Turkey Risks IMF's Wrath Over Tax Cuts

by Lorys Charalambous, Tax-News.com, Cyprus

30 March 2006

Finance Minister Kemal Unakitan has stated that the government was considering tax cuts in various sectors, a policy which could bring the country into conflict with the International Monetary Fund, which has provided substantial loans for the Turkish government, according to a report by the Financial Times.

In a speech delivered on Tuesday, Mr Unakitan indicated the the government was "moving towards" tax cuts for certain sectors of the economy. Mr Unakitan did not elaborate further on this statement, but it is thought that the bulk of the tax cuts will be directed towards the tourism industry - Turkey's main foreign currency earner - which has suffered as a result of the bird flu scare and a strengthening domestic currency.

The minister's comments come soon after the Turkish government decided to cut value added tax for the textile industry, much to the chagrin of the IMF which has warned that the tax cut could breach the terms of a US$10 billion loan agreement. The IMF has also reportedly expressed concern at the government's pace of structural reform.

Last November, Prime Minister Recep Tayyip Erdogan announced that the Turkish government was seeking to make substantial cuts in the personal and company tax burden which could see the standard rate of corporate tax cut by 10% to 20%.

Turkey is keen to reduce its tax burden not only to bring its economy into line with the European Union, which it is hoping to join in the coming years, but also to reduce the size of the black economy.

It is estimated that about half of all economic activity in Turkey is unregistered and untaxed, while those who do pay tax are often penalised by punitive rates.

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