A New Era in Digital Tax Audits: MİHENK and Artificial Intelligence in Transfer Pricing

The Ministry of Treasury and Finance continues to advance its digitalisation initiatives in tax audits to an increasingly sophisticated level. In our previously published article titled “The Importance of Tax Risk Shields Amid the Growing Reach of Digital Tax Audits”, Erta Denetim discussed how the tax administration evaluates taxpayers’ transactions through big data and artificial intelligence-based analyses.

Today, however, we are facing a more specialised stage of digital tax auditing: MİHENK, introduced by the Tax Inspection Board.

From General Risk Analysis to Specialised Tax Auditing

The digital audit capacity of the Turkish tax administration is no longer limited to comparing tax returns, e-Invoices, e-Ledgers and similar electronic data.

While systems such as KURGAN have established an important digital audit infrastructure for identifying the use of false or misleading documents and transaction-based risks, MİHENK takes this analytical capability to a different level.

MİHENK aims to identify unusual pricing and profitability structures by comparing the prices of goods and services, cost structures and resulting profit margins across extensive datasets.

In this respect, the system represents an analytical tax audit approach that goes beyond conventional data matching.

A New Dimension in Transfer Pricing Audits

Transfer pricing is expected to be one of the most significant areas of application for MİHENK.

Whether the prices applied in transactions involving goods or services between related companies, group companies, shareholders and other related parties comply with the arm’s length principle is one of the fundamental issues in transfer pricing.

With the new system, it becomes possible to compare such transactions across significantly broader datasets.

Accordingly, even where the price applied in a sale to a related company appears commercially explainable in itself, the transaction may become a potential risk indicator if it deviates materially from the comparable sets established by the system.

Profitability Is Becoming as Important as Price

Another important aspect of the approach reflected by MİHENK is that the audit assessment should not be considered solely in terms of the sales price.

Even where a company’s prices appear consistent with market conditions, its cost structure, gross profit margin or operating profitability may differ materially from those of comparable businesses.

This development makes it increasingly necessary for businesses with group companies, businesses engaging in significant transactions with related parties, or businesses operating across different regions to establish their transfer pricing policies in a more systematic manner.

A Proactive Approach to Tax Risk Management

The importance of the “Tax Risk Shield” approach previously emphasised by Erta Denetim is becoming even greater with the introduction of these new tax audit tools.

It may no longer be sufficient for companies merely to verify whether invoices have been issued in compliance with the applicable tax legislation or whether tax returns have been prepared correctly.

For this reason, it is becoming increasingly important for companies to analyse their own transactions in advance from a perspective similar to that of the tax administration.

In particular, supporting related-party transactions, pricing policies and profitability levels with comparable analyses may help identify areas that could be difficult to explain before a potential tax audit takes place.

How Should Companies Prepare for MİHENK?

With MİHENK, transfer pricing studies should no longer be regarded solely as an annual reporting obligation.

Companies should monitor their related-party transactions throughout the relevant period, document the pricing methods they apply, and establish a documentation infrastructure capable of demonstrating the commercial rationale behind significant deviations in prices or profitability.

Conclusion: The New Question in Tax Auditing Is No Longer Limited to “Is the Transaction Correct?”

MİHENK is one of the important indicators of the new stage reached by the Turkish tax administration in digital tax auditing.

The focus of tax audits is increasingly moving beyond questions such as “Is there an invoice?”, “Is the tax return correct?” or “Did the transaction actually take place?” towards more economic and analytical questions:

Accordingly, in the coming period, companies will need to approach tax risk management not only from the perspective of compliance with tax legislation, but also through the combined perspectives of data analysis, comparability analysis, transfer pricing and proactive tax auditing.

Our approach at Erta Denetim is clear: as the tax administration’s digital analytical capacity develops, companies’ own capacity to measure and identify their tax risks in advance must develop to the same extent.