Transfer Pricing Policy

1. PURPOSE AND SCOPE

The purpose and scope of this document is to determine the principles and procedures on related party transactions of Sabancı Group companies.

2. ROLES AND RESPONSIBILITIES

The Financial Affairs, Accounting and Investor Relations Department is responsible for following the changes in the transfer pricing legislation, reviewing the regulation and informing the Group on this matter.

Group companies take into account the legal regulations in the tax legislation in all kinds of goods and services purchase and sale transactions they carry out with related parties, and public companies also take into account the provisions of the capital market legislation.

Group companies obtain the opinion of The Financial Affairs, Accounting and Investor Relations Department regarding the compliance of the transaction with the legislation in the transactions subject to transfer pricing they make with related parties.

3. PRINCIPLES

3. 1. General Principles

In all transactions regarding sale or purchase of goods and service with related parties, by Sabancı Group companies determine the value or price in line with the arm's length principle.

Arm’s length principle refers that the price or the value applied in purchase or sale of goods or services with related parties, is in compliance with the price or the value which would be applied in case there was no such a relation.

3. 2. Principles in Tax Legislations

In Türkiye, the transfer pricing provisions have been stated under the Article 13 of Corporate Tax Law with the heading of “Disguised profit distribution via transfer pricing”. The General Communiqué on disguised profit distribution via Transfer Pricing sets the details of implementation.

Group companies comply with the provisions of Article 13 of the Corporate Tax Law and the regulations in the relevant communiqués in all kinds of goods or service purchases and sales transactions with related parties.

3. 2. 1.  Determination of the Methods to be Applied by the Group Companies in Related Party Transactions

Group companies determine the prices or the values to be applied in the transactions with related parties by using one of the below methods which is more appropriate to the nature of the operation:

a) Comparable Uncontrolled Price method: This method implies that where the sales price to be applied by a taxpayer which is in line with the arm’s length principles is determined by comparing with the price applied by the unrelated real or legal persons and engages in comparable purchase or sale of goods or services.

b) Cost Plus method: In the cost plus method, the arm’s length price is determined by adding a reasonable gross profit to the costs of the goods and services.  

c) Resale Price method: In this method, the arm’s length price is determined by decreasing a reasonable gross sales profit from the price to be applied if a commodity or service is resold to independent real or legal persons.

d) Profit Split method: The profit split method is based on the distribution of the operating profit or loss among related parties according to their functions performed and risks assumed.

e) Transaction Net Margin method (TNMM): TNMM is applied according to the net operating profit margin that is found by considering the costs, sales or any other appropriate base.

If the arm’s length price cannot be settled through one of the abovementioned methods, the Group companies can use other methods appropriate to the nature of the operations.

The methods regarding the determination of the price or value to be applied in the purchase or sale of goods or services with related parties can be determined by agreeing with the Ministry of Finance upon the request of the companies.  

3. 2. 2. Transfer Pricing Documentations

In accordance with the Action 13 of BEPS (Base Erosion and Profit Shifting) initiative of OECD; transfer pricing documentation obligations in Türkiye consist of the master file, country-by-country report (CbCR), CbCR notification form, local file (annual transfer pricing report) and the form regarding transfer pricing, controlled foreign corporations and thin capitalization.

Each of transfer pricing documentation obligations are fulfilled by Sabancı Group companies within the framework below:

• “Master File” is prepared by Hacı Ömer Sabancı Holding A.Ş., the ultimate parent company of the Group, until the end of the year following the reporting period on behalf of the Sabancı Group and is kept for the submission to competent authorities if requested. If necessary, the report is shared with Group companies.
• “Country-by-Country Report(CbCR)” is prepared by Hacı Ömer Sabancı Holding A.Ş., the ultimate parent company of the Group, until the end of the year following the reporting period on behalf of the fully consolidated Group Companies and electronically submitted to Turkish Tax Authority. If necessary, the report is shared with Group companies for submission to other country authorities. 
• “CbCR Notification Form” is electronically submitted to Turkish Tax Authority by Hacı Ömer Sabancı Holding A.Ş, the ultimate parent company of the Group, until the end of June of the year following the reporting period on behalf of the fully consolidated Group companies.
• “Local File (Annual Transfer Pricing Report)” is prepared by each of Group companies until the last submission date of corporate income tax return. The report shall include the amounts and methods related to the transactions. The report is kept for the submission to the competent authorities if requested.
• “The Form Regarding Transfer Pricing, Controlled Foreign Corporation and Thin Capitalization” is declared by each of Group companies in Türkiye in the annex of the corporate tax return.

3. 3. Principles in Capital Market Legislations

Publicly held Group companies comply with the regulations in the capital market legislation, in addition to the regulations in the tax legislation, in all kinds of goods or service purchases and sales transactions with related parties.

