Dr. Özgür BİYAN
Transfer pricing, that has been applied in many developed countries particularly America and Japan, is an issue that is as important as to require a special proficiency and it has a wide and detailed field of application. Transfer pricing is an application that is basically used and developed in order to take tax avoidances during operations of international entities between countries under control, and in order to prevent tax evasions.
“Application of disguised profit distribution” that was in 5422 number Corporate Tax Law that was abolished, was rearranged under the title “Disguised Profit Distribution through Transfer Pricing” which is in the 13th article of 5520 number Corporate Tax Law that was published in 2006. In this rearrangement, developments in international field and especially regularizations of OECD were taken into consideration.
The aim of this regularization is to prevent tax loss through the abuse of transfer pricing. Related parties and “arm’s length principle” that form the basis of OECG guide were taken as the bases and the concept of concealed gain through transfer pricing is defined as: “Erosion of tax assessment by related parties by determining the cost or price of product or service transactions different from arm’s length principle and transferring the income to other related parties or partners without taxing profit of company”.
As can be understood from the definition, in order to talk about disguised profit distribution through transfer pricing: (a) Product or service transaction should have been done by an organization, (b) Said organization should have been carried out product or service transaction with related people, (c) In this product or service transaction, cost or price determination should have been carried out in defiance of “arm’s length principle”.
Disguised profit distribution through transfer pricing application has been applied in many developed countries and advance pricing agreements is one of the significant issues in these processes. Advance pricing agreements about transfer pricing is a very technical issue; the agreement is based on agreeing of administration-liable beforehand about the determination of price determination methods that will be used between them.
The objective of an APA is to deliver certainty, for both the taxpayer and the tax authorities, of the tax outcomes of the taxpayer’s international transactions by agreeing in advance the arm’s length pricing methodology (ies) to apply to the taxpayer’s international transactions covered by the APA. An APA may thus remove an audit threat (eliminate the need for an audit), deliver a particular tax outcome based on the terms of the agreement, and often substantially reduce compliance costs over the term of the APA. This enables a more efficient and effective management of transfer pricing compliance requirements by bringing fairness, simplicity and efficiency, which may otherwise lead to protracted and disputed dealings between a taxpayer and the tax authorities, including difficulties involved in resolving economic double taxation. Thus, for a taxpayer, an APA can be an effective tool for better managing the tax risks arising from international transactions. For tax authorities, an APA can similarly be an effective tool for better and more efficient administration of the transfer pricing laws. Consequently, APAs provide a win-win situation for all the parties involved.
In the related clause of Corporate Tax Law, it is stated that advance pricing agreements can be prepared with Ministry of Finance, this shows that one sided agreements are accepted. Although they are partly similar to compromise and advance ruling by finance ministry, advance pricing agreements have specific differences and they are temporary agreements. According to the regulation in Corporate Tax Law, they are valid for maximum three years. Rules about extending agreements are determined by Cabinet Decision.
Advance Pricing Agreements are evaluated by administration in the frame of legal regulations and cases explained above. Namely, administration has the full “authority”. Whether or not administrative power is in accordance with legality is a controversial topic and has some question marks.
As advance pricing agreements are the results that are reached after the evaluation of best method (bargaining) on the basis of data that are shown to the administration, and as they come to a “certain” agreement as legal results, it will not be liable to judicial audit. When an advance pricing agreement isn’t made, during audit, administration evaluates if the advance pricing method preferred by taxpayer gives results in accordance with arm’s length principle and if it is lawful; and if transfer pricing method’s results is not in accordance with arm’s length principle, additional tax assessment will be made and this process is under judicial control which shows that “discretionary decision” mechanism in advance pricing agreements is applied.
Administration that predetermines which transfer pricing rules will be used on individual taxpayer uses its authority of discretional power and set rule, it passes judgment while auditing if the same taxpayer keeps to the agreement or not, and it is opt out of judgment mechanisms. But after examining taxpayer in terms of taxpayers that don’t make advance pricing agreements, it makes judgment, about if transactions are carried out with the correct method and if they are compatible with 13th clause of corporate tax law; and this judgment is under juridical control, it is impossible to talk about discretion here.
According to Council of Minister’s Decision, information and idea exchange with taxpayer at every stage of advance pricing agreement should be carried out. On the other hand, each agreement is special to only related taxpayer and concerns this taxpayer. So, it is impossible to use these agreements in other transactions as precedents or as evidences for transactions.