Tax Measures Taken in Turkey Against The Mortgage Crisis

Although raising taxes is not the favored strategy for decreasing budget deficits in Turkey, the size of the budget deficit and the load of public debt have made it imperative to do so.

The letter of intent for the 19th stand-by agreement, signed in 2005, also addressed tax measures.

As a result, it was planned to merge the tariffs subject to declaration with payroll employees, decrease the number of taxable income divisions, and reconfigure the "Expense deduction" system through Income Tax reform. The following are the tax regulations in general.

• After discounts on education, health, and some food goods, the VAT policy, rates, and scope will not be modified during the program time.

• Corporate tax rates will be streamlined in three years, the tax base will be increased, and the rates will be aligned with the EU.

• Financial intermediation taxes will be phased out if the Banking and Insurance Transactions Tax reaches revenue objectives in 2005. If situations allow, BSMV will be phased out till 2006, and the Resource Utilization Support Fund will be phased down within three years.

• The Securities Tax has been set at 15%, with profits from securities, bank deposits, and other financial assets subject to a single tax rate since 2006.

• Taxes will be unchanged in 2005 and SEE prices will be consistent with the 2005 program projections. To put it another way, taxes on cigarettes, games of chance, and SEE prices will all be raised at least at the rate of inflation.

short-term aim; It was preferable to lower tax rates rather than increase public spending while implementing fiscal policy, which is to encourage investments by allowing sectors with a strong consumption inclination to spend more. The tax cuts enacted in this manner were designed to boost a person's disposable income by lowering direct tax rates, which was followed by lowering indirect tax rates and providing tax incentives to investors.

Some private sector-oriented efforts were implemented to mitigate the negative impacts of the crisis and to stimulate output and demand. VAT, SCT, fees, and fund reductions were made in various industries, such as automotive, housing, white goods, electricity electronics, and furniture,

81 to encourage economic activity. Furthermore, tax obligations were adjusted, and “Asset Peace”

was implemented in an attempt to attract assets from other countries into the economy.

Turkey has implemented the following set of steps to help mitigate the consequences of the crisis through tax relief.

• The validity period of the Asset Peace application, which aims to bring the assets abroad and includes tax reductions and exemptions, has been extended until September 30, 2009.

• The 10% withholding tax applied to domestic investors on stock earnings has been reduced to zero.

• Tax debts before September 1, 2008 can be paid in installations with 3% interest for eighteen months.

• BITT (Banking and Insurance Transactions Tax) exemption has been introduced for the incomes of the Securities Investment Funds and Securities Investment Trusts due to their transactions in the capital market.

• Resource Utilization Support Fund deduction rate in loans extended to real persons was reduced from 15% to 10%.

• Special Communications Tax for wired, wireless and mobile internet service provision was reduced from 15% to 5%.

• Tax and penalty amnesty has been introduced for 1979 or older model motor vehicles that will be deregistered and scrapped by 30 June 2010.

• Income and corporate tax exemption has been introduced until 31.12.2014 for the gains arising from the disposal of product bills regulated under the Agricultural Products Licensed Warehousing Law.

• In order to encourage SME (Small and medium-sized enterprises) mergers, SMEs that merged until 31.12.2009 will be able to benefit from corporate tax exemption and reduced corporate tax of up to 75%, provided that they meet the conditions specified in the law.

The “Decision on Determination of the Value Added Tax and Special Consumption Tax Rates to be Applied to Certain Goods”, which was published in the 1st Duplicate Official Gazette dated 16 June 2009, was taken. In order to stimulate domestic demand, the rates of the temporary SCT reduction applied until 15.06.2009 in some sectors were re-determined and its duration was extended until 30.09.2009. According to this;

• The SCT rate, which was reduced from 37% to 18% for cars with an engine cylinder volume not exceeding 1600 cm3, was changed to 27%.

• SCT rate reduced from 10% to 1% for commercial vehicles with a covered body,

• increased by 3%.

• The SCT rate, which was reduced from 4% to 1% for open box commercial vehicles, was increased to 2%.

• It was decided that the SCT rate, which was reduced from 4% to 1% in tow trucks, midibuses, special-purpose vehicles and trucks, and the SCT rate that was reduced from 1% to 0% in buses, would remain the same.

