Turkey's Lawmakers Approve Corporate Tax Cut

by Lorys Charalambous, Tax-News.com, Cyprus

16 June 2006

The Turkish parliament has approved a substantial cut in the country's rate of corporate tax, a move thought essential by the centre-right government led by Prime Minister Recep Tayyip Erdogan to make Turkey more competitive as it seeks to enter the European Union.

The bill, approved late on Tuesday night by lawmakers, will cut corporate tax by 10% to 20%, and the reduction will apply retroactively to January 1, this year.

As a result of the legislation, Erdogan, who has yet to sign the bill into law, has stated that the total tax burden on foreign investment in Turkey will fall to 28% from 37%.

It is possible that the legislation could bring the Turkish government into conflict with the International Monetary Fund, which has warned that tax cuts could breach the terms of a US$10 billion loan agreement. However, the government has insisted that the tax cut will not undermine the IMF-backed economic reform programme.

Turkey is keen to join the European Union at the earliest opportunity, but is doubtless aware that it faces growing competition for investment from Eastern European countries, some of which have been cutting business taxes aggressively since acceding to the EU.

Officials from Turkey and the European Commission recently started discussions on the compatibility of Turkish legislation on taxation, one of the 35 chapters on which Turkey and the European Union will hold accession talks.

The Turkish government is also hoping that the tax cut will reduce the size of the country's black economy and encourage more compliance. It is estimated that about half of all economic activity in Turkey is unregistered and untaxed.

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