Conference on tax policies of Turkey

01 Feb 2009

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United Nations Development Programme and the Turkish Ministry of Finance held an international conference in Ankara on 12-13 January 2009 about tax policy options of Turkey on the way to European Union.

New Horizons - This joint initiative of UNDP Turkey and the Ministry of Finance aimed to create a platform to discuss the recent trends and developments about tax policy options. The conference is also expected to contribute to the ongoing discussions on the taxation chapter as part of Turkey’s EU accession process.

On the first day of the conference, alternatives for reformulation of Turkey’s tax system and policy options were discussed and comparative studies of relevant tax systems in Europe were referred to.

In the welcome remarks, Seyit Ahmet Baş, General Manager of General Directorate of Revenue Policies of Ministry of Finance, stated that the conference will contribute to strengthening the administrative capacity of the General Directorate of Revenue Policies.

Opening remarks included the speeches of United Nations Deputy Resident Representative Ulrika Richardson-Golinski and Undersecretary of Ministry of Finance Hasan Basri Aktan. United Nations Deputy Resident Representative Ulrika Richardson-Golinski stressed the importance of adopting policies to address main challenges of the Turkish taxation system. Undersecretary of Ministry of Finance Hasan Basri Aktan said the conference will contribute to policy making in taxation. Aktan also thanked UNDP Turkey Office for organizing the conference.

In his speech titled “Tax System and policy options of Turkey”, Deputy of General Directorate of Revenue Policies of Ministry of Finance Ünal Tayyan provided an overview of taxation system in Turkey and examined the share of tax revenues in local administrations.

Representing the European Commission, Umut Özdemir, Sector Manager for Public Finance, gave information on the EU tax policy adding that taxes imposed by Turkey on alcoholic beverages and tobacco are issues regarding adoption of the acquis.

Fiscal Affairs Director of IMF Teresa Ter-Minassian gave a speech on the recent developments in the rationalization of the tax system (trade off between direct and indirect taxation, redistribution of the tax burden).

Pointing out that translation of actual Turkish legal rules into English can help foreign investors, Victor Thuronyi, Senior Counsel at Legal Department of IMF, stated that the income tax structure in Turkey should be reviewed.

Senior Economist at United Nations Development Programme Bureau for Europe and Commonwealth of Independent States Ben Slay examined tax and social policy reforms of new EU member states. Slay stressed that tax reform is also about poverty reduction and added that tax reform, when done right, can reduce poverty and support social solidarity.

Associate Professor of Finance at the African Tax Institute of University of Pretoria, South Africa, Caner Selçuk talked about comparative tax policy and the role of taxation in economic growth.

The first day of the conference ended with a round table discussion among Roy Bahl (Georgia State University), Selçuk Caner (Pretoria University), Ben Slay (UNDP), Teresa Ter-Minassian (IMF) and Victor Thuronyi (IMF) moderated by Jorge Martinez (Georgia State University).

The second day of the conference provided an opportunity for in-depth discussions about taxation polices, particularly in the field of harmonization of indirect taxes in accession process; micro aspects of taxation; fiscal decentralization and intergovernmental revenue sharing. The distinguished academicians, experts and representatives of the international community together with the Ministry bureaucrats focused on the related issues of taxation and hence contributed to the development of a road map for Turkey towards EU membership.

COMPARED TO OTHER COUNTRIES TURKEY IS IN A BETTER SITUATION

New Horizons spoke with Ben Slay, Senior Economist at United Nations Development Programme Bureau for Europe and Commonwealth of Independent States, about the conference, Turkish economy, taxation system in Turkey and global crisis.

New Horizons: What are your impressions on the conference?

Ben Slay: Well, I think it is a very important conference at an important time in three respects. First, Turkey is beginning negotiations on the tax chapter at accession discussions with the European Commission. So, that is a very important issue in the context of integration with European Community. Second, the global economy and the Turkish economy are deteriorating rapidly. The Turkish economy may already be in recession and when the overall macroeconomic picture deteriorates, the fiscal balance, the budget become extremely important. These are issues that will become increasingly significant as we go forward. Number three, we should always be concerned about the welfare of those least fortunate, least well-off in any country including Turkey. It is very important to see how changes in the tax system can be introduced that do not burden those who are most vulnerable, those who are poorest, those who can least afford change. Here it is important to keep an eye on the links between tax policy, social policy and the market policy.

