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ABSTRACT As economic activities are substantially transferred to virtual environments, the necessity for tax systems to adapt to these transformations has arisen. The digital services tax has been incorporated into the Turkish tax system through Law No. 7194 on “Amendment of Certain Laws and the Decree Law No. 375 on the Digital Services Tax”. This article examines how the digital services tax has been shaped in line with OECD recommendations and the innovations introduced by its implementation in Turkey.
Keywords: Digital Services Tax, Digitalisation, Taxation.
INTRODUCTION
The rapid development of digital technologies and the increasingly virtual nature of economic activities have compelled existing tax systems to adapt to new developments. This situation created a gap in terms of public finance in the countries where multinational companies providing digital services operate.¹ In this context, many countries have begun to update their tax policies to encompass the digital economy; digital services taxes have come onto the agenda. In Turkey, the Digital Services Tax (“DST”) was incorporated into the tax system through Law No. 7194 dated 7 December 2019 on “Amendment of Certain Laws and the Decree Law No. 375 on the Digital Services Tax” (“Law No. 7194”). Within this scope, our article will first examine current tax practices regarding the digital economy, specifically focusing on the OECD approach, and subsequently make assessments concerning Law No. 7194.
I. OECD APPROACH TO DIGITAL SERVICES TAX
Although many countries have adopted an approach to introduce digital services tax on the gross revenues of technology companies, this situation is criticised on grounds such as contravention of the principle of equality and giving rise to the phenomenon known as tax pyramiding.² The OECD has carried out various studies to produce solutions at the international level for these new tax problems emerging alongside the digitalising economy. In the two-pillar solution statement published by the OECD in October 2021, it was aimed to develop a comprehensive and multilateral solution to tax problems arising from digitalisation. In this context, Pillar One envisages that multinational enterprises providing digital services and operating on a global scale should be taxed not only based on their physical presence but also in the markets where they conduct business. The OECD stated in its statement that this new structure would ensure a fairer reallocation of taxing rights.³ This regulation is considered a significant step aimed at preventing the erosion of the tax base on a global scale and the shifting of profits to different countries, particularly by granting more taxing authority to countries where digital enterprises operate. Within the scope of the global tax reform developed under the OECD’s Inclusive Framework and consisting of two main pillars, Pillar One envisages the redistribution of profits of multinational digital companies to the markets where they operate; whereas Pillar Two aims to determine a global minimum corporate tax rate. This reform aims to offer a fair and effective solution at the international level against criticisms that companies providing digital services avoid paying taxes. Consequently, the OECD’s approach to digital services tax constitutes a step taken on a global scale to close tax gaps created by digitalisation.
II. IMPLEMENTATION OF DIGITAL SERVICES TAX IN TURKEY: ASSESSMENT OF LAW NO. 7194
The most concrete step taken for the effective taxation of revenues obtained from the digital economy in Turkey was realised through Law No. 7194, which was published in the Official Gazette and entered into force on 7 December 2019. With this regulation, the concept of digital services tax was formally incorporated into the Turkish tax system. Within the scope of the Law, digital services tax was introduced for revenues obtained from activities such as advertising services provided in the digital environment, sale of content created through user interaction, and sale of goods or services in the digital environment. Law No. 7194 defined the tax base as gross revenue and initially determined the tax rate as 7.5%. The authority to change this rate between 1% and 15% was granted to the President. The tax covers companies obtaining Turkey-sourced revenue of 75 million TL or more annually, as well as providing global revenue exceeding 750 million Euro worldwide. It can be stated that these threshold values indicate that the implementation targets only large-scale international companies and in this respect resembles the OECD’s criticisms regarding digital services taxes. However, it is observed that the implementation in Turkey also carries certain problems in terms of the principle of equality, which is debated in international literature. The application of the tax only to certain types of activities brings about sectoral discrimination; this situation may undermine the principle of equality. Moreover, levying tax on gross income rather than profit creates a tax burden regardless of companies’ profitability levels, and this reduces predictability in the investment environment. Nevertheless, although Turkey’s digital services tax implementation will yield positive results in the short term in terms of treasury revenue, it also needs to be evaluated in terms of international tax compliance and investment attractiveness. Particularly in the context of the OECD’s two-pillar solution proposal, considering multilateral agreements to which Turkey is also a party, it is important to review the digital services tax and harmonise this tax structure with global reforms in order to reduce potential double taxation risks. Consequently, although the digital services tax enacted through Law No. 7194 constitutes a response at the national level to the tax effects of digitalisation, it requires assessment regarding its compliance with constitutional principles and international norms.
