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European Union Indirect Tax European Union Indirect Tax Requirements and Implications for Requirements and Implications for

the Harmonization of the Harmonization of Turkey’s Tax SystemTurkey’s Tax System

Jorge Martinez-Vazquez

Conference on Tax Options in the Wake of EU Accession for Turkey, Ankara, January12-13, 2009

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Indirect Taxation Regime in the EU

The indirect taxation acquisharmonized legislation in VAT and excise taxes

as in the Sixth Directive (of 1977 and codified in 2006 for VAT) and Council Directive 92/12 for excises

VAT non-cumulative general proportional tax on consumption prices, on all stages on production and distribution, providing equal treatment for domestic and import transactions

Excise taxes duties to be charged, with minimum rates, on domestic and import transactions for energy products, tobacco products, and alcoholic beverages.

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Customs DutiesCustoms Duties Customs tariffs The tariff is common to all EU members, although the

rates of duty differ from one kind of import to another.

The Customs tariff will not be discussed any further in this presentation

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Degree of Alignment for the Degree of Alignment for the Value Added Tax (1)Value Added Tax (1)

Overall, Turkey is largely aligned with the EU in the field of VAT

But some issues remain:

On tax rates

-- Turkey applies one standard rate (18%) and two reduced rates (8% and 1%). By EU standards, the standard rate may not be less that 15% and the one or two reduced rates can not less than 5%

-- So, usage of the 1% rate is not in line with the EU acquis and part of the base for the 8% rate as applied to supplies of textile products prior to the retail stage is not in compliance either

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Value Added TaxValue Added TaxLIST OF VAT RATES APPLIED IN THE MEMBER STATESMember States Code Super Reduced Rate Reduced Rate Standard Rate Parking RateBelgium BE - 6/12 21 12Bulgaria BG 7 20Czech Republic CZ - 9 19 -Denmark DK - - 25 -Germany DE - 7 19 -Estonia EE - 5 18 -Greece EL 4.5 9 19 -Spain ES 4 7 16 -France FR 2.1 5.5 19.6 -Ireland IE 4.8 13.5 21 13.5Italy IT 4 10 20Cyprus CY - 5/8 15 -Latvia LV - 5 18 -Lithuania LT - 5/9 18 -Luxembourg LU 3 6/12 15 12Hungary HU - 5 20 -Malta MT - 5 18 -Netherlands NL - 6 19 -Austria AT - 10 20 12Poland PL 3 7 22 -Portugal PT - 5/12 20 12Romania RO 9 19Slovenia SI - 8.5 20 -Slovakia SK - 10 19 -Finland FI - 8/17 22 -Sweden SE - 6/12 25 -United Kingdom UK - 5 17.5 -Source: DOC.2441/2008 - EN, European Commission, Taxation and Customs Union

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Degree of Alignment for the Value Degree of Alignment for the Value Added Tax (2)Added Tax (2)

Other issues:-- Differences remain in the usage of some deductions, exemptions (for small enterprises), etc.-- Streamlining definitions for “taxpayer,” “economic activity” and using the acquis “place of supply” as opposed to “place of delivery” (this latter is also an issue for excise duties)

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Degree of Alignment for Excise Degree of Alignment for Excise Duties Duties

Important issues stand with regard to the taxation of “alcoholic beverages” and “tobacco products”

Some less difficult issues remain in the alignment for the taxation of “energy products”

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Issues with the taxation of “alcoholic beverages”(1)

Main issue is that Turkey’s current structure results in higher taxation on those alcoholic beverages that are “mainly imported” and on lower taxation on “mainly domestic” products, which represents a breach of the Customs Union

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 Specific

Rate

Ad Valorem

Rate Total Excise Tax VAT

EU (minimum) 4 euros /liter   4 euros/liter 15%

EU (average6.2 euros

/liter   6.2 euros/liter 19.4%

Turkey        

Raki 35,848 YTL 275.6%max[35,848 or

275.6%] 18%

Whiskey 70,926 YTL 275.6%max[70,926 or

275.6%] 18%

Comparison of EU and Turkey: Taxation of Typical Alcohol Products

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Issues with the taxation of “alcoholic beverages”(2)

Other less difficult issues:-- The EU only applies specific duties while Turkey applies an ad valorem duty replaced by a specific duty only when the ad valorem duty yields a lower tax -- For certain alcoholic beverages Turkey’s duties are based on “type of product” as opposed to the EU’s “ alcoholic content”-- In Turkey, all alcoholic beverages are subject to tax regardless of alcohol content… not so in the EU (de minimis strength of 0.5% for beer and 1.2% for other beverages -- Turkey does not tax pure ethyl alcohol; the acquis provides no basis for this exemption but for some isolated cases (denatured alcohol, etc)

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Issues with the taxation of “tobacco products”(1)

Main issue is that Turkey’s currently applies a specific duty on imported tobacco and cigarettes to finance the “Tobacco Fund. The application of the specific duty only to imported products represents a breach of the Customs Union

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Different Taxation of Imported Tobacco Products and Domestically Produced Tobacco

 

Retail

Price/

Pack

Specific Excise

Tax

Ad Valorem

Excise Tax

Total Excise Tax/ Pack

Total Excise as % of Retail Price

VAT

Tobacco

Fund

Total Tax as % of

Retail Price

EU Criteria   5-55% NA 57% of Retail

Price57% 15%

(min.)

