There has been an
increase in the number of inspections carried out by the Turkish tax authority
regarding intra-group services such as management fees, cost allocations,
etc.
During these
inspections, taxpayers are generally criticized on the grounds that the
professional services provided from group companies are routine and passive in
nature and that the main aim of these services is to create and maintain a
brand identity.
The tax inspectors
tend to claim that since the services are based on knowledge and commercial
experience rather than independent professional activity, the benefits received
from intra-group professional services are similar to utilizing an intangible
right; therefore, the payments for these services must be treated as a royalty
and be subject to corporate tax withholding.
Under the article 30
of Turkish corporate tax code, payments made by Turkish taxpayers to
non-resident companies for the purchase, transfer and assignment of intangible
rights, such as copyrights, trademarks, patents and trade names, are subject to
withholding tax at the rate of 20%. Payments for professional services are also
subject to 20% withholding tax. However, as double taxation treaties are
superior to local tax legislation, the relevant double taxation treaty should
be taken into account before applying withholding tax for both types of
payments.
Turkey has concluded
double taxation treaties with more than 75 countries and in these treaties the
term royalties is generally defined as a consideration for the use of, or the
right to use any copyright of literary, artistic or scientific work including
cinematograph films, any patent, trade mark, design or model, plan, secret
formula or process concerning industrial, commercial or scientific experience.
In most of these treaties, royalty income earned by non-resident companies can
be taxed in Turkey at the rate of 10% through withholding.
Turkey’s double
taxation treaties also cover professional services; however, some certain
requirements should be met for a professional service income to be taxable in
Turkey like the 183-day requirement present in the OECD Model Double Tax
Convention (Article 14 of the tax
treaty).
Companies apply
withholding tax for intangible right payments at the rates determined by the
relevant double taxation treaty. However, for professional services,
withholding tax is rarely applied in practice since it is hard to meet the
requirements described by the double tax treaties.
Under article 65 of
the Income Tax Law the nature of professional services are defined as follows:
“Income
arising from activities of professional services are professional service
income. A professional service activity is the conduct, without being subject to an employer, and under one’s own personal
responsibility and in one’s own name and on one’s own behalf, of work which is
not of a commercial nature and which is not so much dependent on capital as on
personal effort, on practical or professional knowledge, or on one’s
specialization.”
According to the OECD
Model Double Taxation Treaty, the term professional services includes
especially independent scientific, literary, artistic, educational or teaching
activities as well as the independent activities of physicians, lawyers,
engineers, architects, dentists and accountants, and other activities requiring
specific professional skill.
In recent
inspections, tax inspectors have argued that professional services received
from group companies under the name of management services or intra-group
services, etc., are routine and passive services which aim to secure a certain
level of quality and improve brand recognition.
They claim that the
term professional services as explained in the double taxation treaties and
Turkish income tax code includes especially independently handled activities of
scientific, literary, artistic and educational value that require special
professional knowledge and skills such as those of doctors, lawyers, engineers,
architects, dentists, accountants, etc.
In the tax assessment
reports, it is argued that activities, such as sales and marketing consultancy,
cost analysis, financial management advisory, business development consultancy
or quality management, are performed by a group company to protect a brand or
in a more general sense to create a “value” for the benefit of the whole group.
Therefore, these sorts of services which do not satisfy professional services
as defined in the Turkish income tax code and double taxation treaties should
be treated as a part of brand royalty.
Other common
criticisms of tax inspectors are:
•Payments
for professional services are determined as a certain rate of the turnover at a
certain period as in the royalty payment method.
•The
services are not specifically performed for the Turkish entity.
•The
services received and the payments made cannot be substantiated in detail.
•Lack
of adequate evidence regarding the actual delivery of the services.
•The
service agreements include utilization of intangible rights and no
discrimination between services and intangible rights can be performed.
In a recent court
case, such services in which the non-resident company has wide knowledge and
experience regarding the commercial, technical, industrial and administrative
management techniques and these specific knowledge and experience are
benefitted as a whole, are defined as an intangible right. Therefore, the
amounts paid for professional services are actually incurred to benefit from
industrial, commercial and scientific experiences the multinational group owns.
Similarly, in tax
assessment reports it is argued that services granted by a non-resident company
under a technical assistance service agreement cannot be differentiated from a
brand royalty since the services aim to secure a certain level of
standardization and quality throughout the group. The amount paid as a
technical service fee is actually compensation for the right to use a group’s
brands and perception in the market. Although each court decision is unique and
considered in respect to different facts and circumstances, the above mentioned
cases and several other tax assessment reports increase concerns over similar
decisions in the future.
Professional
services, royalties and cost sharing transactions have always been one of the
favourite areas tax inspectors investigate and it’s expected tax audits
regarding this sort of transactions to continue at an increased pace.
According to Turkish
transfer pricing legislation, with respect to intra-group services, the
following issues should be determined;
1. Whether or not the
service is actually rendered
2.
Whether or not the company/companies require the related service
3. Whether or not the
service cost is in line with the arm’s length principle, in the case that the
service is rendered
Therefore, to
decrease the risk of criticism regarding withholding tax and transfer pricing
issues, it is important that the content of intra-group services, royalties and
cost sharing transactions be based on agreements which contain details
regarding the content of the transaction. Moreover, reports prepared by
independent audit companies or other independent institutions which determine
and analyse cost pools, calculation tables and details regarding the content of
the services, as well as other studies that aim to determine the arm’s length
character of the profit margin applied in these transactions should be obtained
and submitted to the tax authority when necessary.
No comments:
Post a Comment