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Tax Liability of Non-Resident Electronic Service Suppliers?

Tax Liability of Non-Resident Electronic Service Suppliers?

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Pursuant to an amendment to the Turkish Value Added Tax Law at the beginning of 2018, non-resident electronic service suppliers are now liable for Value Added Tax on services provided electronically to Turkish individuals who are not VAT taxpayers.

As a result of this move by the Turkish tax authorities, digital businesses with a global reach are obliged to apply, collect, and remit VAT on their supplies to individual Turkish customers. The main objective of this new legislation is to secure VAT income from services provided in Turkey by non-resident e-service providers through the Internet.

Targets of the New Law

E-service providers who do not have a registered address or business headquarters in Turkey and who provide e-services through the Internet or an electronic network to Turkish individuals who are not VAT taxpayers are the main target of this legislation.

This regulation only applies to Business to Consumer (B2C) transactions, and not Business to Business (B2B). This means that making even the merest supply necessitates registration. 

B2B e-services still fall under the scope of VAT through the reverse charge method, but registration is not required for non-resident e-service providers. Having said that, the lack of a B2B validation system adds real-time complexity when attempting to distinguish between private customers and businesses.

VAT Rate

The VAT rate for e-services provided through the Internet depends on the type of service. In Turkey, the standard VAT rate is 18%, while reduced rates are 1% (e.g. for newspapers and magazines and basic foodstuffs) and 8% (e.g., for e-books, pharmaceuticals, and medical products). 

Scope of E-Services

Although the final version of the new legislation does not specify the services that fall under the scope of the amended VAT rules, the list below, which was included in the draft communique of the law, may be helpful in understanding what the Ministry of Finance means by e-services: (i) the supply of a website or webpage, domain name, web hosting, or other services related to a website or webpage; (ii) Remote maintenance of computer software and equipment and remote system management and online data storage services; (iii) the sale of software and all digitalized products including accessing, downloading, and updating (including products such as antivirus programs, ad blocker programs, device drivers, and filters relating to websites and firewalls); (iv) the supply of images, texts, and information as well as the preparation of databases and similar services; (v) the supply of remote teaching; (vi) radio and TV broadcasting services; (vi) other services supplied via the Internet or other electronic networks that are of a similar nature to the above-mentioned services. Of course, the fact that a catalogue of specific e-services which trigger VAT obligations is missing from the law will cause uncertainty and complexity for affected non-resident e-service providers.

Role of Intermediaries

In cases where an e-service provider who provides e-services is unknown or not explicitly stated, VAT liability is shifted and the intermediaries who are authorized to request payment from or set the general terms and conditions of the service or who are liable for supplying these services will be liable for the declaration and payment of the VAT.  

Registration and Declaration Procedure

In order to be able to fulfill the VAT requirement, non-resident e-service providers are required to initially register themselves as “special taxpayers” by filling out the relevant form designed for the non-resident e-service providers, which is available on the Revenue Administration’s website. The acceptance and the approval of this form will qualify as “Special VAT Registration for Electronic Service Providers” for non-resident e-service providers. VAT arising from e-services being provided to Turkish individuals who are not VAT taxpayers will then be declared electronically by the non-resident e-service providers. VAT returns need not be filed for reporting periods in which no transactions occur. 

VAT Deduction          

Non-resident taxpayers who use e-services are allowed to deduct VAT from VAT payable if services and goods are obtained from those who are liable for VAT in Turkey and VAT is shown on the invoices and similar documents, provided that VAT is related to the declared services under the special VAT liability of non-resident taxpayers for e-services.

Bookkeeping Requirements

Foreign enterprises registered under this mechanism are not under any obligation to keep VAT records. However, they are required to keep documentation of the input VAT they incur and deduct from their VAT liability.

By Done Yalcin, Managing Partner, and Taylan Baykut, Tax Counsel, CMS Turkey

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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