The accelerating growth of the global digital economy has yielded new challenges for international taxation, an issue that has pervaded the agenda of the Organization for Economic Co-operation and Development (OECD) in recent years. Published in 2015, the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 1 regarding the taxation of the digital economy primarily focused on the challenges arising from the distribution of the right of tax collection among the states from revenues derived from cross-border activities.
In line with the BEPS developments, on September 7, 2016 Turkey adopted a legislative amendment authorizing the President to introduce a withholding tax liability for the delivery of goods and services carried out electronically on the parties to the transaction and those who act as intermediaries.
On December 19, 2018, the President used this newly granted authority to issue Presidential Decree No. 476 (the “Decree”), introducing a new withholding tax limited to advertising services provided online.
What the Decree Says
As of January 1, 2019, payments made to the providers of online advertising services or to those who act as intermediaries for the provision of this service will be subject to withholding tax at the following rates: 15% for payments made to Turkish resident individuals; 15% for payments made to non-resident entities and individuals; and 0% for payments made to Turkish resident corporate income taxpayers.
The Revenue Administration recently published a draft communiqué explaining that if the real service provider is a non-resident entity and a Turkish resident taxpayer acts as an intermediary for the provision of the advertising services, the payments made to the Turkish resident taxpayer will be subject to 0% withholding tax. However, the Turkish resident taxpayer is required to apply a 15% withholding tax on payments transferred to the non-resident entity. The draft communiqué included a fictional example of a company named “GGL Ltd” resident in Ireland that provides advertising services to a Turkish company, “C,” through an advertising agency, “Mr. E.”
What about Double Tax Treaties?
The Turkish Constitution and Corporate Income Tax Law clearly state that double tax treaties to which Turkey is a party override local tax legislation. The Turkish Revenue Administration has published numerous rulings and communiqués indicating that double tax treaty provisions are excluded, and several Turkish tax court decisions assert the treaty override.
According to the majority of the Double Tax Treaties, business profits derived by a non-resident entity can only be taxed in Turkey if the income is generated through a permanent establishment in Turkey. Under the permanent establishment provisions of double tax treaties and the OECD Model Tax Convention commentary notes, a digital platform or website do not per se constitute a permanent establishment in Turkey. Therefore, the revenue derived by non-resident entities through online advertising services provided to Turkish taxpayers should not be taxed in Turkey if the non-resident entity resides in a country with which Turkey has a double tax treaty.
However, the fictional example in the draft communiqué makes it evident that the Turkish tax authority disregards double tax treaties in the application of this withholding tax liability, and, at least at the moment, we expect the Turkish tax authority to adopt this approach in the final version of the communiqué.
We believe Turkey’s unilateral withholding tax measure is insufficient to tax the income derived by non-resident entities through their online advertising services, unless the relevant double tax treaties are amended.
Considering the Turkish tax authority’s increasing focus on electronic commerce activities, there is no doubt that the Turkish tax authority expects Turkish taxpayers who receive online advertising services from non-resident companies to declare and pay 15% withholding tax on their payments, despite the treaty override issue.
Therefore, depending on the party bearing the withholding tax burden and whether there is a local intermediary, different legal strategies may be developed on how to address this withholding tax issue, including litigation for the refund of the withholding tax and the inclusion of a mutual agreement procedure in the double tax treaties.
By Erdal Ekinci, Partner, and Ipek Beril Aygun, associate, Esin Attorney Partnership
This Article was originally published in Issue 6.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.