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Cablegate: Information On Turkish Foreign Free Trade

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

UNCLAS SECTION 01 OF 03 ANKARA 002336

SIPDIS


STATE FOR E, EB AND EUR/SE
TREASURY FOR OASIA
DEPT PLEASE PASS USTR FOR LERRION
FAS FOR ITP/THORBURN
USDOC FOR 5102/FOREIGN TRADE ZONES (ITA/IA)


SENSITIVE


E.O. 12958: N/A
TAGS: ECON ETRD EFIN TU
SUBJECT: INFORMATION ON TURKISH FOREIGN FREE TRADE
ZONES


REF: SECSTATE 72748


SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY


1. (U) THE TURKISH FOREIGN TRADE UNDERSECRETARIAT
PROVIDED THE FOLLOWING INFORMATION KEYED TO REFTEL
QUESTIONS ON TURKISH FREE ZONES (FZS) RULES AND
APPLICATIONS. THE FOLLOWING IS A TRANSLATION OF
FOREIGN TRADE'S WRITTEN RESPONSE:


2. (U) BEGIN INFORMAL EMBASSY TRANSLATION:


A. WITH THE AIM OF INCREASING AND PROMOTING EXPORT-
ORIENTED INVESTMENT AND PRODUCTION, SINCE 1987 21 FREE
ZONES HAVE BECOME OPERATIONAL WHICH ARE, AT THE
MEDITERRANEAN REGION, MERSIN (1987), ANTALYA (1987),
ADANA YUMURTALIK (1999) FREE ZONES, AT THE AEGEAN
REGION, AGEAN (1990), IZMIR MENEMEN-LEATHER (1998),
DENIZLI (2001) FREE ZONES, AT THE MARMARA REGION,
ISTANBUL ATATURK AIRPORT (1990), ISTANBUL-LEATHER AND
INDUSTRY (1995), ISE ISTANBUL INTERNATIONAL STOCK
EXCHANGE (1997), ISTANBUL THRACE (CATALCA) (1998),
EUROPA (1999), BURSA (2001), KOCAELI (2001) AND TUBITAK-
MARMARA RESEARCH CENTER TECHNOLOGY (2002) FREE ZONES,
AT THE SOUTHEAST ANATOLIA REGION GAZIANTEP (1999),
MARDIN (1995) FREE ZONES, AT THE BLACK SEA REGION,
TRABZON (1992), RIZE (1998), SAMSUN (1998) FREE ZONES,
IN THE CENTRAL ANATOLIA AND EASTERN ANATOLIA REGIONS,
KAYSERI (1998) AND EASTERN ANATOLIA (ERZURUM) (1995)
FREE ZONES, RESPECTIVELY.


THERE IS ONE TYPE OF FREE ZONE BUT ALL THE ACTIVITIES
SUCH AS PURCHASING-SELLING, ASSEMBLING-DISSEMBLING,
WAREHOUSING, MANUFACTURING, ETC. CAN BE PERFORMED
THERE. THE COUNCIL OF MINISTERS HAS THE AUTHORITY TO
DETERMINE THE LOCATION AND BOUNDARIES OF THE FREE
ZONES. THE COUNCIL OF MINISTERS GRANTS PERMISSION FOR
THE ESTABLISHMENT AND OPERATION OF FREE ZONES TO PUBLIC
INSTITUTIONS AND AGENCIES, RESIDENT OR NON-RESIDENT
REAL PERSONS OR LEGAL ENTITIES.


EMBASSY COMMENT:
MOST TURKISH FZS HAVE NOT BEEN SUCCESSFUL IN ATTRACTING
SIGNIFICANT FOREIGN DIRECT INVESTMENT. THEY HAVE ALSO
BEEN NET GOODS IMPORTERS FOR TURKEY. END COMMENT.


