Navigating Turkey's New Pillar Two: Key Compliance Insights on the Local and Global Minimum Top-Up Tax (MTT)

Navigating Turkey's New Pillar Two: Key Compliance Insights on the Local and Global Minimum Top-Up Tax (MTT)

Introduction: The Dawn of Minimum Taxation in Turkey

The global landscape of corporate taxation is undergoing a monumental shift with the implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two initiative¹. Turkey has formally joined this transformative movement by introducing the "Local and Global Minimum Top-Up Corporate Tax" (ATV - Asgari Tamamlayıcı Kurumlar Vergisi) as an amendment to its Corporate Tax Law (Law No. 5520)². This landmark regulation became effective on August 2, 2024³, ushering in a new era of compliance for multinational enterprise (MNE) groups operating within the country.

This development requires immediate attention from all in-scope MNEs. Understanding the precise definitions, scope, and transitional rules outlined in the new General Communiqué is paramount to ensuring seamless compliance and mitigating unexpected tax liabilities.

Phase 1: Understanding the Scope – Is Your MNE Group Affected?

The minimum top-up tax framework is not universal. The first critical step is assessing whether an MNE group falls within the purview of the regulation.

• Revenue Threshold: The regulations apply to MNE groups whose annual consolidated revenue in the consolidated financial statements of the Ultimate Parent Entity (UPE) met or exceeded the threshold of €750 million equivalent in Turkish Lira in at least two of the four fiscal periods immediately preceding the reporting period⁴.

• MNE Group Definition: An MNE Group is defined as a group possessing at least one entity or Permanent Establishment (PE) located in a jurisdiction different from that of the UPE⁵.

• Exempt Entities: Certain entities, such as government entities, international organizations, non-profit organizations, and Pension Investment Funds, are exempt from the ATV⁶. However, the revenue of these exempt entities is still considered for determining if the €750 million threshold is met⁷.

Key Takeaway: Even if an MNE group's revenue does not meet the threshold in the current year, the historical four-year look-back period mandates constant monitoring⁸.

Phase 2: Core Mechanisms – Local vs. Global Minimum Tax

The Turkish legislation introduces both a local and a global minimum top-up tax, utilizing the foundational Pillar Two mechanisms: the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR)⁹⁹⁹⁹.

The Global Mechanism (IIR and UTPR)

The global component ensures that MNE groups pay an effective minimum tax rate of 15% on their annual profits in each jurisdiction of operation¹⁰.

• Income Inclusion Rule (IIR): This rule primarily establishes the UPE as the entity responsible for paying the Global Minimum Top-Up Tax on the income of its low-taxed Constituent Entities (CEs) in other jurisdictions¹¹.

• Undertaxed Payments Rule (UTPR): Where the IIR does not fully apply (e.g., if the UPE's jurisdiction has not adopted a Qualified IIR), the UTPR acts as a backstop. It imposes a Top-Up Tax on CEs in jurisdictions that have adopted a Qualified UTPR, limited to the amount of Global Top-Up Tax not collected under the IIR^12121212.

The Local Mechanism (Local ATV)

The Local ATV applies to all Constituent Entities located in Turkey, including resident UPEs, and is calculated using similar principles to the Global ATV¹³.

• Local Compliance Note: The Turkish communiqué explicitly states that a Local IIR has not been adopted in Turkey¹⁴. However, a De Minimis (Safe Harbour) exemption is available for the Local ATV if the MNE's average annual domestic revenue is below €10 million and average income is below €1 million (in Turkish Lira equivalent)¹⁵.

Phase 3: Immediate Compliance & Next Steps (CTA)

Given the August 2024 effective date, MNE Groups must finalize their compliance strategy now.

Filing Deadlines and Requirements

• Information Return: MNE Groups must file a Global Minimum Top-Up Tax Information Return (Küresel ATV Bilgi Beyannamesi).

• Payment and Filing: The calculated Global ATV must be declared and paid by the end of the fifteenth month following the close of the fiscal period.

  • Transitional Relief (2024 Period): For the 2024 fiscal period only, this deadline is extended to the end of the eighteenth month following the close of the fiscal period.

• Local ATV Deadline: The Local ATV must be filed and paid earlier, by the end of the twelfth month following the close of the fiscal period (e.g., December 31 for calendar-year reporters).

Transitional Safe Harbours: Leveraging the Temporary Relief

For the initial compliance phase, MNEs can utilize the CbCR Safe Harbour ²⁰provisions, which offer temporary relief from full calculation, including a Temporary Minimum Effective Tax Rate of 15% for 2024.

Deep Dive into Effective Tax Rate (ETR) Calculation & Adjustments

The core of Minimum Top-Up Tax compliance lies in the meticulous calculation of the Jurisdictional ETR, which is determined by dividing the aggregate Adjusted Covered Taxes by the aggregate Net Jurisdictional Earning for the period.

To gain full clarity on the complex adjustments required for your Turkish entities, particularly those concerning:

• Adjusted Covered Taxes: Understanding the inclusion of Current Tax Expense and Deferred Tax Adjustments²³.

• Financial Accounting Net Income/Loss (FANIL) Adjustments: Navigating non-deductible expenses (e.g., fines over €50,000 equivalent), Foreign Currency Gains/Losses, and Stock-Based Compensation elections

• The Substance-Based Income Exclusion (SBIE) Calculation: How to accurately compute the 7.8% tangible asset carve-out and 9.8% payroll carve-out applicable for the 2024 fiscal year (subject to phase-down)

[Contact Our Tax Advisory Team to Schedule an Immediate Consultation]

Our dedicated team of international tax specialists offers tailored support to help your MNE Group interpret the nuances of the Turkish General Communiqué and implement a robust, efficient compliance framework.

info@ozmconsultancy.com