Turkey has been trying to take the strong measures against tax heavens and monies left to these countries, but the measures still seem not enough. In order to understand this, foreign investors’ tendency and applicability of Turkish laws should be examined.
II. WHY FOREIGN INVESTORS PREFER TO INVEST IN THESE COUNTRIES
Why are investors very interested in Tax Heavens?
Generally foreign investments occurs within two basic ways,
- Foreign direct investments
- Portfolio Investments
The reason of why foreign investors invest money in tax heaven countries depends on the aim of investors. But mostly because target country may have,
- Cheap labor or,
- Rich natural resources to be invested
- Another competitor company carrying on a business in the same area that investor company wants to get involved in or
- Very profitable tax and foreign currency legislations and policies.
Some multinational companies prefer to invest in due to opportunity of tax concession provided by those countries and to conceal their know-how of course.
However, it is a fact that especially, in order to launder money or to pay low taxes, many foreign investors have a tendency to invest in these countries due to
- Geographical location
- Economical and politic structure
- Laws and other secondary legislations that investor company shall be binding with. For example, legislation regarding establish a new company or features of partners of companies.
- Confidentially of bank accounts and transactions or know how, which will be guaranteed not to be shared with third persons or any other country.
- Double tax agreements that have been signed by the target country
- No restrictions or control on foreign exchanges
- Government’s policies regarding transaction in tax heaven countries.
As it is mentioned above there are a lot of reasons to invest in tax heaven countries. The main reasons are confidentially and lack of control on foreign exchanges and zero or low percentages of taxes to be collected from investor.
II. LEGISLATION IN TURKEY
In Turkish Legislation, there is no definition as “tax heaven” but it is mostly used as a politic and economic term.
In order to prevent money laundering and tax evasion, Turkey has been taking some measures regarding EU Acquis and OECD rules. Lastly, in 2007, new corporate tax law no.5520, entered into force. According to article 30/7 of the Law no. 5520;
“All sorts of payments made to corporations (including branches of resident corporations) that are established or operational in countries which are regarded by the Council of Ministers to undermine fair tax competition due to tax and other practices will be subject to taxation in Turkey irrespective of the fact that: the payments in question are subject to tax or not; or the corporation receiving the payment is a tax payer or not. In this case, stoppage at the rate of 30% is foreseen to be levied over these payments. But under the following cases the stoppage shall not be applied:
- Principal interest and dividend payments over the loans obtained from foreign financial institutions.
- Insurance and reinsurance payments.”
And according to article 7 of the Law no. 5520 that regulates Controlled Foreign Corporations;
“Corporations which are established abroad are controlled directly or indirectly by tax resident companies and real persons by means of separate or joint participation in the capital or dividends or voting rights by at the rate of minimum 50% are considered as Controlled Foreign Corporations (CFC) provided that the below conditions are fulfilled:
- 25% or more of the gross revenue of the foreign subsidiary must be composed of passive income,
- The CFC must be subject to an effective income tax rate lower than 10% for its commercial profit in its home country, and
- Gross revenue of the CFC must exceed the equivalent of TL100, 000 in a foreign currency in the related period.”
CFC’s profit would be included in the corporate income tax base of the controlling resident corporation irrespective of whether it is distributed or not, at the rate of the shares controlled, in the fiscal period covering the month of closing of the according to CFC.
Control rate is considered as the highest rate owned in the related fiscal period.
The CFC’s profit that has already been taxed in Turkey as per this article will not be subject to additional tax in Turkey in the event of dividend distribution; whereas the portion of the profit distributed that has not been previously taxed in Turkey will be subject to taxation.
Taxes that the CFC pays over its profit in the related foreign country will be offset from the tax calculated for the same revenue in Turkey.
Determination of the Regions and countries got involved unfair tax competition
In the way of determination of the countries to be imposed sanction, some criteria would be significant e.g. information interchange and transparency for the Council of Ministers’ examination. As a principal, a country, that has signed a tax agreement with Turkey, should not be in the “black list” which will be compiled by Council of Ministers.
Law without applicability
In despite of amendments, as it is mentioned above, in Corporate Tax Legislatives, the law and related provisions regarding tax heavens have not been applicable. Unfortunately, Turkey is still a “money laundering and tax evasion heaven” as although there are legislations that impose sanctions like stoppage and tax cut; since Council of Ministers has not yet published a “black list” of countries regarded as tax heavens. Therefore, there is no applicability of the legislations. However, Council of Ministers is still working on the subject.
Tax heavens still have been a problem for many countries so that it was shown one of the reasons of global financial crisis in G-20 reports; which forces other countries to take action against tax heaven countries. It still seems a problem for Turkey too when we read some researches saying that 158 billion dollar has left from Turkey to Tax Heaven countries over the years.
As a result, Turkey is intent on taking action against the issue but due to lack of applicability, has not solved the problem yet and seems a money laundering and tax evasion heaven for both foreign and local investors.