Cablegate: Meetings with Budget and Tax Officials

This record is a partial extract of the original cable. The full text of the original cable is not available.

101528Z Feb 04





E.O. 12958: N/A


1. (Sbu) Summary: Deputy General Manager for Budget Ahmet
Kesik described to econoffs the state of play on the 2004
budget, saying there is a TL 7 Quadrillion gap, of which TL
3.7 Quad stems from recent populist measures and 3.3 Quad
from lower-than-expected revenues in 2003. Kesik echoed
senior GOT officials' claims that the 10 percent
across-the-board cut in discretionary spending--proposed in a
supplementary budget sent to the Prime Minister--could be
implemented without seriously hurting government programs.
Kesik admitted, however, that the GOT may have to look to the
revenue side as well to close the gap. In separate meetings,
the Director General of Revenues and his Deputy described the
new strategic plan they are elaborating to achieve more
effective tax collection. Both the Revenue and Budget
officials claimed that the GOT-proposed reduction in VAT
rates--from 18 to 8 percent--on the textile sector would have
the (counterintuitive) effect of helping the fiscal situation
because textile sector export rebates on VAT exceed
collections. End Summary.

Budget Official on Fiscal State of Play:

2. (Sbu) In a meeting with econoffs January 28, Ahmet Kesik,
Deputy Director General for Budget in the Ministry of
Finance, shed some light on the state of play between the GOT
and the IMF on the 2004 fiscal situation. According to
Kesik, for 2004 there is a TL 7 Quadrillion gap (USD 5.2
Billion) between the primary surplus projected in the IMF
program and current estimates. Kesik said that the IMF
believes the gap may be higher, but Kesik stood by the GOT's
figures. He said that TL 3.7 Quadrillion of the gap arises
from the GOT's pension payment and minimum wage increases,
according to IMF calculations. (Kesik noted but that GOT
officials calculate the cost of these measures at TL 3.4
Quadrillion but he used the Fund's numbers.) The remaining TL
3.3 Quadrillion of the gap comes from the "base effect" of
lower-than-expected revenues in 2003. Of the TL 3.3
Quadrillion, Kesik said TL 800 Trillion stemmed from a
shortfall in VAT collections on petroleum products, because
petroleum prices had not been increased in the second half of
2003, whereas the 2003 budget projected price increases in
line with CPI inflation. Likewise, Kesik said the absence of
increases in electricity and natural gas prices had
contributed to the shortfall.

3. (Sbu) To begin bridging the gap, GOT officials have
prepared and proposed to the Prime Minister a package of
measures worth between TL 3.1 and 3.4 Quadrillion to be
included in a supplementary budget. With GOT officials keen
to avoid revenue-side measures, the central element of this
proposal is an across-the board cut of 10 percent nominal in
"discretionary" spending, excluding personnel costs. Kesik
claimed that these cuts could be implemented without hurting
the substance of government programs. According to Kesik,
these expenditure items had been slated to increase roughly
25 percent, i.e. substantially more than projected inflation,
such that a 10 percent cut should not be too damaging. Kesik
said that the cutbacks include military spending, although a
substantial share of military spending is off-budget in the
Defense Industry Support Fund. (Under the reform program,
however, this Fund will be phased out and all military
spending brought on budget by 2007.) So far, the military
seems to be accepting the need for the 2004 spending cuts.
More broadly, the GOT still needs to work out the total
package of compensatory fiscal measures with the IMF to close
the remaining gap. Subsequent to the meeting, the press has
reported that the GOT will announce an additional TL 3.0
Quadrillion of measures, consisting of TL 1.5 Quadrillion
from increased Special Consumption Taxes on fuels and TL 1.0
Quadrillion from a reduction in VAT rates from 18 to 8
percent (See below).

Revenue Issues:

4. (Sbu) In subsequent meetings, Director General for
Revenues Osman Arioglu and his Deputy, Bulent Tas, echoed
Kesik's contention that the GOT would increase revenue if it
decreased repeat decreased the VAT rate on textiles from 18
to 8 percent. Note: As reported reftel, IMF officials had
expressed skepticism about this proposal. End Note. Kesik
said this change would yield between TL 600 and 700 trillion.

