3. COMPARISON OF OUR COUNTRY WITH OECD COUNTRIES

Abstract

The transformation of public finance in the globalized world in terms of method and purpose necessitates compatibility efforts in those areas. Tax is one of those areas in which compatibility effort is needed and this makes the comparison of national tax systems obligatory. However, this comparison is not considered to be an easy process since it is related to the sovereignty of a country and it affects the economy of the country considered.

Key words: OECD, European Union, International Practices, Globalization, Turkish Tax System, Gross National Product

COMPARISON OF TURKISH TAX SYSTEM WITH INTERNATIONAL PRACTICES

Prof. Dr. Mehmet ARSLAN Bal›kesir University Band›rma Faculty of Economics and Administrative Sciences Asst. Prof. Dr. Ahmet AKCAN Düzce University Faculty of Economics and Administrative Sciences

Prof.Dr.Mehmet ARSLAN Asst. Prof. Dr. Ahmet AKCAN

1. INTRODUCTION

The mission of a government is to provide for the whole nation’s physical and moral needs and to prepare conditions to make them happy and prosperous. The most important element of these conditions in the financial area is income-creating financial functions.

Tax systems lead these functions.

Along with the missions undertaken by the government concerning economic, social and financial

politics, the structure and the quality of the resources used to finance them are subject to some changes.

These changes may occur in different directions and magnitudes depending on scientific preferences and determinations, application conditions and national integration increasing with the globalization.

Each government has a specific tax system which reflects its social, economic and political structure.

However, this doesn’t mean that the tax

system of each country has to have specific properties. Changes in economic, social and technological areas affect the development of tax systems. While the level of economic improvement affects taxation capacity it also determines the content of the tax system. Although tax income in undeveloped countries is based on custom taxes and taxes collected from natural resources, in developed countries tax income is mostly based on income taxes and general consumption taxes. Factors such as changes in population structure, general educational level, cultural level etc. have a determining role on taxation level. Changes in technological areas affect tax systems directly as well. While changes in technological areas have positive effects on tax systems (such as automation of tax offices), it may also cause some risks (such as the difficulties in taxation of trading activities in internet) ¹.

The application of tax politics in a globalizing environment brings many difficulties for tax offices. In order to overcome these difficulties, offices develop applications based on the approach of providing a high quality service to tax-payers as well as making efforts to decrease current risks in their systems. Tax offices have some ideas about new tax

systems and changes in the organizational structure². The concept of taxation has a universal meaning and it is based on common scientific reasoning. On the other hand, along with the increase in economic relationships, tax systems of countries are affected by each other.

The level of national trade and capital trends are at the top of the factors determining the level of interaction. National trade and capital trends, which have accelerated since the 70s, have played an important role in the tax systems of countries moving closer to each other. The liberalization of financial markets, the rapid increase of direct and indirect capital investments and the escalation of national competition have also been causing the tax systems to get closer. During this process, the contributions of national organizations (World Bank, IMF, WTO, OECD and EU) have also played an important role. The European Union (EU) has made great efforts to overcome conflicting applications in the area of taxation to provide economic integration.

However, the standardization of tax systems is not the aim of these efforts. The main purpose is to provide a compatibility of tax systems to member countries and to the founding treaty ³.

1 European Union, “Tax Policy in the European Union,” p. 3

2 ÖZ, N. Semih; “Tax Statistics and Future Trends in International Taxation, Taxation Problems”, Issue: 196, p.11

3 AGBAL,, Naci ; “Development of Tax :Burden in OECD Countries-I,” Yaklafl›m Dergisi, Issue: 103

2. COMPARISON OF TURKISH TAX SYSTEM WITH INTERNATIONAL PRACTICES

Tax structure can be considered in micro scale in terms of one particular tax, and it can also be thought of in macro scale in terms of a new tax system. As these are examined, various approaches, like whether the tax is direct or indirect, temporary or permanent can be taken into account. During the collection of taxes, direct or indirect tax can be considered according to whether the personal conditions are considered or not, or whether the tax is subjective or objective. Examinations can also be made in the frame of the distinction between general and private taxes considering the content of the tax. Each approach is individually important and they are interconnected. Depending on the importance of fiscal and extra fiscal functions regarding a tax application, the approaches mentioned above may become more important or less important with respect to each other. For example, in periods when urgent financial needs arise, some of the main tax principles considered to steer a tax application may be ignored and the fiscal function of the tax may come to the fore.

