Turkey's Ambitious Tax Reforms to Boost Revenue

Turkey sets sights on revamping its tax system to enhance revenues and curb budget deficits amid ongoing high inflation. Learn about the intricate plans underway and their potential impact.

Published July 02, 2024 - 00:07am

4 minutes read

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In a bid to address the growing budget deficit and enhance revenue generation, the Turkish government has embarked on an ambitious mission to revamp its tax system. Finance Minister Mehmet Simsek announced on Monday a comprehensive plan aimed at developing the tax regime, which focuses on combating tax evasion and eliminating ineffective incentives, instead of imposing additional overall burdens.

Simsek highlighted that the preliminary draft proposals being discussed within the government envision implementing a minimum 15% tax on multinational corporations, aligning with a report by the state-owned Anadolu Agency last month. Although detailed specifics of the proposal were not disclosed, the minister emphasized that the tax policy plan is in its early stages and may undergo further modifications before being submitted to parliament for approval.

Currently, multinational companies are subjected to varied tax rates influenced by multiple factors, adding complexity to the system. Turkey's fiscal reform endeavors appear to be driven by the need to address a record-high budget deficit and control soaring inflation. The initiative marks an effort to restore financial discipline reminiscent of the Maastricht criteria within Europe, excluding the impact of recent earthquake devastation.

The Turkish financial landscape has been confronted with significant challenges, including an urgent need to balance budget deficits that widened to historical levels. The move towards fiscal consolidation involves not only tax reforms but also reduced government spending and a series of newly formulated plans. Legislators will deliberate on proposals poised to generate approximately $7 billion in additional revenue, a plan likely to gain approval given the ruling Justice and Development Party's (AKP) control over the parliamentary majority.

A critical component of the tax overhaul includes raising the corporate tax rate on public-private partnerships from the current 25% to 30%. Industry observers believe these updates will introduce challenges, particularly against the backdrop of recent investor hesitation stemming from plans for a limited stock transaction tax that faced backlash and was subsequently delayed. Local traders argued such measures could increase commissions and fees while adversely affecting trading volumes. Simsek indicated on his social media platform that these tax measures are up for future reconsideration.

With inflation soaring to unprecedented rates, peaking at 75% year-over-year in May, stock trading has surged as a common form of investment to hedge against the rising cost of living. The central bank has kept the main interest rate unchanged at 50% for three consecutive months, maintaining one of the highest rates among emerging markets. Prior to the last presidential election, the government had already proposed a bill to increase corporate and banking taxes by 5%, aiming to raise corporate tax rates from 20% to 25% and raising taxes on banks, insurance, brokerage, and payment companies from 25% to 30%.

Turkey, lagging behind its OECD counterparts in tax revenue collection as a percentage of its $1.1 trillion economy, faces an uphill battle in achieving fiscal stability. Simsek stressed the government's plans to leverage artificial intelligence, similarly to Italy and the United States, to combat tax evasion and fraud. The minister noted that more than half of Turkish companies reported outright losses or marginal profits, underscoring the importance of advanced technology in detecting inconsistencies.

Financially, Turkey recorded its highest-ever monthly budget surplus of 219 billion lira ($6.7 billion) in May following a pivot towards fiscal reform to complement monetary policies aimed at curbing rampant inflation. Despite this improvement, the overall budget remains significantly deficit-laden since the beginning of the year, trending towards a substantial annual shortfall projected at $130 billion, or 6.4% of GDP, one of the most severe deficits during President Recep Tayyip Erdogan's two-decade rule.

The surplus in May, which marked a stark reversal from five continuous months of shortfalls, was predominantly attributable to a sharp rise in tax revenues that outstripped expenditures. While the government's priority lies in financial stabilization, introducing the necessary reforms remains crucial. The stakes involve not just correcting immediate fiscal imbalances but ensuring sustainable economic health in the long run.


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