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Turkey’s Digital Services Tax developments: USTR Report and Pillar One

March 08, 2021

As of March 1, 2020, Turkey effectively levies its Digital Services Tax (“DST”) to a broad range of digital activities. It is considered much broader than some of the other digital services taxes introduced by other countries. The U.S. Trade Representative (“USTR”) issued the findings of its investigation of Turkey’s DST. Initiated in June 2020 under the US Trade Act of 1974, the investigation’s findings state that Turkish DST is discriminatory against US companies (as most of the digital services companies in scope are US companies), unreasonable as a tax policy and burdens or restricts US commerce.

In this article we will examine the Turkish DST, other taxes applicable to digital services and the findings of the USTR in more detail. We also briefly touch upon the Inclusive Framework’s developments regarding digital taxation, as these might prevent DSTs from applying. We continue to monitor the situation and expect that the USTR will follow up with further reports and updates on the ongoing investigations. It remains to be seen what, if any, trade action will be imposed on any country, including Turkey.

Turkish DST

The Turkish DST, effective as of March 1, 2020, applies to a broad range of activities including: all advertising services offered in a digital environment; digital services for the sale, viewing, listening, playing or recording of any audio, visual or digital content in a digital environment; services for the provision and operation of interactive digital media; and any intermediary services provided by digital services providers in a digital environment in relation to the abovementioned services.

The scope of Turkish DST is quite broad as compared to some of the other countries being investigated. French DST, for example, is limited to advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes, while online sales and the provision of digital content for buying or selling in a digital environment are expressly excluded.

The Turkish DST only applies to service providers who have generated, in the previous financial year, at least 20 million Turkish Lira (approx. US$2.7 million) in revenues in Turkey or at least EUR 750 million (approx. US$910 million) in global revenues. It is significant to note that the DST applies to gross revenues, as opposed to income or net profit. The rate, currently set at 7.5%, may be reduced to 1% or increased up to 15% via Presidential decree.

Turkey’s DST places the tax liability on the digital service provider. It is important to note that liability arises regardless of whether the service provider is resident in Turkey (and inherently fully tax liable) or resident outside of Turkey (in the case of a limited tax payer) or if the provider undertakes taxable activities through a permanent establishment or representative in Turkey. The tax lability test is simply whether these services are “provided” in Turkey, where “provision” includes offering of the service to consumers located in Turkey, if the service is benefited from by consumers located in Turkey or if the service is “utilized” in Turkey. A service is deemed to be utilized if payment for the service is made in Turkey or, in the case of a payment made abroad, recognition of the payment amount for accounting purposes in Turkey by the payer.

Digital service providers who fail to file and pay the DST risk having access to their services denied by internet service providers until the obligations are duly fulfilled. The Information Technologies and Communication Agency, upon request by the Ministry of Treasury and Finance, may request internet service providers to block access to non-compliant sites.

Other Turkish taxes on digital services

Please note, however, that the Turkish DST is not the only Turkish tax which applies to digital services. There are three other taxes to consider:

  • Value Added Tax (VAT) as applied to digital services

Reverse-charge VAT must be applied by Turkish taxpayers receiving digital services from non-resident service providers with no taxable presence in Turkey. Furthermore, if the digital services recipient is a Turkish individual without any Turkish VAT liability, it is required that non-resident companies delivering digital services register for and pay VAT in Turkey.

  • Withholding Tax (WHT) as applied to digital services

Another Turkish tax implication is the imposition of 15% WHT on Turkish taxpayers receiving advertisement services over the internet from non-resident entities. Particular focus, in this case, is paid to advertisement service providers resident in countries with which Turkey has a double taxation treaty because it is felt that this WHT treatment breaches treaty provisions prohibiting taxation of commercial income which is not generated through a permanent place of business in Turkey.

  • Impact of VAT, WHT and DST on non-resident and resident entities

In the case of non-resident digital services providers, the VAT and 15% WHT related to digital services are effectively paid by Turkish resident consumers and are, as such, not direct costs to digital service providers. The impact of the DST on the overall effective tax liability for non-resident entities is a very different situation. The requirement for non-resident entities to register for tax purposes may create the situation where they would become liable to file not only for DST in Turkey but also in relation to commercial income generated from delivery of digital services. For non-resident entities, this change would give rise to a taxation situation similar to that of resident digital service providers. Such entities, which are already subject to a 20% corporate income tax related commercial profits from the digital services in Turkey, would see their overall tax liability increase by the 7.5% DST charged over digital service revenues.

