The Law No. 7194 on Digital Service Tax and the Amendment of Certain Laws and Law Decree No. 375 (the “Law”) which was published on Official Gazette dated December 7, 2019 and No. 30971 and entered into force on 1 March 2020, introduces digital service tax on revenues derived from certain digital services provided in Turkey.\ General Communique on Digital Service Tax (the “Communique”) which was published in the Official Gazette dated March 20, 2020 and No. 31074 and entered into force retroactively as of the beginning of March, provides detailed guidance and further explanations with respect to digital service tax.\ Here is a brief summary of what this new tax law brings:

1. Scope of the Digital Service Tax\ The Law introduces digital services tax (“Digital Service Tax” or “DST”) to Turkish Tax Law to be imposed on revenues derived from the following digital services provided in Turkey (“Digital Services”) which are detailed with further examples by the Communique:

1.1. Any and all kinds of advertising services provided through digital media (including advertising control and performance measurement services, services such as data transmission and management regarding users, as well as technical services regarding the advertising);\ 1.1.1. Search engine marketing,\ 1.1.2. Strip advertising (banners),\ 1.1.3. All kinds of audial, visual or written advertisements on digital media before videos or other contents\ 1.1.4. Online advertisements provided via software within electronic devices\ 1.1.5. Pop-up advertisements.

The Communique provides that the revenue generated from advertising, control and performance measurement services, services such as data transmission and management regarding users, as well as technical services regarding the advertising are also subject to DST. For instance; the revenues generated from advertisement services provided within an online game application are subject to Digital Service Tax according to the Communique.

In this vein, services including analysis and reporting on whether online advertisements reach their audience or determining age, gender or other characteristics of the users would trigger DST liability within the scope of online advertisement services provided in Turkey.

1.2. Sale of audio, visual or digital content through digital mediums (including computer programs, applications, music, videos, games, in-game applications and the like) and services provided through digital media aimed at listening, watching, playing or recording these contents via electronic devices through digital mediums or the use of those contents via such devices

1.2.1. Programme, software and applications used on computers, tablets, smart phones and smart bracelets,\ 1.2.2. Audial or written contents such as films, TV series, videos, photos, pictures, graphics, articles, journals, newspapers,\ 1.2.3. All kinds of digital games and their additional packages and codes, regardless from whether they can be played online or offline,\ 1.2.4. Applications and packages related to online games which are provided to the users in consideration of a price (such as in-game applications, additional materials or money.

The Communique provides examples of sub-section 1.2 such as (i) sale of online money within an online game, (ii) sale of antivirus software on a digital store which will be subject to DST.

The Communique also explicitly excludes the following services from digital contents:

-Storage of digital data on online platforms,

-Sale of tickets on digital environments that represent the right to benefit from a physical service such as cinemas, theatres, concerts, museums, sports events, buses, trains, airplanes etc.,

-Sale of tickets for all kinds of legal gambling games by authorised institutions on the digital environments.

Additionally, the activation or the download of the software in the digital environment will not be considered as sale of digital contents according to the Communique provided that such software is mandatory for the use of a good, the software is involved within the digital content by the seller at the time of the sale and no additional fees are charged for such activation or download.

1.3. Services of the provision and operation of digital media enabling users to interact with each other (including services aimed at the sale or facilitation of sale of goods or services between users).

The Communique gives further examples of sub-section 1.3 such as revenues generated from (i) a website which provides intermediary services aimed at facilitation of sale of cars to its users, (ii) a website which provides digital environment in which its users may submit posts in relation to their careers.

The revenues derived from the sales of goods or services in the digital environment are not within the scope of DST. However, sales obligations must be fulfilled by the sellers and the responsibilities that may arise from the legislation relating to the protection of the consumer rights must also be borne by the sellers for the transaction to be classified as sales of goods or services and not as mediation for such sales according to the Communique. In this vein, the Communique provides that a fashion brand selling its products on a digital environment will not be subject to DST for the revenues generated from such sale.

