Republic of Turkey – Ministry of Finance, Revenue Administration – Summary of Ruling
Date: October 19, 2020
Number: 64597866-130[9]-E.24193
Subject: VAT withholding regarding services procured from group companies.
In the request for ruling, it is stated that a group of companies has three separate legal entities in Turkey, and that transactions are conducted through a single department due to the absence of separate departments and managers for joint operations. A service contract regarding the sharing of common expenses has been established, and shared costs for electricity, water, and natural gas are invoiced to the respective group company based on usage. It is questioned whether the personnel cost allocation without any profit margin falls under the scope of VAT and if it is subject to VAT withholding.
Regarding Corporate Tax: According to Article 13 of the Corporate Tax Law, when institutions engage in the sale or purchase of goods or services at prices or amounts that deviate from arm’s length principles with related parties, the profits are considered to be distributed covertly through transfer pricing. It is essential that the prices applied in transactions between related parties reflect arm’s length principles. In the request, it has been identified that there are two transactions between group companies regarding the mutual allocation of expenses for electricity, water, and natural gas, and the invoicing of shared personnel costs.
Regarding VAT Law: According to Article 1/1 of the VAT Law No. 3065, deliveries and services made in Turkey within the framework of commercial, industrial, agricultural activities, and free professions are subject to VAT. The Ministry is authorized to hold parties involved in taxable transactions responsible for the payment of VAT claims. The VAT General Application Communiqué states that VAT withholding will be applied at a rate of 9/10 for the procurement of labor supply services.
Thus, the personnel cost allocation transactions related to the shared labor usage provided by your company to group companies are subject to VAT under general principles; however, since these services are not conducted under the management of your group companies, they are not subject to withholding under the Labor Supply Service. Furthermore, the charges for these services should be subject to VAT according to arm’s length principles, and calculating based on the personnel’s share of salary (pure cost) is not appropriate. Moreover, when invoices for electricity, water, and natural gas consumption are shared based on usage, VAT should be calculated according to the applicable rate on the invoices issued to the benefiting group companies.
Source: Revenue Administration
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