The USTR’s Investigation

The USTR’s detailed report (the ”Report”) explaining its investigation and conclusions related to Turkey was issued on January 6, 2021. According to the Report, the investigation took several months and includes written comments by the public on the Turkish DST.

The USTR’s criticism of Turkey’s DST is three-pronged, based on the following grounds:

  • The DST is discriminatory against US companies:

(1) The DST applies to exclusively to a sector in which leading companies are mainly of US origin; and

(2) Due to the revenue thresholds described above, it is unlikely that Turkish companies would become subject to the DST. The Report notes that of 61 companies likely to be subject to the DST, 42 are US-based and none are Turkish.

  • The DST is unreasonable and contravenes international tax principles in three ways:

(1) The application of the DST to companies that do not have a permanent establishment (“PE”) in Turkey violates the international tax principle that the corporate tax regime of a state should apply to entities which have a territorial connection with that state;

(2) The calculation of DST over revenue rather than income is inconsistent with prevailing international taxation principles; and

(3) The potentially arbitrary nature of the applicable DST rate. The President has the power to change the rate up to 15% via presidential decree.

  • The DST burdens or restricts US commerce:

(1) The Report estimates that the annual DST exposure of US companies could exceed US$100 million; and

(2) The payment and reporting requirements introduced by the DST will prove costly for the US companies and the penalty for non-compliance, i.e., prohibition from the Turkish market, is a much more severe penalty than any other country has implemented.

DSTs: An International Look

It is worth noting that there is a global trend to fundamentally change how digital services are treated for tax purposes. As you may know, Turkey is not the only country that levies a DST. At the time of writing, European countries like Austria, France, Hungary, Italy, Poland, Spain and the UK have all implemented a DST. Belgium, the Czech Republic and Slovakia have published proposals to enact one and Latvia, Norway and Slovenia have either officially announced or shown intentions to implement such a tax. The European Union is also set to debate a new digital levy early in 2021. It is proposed that the levy on Europe-wide digital revenues would become a direct contribution to the EU’s own budget by January 2023.

The recent surge in DSTs originates from the fact that the current international principles for the taxation of commercial profits rely on the underlying concept of attributing tax liabilities on profits to a fixed place of business or PE in a jurisdiction where the entity is considered resident. Where there is a PE, the profit attributable to that PE is limited by the “arm’s length principle,” which takes into account the overall functions/risks and rewards undertaken by the PE and limits the profit attributable to the PE based on the function/risk undertaken by that PE. The less the risk is undertaken by the PE, the less profit is attributable to the PE. Additionally, in this context, where there is no PE in a respective jurisdiction, there should be no taxation. However, most of the digital services rendered nowadays do not require a company to be established in or trading in a particular jurisdiction.

The introduction of these different DSTs is, however, not undisputed and digital services providers are suffering double taxation (i.e. DST and VAT on turnover, in addition to corporation tax on profits) as a result. As a result, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the “Inclusive Framework”), which combines around 137 countries, seeks to develop a new solution for the taxation of the digital economy. The Inclusive Framework’s Pillar One does not rely on the traditional PE approach and the arm’s length method of profit attribution. Rather, it seeks to create a standalone nexus rule that does not reference physical presence. A “nexus rule” is defined, in short, as a closeness or connection between the taxing jurisdiction and the entity that the jurisdiction is seeking to impose its tax obligations upon. By using a nexus rule, Pillar One would effectively leave a greater portion of the profit generated by the digital service providers in the country where the consumers of the digital service reside where it would be subject to taxation.


The taxation of digital services remains very much in flux. Delays on reaching consensus for new digital taxing systems at OECD/Inclusive Framework level has caused individual countries, like Turkey and many others, to introduce a DST for the interim period.

It remains to be seen if Turkey will ultimately adjust its DST regime to conform with the Inclusive Framework’s initiative, if and when it becomes effective. The Pillar One framework will need to be finalized and accepted by each OECD/G20 member country, including Turkey and the US who are OECD found members.  The Inclusive Framework has set itself a deadline for this for mid-2021.

We continue to monitor the situation and expect that the USTR will follow up with further reports and updates on the ongoing investigations. It remains to be seen what, if any, US trade action will be imposed on any country, including Turkey, but also is consensus can be reached by the OECD/G20 Inclusive Framework members (including Turkey and the US) by mid-2021.