a. Subject Matter of the Tax
According to Article 1 of Law No. 7194, the subjects of digital services tax are revenues obtained from:
• All kinds of advertising services provided in the digital environment
• Sale of any audio, visual or digital content (including computer programs, applications, music, videos, games, in-game applications and similar) in the digital environment and services provided in the digital environment for listening to, watching, playing this content or recording it on electronic devices or using it on these devices
• Services for providing and operating digital environments where users can interact with each other (including services provided for the sale or facilitation of the sale of a good or service between users)
• Intermediation services provided by digital service providers in the digital environment for the services listed above
The expressions “and similar” contained in the full text of the Law article are of a nature that undermines the principle of legality of tax. Certainly, it is not possible for laws to be published simultaneously with developments in the digital world. However, in order to prevent potential disputes, it would be beneficial for laws concerning digital services in particular to be regulated in a more casuistic structure and to adapt rapidly to today’s world. The General Communiqué on Digital Services Tax Implementation (“Communiqué”) published by the Ministry of Finance in the Official Gazette dated 20.03.2020 and numbered 31074 is significant in terms of interpreting the aforementioned Article 1. The provisions of the Communiqué explain within the scope of examples under Law No. 7194. However, it is not possible to regulate and apply the examples and explanations contained in this Communiqué within the scope of every business model. In this case, divergences of opinion in practice between the Administration and taxpayers are likely. Furthermore, it is understood from this article that the taxpayer of the digital services tax is the digital service providers. Whether these are fully liable or not in terms of the Income Tax Law and the Corporate Tax Law, whether they carry out the said activities in the case of limited liability through their workplace or permanent representatives located in Turkey does not affect digital services tax liability⁴. What is important here is the nature of the service and the generation of revenue from the service.
b. Exemptions and Exceptions
Article 4 of Law No. 7194 regulates exemptions and exceptions. Within this scope, those whose revenue obtained in Turkey regarding the services listed in Article 1 of Law No. 7194 in the accounting period prior to the relevant accounting period is less than 20 million Turkish liras, or whose revenue obtained worldwide is less than 750 million euros or the Turkish lira equivalent of foreign currency, are exempt from digital services tax. In case the taxpayer is a member of a consolidated group in terms of financial accounting, the total revenue obtained by the group regarding the services subject to tax is taken into consideration in the application of these thresholds. If both of the above-mentioned thresholds are exceeded together within the relevant period, the exemption terminates and digital services tax liability begins from the fourth taxation period following the taxation period in which the threshold was exceeded. In determining whether the said thresholds are exceeded or not, the cumulative revenue obtained within the relevant accounting period as of the end of the three-month periods of the accounting period is taken into consideration. Moreover, the tax exemption of those who remain below one of the above thresholds consecutively for two accounting periods will restart from the following accounting period.⁵ Exceptions regarding DST are listed by enumeration in the continuation of the article. It is stated that exceptions and exemptions regarding digital services tax can only be regulated by adding a provision to this Law or by making an amendment to this Law. This section of Law No. 7194 reveals an approach aiming to tax only large-scale digital service providers. This situation will enable small enterprises to obtain more opportunities in market competition.
CONCLUSION
DST is a significant step aiming to tax revenues obtained from the digital economy. Certain problems encountered in practice give rise to debates as to whether this new type of tax is in compliance with both constitutional taxation principles and international norms. In particular, matters such as the regulation of the scope of the tax in a broad and open-to-interpretation manner, the lack of clarity of liability criteria, and levying tax on gross revenue instead of profit are open to criticism in terms of legal predictability and principles of justice. In this framework, it is essential for the DST implementation to acquire a more casuistic and clear structure in order to ensure uniformity of implementation for both taxpayers and the administration. The fact that the Tax Administration has recently commenced tax audits solely within the scope of digital services tax indicates that this issue will continue to remain on the agenda for both the Tax Administration and taxpayers in the forthcoming period.
¹ Bunn, D. Asen, E. Enache, C. (2020). Digital Taxation Around the World, Tax Foundation, p. 1.
² Tax Foundation. (2023a). Tax Pyramiding. TaxEDU. (https://taxfoundation.org/taxedu/glossary/tax-pyramiding/) Tax Foundation. (2023b). Testimony: Pillar One & Digital Services Taxes. (https://taxfoundation.org/testimony/pillar-one-digital-services-taxes/#_ftn4)
³ OECD. (2021). Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – October 2021. (https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf)
⁴ Fatih SARAÇOĞLU and Birkan KAHRAMAN, “Assessments on Digital Services Tax”, Vergi Sorunları Journal, January 2020, pp. 9-17.
⁵ Dr. Altan RENÇBER, “Digital Services Tax First Impressions, Problems and Issue”, Vergi Sorunları Journal, January 2020, pp. 27-35.