Use of Internationally Accepted Financial Accounting Standards in Pillar 2 and its effect on Transfer Pricing Implementations in Türkiye

Türkiye introduces a new law which make amendments to various tax laws and also introduces Domestic and Global Minimum Corporate Tax rules and also a Domestic Minimum Tax. The new regulations are published in the Official Gazette on 2 August 2024, and became effective. Therefore, Türkiye like other European countries is now implementing Pillar 2 rules which are expected to be in line with OECD GloBE model rules.

Pillar 2 or GloBE rules targets to tax the jurisdictional profits of multinational enterprise (MNE) groups whose annual consolidated revenue exceeds EUR 750 million in at least two of the four preceding accounting periods. The minimum tax rate is set as 15 % Effective Tax Rate (ETR). The ETR of MNEs in each jurisdiction will be calculated and in case the ETR is below 15%, the difference between the 15% and current ETR will be deemed as a “Top up tax” and will be paid in accordance with Income Inclusion Rule (IRR) or Undertaxed Payments Rules (UTPR). In case countries apply Qualifying Domestic Minimum Top up tax (QDMTT) or QDMTT safe harbours; then the taxes will be paid in countries where the Constituent Entities are operating and can be deductible from the top up tax calculated under IRR rules.

Based on OECD GloBE model rules, in the calculation of the ETR (i.e Covered taxes and GloBE income), the internationally accepted financial standards will be used. Türkiye also expressed that internationally accepted financial standards will be used for GloBE calculations. Therefore a new era is coming and taxpayers will experience to calculate top up taxes or QDMTTs based on internationally accepted financial standards.

As known, in Türkiye; entities are subject to two separate sets of financial reporting requirements, as governed by the Turkish Commercial Code No. 6102 (TCC) and the provisions of the Turkish Tax Procedure Code (TPC). Per to TCC; Turkish Financial Reporting Standards (TFRS) and Turkish Accounting Standards (“TAS”) are applied which aim to design the consistency and accuracy of the financial Reporting in line with international accounting standards (IAS/IFRS). On the other hand, taxpayers are required to prepare their financial statements based on Uniform Chart of Accounts.  Financial statements which are prepared under the TPC are based on the accounting standards specified within the law, which includes the use of a uniform chart of Accounts, whereas financial statements are prepared for tax purposes. These accounts are generally called as “Statutory/Legal Accounts”. Taxes are calculated based on the Statutory Accounts.

Therefore, knowing that TFRS/IFRS accounts will be used in the implementation of GloBE rules; identifying transfer pricing related matters is important. For instance; GloBE model rules ensure that the transactions between constituent entities (CE) should be in line with arm’s length principle and the amounts that are reflected to financial statements should be determined in line with the arm’s length principle. GloBE rules state that any transaction between Constituent Entities located in different jurisdictions that is not recorded in the same amount in the financial accounts of both Constituent Entities or that is not consistent with the Arm’s Length Principle must be adjusted so as to be in the same amount and consistent with the Arm’s Length Principle.

Therefore, Financial statements which are prepared in accordance with international accounting standards and where the related party transactions are determined in line with arm’s length principle will be used for Pillar 2 purposes.  

Transfer pricing applications of MNEs in Türkiye may depend on the approach of such MNE group. However many of the MNEs monitor and use “Statutory Accounts” to set and also test the arm’s length nature of the transfer prices. In other words, the prices or profitability for transfer pricing purposes are generally targeted based on Statutory Accounts and if required necessary transfer pricing adjustments are performed based on such accounts. While some MNEs monitor and use IFRS or the Group GAAP ; it is a common approach to review the transfer pricing related results based on statutory accounts. For example, there might be cases where a related party distributor suffer losses based on IFRS accounts whilst having arm’s length profit margin based on statutory accounts. For this specific case, MNEs which only review and adjust statutory accounts will take no action for such losses of IFRS financials assuming that statutory accounts of which taxes are calculated are in line with arm’s length principle. Before Pillar 2, this approach was quite working since transfer pricing is considered as a tax matter. However after Pillar 2, the IFRS financials should also reflect the arm’s length principle, thus MNEs should also adjust IFRS financials based on arm’s length principle.

For countries, where local GAAPs are similar to IFRS; that might not be a material concern. However, for Türkiye, applying transfer pricing adjustments to financial statements which are prepared in accordance with internationally accepted financial standards will be very important to ensure that financial statements reflect arm’s length principle.

There are also many cases where Tax Authorities may perform transfer pricing adjustments based on an audit or based on unilateral or bilateral Advance Pricing Agreements (APA) The adjustments made in one CE should also be considered and reflected to financials of counterparty CE. Therefore transfer pricing implications continue to be important in Pillar 2 implementations. Turkish MNEs should also monitor the transfer pricing results of their affiliates based on IFRS to capture arm’s length principle application of Pillar 2.

Pillar 2 rules will be effective for 2024 income ( 2025- UTPR) in Türkiye. Therefore, we advise MNEs in Türkiye to review the transfer pricing results based on both statutory and financial statements which are prepared in accordance with internationally accepted accounting standards and make necessary transfer pricing adjustments to ensure golden arm’s length standard.