"Türkiye- The Year-End Transfer Pricing Adjustments" are different this year...

The prices applied for purchase/sell of goods, services, intangible rights and financing transactions between companies that are part of a Group, especially those that are part of a Multinational Group or have investments abroad must be determined in line to the arm's length principle. The transfer pricing methods that must be used, to implement the arm's length principle are included in the OECD and Turkish Transfer Pricing regulations. One of these methods is the "Transactional Net Margin Method", which is a one-sided method that takes "net profitability" as a basis when determining the arm's length transfer prices.

In the application of this method, the tested party to be focused on the profitability (the party with more routine operations) is determined, ensuring that the party in question obtains an arm’s length profit margin which is in line with its activities and comparable.

It is quite common for Country Administrations to criticize the profit margins left to routine companies in their jurisdictions because of the Transactional Net Margin Method implementation. This situation leads to tax disputes. The OECD BEPS 2.0 Pillar 1 Amount B initiative, aims to prevent such disputes by streamlining routine activities in terms of transfer pricing.

Apart from the profit margins left in countries, there are other issues that need to be taken into consideration. One of these issues, is to decide which financials will be taken into consideration for transfer pricing adjustments. As commonly known, companies in Türkiye are subject to two separate financial reporting requirements, in accordance with the provisions of the Turkish Commercial Code (TCC) No. 6102 and the Turkish Tax Procedure Law (TPL). According to the TCC the Turkish Financial Reporting Standards (TFRSs) and the Turkish Accounting Standards (“TMS”) are applied, which aim to form the consistency and accuracy of financial reporting, in accordance with international accounting standards (UMS/UFRS). On the other hand, taxpayers are required to prepare their financial statements according to the Uniform Chart of Accounts. While the financial statements prepared in accordance with the TPL, are prepared based on the accounting standards specified in the law, which include the use of a Uniform Chart of Accounts; the financial statements are prepared for tax purposes. These accounts are generally known as “Legal/Statutory/Tax Accounts”. Furthermore, taxes are calculated according to the Legal Accounts.

In fact, companies generally keep books and records according to the uniform chart of accounts and the Tax Procedure Law and get back to TFRS/IFRS with some adjustments.

When we look at the examples of other countries, we see that taxpayers generally keep their books according to the financials prepared in line with generally accepted accounting principles (GAAP) declared by their own countries (for example, German GAAP), these records may differ from IFRS, and these financials are taken as basis for tax calculation. We understand that the tax corrections “book to tax adjustments” are performed to local GAAP to calculate taxes.  The difference in Türkiye is that the main financials are kept for tax purposes and some taxpayers issue separate financials in line with TFRS, and at the same time for corporate tax calculation, some adjustments are made to tax financials prepared in accordance with the TPL.

In a nutshell, there may be significant differences between tax-based records and TFRS and also IFRS for Türkiye when compared to other countries. In particular, the differences between the inflation accounting standards of legal and TFRS which is implemented in FY24  also lead to material differences. Additionally, with the minimum global corporate tax entering into force as FY 24, it should be noted that, financials prepared in accordance with IFRS must be in line with the arm's length principle. Consequently, all these factors have turned year end transfer pricing adjustments into an equation, with more than one unknown. Therefore, the financial statement basis for the year end transfer pricing adjustments will be important than ever.

For Türkiye, since corporate tax is calculated based on legal records, taking legal records as basis in transfer pricing adjustments is the main approach. However, in comparable analyses, the financial statements of companies operating in different countries, prepared in accordance with their own country's GAAP or IFRS, are taken as the basis for analysis and this prevents “apples-to-apples” comparisons when financials prepared in accordance with TPL are used for transfer pricing purposes for Turkish companies (tested parties). This may distort the comparability factors as well.  Additionally, when monitoring transfer pricing profitability across countries, Groups find more validation in looking at the financials prepared in line with IFRS, when reporting to their own country administrations. The OECD Pillar1 Amount B application will also be based on financials prepared in accordance with IFRS. In addition to these arguments plus considering the global minimum corporate tax; we believe that Türkiye should also be able to make transfer pricing adjustments based on financials prepared in accordance with TFRS. We believe that transfer pricing adjustments made in accordance with TFRS should be accepted by the Administration at a certain level. With the global minimum corporate tax, as top up taxes will now be calculated from financials prepared in accordance with IFRS rather than legal accounts, an evaluation should be made for transfer pricing analyses to be also conducted in accordance with IFRS. Similar to profit distribution rules which mandate that the distributed profit amount based on TFRS can not exceed the  total amount of resources in the records kept in accordance with the TPL; the year end transfer pricing adjustments performed based on TFRS may be acceptable by Tax Authorities satisfying that the statutory accounts also show a certain level of profitability. In addition, it should be kept in mind that if the legal records as a result of the correction made according to IFRS, show a lower/higher profitability than the comparables, unilateral corrections can be acceptable to be performed through the Corporate Tax Income Declaration.

Apart from this, another important point is to decide which Profit Level Indicator should be taken into consideration after inflation accounting. Under normal conditions, especially for routine distributors, Operating Profit Margin (OM or EBIT) is generally taken into consideration as the target profit margin. In the financial statements where inflation accounting has been applied both to legal and IFRS accounts, Operating Profit Margins will vary compared to results where inflation accounting has not been applied. For example, according to legal records, there may be a decrease in the operating profit margin after inflation accounting, while in the financial statements prepared according to IFRS, there may be higher operating profit margins after inflation accounting standards, or the opposite may occur. In this case, for any financials to be used as the basis; it should be evaluated whether transfer pricing adjustments should focus on inflation adjusted or pre-inflation results. Additionally, when there is the inflation accounting loss which is accounted below the Operating Profit Margin and which occurs as a result of  the indexation of the equity; the treatment of such losses from transfer pricing adjustment perspective is an important issue. In fact, while a routine Company is expected to make a profit at the Operating Profit margin level, the Company in question is not expected to make a loss at the pre-tax level due to its limited functions and risks. This is not only valid  for inflation accounting differences but also for exchange rate differences or financing expenses, should be considered. The general approach is to include or exclude non operating items line with the explanations made in the OECD guidelines and  depending on the nature of the transaction and the direct link between transfer prices.

Considering the above explanations, while many different local and international taxation rules are entering into our lives today, we would like to bring to your attention that especially year-end transfer pricing adjustments have become more complicated and should be monitored with importance. In addition, it is very important to evaluate the said adjustments in terms of indirect taxes; especially from customs duties perspective.