Similarly, when economic purposes are more important, flexibility may be allowed in the social structure and functions of tax. When

problems occur due to a jam in production and import risks are encountered, some tax measures can be taken concerning these goods ⁴.

Applications or attempts at economic and political integration may yield the need for the tax structure to be subjected to changes both on the micro and macro scale.

The Enhancement of the internationalization of production and competition, and the increasing developments in globalization cause the necessity of consideration of the approaches needed in micro scale to be taken into account from different perspectives. All these modern developments make the acceptance of the questionability of some approaches to be necessary and useful within a scientific framework.

For example, whether the tax is direct or indirect, or the structuring of a tax system is dependent mostly on direct or indirect tax, may be judged only by theoretical approaches or they may be analyzed according to the currently applied conditions and preferences.

As tax systems of countries develop depending on their economic, social and political conditions, it is seen that common global trends become apparent. In the structuring of the Organization for Economic Cooperation and Development (OECD) there are 30 members including Turkey. The European Union (EU) is

4 AKDOGAN, Abdurrahman; Yaklafl›m Dergisi, June 2006, Issue: 162

also a member of OECD. Member countries have different levels of development. There are also some differences in tax application within the member countries. In this study, applications for OECD countries and European Union countries and the Turkish Tax System will be discussed.

3. COMPARISON OF OUR COUNTRY WITH OECD COUNTRIES

There are thirty members including the EU and our country within the structure of OECD⁵. There are differences in tax applications according to the development level of OECD countries. In this topic tax structure, tax charge, tax-payer conditions and methods of collecting taxes in OECD countries will be discussed.

3.1. TAX STRUCTURE IN OECD COUNTRIES

One of the most important criteria to understand about tax structure is paying attention to the distribution of the tax income supplied from various sources within the total tax income. The taxes, on which the tax system mainly depends, provide an opportunity of creating data used to make national and international appraisals and evaluations. However, comparability of these data depends on commonalities in the calculation methods and approaches and whether the data used are calculated / collected on the same basis. Despite the differences, data published by certain national and international enterprises, companies and foundations are accepted as important sources.

5 Organization for Economic Cooperation and Development

Table-1: Tax Structure in OECD Countries

Tax Structure in OECD Countries ( % )

1965 1975 1985 1995 2002

Income Tax 26 30 30 27 26

Corporate Tax 9 8 8 8 9

Social Insurance Contributions 18 22 22 25 25

Tax from Wages 1 1 1 1 1

Property Tax 8 6 5 6 6

Excise Duties 14 14 16 18 19

Special Excise Duty 24 18 16 13 11

Other Taxes 1 1 1 3 3

TOTAL 100 100 100 100 100

Source: OECD, Revenue Statistics 1965–2003 Paris, 2004

Although there are risks, resulting from the differences in meaning related to data, which may have arisen according to the financial and administrative differences of countries, statistical data has great importance in terms of stating the general opinions and approaches.

The distribution, in OECD countries, according to tax income sources are given in Table 1. In recent years, increases in taxable income limits, such as discounts on the statutory tax rate and minimal living discount, have been observed in OECD countries. Although there have been discounts in the corporate tax rate, the tax base has been extended.

Corporate tax has decreased by approximately 3% on average in OECD countries since 2000.

In OECD countries, personal taxes and corporate taxes provide the

biggest proportion of the total tax income. Excise duties are the secondary source of income in OECD countries. However, there has been a decrease in private excise duties in recent years. Although there was a decrease in taxes collected from real estate in the 1980s, an increase has been observed in recent years because of international tax competition.

These tax incomes in the United States, the United Kingdom, Canada and South Korea were more than 10% of the total tax income in 2003.

3.2. TAX CHARGE AND TAX-PAYER

STRUCTURE IN OECD COUNTRIES

Total tax income (in US dollars), population and tax-payer conditions in OECD countries are given in Table 2 below.

As seen from the table, approximately half of the population of OECD countries are tax-payers.

New Zealand ⁶, Finland and Norway are the countries having the highest number of tax payers and Korea, Mexico and Turkey are the countries having the lowest number of tax payers with respect to population.

The highest number of tax payers per capita is found in the USA with

1,385, and the lowest number is in Turkey with 65 ⁷.

The mean taxation charge in OECD countries was 36.3% in 2003.

The highest taxation charge was in Sweden with 50.6% and the lowest was in Mexico with 19%. Taxation charges in Turkey and in OECD EU countries are 32.8% and 38.9%

respectively.⁸

6 The reason that the number of tax-payers is more than the population may due to tax struc- ture and/or foreign employees.

