Foreign Service Invoices and Types

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What is a Foreign Service Invoice?

Foreign service invoices refer to documents issued and paid for services received by a company based in Turkey from a company located abroad. These invoices have become increasingly important in the business world with the growth of international trade and particularly the rise of digitalization. However, evaluating these documents within the context of tax legislation can be quite complex. If the necessary procedures are not carried out in compliance with regulations, both legal and financial risks may arise.

Types of Foreign Service Invoices

Foreign service invoices vary depending on the type and source of the service. Below are the most common types of foreign service invoices:

Consultancy and Service Invoices: For example, invoices issued through freelance platforms such as Rimuut.

Digital Advertising and Sponsorship Invoices: Invoices related to advertising expenses on platforms such as Google Ads, Facebook, Instagram, Snapchat, and Applovin.

SAAS (Software as a Service) Invoices: Invoices related to the use of cloud-based software like Slack, Mailchimp, Zendesk, Docusign, and Zoom.

Software License Invoices: Invoices for the usage of software like SAP, Oracle, and Unity.

Cloud Services and Storage Usage Invoices: Invoices for services from platforms such as AWS and Google Cloud.

Intellectual Property Invoices: Invoices that include payments for licenses, know-how, and royalties.

Commission Invoices: Brokerage fees invoiced by foreign intermediaries or platforms.

Taxation of Foreign Invoices

One of the most common tax issues in international trade is when both the country providing the service and the country receiving it seek to tax the same income. This situation is referred to as "double taxation." Especially in cross-border service procurements, the country providing the service may want to impose corporate tax or similar taxes under its legislation. Likewise, countries like Turkey, which import the service, may wish to impose withholding tax on the payments made abroad as a prepayment of income or corporate tax.

This increases costs for companies and creates tax-related uncertainties. To resolve double taxation issues and encourage international investments, Double Taxation Avoidance Agreements (DTAAs) are signed between countries. These agreements clearly define which country has the right to tax specific types of income. They also include provisions that allow taxes paid in one country to be credited in another, thus preventing duplicate taxation.

Key Steps in the Taxation Process

Accurately managing the taxation process for services procured from abroad is crucial for minimizing financial risk and ensuring legal compliance. In this context, the following considerations are essential:

Country of Residence and Certificate of Residency of the Service Provider: It must be clearly identified in which country the service provider is resident. A valid certificate of residency obtained from the competent tax authority of that country should be acquired. This document plays a critical role in determining whether a DTAA exists between Turkey and the provider’s country and helps avoid incorrect withholding tax applications.

Existence of a Double Taxation Agreement: Whether a valid DTAA exists between Turkey and the service provider’s country must be determined. If no such agreement exists, a flat 20% withholding tax must be applied under the Turkish Income Tax Law. If a DTAA is in place, the withholding tax rate may differ or may be entirely exempt depending on the agreement’s provisions.

Nature of the Service and Corresponding Article in the DTAA: The nature and content of the service must be carefully analyzed to determine which article of the DTAA it falls under. Common categories include: Business Profits Independent Personal Services Royalties (intellectual property rights)
Each category is subject to different tax treatment. For example, business profits are generally taxable only in the provider’s country, while royalty payments may be taxed in both countries.

Whether the Service Was Used in Turkey: The place where the service is used plays a determining role in VAT and withholding tax obligations. If the service was used solely for a project abroad and had no application in Turkey, VAT and withholding tax may not apply. However, if the service is used in Turkey, both obligations may arise. The purpose of the service and the ultimate beneficiary must be considered in this assessment.

Tax Evaluation by Type of Invoice

SAAS and Cloud Storage Services Invoices

VAT (VAT2) must be calculated. The tax authority generally classifies these services as “intellectual property rights,” thus requiring withholding tax. However, there is a strong opinion in practice that these services should be treated as "business profits," for which withholding tax would not apply.

Software Invoices

If the software only grants usage rights (without duplication or modification rights), it is considered “business profit” and not subject to withholding tax. However, if the invoice includes a licensing fee, it falls under “intellectual property” and is subject to withholding. Therefore, it’s important that invoice items such as license, consultancy, and support fees are clearly separated.

Consulting and Independent Personal Services Invoices

These services are considered independent professional activities. If the service provider has stayed in Turkey for more than 183 days, withholding tax applies. If the duration is less, no withholding tax is due. VAT (VAT2) still applies regardless of the duration.

Important Practical Considerations

An invoice must be obtained even if the payment was made by credit card. It’s acceptable for the invoice to be in PDF format, in a foreign language, or in a foreign currency. Invoices must be issued in the name of the company. Invoices issued to personal names cannot be recorded as company expenses. Invoices must be reported to accounting in the same month they are received. Otherwise, corrections will be required in tax declarations and BA-BS forms. If the invoice amount exceeds 5,000 TL, a BA form must be prepared. Payments are generally recorded using the Central Bank’s exchange rate. Foreign VAT indicated on the invoice is not deductible in Turkey. Therefore, 18% VAT2 must be calculated on the gross amount.

Conclusion

Foreign service invoices are increasingly common in today’s globalized and digitized business environment. However, accurately evaluating these transactions within the scope of tax legislation is essential to avoid both legal and financial risks. Factors such as the type of service, the existence of tax treaties between the provider’s country and Turkey, and whether the service was used in Turkey directly impact the taxation process.

To fully meet tax obligations, each invoice must be thoroughly analyzed, proper VAT and withholding procedures must be followed, certificates of residency must be obtained in a timely manner, and accounting processes must be handled meticulously.