NH: You mentioned that the global economy and the Turkish economy are deteriorating rapidly. Could you please elaborate more on that?

BS: Certainly, the global crisis affects developing countries and Turkey in three or four ways. The first is that the demand for exports is falling. Turkey’s export markets in the European Union, United States, Middle East and other places, the growth is either slowing or these markets are contracting. So that is the first hit, the export hit. The second hit is terms of trade. At the prices that Turkey is paying, the prices Turkey is receiving for its exports are falling. So not only are fewer exports being sold but the price is falling, the price of textiles for example. There is a real downward pressure on these things. That is not such a problem for Turkey compared to some other countries. Third, and this is a very serious problem for Turkey is countries that have a big debt, a big foreign debt that have to refinance their foreign debt. In other words, the debt is coming due, they have to either pay the debt or borrow to refinance the debt. It is very difficult now for countries to refinance their foreign debt and the only way that can easily be done is through the IMF which is why it is so important for Turkey to come to some kind of agreement with the IMF presumably after the local elections in March so that the 7-8 billion dollars foreign debt that Turkey has to repay in the early part of this year 2009 so that it can get that money from the IMF and other places at relatively low interest rates rather than have to borrow at much higher interest rates from the markets that are not able to borrow at all. Last but not least, this is also important for Turkey; remittances. Turks working in Europe that send back Euros, there are fewer jobs now, there is less money coming back either migrant workers or the Diaspora. And so this also will have an impact. These are the four transmission mechanisms that we are concerned about and we are following.

NH: What do you think of Turkey’s taxation system on the way to European Union?

BS: Well, compared to the countries that joined European Union in 2004 and 2007, Turkey is in many respects a much better situation, because it is a market economy, because it has been a member of OECD for many years. By contrast, countries that joined European Union in 2004-2007 only recently became market economies. Prior to 1990, these were part of the Soviet economy or the Yugoslav economy which was much socialist. So, in that sense Turkey is quite well prepared relatively speaking. The issue is not so much in terms of the economics of the tax system, but more the administrative dimensions, the judicial dimensions that reflect the rule of law issues and the political issues in Turkey.

NH: How can Turkey better cope with the problem of informality/unpaid taxes?

BS: Many develoing countries have large informal sectors. Many of the countries that joined EU in 2004 and 2007 have large informal sectors as well. The thing to do is to really understand why those informal sectors exist, what activities of the state create disincentives  for entrepreneurs to declare their activities and how could those policies of the state be changed to increase the cost of non-compliance or reduce the cost of declaring your activities going informal. Sometimes it is tax reform, sometimes it is changing the way the services are delivered, but you have to go sector by sector and think about it not only as an economist but also as a psychologist, as an anthoropologist to really understand culture, the way people actually live.

NH: How can the Taxation System in Turkey be improved so that small and medium-sized enterprises (SMEs) are strengthened more?

BS: I think SMEs as is the case with larger companies in Turkey would very much benefit from a simpler, more transparent and more stable tax system where there are fewer taxes to pay but there are also fewer ways of avoiding taxes. So, for example, for a small farmer or a small businessperson to not have to place different rates of that turonover tax, excises, but just maybe to pay one registration tax a year, 100 dollars, 200 dollars, whatever and that is it. That is a very simple way of solving the problem. And then you can find intermediate solution between the current rather complicated sitution for small businesses and a very simple one would revolve around lump-sum tax, where you just pay a certain amount every year regardless of how much business you do all of which would involve some amount of simplification and clarification of the existing system.

NH: In your talk at the conference, why was there so much emphasis on flat tax?

BS: The emphasis is because, of the countries that joined the European Union in 2004-2007, more and more of them are adopting flat tax systems and the countries that in some respects have the best economic performance are the ones that introduced the flat taxes first. So the flat tax is not a panacea, it is not a miracle but it is worth looking at. Because the experience especially, when the flat tax is combined with social policy reform and labour market regulation reform can really help to solve some problems that might otherwise be very difficult. 

NH: What do we mean by the expansion of tax base and what is the situation in Turkey in this respect?