  NA

EU Average 3,13

Euro30% 61%   59%

0,5Euro**   75%

Turkey   1,4YTL/pack

58% Max[1,4YTL, 58%]

  18% 0,12YTL

NA

Samsun2,17Y

TL 1,40YTL 1,26YTL

1,40YTL 64,5%0,33YT

L   80%

Marlboro4,68Y

TL 1,40YTL 2,71YTL

2,71YTL 73%0,71YT

L 0,12YTL

76%

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Issues with the taxation of “tobacco products”(2)

Other less difficult issues:

-- Turkey defines the cigarettes on the basis of the CN code (Combined Nomenclature of Customs) which is not in line with the acquis

-- The minimum excise levels for cigarettes in Turkey are not established with reference to the “Most Popular Price Category” which is not in line with the acquis

-- To be in compliance, Turkey needs to levy a specific duty (between 5% and 55%) in addition to the current ad valorem rate so the levy is at least 57% of the retail selling price and come to a total of minimum levy of 64 Euros (VAT inclusive) per 1,000 cigarettes

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Issues with the taxation of “energy products”

Turkey still applies excise duty on fewer products( e.g., coal and coke are excluded.) Current legislation will need to be enlarged in the coverage of energy products

Turkey’s Council of Ministers is authorized to either increase the highest duty rate on gas and diesel by 50% or decrease down to 0%. This latter may imply that the EU required minimum rate is not applied

There are several definitional issues:-- Need to distinguish taxation on the basis of final use (e,g, heating, motor vehicle final use versus as an input of production , etc), although this is done in Turkey for electricity-- Currently some energy products still defined in an “unclear manner,” (‘petroleum products,’ ‘solvents,’ etc) not in line with the acquis

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EU Minimum Excise Duties for Energy ProductsEU Minimum Excise Duties for Energy ProductsProduct

Petrol (/1000 l.)Unleaded petrol (/1000 l.)Diesel (/1000 l.)Kerosene (/1000 l.)LPG (/1000 l.)Natural gas

Diesel (/1000 l.)Kerosene (/1000 l.)LPG (/1000 kg.)Natural gasIII. Heating fuels and electricity Business use Non-business useDiesel (/1000 l.) 21 21Heavy fuel oil (/1000 kg.) 15 15Kerosene (/1000 l.) 0 0LPG (/1000 kg.) 0 0Natural gas (/gigajoule) 0.15 0.3Coal and coke (/gigajoule) 0.15 0.3Electricity (/MWh) 0.5 1(The volumes are measured at a temperature of 15° C).

212141

0.3 (/gigajoule)

Minimum excise rates

421359302302125

2.6 (/gigajoule)II. Fuels for industrial or commercial use

I. Motor fuels

Current minimum levels of taxation for energy producing products and electricity

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Summary: Main Issues for Harmonization Reform

Address the different taxation treatment of imported tobacco products and domestically produced tobacco

Address the differential treatment of Raki relative to other alcoholic beverages of similar alcohol content

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Recommendations for Tobacco (1)

Tobacco Fund has to be eliminated However, there are possibilities for:

A graduated phase-in approach to eliminate the Tobacco Fund.

Control impact on relative prices facing domestic consumers by introducing differential excise rates for tobacco products by type of blend.

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Elimination of the Tobacco Fund = -260 million YTL.Change in Excise Tax Due to Increase in Imports of Tobacco Products= 101 million YTL.Change in VAT Due to Increase in Imports of Tobacco Products= 2.2 million YTL,Change in Excise Tax Due to Decline in Consumption of Domestic Tobacco Products = -43 million YTL. Change in VAT Due to Decline in Consumption of Domestic Tobacco Products = -12 million YTL. Net Change in Tax Revenues = -212 million YTL.

Revenue Impact (as of 2006-07)

of Eliminating Tobacco Fund

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Economic Impacts of Eliminating the Tobacco Fund

Production: Reduction in domestic production would be by 1.52% or 615 tons based on production levels in 2006.

Employment: A decline in 2,547 jobs based on number of farmers employed in 2007.

Income loss: 6.4 million YTL (2,500*2,547).

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Recommendations for Tobacco (2)

Introduce a program for income maintenance and crop substitution that would soften the blow on the poor population in the East and the Southeast of Turkey. As part of the negotiations with the EU, ask for cost sharing in this income maintenance and crop substitution program up to 5 years or until accession of Turkey to the EU.

In the medium term for Turkey to reform the structure of its excise tax on tobacco by adopting a tax structure that includes both a specific in rem tax component and an ad valorem component according to EU rules.

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Revenue Impact of Increasing Excise on Raki

Increase excise tax on Raki from 35.848YTL to 70.962YTL.

one hundred percent increase in the excise tax, would imply a 38% decrease in the consumption of Raki

Doubling the excise tax on Raki would approximately double its price.

The excise tax revenues would increase by 62% or by 404 million YTL.

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Economic Impact of Raising Excise on Raki

Production of Raki would decline by 12.54 million liters.

Decline in employment in Raki production would be 954 jobs.

The welfare impact would tend to be more on low income consumers (?).

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Recommendation on Raki

Another feasible choice is to lower the taxes on similar (mostly imported) spirits at a revenue loss of about 20 million YTL.

However, the current tax structure is not similar to the EU and it would be necessary to adopt a structure similar to that in the EU.

There is the possibility of negotiating for a transition period.

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Thank you