment are selected as a starting point.

There are various reasons of the increases in the numbers of transfer pricing tax audits. As known, Türkiye follows international tax standards and particularly the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plans. BEPS Action 13 requirements, formalized in Türkiye through the Presidential Decree No. 2151 and the General Communiqué on Disguised Profit Distribution through Transfer Pricing (Series No: 4) in 2020, have equipped the TRA with more data to identify potential transfer pricing risks.  In addition, it is worthwhile pointing out that the as the Turkish economy continues to grow, albeit at a slower pace, the government faces pressure to expand its tax base to address fiscal challenges, particularly under the shadow of global economic crises. Having said that it is reasonable to expect for more transfer pricing audits in Türkiye and MNEs should be well prepared for this.

As knows, the BEPS framework, particularly Action 13, introduced three tier documentation requirements, including Country-by-Country Reporting (CbCR), Master Files, and Local Files, for MNEs with exceed some thresholds. Basically, Turkish taxpayers are required to fulfil these transfer pricing documentation requirements. Timely and proper TP documentation provides a 50% penalty reduction. The transfer pricing reports (Local file, Masterfile) along with its appendices are requested from taxpayers during the audits and transfer pricing audits are mainly performed through a review of the local files first. Therefore, a robust documentation is a key success area in managing a transfer pricing audit. It is also worthwhile mentioning that Turkish translations are generally required when delivering the reports to Tax Authorities.

The main topics to be analysed and reviewed by TRA during transfer pricing audits will be intra-group services and intangibles, such as management fees, royalties including business fees, and cost allocations. MNEs generally apply centralized and integrated business models, to create synergies, ensure quality and standards, as well as lowering the costs. This centralized structures with the aim of cost and effort savings are crucial under prevailing economic conditions (i.e the global conflicts, trade wars etc). This centralized business models lead to cost allocations and Intangible Property (IP) grant/use within the Group where IP is not limited to standard trademark or know how but it also includes business processes, customer lists, supplier lists, IT programmes etc. Thus, MNEs start to review their value chains and key value drivers which contribute to the overall profits of the Group and started aligning their transfer pricing policies to such key value drivers and the parties who perform DEMPE functions. This led to increased intercompany transactions in the form of transfer pricing adjustments, business fees, royalties and cost allocations. Especially after 2020, we experience a variety of changes in Group’s pricing policies which aim to align the economic reality to the transfer prices and MNEs which did not apply consistent transfer pricing policies before started to correct their policies which led to local affiliates pay more fees or get compensated.

Therefore, transfer pricing audits now in Türkiye will explore Group’s transfer pricing policies and its local implementation accordingly. It is, therefore, extremely important to prepare the calculation details of the intercompany transactions (mainly services, IP). The benefit tests which show that the services/IP are real and Turkish entity has benefited from the use/receipt of such IP/services are crucial for a successful audit.

Intercompany Agreements are also widely requested by Tax Authorities in transfer pricing audits. As know, stipulating intercompany agreements are not mandatory in Türkiye. However, from a tax perspective, it is always recommended to have an agreement between parties. Recent Tax Audits have demonstrated that Tax Authorities are willing to have all intercompany agreements and review of the agreements play a very important role in tax audits. Thus, intercompany agreements which clearly expalin the transactions, roles and responsibilities and pricing scheme is very important. The agreements should be aligned with the economic substance and the local files should contain information which align with the intercompany agreements.

MNEs operating in Türkiye shall be ready to expalin their Group policies and consistent application of these policies to their Turkish affiliates during tax audits. A robust documentation, the intercompany agreements, the details of the fees and the details of all economic analyses presented in the local files shall be kept ready. Above all, it should be ensured that intercompany agreements reflect the actual functions, risks, and assets of related parties. We also advise speaking up in the tax audit and explaining the Group business and functional profile of local entity and the sector specifics to draw a clear picture to Tax Authorities which is important.

Considering tax audits will continue, Groups should diligently complete their documentation requirements for Türkiye.

In addition, as a proactive approach, Advance Pricing Agreements (APA) can save such tax audit efforts and uncertainties. Therefore, best approach would be seeking for an APA in case the transaction amounts are material, and a possible challenge of the pricing policies may lead to material tax exposures and penalties.

As a conclusion, the transfer pricing audits will continue and to mitigate financial, compliance, and reputational risks, MNEs should prioritize transfer pricing policies and documentation. Managing a transfer pricing audit requires collaboration of different departments within the Company (business owners, finance, reporting, tax) and conveying correct and sufficient information to Tax Authorities. Moreover, to facilitate the data collection processes and create a proper defence file for especially services and IP; recent technologies and Artificial Intelligence (AI)[1] can be implemented by Companies. Building a tax audit strategy before the tax audit is also important to manage the process easily and proper.