Group companies can receive some of the services they need from the holding or other group companies. Regardless of whether received from a group company in Turkey or abroad, these invoices are always examined in tax inspections. Invoices for services received from group companies require explanations in proportion with their amount. Relevant inspections consist of two stages.
1st Stage Tests
Based on the explanations in relevant communiqués, the inspections aim to get answers to the following questions. In other words, roughly three tests are carried out.
a. Form requirement tests
In the first stage, transactions are reviewed in terms of invoice explanations and required declarations. - Are the services received, their amounts and pricing method shown in the declaration? Are the explanation consistent with records and documents? - Are the services received specifically stated in the invoice? - Are the prices of services received are shown in the invoice separately on the basis of services? - Is reverse charge VAT declared in foreign invoices? - Is withholding performed and declared for withholding-requiring services?
b. Necessity tests
It is expected to answer the following questions in detail during tax inspection. - Have the services actually been received? - Is the service actually needed? - Is the service received as an obligation due to affiliation to the group? - Is the service related to income-generating activities?
c. Arm's length principle tests
The services that pass the first test partly or as a whole are inspected in terms of the prices paid. - Are the prices paid in proportion with the services and suitable to the market? Has the benchmark study been performed? - If a cost allocation method has been used, to what extent are the keys used in proportion with the services?
2nd Stage Tests Quality of the service
When it is confirmed that the services have actually been received and the amount paid is consistent with the arm's length principle, second stage tests are initiated. After the first stage, if the group company providing the services is a foreign company, it can be claimed that the services received are not in the nature of consultancy services, but are intellectual property (know-how) payments partly or as a whole.
The main reason for this claim is that, under bilateral agreements, services in the nature of consultancy received from agreement countries are not subject to withholding, but intellectual property payments are subject to 10% withholding under all circumstances. Reasons such as the obligation to receive the services from group companies, the obligation to keep the contents of the services received confidential, and the services' nature of benefitting from the group company's know-how are put forward in recent years in order to justify the claims that the services are in the nature of intellectual property payments.
Relevant judicial decisions
As can be understood, the form and explanations of invoices and their supporting documents are extremely important in order not to have any problems. Judicial decisions can be taken for or against the taxpayers depending on whether superficial inspections have been performed, actions have been taken based on assumptions, explanations have not been taken into consideration, or on the taxpayers' persuasiveness on the presence and market value of the services. Therefore, as the amount of service invoices received from group companies get higher, it will be beneficial to make preparations in proportion with these amounts and keep files ready instead of waiting for inspections.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.