7 In calculation of the number of tax-payer per personnel, income and corporate tax-payers are taken into account for each country.

8 http://www.gib.gov.tr/fileadmin/HTML/VI/OECD/Tablo %201.xls.htm, Source: OECD, REVENUE STATISTICS OF OECD MEMBER COUNTRIES, PARIS, 2005 (TABLE 1-2)

3.3. ALLOCATION OF TAX INCOME TO CENTRAL AND LOCAL GOVERNMENTS

The allocation of financial responsibilities in central and local governments in OECD countries has differences according to their administrative structuring. Local governments have to be strengthened financially along with the political activities. Local needs and preferences have to be taken into account in the provision of public services. While providing financial support for local governments, the positive effects of one-source distribution, macro economic equilibrium, economies of scale, and money politics should not be forgotten.

The allocation of direct taxes, social security payments, sales taxes, estate taxes, inheritance taxes and motor vehicle taxes by central and local governments in the OECD countries are given in Table 3 below.

As seen in the table, direct taxes are allocated to the central administration in all the OECD countries. The other taxes and social security payments are presented in different ways.

Social security payments considered as a tax-like financial duty are very important income sources for governments. In 11 of the OECD

countries, income offices collect social security payments as well as collecting taxes. In other countries, separate units are employed for social security payments. In some of the OECD countries, especially Germany, France, Japan and the Czech Republic, it is observed that social security payments are of great importance in the total income of the governments.

3.4. TAX STRUCTURE AND ANALYSIS IN OUR COUNTRY In the light of the theoretical approaches presented above, tax structure can be examined in different perspectives. In order to present the topic in a suitable way, analysis of periodical development and general preferences is very important. Giving consideration to our financial, economic and social conditions as well as the need to adopt modern approaches is essential in terms of the value of analyses and explanations.

Otherwise, differences in tax structures of countries are handled without considering other peculiarities and this causes the conclusions obtained to be questionable. There can be no doubt that the upper limit of this approach is the gains from modern tax principles and the applicability of them for our country.

In presenting tax structure, the distinction between direct and indirect taxes has an important role to play. As seen from Table 4, our tax system has become indirect tax dominant. When the 1980s and the later periods are examined, income distribution of 60% direct, 40%

indirect taxes in the first years, has become 50% direct, 50% indirect in the period 1987-1993 and after these years trends changed into indirect taxes. In the period after the

financial crisis, the proportion of indirect taxes increased over 50%, and it jumped in 1995 when indirect taxes were 59% while direct taxes were 41%. In the following years the increasing trend of indirect taxes continued and it reached 70% in the 2000s.The jump in indirect tax after the 1994 crisis was seen in 2002 as well. In other words, in both periods the preference was to increase the indirect taxes to create a narrowing effect.

Source: This table is derived from

http://www.gib.gov.tr/fileadmin/user_upload/VI/GBG/Tablo_3.xls.htm (1) Direct taxes consist of income taxes and wealth (property) tax.

(2) Indirect taxes consist of taxes collected from goods and services, from foreign trade and taxes from surplus of removed taxes.

(3) 10 month (Since Fiscal year is started to be applied in a period of Jan, 1st- Dec,31st)

The domination of indirect taxes within the system could have resulted from many political and administrative factors. For example, indirect taxes create revenue easily, there is not much reaction from society against them, they have less political risks, financial results can be obtained in a short time and the management of them is easy. Besides

the questionability or preference for indirect taxes in terms of economic and financial aspects, negative social results are scientifically and commonly accepted. Since indirect taxes generally are not based on income, they create a taxation burden on the tax payer and since they negatively affect personal income levels, indirect taxes are considered to be

unfair taxes. In other words, corrupt tax justice has become more corrupt starting from the 1980s in our country. Negative social effects of this situation are sharpened by the structure and quality of public expenses.

In Table 5, considering tax content, and thinking whether they are collected from income, wealth and consumption (expenditure) or not, it can be seen that the concentration is on taxes collected from consumption (expenditure).

Although the share of taxes collected from income, i.e. total of income and corporate taxes, is under 30%,

taxes collected from consumption (expenditure) is around 70%. Taxes collected from wealth and wealth transfer within total tax income is around 1%. This 70% share of taxes collected from goods and services is an important adverse indicator in terms of tax payers considering their personal conditions. As opposed to the high level of breaks and leaks in direct taxes, the easiness in relative conceivability of indirect taxes causes the adoption of a state of under performance and produces limitations on reorganization approaches of the tax system.

