THE GENERAL PERSPECTIVE AND APPROACH OF TÜRKIYE ON OECD ACTION PLANS ON
BASE EROSION AND PROFIT SHIFTING
Onur Çağdaş Özgür
This article examines Türkiye's general perspective and approach toward the Organization for Economic Co-operation and Development's (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS). The BEPS project aims to address concerns about multinational companies shifting profits to low-tax jurisdictions and exploiting gaps in tax rules. Türkiye has historically positioned itself as a country that does not attract investors through low tax rates or engage in harmful tax competition. Consequently, Türkiye has been supportive of the BEPS project since its inception. This article explores the relevance of the BEPS Action Plan to Türkiye and highlights specific regulations implemented by the country in response to the project. These regulations include measures to tax the digital economy, controlled foreign company rules, limitations on interest deductions, review of harmful tax regimes, transfer pricing rules, and documentation requirements. While Türkiye has made significant progress in aligning its tax legislation with the BEPS project, there are still pending legislative changes, particularly in the Tax Procedure Law and MLI process. The article concludes by emphasizing Türkiye's commitment to collaborative partnerships and the need for further developments in the country's tax regulations to address aggressive tax planning and BEPS-related challenges.
Key words: OECD, Base Erosion and Profit Shifting, BEPS, Tax Avoidance, Tax Planing, International Tax, Türkiye, Corporate Income Tax, Personal Income Tax,
The BEPS project is an international tax initiative led by the G20 Countries and OECD. Its objective is to address concerns about multinational companies shifting profits to low-tax jurisdictions and exploiting gaps and mismatches in tax rules. The BEPS project aims to develop coordinated policies and guidelines to prevent base erosion (reducing taxable profits) and profit shifting (transferring profits to lower-tax jurisdictions). It seeks to ensure that companies are taxed where economic activities generating profits take place and where value is created. The project involves collaboration among governments to update international tax rules and promote transparency and coherence in global taxation. OECD states that BEPS allows businesses to gain a competitive advantage by exploiting gaps in tax rules, which undermines the fairness and integrity of tax systems and voluntary compliance by taxpayers.
The OECD/G20 Inclusive Framework on BEPS provides 15 Actions to tackle tax avoidance and equip governments with domestic and international instruments to ensure profits are taxed where economic activities generating the profits are performed. OECD and G20 countries, along with developing countries, are implementing the BEPS Package and anti-BEPS international standards. The OECD/G20 Inclusive Framework on BEPS monitors the implementation of all BEPS Actions and conducts peer reviews of the BEPS Minimum Standards to evaluate implementation and provide recommendations for improvement. The BEPS project is a set of 15 actions based on three principles: Compliance in International Taxation, Priority of Essential in Taxation, and Transparency.
Generally, we can state that Türkiye did not become one of the "tax haven" countries historically inclined to attract investors with low tax rates. Current corporate tax and income tax rates in Türkiye are slightly above the world average, and practices that could be considered as "harmful tax competition" are not included in our tax legislation. Therefore, Türkiye has been among the countries that have supported these processes from the beginning.
The actions in the BEPS Action Plan are relevant to Türkiye, and certain elements of the Action Plan will be less emphasized by the Turkish tax authorities. Turkish tax professionals have been working on the effects of BEPS to Türkiye’s Tax regulations. Biçer and Enginay (2015) states the actions of the BEPS Action Plan and their relevance Türkiye.  Despite the extensive research conducted by numerous scholars on this subject, it is widely deemed essential for the public authorities to exhibit greater dedication and focus towards addressing this matter.
BEPS Action 1 Regarding the taxation of the digital economy, a withholding tax of 15% has been imposed on advertising payments made abroad, and the Digital Services Tax has been implemented since the beginning of 2020. Law no. 7194 came into force on 07.12.2019 and the Communiqué was published on 20.03.2020 by the Ministry of Treasury and Finance in Turkey. According to the respective law Digital Service Tax (DST) will be levied for taxpayers and respective law entered into force retroactively from 1 March 2020.
The Action 3 recommendations outline approaches to attribute certain categories of income of foreign companies to the shareholder(s) in order to counter offshore structures that shift income from the shareholder jurisdiction. The OECD states that Controlled foreign company (CFC) rules respond to the risk that taxpayers can strip the tax base of their country of residence and by shifting income into a foreign company that is controlled by the taxpayers. Without such rules, CFCs provide opportunities for profit shifting and long-term deferral of taxation. Türkiye has enacted CFC rules in 2006 under the Corporate Income Tax Law No. 5520. And Personal Income Tax 193 Article 75/2. As per the Article 7 CIT Law and Article 75/2 Personal Income Tax, Turkish resident companies and real persons who have invested in foreign subsidiaries might be subject to CIT in accordance with the CFC regime.
The primary objective of the Action 4 recommendations is to curtail base erosion by effectively addressing two key aspects: the utilization of interest expenses to attain unwarranted interest deductions and the employment of such expenses to finance the generation of exempt or postponed income. Notably, within the Turkish context, the deduction of interest expenses for companies was subject to limitations as of 2013, subject to specific conditions. However, this regulation has been introduced but not into force until 2021. This measure was implemented with the aim of incentivizing companies to opt for equity financing over debt financing when faced with financial exigencies. Presidential Decision No. 3490, published in the Official Gazette on 04 February 2021, sets the rate of non-deductible financial expenses at 10%, and makes the deductibility limitation effective from 2021.
