What are the effects of the new tax reforms in Türkiye? | Economy

Istanbul- The Planning and Budget Commission of the Turkish Parliament has approved a bill submitted by the ruling Justice and Development Party (AKP) that aims to enhance fairness and efficiency in the tax system and amend its laws.

For his part, Treasury and Finance Minister Mehmet Simsek announced that the government has prepared a new tax package based on the principle of “increasing taxes on those with higher incomes and reducing them on those with lower incomes.”

The Minister added that these measures aim to enhance tax justice and ensure that everyone shares in bearing the state’s financial burdens, thus supporting the country’s financial and economic stability.

Under the new law:

• Strengthening efforts to combat informal activities by imposing strict fines, and more than 4,000 tax inspectors will undertake inspection tasks throughout the year to ensure compliance.
• The minimum pension was raised to 12,500 Turkish liras (about $380), from 10,000 liras (about $300).
• Amending the minimum corporate tax rate, whereby a 10% tax will be imposed on local companies, while a 15% tax will be imposed on the profits of international companies from their activities in Turkey.
• New companies are set to be exempt from taxes for 3 years, while preserving the rights of those who hold investment incentive certificates.
• A 30% tax will be imposed on profits from large investments and profits from public-private partnership projects, while exemptions in free zones will be limited to export revenues only.

Turkey’s budget deficit is expected to reach 2.7 trillion liras ($81.9 billion) in 2024.

Low income exceptions

Speaking to Al Jazeera Net, economic analyst Bilal Baghaish said that the regulation of tax policies was a necessary step to achieve financial balances, support the financial aspect to combat inflation, complete the revenue aspect, and support the recent savings package.

Baghaish explained that the applications of the minimum corporate tax at home and abroad aim to achieve sustainability in the budget balance, noting that the financial balances, especially the expenses for recovering from the effects of the earthquake, social support, the informal economy and the decline in tax revenues, have recently begun to show a large deficit.

He believed that it was necessary to correct this situation to achieve financial sustainability, as the budget deficit is expected to reach 2.7 trillion liras ($81.9 billion) in 2024.

Bagish pointed out that the new tax package aims to support the strict monetary policies implemented last year to combat inflation, as the austerity financial measures will be reinforced by regulating taxes.

He explained that the increase in taxes, such as the value-added tax, will affect prices, but will not have a direct impact, but will lead to a reduction in local demand, which has had a significant impact on growth and inflation recently, which will enhance additional revenues for the budget.

He stressed that taxes imposed on low-income earners were exempted from these regulations and tax increases, stressing that the aim of this step is to protect the lowest-income groups from additional tax burdens.

New taxes

The ruling party is preparing to announce details of a second tax package targeting the real estate sector, according to Turkish media reports.

This tax package includes:

• Imposing an additional property tax on those who own two or more homes, as the tax value will increase with the increase in the number of properties owned.
• A tax will be imposed on 600,000 empty homes in Turkey, with the aim of encouraging owners to rent them out rather than keeping them unoccupied.
• Those who sell their homes within 3 years of purchase will face double tax, while those who sell within 5 years will face a one-time tax increase.

It is noteworthy that home sales in Turkey fell by 5.2% in June compared to the same month of the previous year, while home sales to foreigners fell by 45.1%.

The most important repercussions

In his recent remarks, Treasury and Finance Minister Mehmet Simsek pointed out that Turkey is the second country with the lowest tax burden among OECD countries, with the tax-to-national income ratio in Turkey being 20.8% compared to 34% in other OECD countries and 41.2% in EU countries.

The draft resolution was widely criticized by citizens and opposition parties, who considered that despite the project’s orientation towards collecting taxes from capitalists and the rich, the financial burdens will ultimately be reflected on ordinary citizens through the rise in commodity prices.

Economic analyst Farid Kaya told Al Jazeera Net that the new economic model, known to some as the “electoral economy,” which has been implemented over the past two years, in addition to the tragic earthquake disaster, has made it necessary to impose tax increases.

Şimşek: Turkey is the second country with the lowest tax burden among OECD countries

Kaya explained that the causal relationship between the economic reality and the political results in the country was severed, and after a long period of time had passed since the presidential and local elections, the economic administration had gained a great ability to make bold decisions.

The administration is expected to adopt a hawkish stance on both monetary and fiscal policy through the end of the second quarter of 2024.

Kaya added that the slowdown in wage growth and the rise in taxes may lead to a reduction in demand, indicating the end of the period of inflationary growth, and that the profits and inflationary cycle that we witnessed in the past should be forgotten.

At the same time, Kaya believes that the tax packages will not negatively affect foreign investments, as they will contribute to combating inflation and stabilizing the lira exchange rate in the long term, which will make the Turkish market more attractive to foreign investors and restore the confidence they had previously known.