In Table 6, shares of taxes collected from goods and services within total tax income are given with respect to countries and years.

It can be seen that the share of taxes collected from goods and services was 25.6% in Turkey in the year 1980 and there is an increasing trend in the following years - parallel to the explanations above. This share was 36% in 1985, 27.9% in 1990, 37.6% in 1995, and 42% in 2000.

The share which was 46.9% in 2002 became 49.5% in 2003. However, there have not been changes in this share in countries like Mexico, USA, Australia, Belgium, Denmark, Germany, Hungary, Italy, Poland, Spain, Sweden, Switzerland and the UK while there have been decreases in this share in countries like Canada, Korea, Austria, Finland, France,

Greece, Iceland, Ireland, Norway and Portugal. Japan, New Zealand, Luxemburg, Netherlands and Turkey are the countries that had increases as follows: 5% in Japan, 13% in New Zealand, 7% in Luxemburg, 6% in Netherlands. The increase in Turkey has been 100%.

The share of taxes collected from property and services has the same structure as above when comparing OECD countries. The figure for Turkey was 49.5% in 2003; for OECD countries as a whole it was 32.1%, and 32.3% for OECD America countries, 30.6% in OECD Pacific countries and 32.3% in OECD European countries. Considering European Union countries, the share was 31.4% in 19 countries and 30.4% in 15 countries by the year 2003.

Tablo-6: Taxes collected from goods and services as a share of Total Tax Revenues (%)

1980 1985 1990 1995 2000 2002 2003

Canada 32.6 31.8 25.8 25.4 24.2 26.0 26.1

Mexico 51.2 64.8 55.3 53.9 53.0 49.0 52.5

USA 17.6 18.8 17.4 18.0 16.1 17.7 18.2

Australia 31.1 32.8 27.8 29.0 28.7 30.3 29.7

Japan 16.3 14.0 13.7 15.8 19.3 20.1 20.3

Korea 62.7 59.5 46.7 43.1 38.3 38.8 37.1

New Zealand 22.3 23.1 33.6 33.4 34.7 35.1 35.2

Austria 31.5 32.6 31.5 28.0 28.2 28.2 28.2

Belgium 27.2 25.5 26.5 25.8 25.3 24.6 24.6

Czech Republic 32.2 31.6 29.7 29.7

Denmark 37.4 34.2 33.0 32.1 32.1 33.4 33.0

Finland 35.4 33.9 32.5 30.2 29.0 30.2 32.0

France 30.4 29.7 28.4 27.3 25.7 25.6 25.5

Germany 27.1 25.7 26.7 28.0 28.1 29.2 29.4

Greek 41.2 42.7 44.5 41.3 35.3 36.8 35.8

Hungary 40.6 40.5 37.6 39.4

Iceland 59.9 61.1 51.3 48.7 44.8 40.8 41.0

Ireland 43.7 44.4 42.3 40.7 38.6 39.5 38.4

Italy 26.5 25.4 28.0 27.3 27.8 26.9 25.7

Luxembourg 21.5 24.3 24.8 26.6 27.4 27.3 28.1

Holland 25.2 25.6 26.4 27.2 29.1 30.8 31.8

Norway 35.3 37.5 35.5 38.6 32.1 31.5 31.2

Poland 35.2 36.3 34.7 35.8

Portugal 44.9 42.8 43.8 39.0 37.4 37.6 36.7

Slovakia 36.1 35.9 36.2

Spain 20.7 28.7 28.4 28.6 29.4 28.1 28.2

Swiss 24.0 26.6 25.0 27.8 24.2 26.4 26.3

Switzerland 20.5 21.9 21.2 21.9 22.5 22.6 23.3

Turkey 25.6 36.0 27.9 37.6 42.0 46.9 49.5

United Kingdom 29.2 31.5 31.0 35.4 32.0 32.6 32.7

OECD in total 32.4 33.7 31.9 32.4 31.7 31.8 32.1

OECD (only Americas) 33.8 38.5 32.9 32.4 31.1 30.9 32.3 OECD(only Pacific Region) 33.1 32.4 30.5 30.3 30.3 31.1 30.6 OECD (only Europe) 32.0 33.2 32.0 32.7 32.0 32.0 32.3

EU 19 31.1 31.6 31.5 31.9 31.3 31.3 31.4

EU 15 31.1 31.6 31.5 31.0 30.0 30.5 30,4

Source: OECD, Revenue Statistics of OECD Member Countr›es, Par›s, 2005 (Table 34) http://www.gib.gov.tr/fileadmin/HTML/VI/OECD/Tablo%2034.xls.htm.

