Turkey plans to raise taxes to shore up revenue and 'create fairer system'

Turkey is planning major tax changes as part of an economic reform proposal that aims to shore up government revenue, reduce inflation and "create a fairer system".

The parliament, controlled by a coalition led by President Recep Tayyip Erdogan’s Justice and Development Party (AKP), will vote next week on a package of major new fiscal laws, an MP on the parliamentary planning and budget committee said.

The legislation mostly involves corporate tax changes and aims to “create an effective, simple and fairer tax system, increase the share of direct taxes, encourage investment, employment, production and exports, and provide public financing with permanent resources”, according to a copy of the bill seen by The National.

The changes, which observers and MPs expect to pass with few amendments, also aim to increase compliance in Turkey’s $1 trillion economy.

While the bill does not say exactly how much additional revenue the tax changes are expected to generate, opposition MP Cavit Ari, a member of the planning and budget committee, estimated the changes to domestic and multinational companies' tax obligations could bring in at least 120 billion Turkish lira ($3.6 billion) annually.

Turkey is running a budget deficit of up to 2.7 trillion lira, about 6.4 per cent of gross domestic product this year, the government estimates. The deficit was fuelled in part by spending that followed last year's devastating earthquakes in the south-east of the country.

The latest proposals include a 15 per cent minimum tax on global income on multinationals, with an annual turnover of more than €750 million ($816.4 million). The change would allow Turkey to comply with an Organisation for Economic Co-operation and Development initiative that aims to prevent companies from storing capital in tax havens.

The proposals also include a minimum 10 per cent corporate tax on local companies, and a five percentage point increase in corporate taxes to 30 per cent on earnings from public-private projects that have a build-operate-transfer model, the form used for some major infrastructure projects in Turkey, including roads, bridges, airports and hospitals.

Turkey has a general corporate tax rate of 25 per cent, but discounts and exemptions on declared earnings mean payments made can be “well below this rate”, the draft legislation says.

“In this context, it is recommended to create a minimum tax to be paid by establishing a link between the declared income and the tax base,” it adds.

“This [the tax changes] was expected,” said Dr Numan Emre Ergin, a lawyer and tax specialist in Istanbul. “The Turkish economy is not good, the budget deficit is huge and the government has room for tax increases."

The proposed changes add to indirect tax rises introduced last year, including a two percentage point increase in standard VAT to 20 per cent.

The bill also lays out plans for a threefold increase in exit taxes that Turkish citizens must pay to travel outside the country, from 150 lira to 500 lira.

It comes at a time when Turkish consumers are being squeezed by inflation running at 72 per cent. Rent, food and transport costs have all increased.

Mr Erdogan and Finance Minister Mehmet Simsek, a former investment banker, have vowed to lower inflation by the end of the year.

The bill also proposes a rise of 2,500 lira a month to 12,500 lira for people on minimum pensions. Workers’ unions say that someone living alone needs to earn 30,000 lira a month to stay above the poverty line, and opposition MPs have called for higher increases.

“The only MPs who want to increase the pensions are us, namely the [Republican People's Party] CHP, and the opposition MPs,” said Mr Ari, a member of Turkey's main opposition party.

The regulation will affect 3.7 million of the 15.8 million retired people in Turkey and will bring an additional cost of about 33 billion lira to the country's 2024 budget, AKP parliamentary leader Abdullah Guler was quoted as saying by pro-government newspaper Daily Sabah.