3. 3. 1. Transactions to be Fulfilled with Related Parties

With respect to the transactions between Sabancı Group companies thereof with their related parties, in cases where,

• In transactions i.e. asset and service purchase and obligation transfer transactions, the rate of the transaction amount comparing to the total asset as per the latest financial statements disclosed to public or to the revenue amount as per the latest financial statements disclosed to public or to the value of the corporation to be calculated on the basis of the average of the weighted average of the daily corrected prices of the six-month term prior to the board of directors resolution date,
• In transactions of Group companies i.e. asset and service sale, the rate of the transaction amount (in case the net book value of the asset is higher, the rate of the net book value) comparing -to the total asset as per the latest financial statements disclosed to public or to the revenue amount (in cases that the asset is transferred, leased out or right in rem is established thereon, the rate of the profit earned from the asset as per the latest financial statements comparing to the profit of the corporation before the taxation on its ongoing operations) as per the latest financial statements disclosed to public or to the value of the corporation to be calculated on the basis of the average of the weighted average of the daily corrected prices of the six-month term prior to the board of directors resolution date,

is foreseen to be more than 5%, before the transaction it is mandatory to have made an appraisal by an institution designated by the Capital Market Board.

In cases where it is foreseen that a rate more than 10% may be achieved in respect of the rates stated above, approval by the majority of the independent board members shall be required in the resolution of board of directors regarding the transaction, in addition to the obligation of having made an appraisal. In case that the majority of the independent board members do not approve such transaction, this situation shall be disclosed at PDP in a manner including a satisfactory explanation and the transaction shall be submitted to the approval of the general assembly.

In case that it has been decided to execute the related party transaction, direct or indirect relations among the parties of the transaction, feature of the transaction, a summary of the appraisal report including assumptions used in the appraisal and appraisal results; and in case that the transactions have not been fulfilled in accordance with the results obtained in the appraisal report, the ground for this situation shall be disclosed at the PDP within the framework of the Board’s regulations on public disclosure.

3. 3. 2.  Common and Continuous Transactions with Related Parties

The scope of the common and continuous transactions between Sabancı Group companies thereof with their related parties and the conditions as to these transactions shall be resolved by the board of directors as of January of each year.

In cases where it has been foreseen that the rate of the amount of common and continuous transactions between Group companies thereof with their related parties within an account period, compared to

• For purchases, the cost of sales in the latest annual financial statements disclosed to public,
• For sales, the revenues in the latest annual financial statements disclosed to public,

exceed 10%, the board of directors of the corporation shall, in addition to its resolution, issue a report regarding the conditions of the transactions and comparison thereof with the market conditions and the entire report or its result only shall be disclosed at the PDP.

Reports to be issued shall include at least the following matters:

a) Information on parties to the transaction including their trade name, their activities in relation to the corporation, whether it is a public corporation or not, and summarized financial data including annual total assets, operation profits, net sales.

b) General information on the feature of the relations with the corporations which are party to the transaction and the effects thereof on the operations of the corporation,

c) Date, subject and significant issues of the contract that the transaction is based on, provided that they are not commercial secrets, and in case such information has been disclosed in a document such as prospectus in the past, information on this matter.

d) Criteria followed during the appraisal of the transaction’s compliance with the market conditions.

e) Appraisal as to whether the transaction complies with the market conditions.

In case that the majority of the independent board members do not approve such transactions, the ground for opposition shall be disclosed at the PDP.

3. 4. Principles in Turkish Commercial Code

The board of directors of the dependent company shall prepare a report (affiliation report) regarding the company’s relations with controlling and dependent companies until the end of the March of following year.

All legal transactions which the company conducted in the previous activity year with the controlling company, with a company dependent on the controlling company, through the direction of the controlling company that serves to its advantage or the advantage of its dependent company and all other measures taken or refrained from being taken to the advantage of the controlling company or of its dependent company in the previous activity year shall be explained in the report.

The report must comply with the true and fair view accounting principle.

At the end of the BoD report it shall be explained whether the company, in the circumstances and conditions known to the board at the time at which the company conducted the legal proceeding or took or refrained from taking the measure, obtained appropriate counter performance in relation to each legal proceeding and whether the company incurred any loss due to taking or refraining from taking the measure. If the company incurred loss, the BoD shall specify whether the loss has been compensated for.

The explanations in the conclusion of the Affiliation Report are included in the annual reports to be prepared by Sabancı Group companies.

4. REVISION

This regulation is reviewed at least once a year under the responsibility of The Financial Affairs, Accounting and Investor Relations Department. If necessary, the regulation can be revised in line with the changes made in the process. In case of updates, following the completion of the necessary approval processes, the regulation come into force after being approved by the CEO of Sabancı Holding. Accordingly, the Regulation is announced to the related parties.