4. TAXATION

COMPATIBILITY - TURKEY AND THE EUROPEAN UNION

The process of Turkey’s accession to the European Union started with the Ankara Treaty in September, 12th 1963 and continued into a new period by the acceptance of Turkey as a full-member candidate at the Helsinki Summit December, 10-11th 1999. Nowadays, one of the main obstacles facing Turkey is the Copenhagen Economic Criteria. To meet these criteria, it is necessary to restructure the economy, to have a free market economy and to provide for compatibility of tax legislation of Turkey and European Union legislation.

4.1 TAXATION LEGISLATION OF THE EUROPEAN UNION

The European Union is an economic integration in which member countries limit their sovereignty and alienate some part of it to the foundations of the Union. The responsibility of the European Union was widened by the Single European Act in 1986, the Maastricht Treaty in 1992, Treaty of Amsterdam in 1997 and the EU Constitution in 2004.

Tax policy is the symbol of national sovereignty for countries and tax policy in the EU is the responsibility of member countries.

The aim of the EU is not to standardize the obligatory taxes and payments, but rather it is aimed to help to achieve the target of the Founding Treaty of Union.

Tax regulations of the EU are legally based on The Treaty of Rome (articles 95, 96, 99, and 100) and The Treaty of Amsterdam (articles 90, 91, 93 and 94). These regulations cover capital movements, value added tax, direct taxation, indirect taxation, and administrative cooperation.

The target here is to provide taxation compatibility within the EU. Especially, the 90th article of The Treaty of Amsterdam aims to prevent discrimination in tax laws of member countries. In addition, by this article based on the target of free circulation of goods in a single market, it is aimed to prevent different taxation applications for the same kinds of products.

The EU aims to make the different national tax systems compatible with each other and the founding treaty rather than standardizing them. In this sense, 90-94th articles of The Treaty of Amsterdam are stated in Section 3 under the heading of Union Policy. Economic and social policies that member countries execute stay within their authorization area and taxation is used together with the target of economic and social policies of the EU, and thus the EU has taxation authorization.

Value Added Tax (VAT) was introduced in EU legislation by member countries in 1967. Instead of production and consumption taxes, VAT was applied by primary and secondary directives and by the 6th Council Directive number 77/338/EEC providing for identical application of VAT in all countries.

Besides the common determinations within the Union, it was found necessary to have additional precautions in place to reach the target of removing taxation limits.

Products are taxed in the country of purchase but eventually, when the final VAT system has been decided by the Council, they will be taxed in the country of origin. Thus, it is seen that taxation authorization is left to the country in which the products are consumed.

After the determination of a Single Market in 1993, people going to a foreign country and buying goods and services in that country had the right to pay same VAT as the people of that country. However, there is not a truly common rate of VAT for the member countries of the Union. Although the member countries are free to set a tax rate this rate cannot be lower than 15%

which is a minimum threshold limit, so member countries apply standard rates between 15% and 25%.

In order to facilitate market operations and to provide for the circulation of goods in a single market, compatibility of taxes from private consumption products has also been considered. Directives 92/79/EEC, 92/82/EEC and 92/83/EEC have been accepted. According to these directives, the contents of products have been determined and application methods for these taxes have been stated.

Not much progress has been recorded in the compatibility of direct taxation within the Union. In addition, a strategy report related to the future taxation policy of Union was prepared on May, 23rd 2001 and it was stated that the tax policies of the Union must support policies like The Lisbon Strategy. It was also stated that it is essential that the coordinated approach of member countries in taxation of establishments and people is a part of tax policy.

4.2 COMPATIBILITY OF TURKISH TAX SYSTEM WITH THE

EUROPEAN UNION

The integration period of Turkey to the EU started in 1959; it was legalized with the signing of the Ankara Treaty on September 12th 1963 and the Additional Protocol November 23rd 1970. The formation of a 3-stage customs Union between Turkey and the EU was stipulated in these documents. The relationship between Turkey and the EU is based on the formation of a customs Union and it aims to have free circulation of goods, services and people as well as the rapprochement of economic policies. Therefore, a cooperating relationship has been shaped to form an economic union. ⁹

There are taxation arrangements parallel to The Treaty of Rome in The Ankara Treaty and the Additional Protocol. In Article 2 of The Ankara

9 BÜYÜKTAfiKIN, fiener; “Turkey-EEC Relations and Options”, Maliye Dergisi, Nov-Dec 1979, p. 105

Treaty, the formation of a customs union between Turkey and the EU was considered and it was stated in the Article 10 that the customs union covers all trade of goods and it was also stated that the customs union covers “the reduction in customs tax in both imports and exports, the prohibition of all kinds of parallel effect measures, the acceptance of common custom rates in the relationship of Turkey with third countries and rapprochement to other Union policies about foreign trade”. Same dictums are given in Additional Protocol (Articles 7 and 17).

