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Draft Guidance on Transfer Pricing published — Orbitax Tax News & Alerts

The draft guidance of the Council of Ministers on transfer pricing was published on the web site of the Ministry of Finance on 1 June 2007. The draft guidance regulates the procedural rules on transfer pricing legislation, which was first introduced for corporations by the new Corporate Income Tax Act (CTA) (see TNS:2006-06-23:TR-1) and for individuals by amendments to the Income Tax Act (see TNS:2007-03-09:TR-1), has been effective since 1 January 2007.

The draft guidance, which applies to both resident and nonresident individuals and corporations, clarifies the arm's length principle, transfer pricing methods, advance pricing agreements and transfer pricing documentation. The draft guidance will be retroactively applied from 1 January 2007.

The draft guidance follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and generally applies the rules clarified therein.

Arm's length principle

The main purpose of the arm's length principle is to maintain the equality of prices applied to transactions between related persons and between unrelated persons under comparable conditions (Art. 4).

Comparability analysis is based on a comparison of the conditions in a controlled transaction with the conditions in uncontrolled transactions. In other words, "comparability" refers to the differences between comparable situations which could materially affect the conditions thereof, or if accurate adjustments can be made to eliminate the effect of any such differences (Art. 5).

Factors determining comparability are (Art. 5):

-   characteristics of goods or services;
-   the analysis of functions and risks; 
-   the economic conditions of the market where the transactions are realized; and 
-   business strategies.

Under the arm's length principle, the most reliable result is to arrive at a single price as a consequence of comparison. However, after the comparisons are made and the methods are applied, a price range which comprises of approximate prices may be reached, rather than a single price. The arm's length price range is a price range which comprises different arm's length prices arrived at either by the application of the same method to different comparable uncontrolled transaction data or by the application of different methods on the same data (Art. 6).


Taxpayers are obliged to show that by applying the method which best reflects the conditions and characteristics of the transaction, they have applied the most consistent price under the arm's length principle to the transactions effected by the related persons (Art. 7). In cases where traditional transaction methods cannot be reliably applied to approximate arm's length, taxpayers may apply any other method that is most appropriate considering the nature of the transaction, i.e. transactional profit methods. However, if transactional profit methods do not give a reliable price under the arm's length principle, taxpayers may estimate that the method will produce a more reliable result. Such self-determined methods must also be consistent with the arm's length principle (Art. 11).

In addition to the traditional transaction methods, i.e. the comparable uncontrolled price method, the cost price method and the resale price method, transactional profits methods are also defined. Thus, taxpayers may also apply the profit split method and the transactional net margin method (Arts. 12-13).

Advanced Pricing Agreements (APAs)

Under the new CTA, taxpayers may also conclude APAs with the Ministry of Finance for a maximum period of 3 years. The draft guidance regulates the procedural rules for APAs as follows:

The purpose of an APA is to prevent transfer pricing disputes (Art. 14). Scope of the APA procedure is, however, limited to large-scale taxpayers registered with the tax office of large-scale taxpayers in Istanbul. Such taxpayers may enter into an APA with the tax administration for their foreign transactions beginning from 3 September 2007 (Art. 15).

APA negotiations is initiated upon the written application of the taxpayer. A taxpayer applying for this procedure must provide the following information (Art. 17):

-   written application including information on related persons, economic and legal history, the structure of the corporation, capital formation etc.;
-   information on the corporate functions and risks;
-   list of product prices applied during the application period; 
-   production costs incurred in the application period;
-   amounts and related invoice information of the transactions realized with related and unrelated persons; 
-   copies of the last three years' financial statements, tax returns, foreign transaction contracts of related persons; 
-   information, if any, on different accounting standards and methods applied by related persons and comparable corporations;
-   the transfer pricing method suggested and the explanations, supportive analysis and statements on the conditions effected that choice (comparability analysis, information on comparable corporations, market data, court decisions, scientific research, if any); 
-   last three year's financial data and related documents supporting the suggested transfer pricing method;
-   in cases of two or more comparable transactions, arm's length price range and the method applied in the determination of that range;
-   economic assumptions that may affect taxpayer's financial position (profit presumptions, exchange rate data, interest rates etc.); and
-   other documentation relevant to the determination of the arm's length price.

Upon pre-evaluating and analyzing the file, the administration may accept (under amended conditions), or reject, the application. In cases where the APA agreement is signed, the tax administration may examine the application, including the method and the conditions of the application of this method. The taxpayer must annually provide reports to the tax administration. By examining such reports, the tax administration shall follow whether the taxpayer complies with the conditions of the agreement and/or whether those conditions continue to be valid or not (Art. 16).

In cases where the taxpayer does not comply with the conditions of the APA, or those conditions are not valid any more, and/or the information and documents provided by the taxpayer have proven to be false or incomplete, the tax administration may unilaterally cancel the APA with retroactive effect. In such cases, tax audits shall be initiated with respect to the taxpayer (Art. 16).


Taxpayers are obliged to keep and submit on request the transfer pricing documentation to the tax administration. The reports on the transactions effected by the related persons must be prepared annually. The taxpayers must submit such reports and the following information to the tax administration upon request (Arts. 18-19):

-   corporate activities and organizational structure, information on related persons (taxpayer identification number, address, telephone numbers etc.) and the ownership relations between such persons;
-   information on corporate functions and risks; 
-   list of product prices applied, and production costs incurred, in the period when the transaction occurred;
-   transaction amounts and related invoice information realized with related and unrelated persons in the period that the transaction occurred;
-   copies of contracts entered into with related persons;
-   summarized financial statements of related persons;
-   internal pricing policies applied to transactions between related persons;
-   information, if any, on different accounting standards and methods applied by related persons;
-   information on the ownership of the immovable properties and on royalties paid and received;
-   the reason for the choice of the transfer pricing method applied, and information and documentation on the application of this method (comparability analysis, internal and/or external arm's length prices);
-   calculations of the arm's length price or profit margin and detailed information regarding assumptions;
-   if an arm's length price range is determined, the method used for this determination; and
-   other relevant documentation.