Recent Development
The Presidential Decree No. 476, published in the Official Gazette dated 19/12/2018, regulated that payments to the providers of advertising services provided through the Internet, or to those who act as an intermediary for the provision of this service, falls within the scope of the withholding tax liability, regardless of whether the payee is a taxpayer.
The Ministry of Treasury and Finance’s Communiqué No. 17 Amending the General Corporate Income Tax Communiqué No 1. (“Communiqué“) clarifying the details of this new withholding tax liability was published in the Official Gazette dated 15/2/2019.
What Does the Communiqué Say?
The main points clarified by the Communiqué are:
- Those responsible for applying a withholding tax listed in Article 15 of the Corporate Income Tax Law must pay a withholding tax of 0% on the amounts that they pay to a full taxpayer corporation (i.e., Turkish resident entity) for the advertising services they receive on the Internet. Those not responsible for withholding tax are not obliged to apply any withholding tax on the amounts that they pay to a full taxpayer for the advertising services they receive on the Internet.
- Those responsible for applying a withholding tax listed in Article 15 of the Corporate Income Tax Law must pay a withholding tax of 15% on the amounts that they pay to a limited taxpayer corporation (i.e., non-resident entity) for the advertising services they receive on the Internet. Those not responsible for withholding tax are not obliged to apply any withholding tax on the amounts that they pay to a limited taxpayer corporation for the advertising services they receive on the Internet.
- In the event that payments for advertising services provided on the Internet are made to a full taxpayer corporation that mediates the provision of this service, 0% withholding tax must be applied on these payments. On the other hand, the full taxpayer that mediates the provision of the advertising services on the Internet should apply withholding tax on the payments made to the service provider for such services.
- Therefore, if the actual service provider is a limited taxpayer corporation, the full taxpayer who mediates the provision of online advertising services must apply a 15% withholding tax on payments to the actual limited taxpayer service provider. If the actual service provider is a full taxpayer corporation, the applicable withholding tax is 0%.
- Additionally, the withholding tax rate to be applied on payments made to real persons who provide advertising services on the Internet or mediate the provision is 15%. This rate does not change whether the real person is a full or limited taxpayer.
- The Presidential Decree No. 476 entered into force on the date of its publication (19/12/2018) for payments made after 1/1/2019, and even if the service was provided before 19/12/2018, the withholding tax must be applied on the payments made from 1/1/2019 onwards (including this date).
- In the event of a cash payment or payment on account made before the effective date of the Decree (19/12/2018) to those who provide or mediate the provision of advertising services on the Internet, no withholding tax shall be applied on the payments made after 1/1/2019 with respect to said services.
Impact of Double Tax Treaties
The income derived from the provision of advertising services and the mediation for advertising services is subject to business profits rules for tax purposes. According to the double tax treaties to which Turkey is a party, business profits derived by non-residents can only be taxed in Turkey if the income is generated through a fixed place of business or permanent representative in Turkey.
According to the permanent establishment provisions of double tax treaties to which Turkey is a party and OECD Model Convention commentary notes, a website per se does not constitute a permanent establishment. Therefore, the new withholding tax liability should not cover the advertising services provided by non-resident entities and individuals residing in a country with which Turkey has a double tax treaty and operating in Turkey through websites without a permanent establishment.
In this sense, as double tax treaties to which Turkey is a party prevail over the local legislation, it is not legally possible for Turkey to create a taxation right through a unilateral legislative amendment. This approach was also confirmed by Article 35 of the Corporate Income Tax Law, many rulings and communiqués published by the Revenue Administration and case law.
However, the fact that the Communiqué included an example for the withholding tax liability on the payments made to an Ireland resident company without referencing to the Double Tax Treaty between Turkey and Ireland clearly contradicts the above approach.
Conclusion
Taking into consideration the business profits and permanent establishment provisions of the double tax treaties to which Turkey is a party, we believe the new withholding tax liability will undoubtedly cause new disputes regarding advertising services payments made to non-residents operating without a permanent establishment in Turkey.
