What Is Transfer Pricing in Turkey?

Transfer pricing is an area of tax supervision aimed at preventing the tax base from being eroded when the sale of goods and services between group companies or other related parties departs from the pricing used in transactions with third parties.

The Arm's-Length Principle

Under Article 13 of the Corporate Tax Law (KVK), the price or consideration applied in transactions where a corporation buys or sells goods or services with a related party must be based on the arm's-length price that would apply between unrelated parties at the time of the transaction. Setting a price higher or lower than the arm's-length price is treated as a disguised distribution of profit.

The Consequence of Disguised Profit Distribution

A price difference set contrary to the arm's-length principle is deemed to have been distributed as disguised profit from the corporation's earnings, and this amount is included in the corporate tax base and taxed accordingly. This can result in both an additional tax assessment and a tax loss penalty.

The Documentation Obligation

The burden of proving that transactions with related parties are arm's-length rests with the taxpayer. For this reason, an annual transfer pricing report must be prepared for transactions of a certain volume and nature, and submitted to the tax administration upon request. A report prepared correctly and on time can affect whether a penalty is applied in the event of an audit.

Which Methods Are Used?

To determine the arm's-length price, the method most appropriate to the nature of the transaction is chosen from those listed in the KVK, such as the comparable price method, the cost-plus method, or the resale price method; the taxpayer must select and justify one of these methods.

Practical Recommendations

Plan the pricing policy for your intra-group transactions in a documentable way before the transactions take place; justifications prepared after the fact may be found less convincing in an audit. Working with an accountant and a tax lawyer on preparing transfer pricing reports both reduces compliance risk and strengthens your defence in any subsequent audit.

This article is for informational purposes only and does not constitute legal advice. Please contact our team regarding your specific situation.