1.4. The intermediary services performed in the digital environment in relation to the aforementioned Digital Services

The Communique provides an example of intermediary services as follows:

Company B provides intermediary services on its digital store with respect to sales of Company A which also provides intermediary services on its own digital store. In this vein, the revenues generated from services provided by Company A will be subject to DST according to sub-section 1.4. The revenues generated by Company B will also be subject to DST according to sub-section 1.3

2. Digital Service to be Performed in Turkey

The Communique specifies the criteria for the digital services to be deemed as performed in Turkey for Digital Services as follows:

-The Digital Services are performed in Turkey, or

-The Digital Services are received in Turkey, or

-The Digital Services are performed targeting the persons located in Turkey, or

-The Digital Services are accounted in Turkey

If the payments in consideration for the Digital Services are made in Turkey or made outside Turkey but recorded on company ledgers in Turkey; such Digital Services will be deemed as accounted in Turkey.

The Communique explicitly excludes online advertising services that are targeting persons residing out of Turkey.

For instance; intermediary services provided by a foreign company for rental of properties located out of Turkey to the persons located in Turkey and intermediary services provided by a foreign company for sale of goods to the persons located in Turkey will be deemed as Digital Services according to the Communique.

3. Tax Base and Rate

DST rate is regulated as 7.5%(1) on the revenues generated from the Digital Services listed above. The taxpayers are not allowed to make any deductions from (i) the tax basis under the name of expenses, costs or taxes, and (ii) the calculated DST. It is also mentioned under the Law No.7194 that the DST cannot be indicated on the invoices or documents equivalent to invoices.

4. Taxpayers

According to the Law No. 7194 taxpayers are Digital Service providers and intermediaries in the provision of such Digital Services in Turkey. It is mentioned under the Law No. 7194 that the DST must be imposed on providers and intermediaries in the provision of Digital services in Turkey regardless of whether they are full taxpayers(2) or limited taxpayers(3) according to the Turkish Tax Law. In other words, tax residency of the providers or intermediaries has no effect on determining their tax liability. Therefore foreign entities may be determined as taxpayers in terms of DST according to whether they provide the Digital Services that fall in the scope of the Law No. 7194 in Turkey.

In the event where the taxpayer does not have any domicile, workplace, legal or registered or business headquarters in Turkey, and in other cases deemed to be necessary, the Ministry of Treasury and Finance has the authority to secure tax receivables by imposing DST on those who are parties to the taxable Digital Service transactions and those who intermediate such transaction or payment liable for the payment of the DST.

The taxpayers are required to fill the form in electronic form provided by Revenue Administration (DST) before their declaration for Digital Service Tax.

5. Exemptions

The Law also provides certain exemptions from DST liability which is determined according to the revenues derived from Digital Services in the previous fiscal period by the corporation. In the event that the revenues generated from Digital Services in the preceding fiscal period are below (i) 20 million Turkish Liras generated in Turkey or (ii) 750 million Euros generated globally or the Turkish lira equivalent of 750 million Euros, the provider or intermediary of the Digital Services will be held exempt from DST.

The Law and the Communique provides that, the total revenues of the group generated from the digital services triggering the DST in Turkey will be taken into account in considering whether the exemptions apply if the taxpayer is a member of a “consolidated group” in terms of financial accounting. In a “consolidated group” all enterprises in the consolidated financial statements subject to the International Financial Reporting Standards or Turkish Financial Reporting Standards for the purposes of digital service tax, will be taken into account in determining whether the revenue generated from digital services exceeds 750 million Euros worldwide.

If both of the thresholds are exceeded in the relevant fiscal year, the exemption will cease to exist and DST liability will be triggered as of the fourth taxation period following the taxation period in which the thresholds are exceeded. The quarter-end Digital Service revenues shall be evaluated on a cumulative basis in order to determine whether the thresholds are exceeded.\ The following services provided in digital media are listed in the Law No. 7194 to be exempt from the DST (i) Services involve services subject to the treasury share payment under The Telegraph and Telephone Law No. 406 (such as mobile electronic communication services); (ii) Services subject to the special communication tax (such as telecommunication services); (iii) Services provided within the scope of banking activities; the sale of products created as a result of R&D activities performed in R&D centers; and (iv) Services provided solely in relation to such products and payment services under the Law No. 6493 regarding payment services.

