Taxing issues in Turkey

By bne IntelliNews November 11, 2009

David O'Byrne in Istanbul -

News that major corporations and foreign investors have been hit with huge and unexpected tax bills, coupled with allegations of tax evasion, can hardly be guaranteed to evoke outbursts of public sympathy. However, public Schadenfreude over recent cases involving several of Turkey's biggest companies has been tempered by concerns over what lies behind them and who will be next.

First to be hit - and most controversially - has been Turkey's biggest media group Dogan Yayin Holding, which in September found itself being ordered to pay a cool TRY4.8bn ($3.27bn) in back taxes, fines and interest payments, allegedly relating to tax evasion on share transfers between companies within the group. These are allegations Dogan deny and has gone to court to fight. On Tuesday, November 10, Dogan said a court case pertaining to the fine was postponed.

Then, in late October, the country's biggest mobile phone operator Turkcell received a demand for TRY258.3m, while the country's smallest mobile operator Avea - wholly owned by Saudi Oger - confirmed that it too had received a similar, but smaller, bill. Both demands are for taxes that officials say operators should have levied on roaming charges for Turkcell subscribers using their phones outside Turkey between April 2005 and July 2009. "It's a complex issue, but we firmly believe we've followed the regulations correctly," Turkcell CEO Surreyya Ciliv tells bne, explaining his company had been informed in 2005 by the Finance Ministry that roaming charges were not subject to the taxes in question.

Part owned by Scandinavian company TeliaSonera and Russia's Alpha Telecom, Turkcell is controlled by Turkey's Cukurova Group, which also owns a stable of influential newspapers and TV stations. While Avea is wholly owned by the wealthy Lebanese-owned Saudi Oger group - a fact not lost on analysts. "The government has said that it plans to reduce the budget deficit, but that it doesn't plan to raise tax rates - which means that it will have to find extra revenue from existing sources," explains one economist at an Istanbul brokerage, speaking on condition of anonymity. "Investors are worried that these surprise tax bills indicate that international companies and big Turkish groups unsympathetic to the government may be being targeted."

He adds that Turkey's financial sector is awash with rumours as to which other groups are currently under investigation.

Dogan itself, whose newspapers and TV stations are regularly critical of the moderate Islamist government of Prime Minister Tayip Erdogan and his Justice and Development Party (AKP), has condemned the investigations into its finances that triggered the tax demands as "unjust" and "politically motivated," claiming other media groups less critical of the government haven't been investigated. These are allegations the Finance Ministry denies, describing them as "disturbing" and "baseless," and claiming to have investigated the majority of Turkey's media companies.

Clamping down

Denials notwithstanding, the tax bill has come following a year during which Dogan and the government have repeatedly traded allegations of impropriety over various issues, including an application by a Dogan subsidiary, Petrol Ofisis, to build an oil refinery on state-owned land. During this, Petrol Ofisi itself was hit by a fine of its own worth TRY600m for allegedly violating petroleum regulations - charges that Turkish courts later threw out, overturning the fines.

Now, with the tax authorities demanding collateral to be put up against Dogan's humungous bill and the company having lost a legal action aimed at stalling the demand, Dogan has agreed to a showdown meeting with the authorities on November 24. Most observers believe the two sides will hammer out a deal, albeit one that may have hidden costs.

2010 is widely expected to see PM Erdogan calling an early general election on the back of hoped-for signs of a recovery from the global economic crisis, which caused unemployment to hit a historic high of 15.5% in January and which is expected to result in GDP contracting by as much as 6% over the year. This will be an election in which, more than the AKP's two previous victories in 2002 and 2007, media coverage is expected to play a crucial role.

Indeed, the possibility of the tax fines issue affecting media coverage was commented on by the European Commission in its 2009 progress report on Turkey's EU accession published in late October. Noting that the size of the fines "undermine the [Dogan] group's economic viability" and warning that by doing so, "they therefore affect freedom of the press," the report cautioned that, "There is a need to uphold the principles of proportionality and of fairness" in tax procedures.

These are remarks that may yet cast a shadow over Turkey's bid to join the EU.

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