Nicholas Birch in Istanbul -
With the world's financial markets in turmoil and foreign direct investment in Turkey slowing, the government has become embroiled in an unnecessary fight with the country's leasing industry after botching the introduction of massive tax hikes, which some claim will jeopardise the sector's glowing future.
Representatives of Turkish leasing companies are furiously lobbying ministers as pressure grows on the government to scrap its unexpected tax hikes that were suddenly introduced on December 30. Under the change, VAT rates in the sector will soar from 1% to 18%.
The move sparked immediate panic, with leading stocks in the leasing sector diving 35% amid fears the increase could knock up to 70% off the $7bn sector. The latest statistics appear to back up the industry's fears about its future. The Association of Financial Leasing (FIDER) released a report on January 21 showing that the number of leasing agreements made in the first fortnight of 2008 were down 76% compared with the same period last year. The total value of leasing agreements fell by a similar degree, down from $125.3m in first fortnight of 2007 to just $29.9m in the same period this year.
The leasing industry held a meeting with government ministers, including the finance minister, on January 10 to express it displeasure with the tax hike and has continued a vociferous PR campaign against it.
Critics argue that the taxes should either be reduced considerably (to 8% for instance) or brought up from 1% to 18% step by step rather than in one go. Chairman of the influential industrialist group TUSIAD, Arzuhan Dogan Yalcindag, has added her voice to the growing criticism. The legislation, she said, constitutes "an obstacle to corporate financing at a time when international liquidity is on the way down." The resulting rise in capital costs would most seriously affect small and medium-sized enterprises (SMEs), she added.
Head of the Financial Leasing Association, Hakan Gulelce joined TUSIAD's Yalcindag in calling on the government to scrap the changes altogether.
That's unlikely judging from recent comments. At the January 10 meeting with leasing lobbyists, Finance Minister Kemal Unakitan told them bluntly, "We cannot go back to the old system."
Finance Minister Unakitan's comments were echoed by Trade and Industry Minister Zafer Caglayan, who also attended the January 10 meeting. "If a bone sticks in your throat when you're eating fish, you don't send the whole fish back to the kitchen," he said.
Analysts parsed his elliptical remarks as a call for selective tax incentives and a defense of the tax authority chief who spearheaded the changes. On Tuesday, the tax commissioner Mehmet Akif Ulusoy acknowledged the need for correction, but insisted the hikes were a necessary step to prevent abuses of the system. The sector's increased favouring of consumer goods over investment products, he said, constituted "unfair competition."
"Tiles, cement, sales of land, even stadium seats have been brought into the leasing system", Ulusoy said.
Ulusoy's comments brought a pointed response from experts. The prevention of indiscriminate use of leasing is the role of the Banking Regulation Authority (BDDK), they say, but the BDDK was not informed of the changes. Others note that owners of Istanbul's Formula 1 circuit actually asked the tax authorities whether they could avoid paying the $45m needed to install seats by leasing them annually. The tax authorities gave them the go-ahead.
One of the drafters of Turkey's 1983 leasing law, Korkmaz Ilkorur is strongly critical of the hikes, but he also thinks Ulusoy has a point. The law was all right, Ilkorur says, but the ministries responsible for applying it simply didn't do their homework. "They didn't realise leasing was a financial tool," he says. "For them, it was no different from Saudi citizens renting summer houses on the Bosporus."
The stage is set for some kind of compromise between the government and the industry, but most analysts and investors think the damage to Turkey's reputation as an increasingly safe investment has already been done.
"In countries we are competing against, vital tax decisions like this are widely debated long before being applied," says Rifat Hisarcikioglu, chairman of the Turkish Union of Chambers and Commodity Exchanges. "Here, we still go to bed at night not knowing what surprises we'll wake up to."
Shailash Dash couldn't agree more. As private equity head of the Kuwait-based investment fund Global Investment House, he masterminded Global's decision to buy 60% of Fon Financial Leasing from Ulker, a transaction completed just three days before the hike. At the time, analysts expected the penetration of Turkey's leasing sector to grow from 8.5% to 10% within five years. Now, Dash says, "all our expectations are in ruins. We had a number of plans for various sectors of Turkish business. We will now have to sit down and seriously reconsider them all."
More fortunate, the UK-based MAN Financial Services, a subsidiary of leading alternative investments manager the MAN Group, announced in January it was suspending plans to establish a leasing business in Turkey.
At a time when foreign direct investment in Turkey is slowing - down to $10.8bn in the second half of 2007 from $13.2bn in the first half, of which there was only $2.8bn in the last quarter - that's the sort of decision that Turkey could well do without.
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