6. Declaration and Documentation Obligation in relation to Exemptions

The Communique provides terms and procedure with respect to declaration and documentation of the exemptions with respect to DST.

Digital Service providers whose revenues generated from Digital Services in the preceding fiscal period exceed 20 million Turkish Liras in Turkey yet do not exceed 750 million Euros globally are required to declare their exemption from DST by obtaining a financial audit report in order in accordance with the Law, the Communique and international audit standards which must be prepared by an independent auditing firm that provides auditing services in at least 5 countries (including Turkey). Such audit report must be submitted to DST until June 30, 2020 and must contain the following information:-

-Company name, contact information, information regarding shareholders and activities of the company,

-Domain names and IP addresses where Digital Services are provided,

-Information regarding authorised representatives in Turkey (if any)

-Revenues generated from Digital Services in Turkey

-Revenues generated from Digital Services worldwide,

-Analysis with regards to exemption from DST in accordance with the Law.

It should be noted that, Digital Service providers cannot benefit from exemptions unless the audit report which meet the conditions listed above is submitted to the aforementioned website before June 30 in the fiscal period where exemptions arise.

Additional 30 days may be granted by Revenue Administration if the Digital Service provider fails to submit their audit report within the aforementioned time periods.

7. Taxation Period, Declaration and Payment of the Digital Service Tax

The Law No. 7194 entered into force at the beginning of March 2020. DST is regulated as to be applied on monthly basis. The taxpayers are required to file their DST returns with the relevant tax offices by the end of the month following the taxation period (one-month) in order to fulfil their requirement to declare DST.

The relevant tax office where the DST returns will be filed is the tax office where the VAT taxpayer service providers or intermediaries are registered and the tax offices that will be designated (4) by the Ministry of Treasury and Finance for the taxpayers which are not registered to a tax office for VAT.

Taxpayers are obliged to pay the DST within the DST return submission period. It should also be noted that digital service taxpayers can deduct the declared and paid DST as expenses in the determination of the net profit with respect to the income tax and corporate income tax calculation.

It should also be noted that the DST must be declared and paid in addition to the withholding tax for online advertising services contemplated by the Presidential Decree numbered 476 and dated 18.12.2018 which entered into force on 01.01.2019.

8. Blocking Access to Services

In the event of failure to comply with the DST declaration and payment obligations within 30 days following the date of receipt of the warning from the tax authorities, The Ministry of Treasury and Finance is granted with the authority to prevent access to services provided by digital service providers.

DisclaimerThe content of this document is intended to provide a general guide to the subject matter. Legal advice should be sought about your specific circumstances. Information in this document should not be construed as legal advice or a substitute for legal counsel. Lawyers at Kesikli Law Firm assume no liability or responsibility for the accuracy or validity of any information provided herein. As information changes rapidly, the user is strongly advised to verify any information before relying on it. The materials and information on this document are not guaranteed to be updated. There are many issues and details involved with international arbitration so it is important that you get specific advice prior to making any decisions on your business transactions. No person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.

@Sena Güngördü

(1) The President of Turkey is granted with the Law No. 7194 with the authority to reduce the DST rate to 1% separately, for each service type, or collectively, or to increase the rate up to 15%.\ (2) This is a term of art in Turkish Tax Law. Those judicial persons who are not residing in Turkey, but obtaining taxable income from Turkey are regarded as “limited taxpayers”.\ (3) This is a term of art in Turkish Tax Law. Those judicial persons who are residing in Turkey are regarded as “full taxpayers”.

(4) According to our legislative research, the Ministry of Treasury and Finance has not published a regulation on the matter yet.