BS: Well, at a most general level economic development can be understood in terms of broadening tax base. When a country is at a low level development, most economic activity is agriculture production or self sufficiency. So the family, who produces food, can feed itself or maintains animals to feed itself and never engages in economic activity sold in market therefore never has economic activities that are taxed and all of the economics of the family are outside the tax system. As economic development occurs, as markets grow, as economic activity in general becomes more modern, tax base grows. The question then becomes how to introduce taxes into economic activities that previously were not taxed and what is the best way to do that to avoid distrorting the economy. And the markets develop in an economy like Turkey where there is still large agricultural sector. And where in other sectors, in services, in small scale industry there is a large share of informal activity where it is a market but is not necesarilly official. There is a question of changing culture to make it acceptable and normal for people to recognize that paying taxes makes sense and to some extent this involves public relations. It involves conveying a sense of civic resposiblity to people but it also involves simplyfing the tax system to make it less burdenesome to pay taxes. So it is a cultural, it is a legal and it is an administrative challange and it is true whether we are talking about SMEs, whether we are talking about agriculture or whether we are talking about other sectors.

NH: Anything else you would like to comment about the tax system in Turkey?

BS: I would maybe make one or two comments. The first is there is going to be a real tension in Turkey in the next year between short-run tax measures that support the budget at a time of declining economic activity or slowing economic growth linked to the economic problems and economic crisis. The deficit will get better, there will be a search for short-term solutions to prevent the budget deficit getting out of control.That is very different from the long term challanges of putting in place a modern, fair European tax system... So, managing the tradeoff between short term demands of managing the economic crisis and the longer term demand of performing the tax systems. Second, we have to keep in mind that low-income families and the least well-off parts of Turkish society may be especially affected by changes not only in the tax system and but related changes in social policy. It is extremely important to look at how changes in excise taxes, changes in value-added taxes, changes in income taxes also interact with changes in social benefits to be sure that there are not uninteded consequences in terms of making poverty and social exclusion worse for those people who are least able to afford it and if such changes are necessary, then there should be compensating changes in terms of social benefits to protect those who are least to able to bear the burden of higher taxes or lower benefits in other respects.

NH: How do you think the global crisis is affecting the achievement of United Nations Millenium Development Goals (MDGs)?

BS:  It will regretablly make fulfulling the MDGs much more difficult because the single most important factor in meeting the MDGs is economic growth. Economic growth raises the incomes of poor people, allows you to meet MDG 1. Economic growth creates more revenues for state budgets allowing for expediture on public health, allowing you to meet MDGs 2,3, 4 better. MDG allows for more revenues for the state to support gender related initiatives, MDG 5, and it provides more revenues for dealing with HIV/AIDS, tuberculosis, malaria, MDG 6, and provides more funds for businesses to invest in environmentally sustainable techonologies, MDG 7 as well as more funds for developed countries to provide ODA to developing countries, MDG 8. So, when there is a recession or when economic growth slows, it makes it more difficult to do anything on the MDGs. And it is really sad that at a time when so many countries would otherwise be focusing on poverty reduction and helping those who are least fortunate in their countries, the MDG agenda, they are instead focusing on macro economic management, bailing out their banks and being sure that big macro economic questions are answered.  Those questions were answered satisfactorily in many countries so recently and now they can reveal.

NH: What are the effects of the global crisis on international development actors?

BS: Well, clearly there will be a reduction in official development assistance provided by those ODA contributors, EU, United States, Canada, Japan... At the same time one could have imagined more and more ODA being provided by countries like Turkey, like Russia, like China. And that is good but it makes the problems of donor coordination so much more difficult. Donor coordination and harmonization of course is a major part of making development decisions work better that is what the Paris Declaration is all about. So one could have imagined that even if ODA from developed countries declines but that is offset by more ODA from China, Brazil, India, Russia, and Turkey, the picture becomes much more fragmented and much harder to coordinate. Then when you have more ODA coming from the Gates Foundation, from the Open Society and from all sorts of non-government actors, coordination problems can become worse. So I think at best we are looking at constant and maybe somewhat declining ODA overall, probably more significant declines from the major donors and much more difficult coordination problems for the overall development cooperation picture.