Turkey to Implement Pillar Two Rules Starting from 2024

Overview of the Pillar Two Legislation

A Draft Bill was presented to the Turkish Parliament on 16 July 2024 which aims to amend various tax laws and to include Domestic and Global Minimum Corporate Tax in line with the OECD’s Pillar Two rules and also a Domestic Minimum Tax into Turkish legislation. The Bill is approved and published in the Official Gazette of Turkey on 2 August 2024, and become effective.

Key Provisions of the Pillar Two Law

The Law encompasses significant changes, particularly in Articles from 36 to 50, which includes the following:

1. Turkish Domestic Minimum Tax (DMT):
• Article 36 introduces a Turkish Domestic Minimum Tax and states that the corporate income tax calculated cannot be less than 10% of the corporate earnings/profits before the additions and deductions to corporate tax base.
• This article will be applied to each taxpayer in Turkey and different from the Domestic Top-Up Tax explained below.
2. Domestic and Global Minimum Top-Up Tax:
• Articles 37 to 50 contains a Global Minimum Top-Up Tax aligned with the Pillar Two Global Anti-Base Erosion (GloBE) rules, as well as a Qualifying Domestic Minimum Top-Up Tax (“QDMTT”). Accordingly, the profits of affiliated enterprises belonging to multinational enterprise (“MNE”) groups, with an annual consolidated revenue in the consolidated financial statements of the ultimate parent enterprise (prepared in accordance with the internationally accepted accounting standards) exceeding the Turkish Lira equivalent of EUR 750 million in at least two of the four accounting periods before the reporting accounting period, will be subject to Domestic and Global Minimum Top-Up Tax in the relevant fiscal period. These rules will be incorporated into the Turkish Corporate Tax Law.

Global Minimum Top-Up Tax will be calculated based on the Income Inclusion Rule (IIR) applying for fiscal years starting from 1 January 2024, and the Undertaxed Profits Rule (“UTPR”) applying for fiscal years starting from 1 January 2025.

Details of Global Minimum Corporate Tax

The Law includes 13 articles related to the Global Minimum Top-Up Corporate Tax that will be added to Turkish Corporate Income Tax Law. In these articles; subject of the tax, definitions of main concepts (e.g. ultimate parent entity, MNE group, safe harbor, covered tax, consolidated revenue, net tax expense etc.), the enterprises that are exempted, calculation of the tax burden, tax base, substance based carve-out rules, applicable tax rate, taxation period, declaration, assessment, payment of Global Minimum Corporate Tax and certain other matters regarding the implementation are regulated.

Scope of Tax and Calculation

The Law targets the profits of multinational enterprise (MNE) groups whose ultimate parent entities have annual consolidated revenues exceeding EUR 750 million in at least two of the four preceding accounting periods. These profits will be subject to the qualifying domestic and global minimum top-up corporate tax. The Law states that in line with OECD GloBE rules, international shipping income is excluded from GLOBE income calculations.

The minimum global corporate tax rate is 15%. The difference between 15% and the effective tax rate (ETR) of a MNE group calculated on jurisdictional basis and in accordance with the Pillar Two regulations will be collected as the Top-Up Tax.

The calculation considers the adjusted covered taxes of affiliated enterprises. In line with OECD Model Rules. while making the jurisdictional ETR calculations, the GloBe income or loss of an affiliate for the relevant accounting period will be determined by making certain additions to (e.g. net tax expense greater than zero, equity losses, revaluation method gains, asymmetric foreign currency gains or losses, etc.) or deductions from (e.g. net tax expense less than zero, excluded dividends, equity gains, revaluation method losses, asymmetric foreign currency gains or losses etc. ) the net book profit or loss reported by that affiliate.

In determining the Top-Up Tax base, 9.8% of the gross wages of the employees and 7.8% of the net book value of tangible fixed assets (for 2024 accounting period) are allowed to be deducted from the total net jurisdiction-based income, in line with substance-based income exclusion (SBIE) rules of OECD Model Rules. These rates are applied by decreasing 0.2% for the following four accounting periods; and starting from 2029 and for the following four accounting periods, by decreasing 0.8% for the gross wages of the employees of the subsidiaries for each accounting period and 0.4% for tangible fixed assets.

Exemptions

The following enterprises and their workplaces are exempt from local and global minimum top-up corporate tax:

–       public institutions and organizations, as well as international organizations;

–       non-profit organizations;

–       pension investment funds;

–       funds evaluated as investment funds, including those qualifying as ultimate parent enterprises; and

–       funds evaluated as real estate investment vehicles, especially real estate investment trusts, qualifying as ultimate parent enterprises.

For MNE groups that have affiliates in a maximum of six different countries and whose net book value of their tangible fixed assets does not exceed the Turkish lira equivalent of EUR 50 million in countries other than the country with the highest total tangible fixed assets, the Global Minimum Top-up Tax is assumed to be zero for five accounting periods.

Payment and Reporting of Global Minimum Top-Up Tax

The Global Minimum Top-Up Tax is based on the accounting period, which is the period used to prepare the consolidated financial statements of the main parent company. Taxpayers must declare and pay the calculated tax by the end of the 15th month following the end of the accounting period.

For the QDMTT, the taxpayer is any affiliated enterprise or joint venture resident in Turkey. The tax must be declared and paid within 12 months after the accounting period ends.

Safe Harbour Provisions

Based on the transitional safe harbour provisions contained in the Law, if one of the below three tests is passed, Top-up Tax in Turkey will be considered zero.

1.     The jurisdictional revenue of a MNE group (based on the Qualified CbCR data) is less than the Turkish Lira equivalent of EUR 10 million and the jurisdictional profit before tax is less than the Turkish Lira equivalent of EUR 1 million (De minimis Test).

2.     The MNE group’s jurisdictional ETR (based on the CbCR data) is equal to or more than 15% for 2024 accounting period, 16% for 2025 accounting period and 17% for 2026 accounting period (Simplified ETR Test)

3.     The profit before tax of a MNE group is equal to or less than the sum of the Substance-based Income Exclusion (SBIE) amount (Routine Profits Test).

In the event that a corporate income tax of at least 20% is imposed in the country where the ultimate parent entity of a MNE group is located, the Top-Up Tax calculated under the basis of UTPR for that country shall be considered zero for each accounting period during the transition period. The transitional period in this paragraph refers to the accounting periods starting before 31/12/2025 (including this date) and ending as of 31/12/2026.

The Law mentions that the Turkish President and the Ministry of Treasury and Finance have the authority to designate safe harbour jurisdictions and set the conditions for their designation.

Takeaways

This comprehensive legislation aligns Turkey with international tax standards, ensuring fair taxation of multinational enterprises operating within the country.

With the enactment of Pillar Two rules in Turkey, Turkish based in-scope MNE groups or MNE groups operating in Turkey through subsidiaries need to analyze the impact of Pillar Two on their organizations and the readiness of their accounting and tax data to comply with Pillar Two reporting.

A Communique detailing and clarifying the application of Pillar Two rules are awaited to be published in the upcoming months.