In this framework, a staged plan is determined for Turkey to remove customs tax and parallel effect financial responsibilities and to provide compatibility to the common customs rate of the Union. 12-year reductions for some kinds of goods and 22-year reductions for some kinds of goods have been stipulated in terms of customs tax. 12 and 22- year schedules have been determined for compatibility with the common customs rate of the Union.

In Article 16 of The Ankara Treaty, it has been stated that “sides of the agreement accept the need of the application of principles about competition, taxation and rapprochement of legislation placed in the 3rd section of the founding treaty of the Union. Beyond these dictums placed in The Ankara Treaty, more detailed arrangements about compatibility of taxation have been placed in The Additional Protocol and Joint Committee.

Article 16/3-4 of The Additional Protocol states that Turkey may transform customs responsibilities which are based on finances into internal tax or duty without discriminating against imported products. In this respect it has given authority to the Joint Committee to maintain financial customs responsibilities which would otherwise cause serious difficulties if they were transformed into internal tax and duty. Besides, with Article 7/2 of The Additional Protocol, authorization has been given to The Joint Committee about applying customs tax and parallel effect responsibilities to exports, and to increasing the extant obligations in order to achieve agreement aims. Article 43.2 of The Additional Protocol has a dictum about aid saying that “The financial aid used in the facilitation of economic reconstruction of Turkey is accepted as agreed with good cooperation unless they change trading conditions against the agreement”. Therefore, the application by Turkey on tax measures encouraging investment has no obstacles.

Dictums have been placed in The Additional Protocol parallel to Articles 95-98 of The Treaty of Rome which are accepted as the most important arrangements about taxation. Article 44 of The Additional Protocol includes principles about indirect taxes parallel to Articles 95 and 96 of The Treaty of Rome.

According to this dictum, putting more tax on products imported from EU countries than the tax put on the

same kind of domestic products, and tax returns exceeding domestic taxes on domestic product exported to EU countries, have been prohibited.

Article 45, which is identical to Article 98 of The Treaty of Rome, points out that exemption from taxes on trade between Turkey and the Union rather than operational taxes, consumption taxes and other indirect taxes, having tax returns on exports, and putting balancing taxes or duty on export depends on previous approval in a limited period by The Joint Committee.

The European Commission has been preparing Progress Reports related to the compatibility of candidate countries to EU policies since 1998 and in these reports, stages have been set out, legal arrangements to be performed have been stated, and the application of them by candidate countries has been explained.

In the Progress Report declared in November 2003, the things that Turkey has to perform have been stated. Some of the topics mentioned in this report are given below:

For indirect taxation, VAT structure put into operation in 1985 has been continuing. In addition, extra efforts are needed in some areas like content of exemptions, content of discount rates and content of private arrangements.

About the excise duties: although there is a partial compatibility, more compatibility is needed on this topic.

Specific taxes on cigarettes and transformation of taxes on alcohol drinks to a specific tax have great importance.

Tax levels applied to cigarettes and alcohol drinks are below the minimum amount of the EU, and tax exemptions (especially for alcohol drinks and mineral oils) are only partially compatible to EU legislation.

The acceptance of a tax delay system and dictums on tax-free zones are needed. The removal of The Tobacco Fund providing tax collection from imported tobacco and cigarettes since 1986 is very important. Paying attention not to discriminate against fuel used for naval trade is very important.

About direct taxation: extra efforts are needed to provide compatibility with EU legislation.

Turkey needs to concentrate on the rules of conduct for taxation of establishments. In addition, modernization and rehabilitation efforts have to be maintained. Extra efforts on electronic file transfer and data processing are needed.

Widening of geographical content of automation projects is very important.

It is pointed out in the Progress Report, declared by The European Commission on November, 5th 2003, that Turkey had made partial progress in the taxation area.

According to the report, in the area of legislation it is important to give more effort to taxation by paying special attention to the content of exemptions and discounted rates.

Compatibility work is needed on consumption taxes especially on the structure of taxes applied on tobacco and alcohol drinks. It is also important that Turkey applies a movements-certification regime, including tax postponement.