• The SCT rate, which was reduced from 9% to 2% in minibuses, was updated to 4%.

• The SCT rate, which was reduced from 22% to 11% for motorcycles not exceeding 250 cm3, was increased to 16%.

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• The SCT rate, which was reduced from 6.7% to 0% in white goods, was determined as 2%.

• The duration of the VAT rate, which is expected to be applied as 8% instead of 18%

until 30.06.2009 on furniture and computers, has been extended for another 3 months.

Many tax policies have been proposed and attempted to be adopted in order to mitigate the impacts of the global crisis and to alleviate market stagnation, as indicated above. Its goal is to reactivate the markets, notably with the decreases in VAT and SCT. The following shows the allocation of income, companies, and VAT in general tax receipts, as a result of the most recent tax measures:

Table 31. Share of Income, Corporate and Value Added Taxes in General Tax Revenues (2004 - 2010)

Tax reven ue collection

Income tax

collection Its share in tax revenues

%

Corporate tax collectio

n

Its share in tax revenues

%

VAT

collection Its share in tax revenues

%

2004¹ 101.038.904 19.689.593 19,5 9.619.359 9,5 34.325.208 34,0

2005¹ 119.250.807 22.817.530 19,1 11.401.986 9,6 38.280.429 32,1

2005² 131.948.778 26.849.808 20,3 13.583.291 10,3 42.263.650 32,0

2006² 151.271.701 31.727.644 21,0 12.447.354 8,2 50.723.560 33,5

2007² 171.098.466 38.061.543 22,2 15.718.474 9,2 55.461.123 32,4

2008² 189.980.827 44.430.339 23,4 18.658.195 9,8 60.066.230 31,6

2009² 196.313.308 46.018.360 23,4 20.701.805 10,5 60.169.248 30,6

2010² 235.686.590 49.384.949 21,0 22.854.839 9,7 75.649.445 32,1

2011² 284.490.017 59.885.000 21,0 29.233.725 10,3 95550.463 33,6

When the proportion of income, corporate, and value-added tax in general tax receipts is examined as of 2004, it is clear that value-added tax has the greatest share. While the percentage of income tax collected fell each year, it was 21.0 percent in 2011, and the corporation tax system was very unpredictable. As of 2011, the corporation tax, which had been at its lowest rate of 8.2 percent since 2006, contributed 10.3 percent of tax collections. The VAT proportion, on the other hand, has not dipped below 30% in the previous 10 years, hitting a high of 33.6 percent in 2011.

Every year, the percentage of indirect taxes in overall tax collections rises. Growing tax losses as a result of increased informality, as well as high-income people's inclinations not to raise their tax burden, are both effective in this.

In reality, countries that have been through a crisis before having an edge over those that have never been through one. When the data from 2001, 2008, and following crises in Turkey are examined, there are some discrepancies between the post-crisis statistics.

83 Figure 12. Some Economic Indicators after 2001 Crisis and 2008 Crisis in Turkey (%)

As the bar graph shows, there are significant variations in economic indices in Turkey following the past two crises. The rate of growth in the exchange rate after the 2001 crisis nearly got close to 150%, while the rate of increase in interest rates was 400%. The rate of growth in exchange rates was 41.7 percent following the 2008 crisis, while the rate of increase in interest rates was 58 percent. While the Central Bank's foreign exchange reserves fell by 43 percent during the 2001 crisis, they only fell by 20 percent during the 2008 crisis. During the 2008 financial crisis, unemployment and GNP were the two areas where Turkey was most affected and lost. While the first quarter of the 2001 crisis had an 11.8 percent drop in GDP, the first quarter of the 2008 crisis saw a 14.3 percent drop. While the jobless rate rose to 8.4% during the 2001 financial crisis, it soared to 14% during the 2008 financial crisis.

During the global crisis, Turkey's risk indicators outpaced those of other emerging countries, as seen in this chart.

In terms of the overall crisis, Turkey was impacted by the global recession, with higher unemployment rates and problems boosting savings rates. However, the crisis did not have the same severe consequences in the United States as it did in other nations because of major actions done in the areas of banking and financial discipline following the 2001 crisis.