5. (Sbu) Kesik and revenue officials argued that, because of
massive false invoicing, the GOT currently pays out more in
textile sector VAT tax rebates than it takes in via textile
sector VAT payments. According to the Revenue Directorate's
calculations, the textile sector accounts for 43 percent of
VAT export rebates, such that the proposed rate reduction
would reduce rebates paid out by TL 1.393 Quadrillion. On the
collection side, the Directorate attributes only 7 percent of
VAT collections to the textile sector, such that the proposed
rate reduction would reduce collections by only TL 691
trillion. The net saving of about TL 700 trillion
corresponds to the high end of Kesik's range. The Director
General went so far as to ask for the USG's help with the IMF
on this issue. Comment: While we have no reason to doubt the
GDR's estimates, we cannot help wondering why, instead of
reducing the VAT rate, the GDR does not crack down on
questionable export rebate payments--and underreporting of
VAT collections--through enhanced auditing of exporters'
rebates and collections. Subsequent to the meetings there
have been press reports, anonymously quoting GOT officials,
saying they have come up with a package to close the gap,
including the VAT rate reduction. Since the IMF has not yet
agreed to these measures, GOT officials seem to be
deliberately leaking its package as a way to pressure the
Fund. End Comment.

Improving Collections and the Unregistered Economy:
--------------------------------------------- -----

6. (Sbu) The two General Directorate of Revenues (GDR)
officials explained that a major priority was to improve tax
collections, via a campaign to bring the unregistered economy
into the formal sector. The GDR officials echoed earlier IMF
staff comments that, in Turkey, even large companies conduct
some of their operations outside the formal economy. Tas
emphasized the key to improving collections is to have a more
efficient tax administration. The tax administration
reorganization moves (see below) under consideration are
designed with improved collections in mind. In addition,
some of the specific actions the GDR is considering to
improve collections in the short run include a more automatic
system for VAT collection at gas stations, a reduction in the
threshold above which transactions are required to go through
banks, and working with local chambers of commerce to improve
compliance. Tas acknowledged that Turkey's history of tax
amnesties has not helped collections. In his meeting with
econoffs, Kesik noted wryly that, with 70 percent of revenues
deriving from indirect taxes, and 92.5 percent of direct
taxes deriving from withholding taxes on wages, the GDR
really should be able to concentrate on the relatively small
remaining tax base to improve tax collections.

Reorganization moves:

7. (Sbu) Both Tas and Arioglu expressed their appreciation
for the work of the U.S. Treasury tax advisors, who had
recently completed their second strategic planning workshop
with the GDR. The strategic plan that emerged from the
workshop was mentioned by Finance Minister Unakitan in a
recent press conference, and the tax advisors told econoff
the GDR, and even the Minister seem enthusiastic about it.
As part of the plan, the GOT would reorganize tax collection
in several key respects. At the local level, tax collection
is currently the responsibiltiy of the "Deftedars," i.e.
local offices that represent the broad spectrum of Ministry
of Finance issues. The reorganization would put tax
collection in the hands of local offices responsible only for
tax collection and reporting to the GDR. The GDR would also
gain more autonomy from the rest of the ministry, being
transformed into a tax administration agency. A large
taxpayer unit would also be established. The GDR's ideas are
receving GOT support so far; however, Tas noted that the
private sector tax advisory body, the "Tax Council" was doing
a separate study on the tax administration system.

8. (Sbu) Tas explained that the legislative vehicle for the
GDR's prosposed changes would be the much broader public
administration reform bill, currently being spearheaded from
the office of the Prime Minister. The new legislation is
expected to be submitted to parliament in late spring or
summer. Tas explained that part of the reform would be to
reduce the number of bodies doing tax audit work, thereby
improving coordination. Currently there are four, of which
two are in the Ministry of Finance: the Financial Inspection
Board, the Tax Audit Board. The GDR officials noted with
pleasure that the U.S. Treasury-facilitated plan basically
implements the kind of measures the IMF tax experts desired,
such that the IMF recommendations dovetailed with what GDR
was already doing.

Overreliance on Indirect Taxes:

9. (Sbu) Both Kesik and the GDR offiicals lamented the
Turkish state's overreliance on indirect taxation. Kesik
noted that the IMF would like to see a shift to more direct
taxation, as a means of broadening the tax base without
increasing tax rates. Tas remarked that the trend has been
for the GOT to raise indirect taxes when revenue was needed
because it is easier to do so: the GOT has the authority to
increase indirect taxes but has to get parliamentary approval
to raise direct taxes.

© Scoop Media

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