Additionally, more efforts have to be spent on the compatibility of indirect taxation, and Turkey needs to concentrate on the rules of conduct for taxation of establishments. To increase the tax collection and obedience of tax-payers, the modernization process of tax offices has to be continued and the reinforcement of their administrative capacity has great importance.

The Turkish tax regime is partially compatible to EU legislation according to the Progress Report declared in 2004.

For all areas related to the legislation, compatibility work is needed urgently, especially on the removal of discrimination on cigarettes and alcoholic drinks.

About VAT: progress is needed in terms of the content of exemptions and tax rates applied. On private consumption taxes, discrimination factors have to be removed from the legislation. Furthermore, Turkey has to expend more effort in the compatibility of direct tax. Concerning its administrative capacity, Turkey has to continue efforts on the modernization of tax offices, tax

collection and providing increases in the capacity of tax-payer compatibility.

Turkey has been working to eliminate insufficiency in taxation in the frame of a National Program which has been operating since July 2003. Compatibility work has been carried out on VAT, private consumption tax and indirect tax collections from corporate tax and capital gains tax.

Additionally, Turkey may join the Fiscalis (2003-2007) Program, one of the Union’s Programs related to taxation ¹⁰.

In 16th section of the Progress Report, “Taxation”, declared by the commission in 2005, declarations were given as below.

The legislation about taxation covers indirect taxes in detail, namely VAT and private consumption taxes. It specifies the content, principles and determination of VAT. Taxes on tobacco products, alcohol and energy drinks are dependent on EU legislation. About direct taxation:

the legislation covers some part of corporate tax and income tax collected from personal savings.

Additionally, the member countries have to obey the principles of code of conduct on corporate taxation aiming at the removal of negative tax measures. Administrative cooperation and mutual assistance between the member countries aim to facilitate better taxation in the domestic market and to prevent tax breaks.

The member countries have to

10http://www.deltur.cec.eu.int/default.asp?lang=0&pId=3&fId=10&prnId=21&hnd=1&ord=20

&docId=331&fop=0

provide much needed applications and monitoring capacities including access to the EU’s tax systems installed on computers. Turkey had made limited progress on taxation.

There hasn’t been solid progress on the compatibility of indirect taxes with VAT legislation. Solid improvements are needed on issues like the content of exemptions, content of discount rates and levels to provide full compatibility to legislation. The legislation allows Turkey to apply 8%

of discounted VAT rate on foods, medical services, education and educational materials. However, having 2 different discounted tax rates, one of which is below 5%, does not match the legislation.

Related to private consumption taxes, Turkey has made some progress on the compatibility of tobacco products. Legislation changes accepted in July 2005 removed the discriminating taxes applied on tobacco products. This is not the case for imported alcoholic drinks, on which more taxes are applied compared to domestic alcoholic drinks. Customs taxes applied on alcoholic drinks do not match the legislation. Taxes differ depending on the alcohol content and the type of product and lower taxes are applied to imported alcohol drinks although the alcohol content of some domestic drinks, such as Raki, are the same as that of imported drinks. Private customs taxes applied on imported tobacco products can be considered as discriminating applications by The Tobacco Fund.

These kinds of applications are

inconsistent not only with the legislation but also with The Customs Union Agreement and the principles of the World Trade Organization.

Turkey should pay more attention to taxes and rates applied on tobacco products framed by the legislation as well as stopping any discriminating taxation and applications of The Tobacco Fund.

In the reporting period some progress has been recorded related to direct taxation. Turkey has made some modifications about free zones (standstill clause). More effort has to be spent in order to accomplish the compatibility work regarding direct taxation. As these measures are being implemented, Turkey has to avoid taking measures that contradict the principles of the code of conduct of business taxation.

Some improvements have been recorded in administrative cooperation.

In the area of administrative capacity, a law about an autonomous Tax Office which restructures the administration and connects central and local administrations has been introduced. The computerization of tax offices and giving ID numbers to tax-payers has been developed. A total of 300 tax offices which collect 95% of total tax income have been computerized and 38 million tax payers have been given ID numbers.

However, there is no Tax Legislation Strategy that encourages tax payers to pay their taxes, nor to provide for the use of information technology in tax offices.

5. CONCLUSION

Although tax administration and tax applications are parts of public administration, the determination of tax policies is part of the political function. Beginning with this concept, in most of the OECD countries and in modern tax offices, the function of tax legislation is insulated from the other functions.

