Turkey’s Inspection Board of Ministry of Treasury and Finance has initiated a wave of tax audits of nonresident taxpayers engaged in the digital economy by sending an official audit letters to multiple nonresident taxpayers. These letters states that VAT and corporate income tax liabilities of nonresident taxpayers engaged in the digital economy will be audited for the 2015 – 2018 period. This is a concerning situation as tax auditors can retrospectively audit corporate income tax and VAT liabilities of nonresident taxpayers in Turkey.
Turkey follows an approach that if a nonresident taxpayer conducts digital business activities and earns Turkey-sourced income from a website, its activities are considered to create a permanent establishment in Turkey, even if the server on which the website is stored is located outside of Turkey. This approach will be taken during above mentioned tax audits for income tax purposes, even though there is no law in force in Turkey on digital permanent establishment.
Tax audits will cover VAT also as article 9 of the Turkish VAT law stipulates that VAT arising from services provided electronically by nonresident taxpayers to individuals in Turkey must be declared and paid by the nonresident taxpayers.
Tax audits will be initiated against those nonresident taxpayers who has commercial activities in Turkey.
If the non-resident taxpayer does not accept the tax audit invitation or does not assign a representative, it will be assumed that the company gave up any rights of objection and defense.
If the tax auditor concludes that digital activities of an audited nonresident taxpayer creates a digital permanent establishment in Turkey, he will likely make retrospective requirement for corporate income tax and VAT payment obligations for the fiscal periods before 2018.
If the nonresident taxpayer will fail to settle an assessed corporate income tax and VAT liabilities, Turkish tax authorities are empowered to withhold payments from Turkish banks to nonresident taxpayers and they may collect the tax debt through Turkish banks. Nonresident taxpayers may also be faced with more sanctions, for example – banning of digital business activities.
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