Turkish Prime Minister Seeks Substantial Tax Cuts

by Lorys Charalambous, Tax-News.com, Cyprus

01 December 2005

Turkish Prime Minister Recep Tayyip Erdogan, announced on Tuesday that the government will seek to bring about a substantial reduction in the country's personal and company tax burden in order to compete more effectively with the European Union and reduce tax evasion.

Mr Erdogan told the ruling Justice and Development Party conference that the standard rate of corporate tax will be cut by 10% to 20% while the overall tax burden for companies will be reduced to about 28% from the current 37%.

"These cuts will attract investment from abroad and greatly increase our competitiveness with neighbouring countries and with the European Union," Mr Erdogan stated.

Turkey is now facing intense tax competition from nearby countries in Eastern Europe that joined the European Union in 2004, some of which are aggressively reducing rates in order to attract foreign businesses.

However, there is also another reason for Turkey's sweeping tax reform programme, and that is to reduce the size of the country's enormous untaxed black economy. At present, 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.

The government's tax reform proposals have come about largely as a result of recommendations from the International Monetary Fund.

Mr Erdogan's announcement was welcomed by the country's stock market, which rose by 2% after the Prime Minister's speech, and analysts have suggested that the proposed reforms are a step in the right direction, although some say that they are unlikely to have much effect on the black economy, at least in the short term.

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