PE and Profit Attribution in Turkey: Core Concepts
Permanent Establishment (PE): A fixed place of business (or dependent agent arrangement) through which a foreign enterprise carries on business in Turkey.
Profit attribution: Allocation of an enterprise’s profits to its PE based on the PE’s functions performed, risks assumed, and assets used.
Post-BEPS Principles for Profit Attribution
Under BEPS Actions 7 and 8–10:
- Arm’s Length Principle (ALP): Treat the PE as a separate and independent enterprise earning a fair return.
- FAR Analysis: Identify significant people functions, risk control, and asset deployment at the PE level.
- Transfer Pricing Alignment: Apply the ALP to head-office/PE dealings (goods, services, intangibles, financing).
- Disregard Artificial Structures: Ignore arrangements designed to unduly depress the PE’s taxable profits.
- Authorized OECD Approach (AOA): Two-step process—(i) functional delineation of the PE; (ii) arm’s-length profit attribution.
The Turkey Lens: Law and Practice
- Legislative Framework: Turkish tax law and double tax treaties (generally aligned with the OECD Model) guide PE profit attribution.
- Administrative Practice: The Turkish Revenue Administration increasingly reviews PE filings and transfer pricing documentation (local file, master file, and—where applicable—CbCR).
- Dispute Resolution: Settlement and the Mutual Agreement Procedure (MAP) under treaties can be used to resolve attribution disputes.
Common Risk Areas in Turkey
- Dependent agent/commissionaire models: Contract-concluding authority or key negotiation functions in Turkey can create a PE.
- Marketing & business development teams: When value-creating functions are located in Turkey, a portion of intangible-related returns may be attributable to the PE.
- Intragroup services, royalties, financing: Weak benefit tests, allocation keys, or benchmarking raise adjustment and penalty exposure.
Action Checklist for Multinationals
- Run a FAR Analysis: Map Turkish teams, processes, decision rights, and risk control.
- Assess PE Thresholds: Consider agent, construction, service PEs, and digital distribution footprints.
- Select & Substantiate Methods: Cost-plus, resale price, profit split, or other ALP-consistent methods.
- Fortify Policies: Intragroup services, royalties, and funding should have clear benefit tests and documentation.
- Document Thoroughly: TP reports, intercompany contracts, responsibility matrices, process flows, board minutes.
- Plan for Controversy: Evaluate advance discussions and be MAP-ready where double taxation arises.
What This Means for Businesses in Turkey
Post-BEPS, profit attribution to permanent establishments in Turkey centers on substance and documentation quality. Early FAR analysis, consistent transfer pricing policies, and robust evidence significantly reduce controversy risk.
For expert support with PE transfer pricing, FAR analysis, and Turkish tax compliance, contact us: ozbekcpa.com
