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.
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