TURKEY A QUICK VIEW ON TAXATION

PREFACE-I It is believed that FDI provide an economy capital accumulation, technology transfer, competitive power and productivity. With this common belief, in the global economy, the number of the countries adopting policies that aim to create attractive investment environment are increasing day by day. FDI means transfer of capital and technological knowledge. In this regard it is more desireable for underdeveloped and developing countries whose main economic problems are capital accumulation and insufficent technology.

In Turkey, the program of improving investment environment was accepted as a government policy in 2001, and since then, sistematical and comprehensive efforts have been maintained at the governmental level. Having adopted this programme, some serious measures were taken in recent years. Correspondingly Turkeys FDI statistics performed a great deal of rise. According to UNCTAD s (United Nations Conference on Trade and Development) preliminary data for 2006, Turkey seems to be among top 10 FDI attracting countries. PREFACE-II

It is commonly said that foreign investors give a great deal of importance to taxation* for their country selection to invest. There are considerable amount of academic studies reporting the evidence in favour of this arguement. For example in a World Banks study, the rate of the firms all over the world that consider taxation is among the top 5 major constraints for their investments is %82. Turkish Revenue Administration, after restructuring in 2005, takes into account both domestic and foreign investors sensibility for taxation, by adopting the view that focuses on taxpayer satisfaction. In its Strategic Plan it has the vision of to be an administration that improves the economy, implying that, the Administraion pledges not to be constrains for investors. * I meant with this term both tax rate and revenue administrations approach PREFACE-III

I-TURKISH TAX SYSTEM

TURKISH TAX SYSTEM TAXES ON INCOME, PROFITS AND CAPITAL GAINS -Income Tax -Corporation Tax TAXES ON GOODS AND SERVICES -Value Added Tax -Special Consumption Tax TAXES ON PROPERTY -Inheritance and gift taxes -Motor Vehicle Taxes TAXES ON INTERNATIONAL TRADE AND TRANSACTIONS -Customs Duties -VAT on imports

I A - TURKISH TAXATION SYSTEM-TAXES ON INCOME,PROFITS AND CAPITAL GAINS There are two main taxes on income, profits and capital gains: Income Tax Corporation Tax

I B -TURKISH TAXATION SYSTEM-TAXES ON INCOME,PROFITS AND CAPITAL GAINS INCOME TAX The subject of income tax is individuals profits and earnings. Turkish income tax regime is the progresive one, and consists of 4 income tax brackets. Tax rates for the the lowest bracket is %15 and, %35 for the highest. CORPORATION TAX The subject of corporation tax is earnings and profits of corporations. The corporation tax rate is %20, which can be considered fairly low one.

I C - TURKISH TAXATION SYSTEM- TAXES ON GOODS AND SERVICES There are two main taxes on goods and services: Value Added Tax Special Consumption Tax

I D - TURKISH TAXATION SYSTEM- TAXES ON GOODS AND SERVICES VALUE ADDED TAX The Turkish Tax System levies VAT on the supply and the importation of goods and services. Currently the general rate is %18. Reduced rates are avaliable for some certain goods and services which are listed in two categories. Those rates are 1%, 8%. SPECIAL CONSUMPTION TAX Goods in the lists attached to the Special Consumption Tax Code are the subject of the tax. There are mainly 4 different product groups listed in the code.

I D - TURKISH TAXATION SYSTEM- TAXES ON GOODS AND SERVICES-II SPECİAL CONSUMPTION TAX Goods in the lists attached to the Special Consumption Tax Code are the subject of the tax. There are mainly 4 different product groups listed in the code: 1) Petroleum products, naturalgas, lubricating oil, solvents and derivatives of solvents 2) Automobiles and other vehicles, motorcycles, planes, helicopters, yachts 3) Tobacco and tobacco products, alcholic beverages 4) Other products such as caviar, perfumes, furs, electronical devices, magazines, home appliances..

I E - TURKISH TAXATION SYSTEM- TAXES ON PROPERTY There are two main taxes on property: Inheritance and gift taxes Motor Vehicle Taxes

I F - TURKISH TAXATION SYSTEM- TAXES ON PROPERTY INHERITANCE AND GIFT TAXES The subject of the tax is the gratuitous devolution of the assets (such as moveable goods, real properties, rights and receivables that can be included in estate) of Turkish citizens and the assets within Turkey by legacy or by any means among the persons. MOTOR VEHICLE TAXES The subject of this tax is motor vehicle such as cars, tracks, buses, planes, helicopters and naval vessels.

I G - TURKISH TAXATION SYSTEM-TAXES ON INTERNATIONAL TRADE AND TRANSACTIONS There are two taxes on international trade and transactions: Customs Duty (Goods imported from abroad is the subject of the tax.) VAT on imports (same rates as the domestics ones)

I H - TAXES ON INCOME,PROFITS AND CAPITAL GAINS In 2006, the ratio of taxes on income, profits and capital gains to tax revenues :

I I - TAXES ON GOODS AND SERVICES In 2006, the ratio of taxes on goods and services to tax revenues:

I J - TAXES ON PROPERTY In 2006, the ratio of taxes on property to tax revenues:

I K - TAXES ON INTERNATIONAL TRADE AND TRANSACTIONS In 2006, the ratio of taxes on international trade and transactions to tax revenues:

III-TAX INCENTIVES

III A - TAX INCENTIVES In our current tax regime, İnvestors enjoy some tax exemptions, which can be called tax incentives, to be applied one or whole types of taxes. Below listed some of them. Research and development allowances, Tax exemptions in industrial zones Tax exemptions in technology development zones, Tax exemptions in free zones, Tax exemptions for priority regions for development, Tax exemptions in organized industrial zones Tax exemptions for cultural investments and enterprises.

III B - TAXATION IN FREE ZONES According to The Free Zones Law No. 3218, free zones are regarded as outside Turkish custom area. Operating in free zones requires a licensing process. The income of taxpayers, who licensed before , exempted from Income and Corporate tax, until the expire date of their current operating license. According to the temporary article 3 in the Law No. 3218, added by the Law No.5084, the wages of employees of taxpayers operating in free zones exempted from income tax until Only taxpayers who was licensed before can benefit from this exemption. Taxpayers income obtained from manufacturing goods in free zones are exempted from Income and Corporate tax until the end of financial year of Turkeys full membership to Europian Union. All transactions concerning taxpayers operations in free zones are exempted from all kind of tax and fees until Goods and services delivered within and to free zones are also excluded from VAT. (Value Added Tax Law a.16/1-c)

III C – TAX INCENTIVES Due to tax incentives, the effective corporate income tax rate is lower than statutory corporate income tax rate. For example for the years 2004 and 2005, although the statutory corporate income tax rate was %30, the effective corporate income tax rate can be calculated as low as %16.

BIBLIOGRAPHY BULUT, Mustafa The Role of Tax Policies on Improvement of Investment Climate: The Case of Turkey, 2007 Revenue Administration Brochure of Taxation in Turkey YASEDs FDI Report, June 2007 General Directorate of Public Accounts web site The Law of Free Zones Head of Tax Administration of İzmir, Directorate of Strategy

HEAD OF TAX ADMINISTRATION OF İZMİR

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