Turkey is turning on tax evasion, as the source of global cash runs dry

ANKARA – Turkey’s plans to crack down on tax evasion could net the government billions of dollars, crucial money at as a credit crunch grips the globe, but it must first invest in manpower and new technology to succeed. The Turkish government has said it would launch a campaign in 2008 against widespread tax evasion in the form of tighter controls and harsher sentences as revenue-boosting fast economic growth slows down and the global backdrop deteriorates. Even in the worst scenario, the government should be able to successfully target 10 percent of Turkey’s unregistered economy and this will mean a few billion dollars in additional tax revenues, said a government official who asked not to be named. Though there is no official data on the size of the black economy, officials say it could be anything from half to twice the size of the formal economy, predicted at $520 billion in 2008. Analysts were skeptical that the plan would give results as promptly as the government hopes. «I can say that it will be impossible that the plan will show its effects in 2008. Tighter tax control requires a lot of investment in infrastructure and you can reap the benefits only in 2010,» said Tera Stockbrokers’ head of research Ayse Colak. It is common in Turkey for small businesses to declare revenues far below actual figures to pay less tax. Many shops offer discounts to customers in return for non-invoicing to avoid value-added tax (VAT) at 8 or 18 percent. Many firms do not register their employees to avoid paying high social security premiums or register them only as minimum wage-earners to minimize premium payments. «The large unregistered economy is the chief factor hindering efficient functioning of the market economy. Actual tax revenues are below the goals,» said Hakan Yilmaz, an economist at the Middle East Technical University. The ruling parties, fearful of losing votes, have for decades turned a blind eye to widespread tax evasion and have been satisfied with corporate tax from big businesses and income tax from wage-earners who have their taxes deducted at the source. Unregistered transactions not only trim tax revenues but also discourage foreign investment by creating an uneven playing field between foreign and local firms, analysts said. «The more important effect of the unregistered economy is that foreign investment is not coming to sectors with high rates of unregistered transactions, such as food and textiles,» said Garanti Bank’s head of research Ali Ihsan Gelberi. That, and slow judicial processes are major challenges as Turkey tries to attract $20 billion in foreign direct investment this year, the Turkish Investment Promotion Agency’s chairman, Alpaslan Korkmaz, said. Turkey failed to meet its $25 billion foreign direct investment goal last year. Unlike some of their local competitors, foreign investors have to register their transactions in Turkey from the start. Gross domestic product growth is expected to slow to 4 to 4.5 percent last year from 7.4 percent on average between 2002-2006 and the worsening global backdrop is forcing the reform-minded Justice and Development Party (AKP) government finally to tackle the issue. Simpler code Simplification of the tax code, use of new technology, such as sending SMS messages to taxpayers’ mobile telephones, and installing devices at gas stations to monitor sales are aimed to create a more efficient system. Finance Minister Kemal Unakitan said earlier this month that the government was working on a whole new income tax law and will impose harsher penalties for those «who resist taxation.» The biggest reason for small firms to operate outside the registered economy is high taxes, but economists say Turkey cannot afford tax cuts and losing revenues amid an ongoing crisis in world markets. «When the world is in turmoil, the Finance Ministry cannot tolerate losing revenues. The message the government should give to the financial markets is that it is sticking to tight fiscal policies and tax cuts will not considered,» said Gelberi. Ignoring criticism from the International Monetary Fund, the government cut VAT for textiles and food in previous years and also cut VAT for tourism this year. «Figures show that cutting corporate tax from 30 percent to 20 percent has helped widen the formal economy to a certain extent,» said Osman Arioglu, founder and former chairman of Turkey’s Tax Council. But he said a lack of sufficient tax inspectors makes winning the battle against the unregistered economy harder.