Turkey: Giving a facelift to the Turkish tax system
Publication: Celebrating Reforms 2008
Almost all tax reforms aim at a single goal: to increase revenue. But Turkey’s 2007 reform was different—simplifying and modernizing the tax system were the key goals. The government had been concerned that an antiquated corporate tax law was hindering foreign direct investment. It wanted to align its system with international standards.
While it remains too soon to see the medium-term effects of the recent tax reform (passed April 2007), the first signs are promising. The reform introduced new corporate taxation concepts and dealt more clearly with areas hardly regulated in the country before. The most novel changes were in transfer pricing, thin capitalization, anti-avoidance measures, foreign participation exemptions, and provisions specific to controlled foreign companies. This case study follows the timeline to reform and examines the changes afoot.
- One of the most visible changes introduced by the 2007 law was a 10% reduction in corporate tax rates, from 30% to 20%.
- However, at the same time, the withholding tax rate on profit distribution increased from 10% to 15%.
- In the short-term, tax revenue from declared corporate income has decreased by YTL 211,401,000 (approximately USD 168,196,393). However, Turkey expects to collect higher tax returns in the medium term, as its revenue base increases.