Despite the differences in the approach of functional distribution, the main target should be the adoption of applications and techniques encouraging volunteer participation of tax payers, reinforcing tax security, providing a tax environment that supports development, and considering desires and preferences of social groups ¹¹. Taxation among the OECD countries is greatly different. These differences are most obvious in tax rates, and the goods and services groups taxed.

Although structures of income and corporate taxes have similarity in member countries, there are many differences in the application of private consumption taxes. Since most of the EU member countries are also members of OECD, existing

tax compatibility in the EU is applied automatically in EU and OECD countries. However, there appears to be a need for tax compatibility in the countries which are members of OECD but not members of the EU.

There have been some reforms to simplify tax laws in OECD countries in recent years. Tax rates have been decreased and tax assessments have been widened. Furthermore, while tax offices have been turned into functional organizational structures, special units have been formed for big companies in developed countries ¹².

The financial regime in Turkey partially matches the legislation.

However, a legal regulation is needed related to the content of VAT, quality and rate of special consumption taxes as well as the need for regulation of direct taxation.

The EU has progressed a certain way in the compatibility of indirect tax and corporate tax. Since there are more disagreements on income tax among member countries, the progress seems to be slower.

As OECD declared ¹³:

11 Keramettin TEZCAN-Adnan GERÇEK-Mustafa Ali SARILI, “Relative Structure of Tax offices of OECD Countries and The Evaluation of Restructuring of Internal Revenue Office in Turkey”, Recent Developments in Public Finance – 21st Finance Symposium of Turkey, May,10-14th 2006, Antalya, pp. 18-21

12 The studies of Ministry of Finance in this area reaches the last stages and it is stated that tax offices will be formed for big companies.

13http://www.zaman.com.tr/webapptr/haber.do;jsessionid=0751228B5A66926F2F0DD5CFE6 9647.node3?haberno=270892 http://www.hurriyet.com.tr/ekonomi/5261019.asp?sd=3

http://www.malihaber.com/modules.php?name=News&file=article&sid=276 http://www.sabah.com.tr/2006/10/13/eko107.html

“-Turkey occupies 19th place among world countries in the tax rate index which has been formed by the sum of total rates of income, corporate, wealth (property) tax, VAT and social security payments.

Turkey left the USA, Switzerland, the UK, Germany, Canada, Ireland, Australia and Denmark behind by an index value of 124.5”

-According to the report prepared by OECD and International Energy Agency with regard to international statistical financial data, Turkey is in 1st place with a tax rate of 42.1%

among 26 countries in taxes from employment. Following countries are: Poland with a rate of 41.3%, France with a rate of 40%, Sweden with a rate of 39.5%, Belgium with a rate of 39%, Italy with a rate of 35.5% and Greece with a rate of 34.3%. The lowest tax rate, 13.6%, is in South Korea. The USA follows South Korea with a rate of 15.5%, then comes Mexico with a rate of 15.6% and Switzerland with a rate of 17.8%.

- Turkey leads on income tax rate with a rate of 45%, than comes Denmark with 38.3%, Sweden with 31% and South Korea with a rate of 30%. The country having the lowest income tax rate is Russia with a rate of 12%. China, Germany, Greece and Netherlands precede this country with a rate of 15%.

- In corporate tax rates, Turkey occupies 5th place with a rate of 33% ¹⁴ after Belgium, Spain, Netherlands and Greece, with rates of 40.2%, 35%, 35% and 35% respectively.

- It has been determined that Turkey, collecting taxes at 7% of Gross National Domestic Product, is the 3rd OECD country after Mexico and The Republic of Slovakia which are the countries collecting the lowest amount of tax from income.

- According to OECD taxation data (ratio of total tax income to Gross National Domestic Product) Turkey had a figure of 32.3 in 2000 and 32.3 again in 2005 despite small fluctuations between the periods. It has also been noted that Turkey, with a ratio of 32.3, has more taxation charges than countries like The Republic of Slovakia, Mexico, USA, South Korea, Ireland, Switzerland and Japan.

In parallel with the globalization issue fed by world-scale political and economic transformations during the 1990s, the period of interaction and integration of social, political and economic structures of course caused new opportunities and new risks. After the major economic crisis that we survived in recent years, it has been inevitable to take some strategic decisions in legal, political and economic areas.

In this sense, we have a vision that it is very important to have a legal infrastructure which matches the needs and realities of the modern era. The acceptance of new Civil Laws and Penal Laws, the structuring of a new Commercial Law, the acceptance of new Corporate Tax Laws to restructure the tax system as well as the

rewriting of our Income and Tax Procedure Law to facilitate our economic and financial targets are paramount.

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