Office of US Trade Representative’s Report on Turkey’s Digital Service Tax

On January 6th, 2021, the United States released reports on the Office of the U.S. Trade Representative's ("USTR") investigations regarding the Digital Service Tax ("DST") practices of some other countries, as was the case with France's DST.


The Report on Turkey ("Report") is summarized as follows:


First of all, the developments in the Middle East regarding the OECD BEPS project are mentioned, and it is highlighted that there is not a consensus built yet on digital taxation in a global sense. At this point, it is noted that Turkey chooses a unilateral application, and the DST entered into force.


The services within the scope of the DST, tax liability, tax rate, and penalties to be applied in case of non-payment of the DST are explained, and the criticisms of the USTR regarding the Turkish DST application are gathered under three main headings:


  1. It is asserted that Turkish DST is discriminatory against U.S. Digital Services Companies.


In this respect, the minimum thresholds determined for the tax liability are considered as discriminatory since the said amounts are determined low for revenue earned from the domestic market and high in terms of global earnings, which results in not including Turkish companies but targeting U.S. companies. 


This situation is supported by numbers: A total of 61 companies have been identified that meet the two minimum thresholds, and it is documented that while 42 of them are U.S. companies, none of them are Turkish companies. Therefore, it is mentioned that a large part of this practice is undertaken by U.S. companies. In addition, the Turkish Parliament discussions were also included, and the expression of a deputy stating that "this tax will not be a burden on domestic companies" was mentioned at the point of drafting the law.


The claim of discrimination is also approached in the sense that covered services are differentiated on the way they are conducted. It is stated that it is a discriminatory practice not to collect this tax over the services performed via non-online platforms. In this sense, it is mentioned that the OECD also drew attention to this issue (ring-fencing approach) and highlighted that a distinction between digital and non-digital services should be avoided when updating tax regulations according to today's conditions.


2.     It is claimed that the Turkish DST regulation is inconsistent with international tax norms.


It is stated that such taxation without stipulating a physical presence disregards the "permanent establishment" treatment, which is foreseen by bilateral treaties and accepted as a global understanding. At this point of the Report, related articles of the OECD, the U.N., and the U.S. model tax conventions are mentioned, and physical presence is highlighted as a condition for a permanent establishment to be occurred according to the aforementioned rules. To sum, the Turkish DST is criticized for (i) not including permanent establishment treatment and (ii) disregarding physical presence criteria; and hence, it is found inconsistent with the international tax norms. 


In addition to this, it is stated that this taxation on revenue, and not on net income, is against the internationally accepted tax base understanding. The "business profits" and other relevant articles in the OECD model convention are included, and it is underlined that there is not a reference to the taxation on revenue in Turkey-U.S. double tax agreement.


Finally, it is mentioned that DST does not provide tax predictability and therefore violates international tax norms. Regarding this, it is stated that due to the President's authority to change the relevant minimum thresholds for tax liability, there is a certainty problem. In addition, it is highlighted that having the President's power to change the tax rate (in an extensive parameter) creates uncertainty about how much tax will be paid.


3.     It is asserted that Turkish DST burdens or restricts U.S. commerce.


The large tax burden, compliance costs, and administrative burdens in order to revamp company systems, double (even triple) taxation risk, and possible penalties for non-payment of the DST are mentioned. It is also highlighted that the Turkish DST has the highest rate with 7.5% among others.

Prepared by:

Zeynep Kılavuz, Senior Associate

Dilara İnal, Legal Intern