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24.11.2021

New Multilateral Solution on Digital Services Tax




On November 22, the US and Turkey have reached an agreement and announced the terms of such agreement concerning the transition from the existing Turkish Digital Services Tax regime (“Turkish DST”) to a novel multilateral solution. In practical terms, as per the agreement, Turkish DST that applies to the US tech companies will be withdrawn. Further details on the bilateral agreement are shared below. 

 

Background Information

Turkish DST was introduced under the Law on Digital Service Tax and Amendment of the Certain Laws and Decree Numbered 375 (“DST Law”), published in the Official Gazette dated December 7, 2019 and numbered 30971. According to the DST Law, digital services tax rate is determined as 7.5% and the President is authorized to reduce this rate to 1% and to increase this rate up to twice. 

 

The US government has initiated an investigation against Turkey’s DST in June 2020. The investigation was mainly triggered due to the revenue threshold determined in the DTS Law, which was interpreted as particularly targeting and discriminating against the US tech companies. Accordingly, on January 6, 2021, the US released reports on the Office of the US Trade Representative's (“USTR”) investigations regarding the DST practices of certain other countries, including Turkey. In the Report prepared on Turkish DST (“Report”), the services that fall within the scope of Turkish DST, tax liability, tax rate, and penalties to be applied in case of non-payment of the DST are tackled, and the criticisms of the USTR raised against the Turkish DST were gathered, while the large tax burden, compliance costs, administrative burdens and double taxation risk were particularly underlined in the Report. In addition to the above, the Report also pointed out that the Turkish DST levies the highest DST rate with 7.5%, as opposed to other countries with similar DST practices. Following the investigation, on June 2, 2021, the US has announced 25% tariffs on over USD 2 billion worth of imports from six countries, including Turkey, in retaliation to their digital services taxes. However, the US has immediately suspended the duties for up to 180 days to provide additional time for the ongoing multilateral negotiations on international taxation at the OECD. Even though Turkey was expected to retaliate against the application of the US, Turkey instead has chosen to negotiate in good will to stabilize the bilateral relations with the US given its quite fragile economic recourse. Thereafter, the US Trade Representative Katherine Tai and Trade Minister Mehmet Muş have held a virtual meeting focused on raising the trade targets and mutual expectations, while discussing the issues related to digital services tax. Following the meeting, Tai’s office has published a written statement, underlining that the US has put forward its request for the removal of the digital services tax, referring to an agreement reached by the members of the OECD. On the other hand, Minister Muş conveyed his requests not to introduce additional tariffs to Turkey, while not making any comments on the digital services tax. 

 

New Development

Recently, a historic agreement reforming the international tax framework was reached at the G20 Summit in Rome. On October 8, 2021, the Organization for Economic Co-operation and Development (“OECD”) announced that 136 jurisdictions out of 140 members of the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (“IF”), including the United States and Turkey, reached a political agreement on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy (“Agreement”). Accordingly, the Agreement seeks to ensure a fairer distribution of profits with the application of profit allocation rules in taxing the digital economy (“Pillar 1”) and subject Multinational Enterprises (“MNEs”) with an annual revenue above EUR 750 million to minimum tax at 15% as of 2023 (“Pillar 2”).


Accordingly, the Pillar 1 envisages the reallocation of taxing rights over MNEs from their home countries to the markets where they have business activities, regardless of their physical presence in respective countries. In particular, MNEs with global sales above EUR 20 billion and profitability above 10% will be covered by the new rules with 25% of their profit (above the 10% threshold) to be reallocated to market jurisdictions. In other words, the long-awaited global tax for MNEs, especially the bigtechs, which are defined as the “winners of globalization”, is introduced with the Agreement.  In addition to determining the tax rate to be applied, a transition period is also foreseen from January 1, 2022 until the earlier of the date the Pillar 1 multilateral convention comes into force or December 31, 2023.

 

In support of the Agreement, on November 22, 2021, the US and Turkey have announced the terms of a similar agreement on the transition from the existing Turkish DST to new multilateral solution. The US and Turkey agreed for the abolition of digital services taxes imposed by Turkey, especially targeting high-profit US technology companies. Moreover, the parties have committed to sustain a constructive dialogue on the matter. While the US Treasury stated that this agreement would pave the way for the removal of additional customs duties imposed as a response to the Turkish DST, it also announced that it would be the same as the terms of the Unilateral Measures Compromise reached in October 21 with Austria, United Kingdom, France, Spain and Italy. The US Treasury has announced that that Turkey will calculate the corporate tax as if the new rules were valid in the transition period and deduct the additional digital services tax amount from the corporate tax, which will be paid in the following years by the companies included within the scope, and in return, the US will abolish additional tariffs of 25% imposed on 32 products in the carpet, glass, ceramics and jewelry industries.