Turkey: who’s liable for VAT on e-commerce?

July 9, 2013

E-commerce is becoming more popular all around the world. But current legislation in many countries struggles to meet the taxation requirements of these “new” transaction types. The taxation of e-commerce has become a hot topic in a number of countries, including Turkey.

This article looks at the taxation of e-commerce in Turkey and the possible response of the country’s Ministry of Finance, based on reports in the Turkish press. Currently there is no mechanism for collecting VAT from overseas suppliers or from Turkish non-business customers.

The questions that the Turkish tax authority has to address include:

  • Does VAT apply to these transactions?
  • Who is the taxpayer responsible?
  • And how can the VAT be collected?

The e-commerce boom in Turkey

The Turkish press has recently reported that Turkish consumers have spent US$200m in the past four years on internet applications downloaded to their mobile phones. The fast progress in technology and the high volume of online transactions will probably attract the Ministry of Finance’s attention.

The revenue administration’s view is that downloaded applications are subject to Turkish VAT and that the party liable for VAT in Turkey is the foreign company that provides the content. However, unlike in the EU, there is currently no mechanism for foreign companies to register only for VAT in Turkey if they are not physically located in the country.

The Turkish tax administration may, therefore, look to the person downloading the content to declare and pay the VAT on this transaction. But this also creates problems, as it is not known how this VAT can be collected from individuals.

The impact of this issue could determine the future of reverse charge VAT since the liabilities of individuals and nonresident foreign companies in the Turkish tax system look set to change drastically.

When does VAT apply on services received from outside Turkey?

Turkish VAT law stipulates that services are deemed to be performed in Turkey if the services are rendered in Turkey or if the benefit of the service is enjoyed in Turkey. Therefore, services procured from abroad are taxable when the beneficiary of the service is in Turkey. This rule, therefore, makes Turkey the place of supply for a service supplied electronically to a recipient in Turkey, even if the service provider is not resident in Turkey and does not supply the service from a place of business in the country.

Who is the liable for VAT on services provided from abroad?

When services are rendered in Turkey by an entity that is not physically located there, the person benefiting from the service in Turkey must account for VAT via the reverse charge. If the recipient of the service is a taxpayer in Turkey, then VAT is due. But what happens if the recipient of the service is not a VAT taxpayer?

Who is responsible for payment of the VAT due on services procured from outside Turkey?

By its nature, VAT is a transaction tax, and its application does not depend on companies or persons. According to the regulations about joint responsibility, tax may be claimed from any person who is party to a taxable transaction. Besides, none of the articles of the VAT Law makes any distinction between individuals and companies in terms of securing VAT.

If a Turkish recipient receives a supply of services from an overseas service provider, the Turkish customer may be treated as the party responsible for the tax. The responsible party is liable to fully and accurately calculate and declare the tax that it is liable to collect, and to pay the accrued tax on time.

But can this obligation apply to an individual who is not a VAT taxpayer? The new wording of a VAT General Communiqué Series (Number 117) regarding the reverse charge mechanism appears to establish a strong foundation for the ministry’s intention to tax individuals in these circumstances.

How can Turkey tax e-services provided to private individuals?

The Turkish tax system does not currently allow persons to register for VAT purposes only. In Turkey, a legal entity comes into existence upon its registration in the Trade Registry, and it is subject to an inspection of its “workplace,” which must exist physically. After the inspection, a tax identification number is given to the entity, and this identification number makes the legal entity a taxpayer, not only for VAT purposes, but also for a number of other taxes.

If a company does not physically exist in Turkey, it is not obliged to become a taxpayer there, even for activities supplied to or benefited from in Turkey. Under the current rules, there is no mechanism enabling an overseas company to register for VAT purposes only in order to fulfill its VAT liabilities in Turkey. It therefore does not seem possible for the Turkish tax administration to collect tax from overseas companies that are not required to register for tax liability in Turkey.

However, we understand that the Turkish tax administration is determined to collect tax on these transactions. Therefore, we believe that it would be no surprise if the administration were to focus in the near future on individual Turkish residents who download internet applications or shop online to require them to account for any tax. However, a non-business customer may not even be aware that it may be liable to pay any VAT due.

Although it is not yet known how these taxes will be collected, considering the increased use of technology and electronic controls to track online activity, the Turkish tax administration could well develop the means to identify the nonresidents who supply these services and their Turkish customers.

Payments for programs downloaded from the internet (particularly from websites of non-resident companies), or for online purchases of goods, are almost exclusively made using credit cards. Therefore, these transactions could be tracked by using bank databases, and VAT could be assessed using the credit card statements of individuals who purchase these services.

Read the full version of this article in the Ernst & Young Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).

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