The Action Plan 5 basically requires a review of harmful tax regimes in OECD member countries by September 2014. The tax exemption introduced by Turkey for technology development zones has been examined within the scope of Action Plan 5 of the OECD. The OECD reviewed tax exemption and tax facilitation for intangible assets for taxpayers operating in technology development zones under the temporary Article 2 of the Technology Development Zones Law. They found that the conditions are not fully compatible with the standard in some respects. The exemption for design activities required clear regulations in the legislation to demonstrate that the income from design activities is proportional to the qualified expenses incurred within the framework of the connection approach. The regulations also needed to clarify that design activities are part of R&D activities. In line with Türkiye's commitment to preventing unfair tax competition in the international community, the government has made necessary regulations in the Law on Technology Development Zones and related secondary legislation through decisions of the Council of Ministers and the President. The first of these regulations was Article 64 of Law No. 7033, which added the second paragraph to the temporary Article 2 of Law No. 4691. This regulation added the concept of "qualified expenses" to Law No. 4691. The second regulation was an amendment to the Council of Ministers' decision through Presidential Decree No. 54/2018. This amendment was made because design registration certificates obtained solely based on design activities do not meet the requirement of a patent or equivalent document specified in the standard. The amendment introduced the condition that design certificates can be considered equivalent to a patent if they are obtained as a result of R&D activities. Design registration certificates obtained without involving R&D activities were excluded from the scope of the exemption.
BEPS Actions 8-10 on transfer pricing to ensure that transfer pricing outcomes are better aligned with value creation of the multinational enterprise group. Specific transfer pricing rules are valid in Turkey as of the beginning of 1 January 2007 under Article 13 of the Corporate Income Tax Law with the title ‘Disguised Profit Distribution through Transfer Pricing’. Furthermore, an amendment has been made regarding Article 13 of the CIT Law. For corporations, a requirement of 10% control (ownership, voting rights, or profit share) has been introduced to be considered related parties. Advance pricing agreements can be applied retrospectively, and the agreement period can be up to 5 years. In cases where transfer pricing documentation is prepared in accordance with the legislation, a 50% reduced penalty will be applied in transfer pricing assessments. Turkey has adapted the 3-tier documentation system, which it committed to under the OECD BEPS Action Plan, into Turkish tax legislation through Presidential Decree No. 2151. The recommended three-layered documentation model outlined in BEPS Action 13 is being integrated to the Turkish Transfer Pricing Regulations. Accordingly, Master File preparation, annual transfer pricing report preparation and CbCR filing, which is to be submitted electronically, are now applicable for entities operating in Turkey, along with notification submissions to the Tax Authorities.
Detailed explanations regarding the 3-tier documentation have been provided in the Transfer Pricing General Communiqué No. 4. In addition to local documentation requirements, the obligation of preparing a master file and country-by-country reporting has been introduced. Certain thresholds need to be exceeded to prepare a master file and engage in country-by-country reporting.
The latest action plan BEPS includes The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "BEPS MLI") BEPS MLI is a tool that governments can use to close loopholes in international tax treaties. The MLI transposes the results of the BEPS Project into bilateral tax treaties worldwide. The BEPS MLI is a multilateral treaty that allows governments to modify their existing bilateral tax treaties in a coordinated and efficient manner. This means that governments can implement the tax treaty measures developed during the BEPS Project without having to renegotiate each treaty bilaterally. The MLI was signed by Türkiye in 2017. However, for the agreement to enter into force, it needs to be approved by the Turkish Grand National Assembly (TBMM). Although the MLI was submitted to the Plan Budget Commission in June 2020, it is still pending in the Commission.
Tax treaties typically state that a foreign company's business profits are only taxable in a jurisdiction if the company has a permanent establishment in that jurisdiction. The definition of permanent establishment in tax treaties is therefore critical in determining whether a non-resident company must pay income tax in another jurisdiction. The BEPS Action Plan 7 called for a review of this definition to prevent the use of certain common tax avoidance strategies that were used to circumvent the previous Model (2014 Model Convention) permanent establishment definition. These strategies included arrangements in which taxpayers replaced subsidiaries that traditionally acted as distributors with commissionaire arrangements, resulting in a shift of profits out of the jurisdiction where the sales took place without a significant change in the functions performed in that jurisdiction. A detailed definition of a permanent establishment has not yet been included in Türkiye's tax laws. As a result, disputes between taxpayers and the tax authority continue within this scope.
Turkey has always aimed to be one of the collaborative partners in the implementation of OECD's BEPS action plans. Furthermore, Türkiye's efforts were evident during the summit held in Antalya in 2015.  Türkiye has implemented regulations in line with various BEPS actions, addressing the taxation of the digital economy, controlled foreign companies, interest deductions, harmful tax regimes, transfer pricing, and documentation requirements. While progress has been made, there are still pending legislative changes, particularly in the Tax Procedure Law (definition of permanent establishment) and MLI process. Türkiye's dedication to collaborative partnerships and ongoing developments in tax regulations will be vital in addressing aggressive tax planning and BEPS-related challenges effectively.
 https://www.denet.com.tr/vergi/dosyalar/makaleler/DUYURU060-421.pdf (accessed 17 May 2023)
 Ramazan Biçer & Mehmet Enginay, International Transfer Pricing Journal, (January, February 2015)
NAZALI TAX & LEGAL