The government has decided to tax capital gains and interest income through a 15% withholding tax starting from 2006. Although the details of the regulations are not finalised yet, we have decided to send this descriptive note, in view of the abundance of related queries we have received from investors. We aim to elaborate on the implications of the new tax regime based on currently available information comprising our inferences from the joint press conference held by Finance and Economy Ministers, the draft law, and AKP MPs’ amendment proposal sent to the Parliamentary Planning and Budget Committee where discussions on the bill are still under way. Below we provide excerpts from the draft law, as well as tables demonstrating the implications of the planned tax levy on the markets. 1. The aim of the new tax regime is to unify taxation on every financial instrument in order to simplify different and complex tax structures governing the financial sector. Thus, the withholding tax on T-bills, equities, repo, TRY and FX deposits will all be equal to 15%. We think this is not meaningful, though, as it does not reflect the preferences of the tax authority. We would assume that the 5-year FRN should be favoured more than the 1-month dollar deposits; thus should be taxed at a lower rate. 2. Losses and profits recorded in different periods and from operations through different intermediary institutions can be offset against one another. However, no offsetting is permitted for losses and profits made on different financial instruments. In case of losses created in one calendar year, investors could apply for a rebate from the taxes they previously paid, through making a tax declaration at the end of each year. We believe that even if an offsetting mechanism is awarded, the time span between the losses created and the tax return would be a long one, which the investor would have to finance. 3. Double tax treaty regimes will be recognised, implying that foreign investors residing in those countries with which Turkey has a double tax treaty agreement in effect, will benefit from these treaties. 4. Bonds/bills issued before 1.1.2006 will be subject to the current tax regime, even if they are traded in 2006 or later. 5. Equities that are acquired before 1.1.2006 will be subject to the current tax regime, even if they are sold in 2006 or later. 6. Interbank deposits and money market transactions among intermediary institutions will not be subject to the 15% withholding tax. Additionally, we believe that the new tax regime will entail various practical problems, which in turn could create confusion and chaos in the implementation process. Finally, we would like to underline once again that the comments we make above and the tables we provide in the following are intended to clarify the existing situation and are subject to change in case of any amendments to the bill. |