Taxing times in Turkey

By bne IntelliNews June 14, 2012

Justin Vela in Istanbul -

Tables and chairs are slowly reappearing in front of many cafes and bars in Istanbul's central Beyoglu district. Last summer they disappeared, with city officials saying they were not permitted, dramatically altering the landscape of Beyoglu and causing a downturn in business that is said to have led to the closure of some establishments. Now they are coming back, along with rumours that the city is extracting taxes for the permission to have the tables and chairs outside. Was the bizarre show of force followed by leniency only an example to make tax-adverse Turks pay up?

The trend in Turkey is to evade taxes at all costs. According to a study by Istanbul's Bogazici University, only 24.6% of total taxes are collected as a percentage of GDP in Turkey. In 1995, it was only 16.8%. The current average for the Organisation for Economic Co-operation and Development (OECD) countries is 33.8%.

According to the country's revenue administration, laws on taxes in Turkey are the income tax law (ITL) established in 1960 and corporate tax law (CTL) established in 1949. Any individual with their place of residence in Turkey is liable to pay tax of 15-35% on his worldwide income. Anyone in Turkey for more than six months of a year is assumed to legally be a resident. Corporate entities with their head office in Turkey or place of effective management are taxed on their worldwide income at a rate of 20% of all earnings.

Laws are laws, but in Turkey clearly most people skirt these direct tax ones. There is even a sense in Turkey that direct taxes are actually bad for the economy and that they push people towards the grey economy, according to some analysts. Rather than increasing direct taxes, Turkey has actually decreased taxation for corporations with the aim of increasing the country's competitiveness. On May 31, Turkey's parliament passed a draft bill that will change tax regulations that are seen as an obstacle to preventing fund management firms from opening offices in Turkey.

The government also appears to be leaning toward supporting entrepreneurs via tax incentives. "In this period when the global economic outlook is grim, it is very important to support and encourage our entrepreneurs," Deputy Prime-Minister Ali Babacan was quoted by the Anatolia News Agency as saying in May.

The flip side of not strongly going after tax evaders is that many Turks tend to remain working in the grey economy. In October 2011, the Parliamentary Assembly of the Council of Europe (PACE) named Turkey as one of several leading economies with a large informal, and therefore untaxed, economy. The study estimates that Turkey's grey economy constitutes about 33% of the country's GDP. In April, tax revenue growth slowed to 4%, a sign of this year's economic slowdown, according to economists.

Partly due to many citizens not paying the required income and property taxes, Turkey has struggled to address budgetary issues. First-quarter data released by TurkStat shows that the budget registered a TRY6.4bn (€2.8bn) deficit in the first three months of the year. So in order to increase the budget, the country has introduced a raft of indirect taxes in recent years, an example of which is the alleged tax on the tables and chairs around Beyoglu.

Unpaid dues

The main indirect tax in Turkey is VAT, which currently stands at 18%. There is also a stamp duty on contracts, agreements and notes payable at rates that range from 0.15%-0.75%. There are taxes on motor vehicle registration that are paid in two yearly instalments, and banking and insurance transactions. Casinos are not legal in Turkey, but there is a gambling tax levied on lotteries and other forms of betting. There are also taxes on inheritance, gifts and also customs duties. Yet, the most irksome form of taxes for Turks are the ones they just cannot escape: special consumption taxes (SCTs).

Today, about 60-65% of Turkey's total tax revenues comes from SCTs, according to the Bogazici University study. These include taxes on petroleum products, natural gas, lubricant oil, solvents, derivatives, automobiles, planes, helicopters, yachts, and luxury products such as tobacco and alcohol.

Some argue that indirect taxes put the tax burden unfairly on the poor and let the rich get away with paying less, increasing inequality. However, instead of more aggressively going after tax evaders and increasing direct taxes, the Turkish government has focused on indirect taxes to gain revenues. SCTs on alcohol and tobacco have been raised several times in the past two years, fostering concerns among secularists that the Islamist-rooted ruling Justice and Development Party (AKP) is using taxes to stealthily impose its religious views on society.

The effects of the SCTs are felt in other ways also. Sales of automobiles and light commercial vehicles in Turkey shrank by 20.7% between January and May, partly due to the increase in SCTs, claims Hayri Erce of the Association of Automotive Distributors.

Turkey has some of the highest gasoline taxes in Europe, ranking third between the UK and Sweden in taxes on diesel gas. "Turkey imposes the highest tax on gasoline, with a €1.04-per-litre tax," according to a March statement from the Petroleum Industry Foundation of Turkey (PETDER). Petroleum accounts for 30% of Turkey's tax revenues, Finance Minister Mehmet Simsek said in April, according to the Hurriyet Daily News.

Confusion over these indirect taxes have also fed conspiracies among traditionally suspicious Turks. Take the alleged taxes over tables and chairs - according to some bar and cafe owners interviewed by bne, taxes must now be paid to the Istanbul municipality for the right to have tables and chairs outside their establishments. Yet others dispute this, saying that once they painted the outside of their properties and scaled back the number of chairs and tables so as to not impede passersby, the municipality had no issue with them. Still others say they have not been asked to pay anything yet still are not allowed to have tables and chairs outside.

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