B. AT THE TOP OF THE FREE ZONES ADMINISTRATION STANDS
THE UNDERSECRETARIAT FOR FOREIGN TRADE, DIRECTORATE
GENERAL OF FREE ZONES. THE DIRECTORATE GENERAL OF FREE
ZONES IS RESPONSIBLE FOR SETTING PRINCIPLES AND
POLICIES FOR ESTABLISHMENT, ADMINISTRATION, AND
MANAGEMENT OF FREE ZONES; CONDUCTING RESEARCH,
PLANNING, AND COORDINATION ACTIVITIES; DETERMINING AND
EXAMINING THE ACTIVITIES IN FREE ZONES; GRANTING AND
CANCELING OPERATING LICENSES TO ENGAGE IN COMMERCIAL
ACTIVITIES IN FREE ZONES.


AT THE LOCAL LEVEL, THERE ARE FREE ZONE DIRECTORATES AT
EACH ZONE. ZONE DIRECTORS REPORT TO THE GENERAL
DIRECTOR OF FREE ZONES AND THEY ARE RESPONSIBLE FOR THE
NECESSARY SUPERVISION, INSPECTION, AND IMPLEMENTATION
IN THE ZONES.


THERE ARE ALSO ZONE OPERATOR OR ZONE FOUNDER AND
OPERATOR COMPANIES AT EACH ZONE THAT ARE RESPONSIBLE
FOR PROVIDING OF SERVICES AND UTILITIES, BUT THAT DO
NOT HOLD ANY ADMINISTRATIVE POWER.


THE ENTRY AND EXIT POINTS ARE CONTROLLED BY CUSTOMS.


C. IN ORDER TO ENGAGE IN OPERATIONS IN FREE ZONES, AN
OPERATING LICENSE SHOULD BE GRANTED BY THE
UNDERSECRETARIAT FOR FOREIGN TRADE, DIRECTORATE GENERAL
OF FREE ZONES. THE ASSESSMENT OF AN APPLICATION TAKES 5-
7 DAYS IF THE DOCUMENTS ARE COMPLETE. AFTER APPROVAL OF
THE APPLICATION, THE APPLICANT SHOULD MAKE A RENTAL OR
SALE CONTRACT FOR OFFICE AND ACTIVITY SPACE. AFTER THE
CONTRACT IS SENT TO THE UNDERSECRETARIAT FOR FOREIGN
TRADE, THE LICENSE CAN BE GRANTED IN 3-5 DAYS.


D. YES. IN CONTRAST TO MOST FREE ZONES IN THE WORLD,
SALES INTO THE DOMESTIC MARKET ARE ALLOWED (SEE ALSO
ANSWER E). THE ADVANTAGES PROVIDED IN THE FREE ZONES
ARE AVAILABLE TO ALL FIRMS REGARDLESS OF THEIR ORIGIN.
THERE IS NO DISCRIMINATION BETWEEN FOREIGN OR DOMESTIC
INPUTS.


E. LEGISLATIVE PROVISIONS PERTAINING TO CUSTOMS AND
FOREIGN EXCHANGE OBLIGATIONS ARE NOT APPLICABLE IN
THESE ZONES. SINCE THE TRADE CONDUCTED BETWEEN TURKEY
AND THE FREE ZONES IS SUBJECT TO THE FOREIGN TRADE
REGIME, FREE ZONE USERS CAN PURCHASE GOODS AND SERVICES
FROM TURKEY. SINCE FREE ZONES ARE PART OF THE TURKEY-EU
CUSTOMS TERRITORY, THE GOODS OF THIRD COUNTRY ORIGIN
THAT ARE NOT IN FREE CIRCULATION ARE SENT TO THE EU
COUNTRIES BY AN A.TR CERTIFICATE (NOTE: THIS IS A
CUSTOMS CERTIFICATE USED WHEN IMPORTING THIRD COUNTRY
GOODS TO EU COUNTRIES. END NOTE), ONLY AFTER THE
CUSTOMS DUTIES ARE PAID OVER THE RATES DETERMINED IN
THE COMMON CUSTOMS TARIFF.


CUSTOMS DUTIES, VALUE ADDED TAX AND OTHER LEVIES SHOULD
BE PAID WHEN THE GOODS ARE LEAVING FOR THE HOME MARKET.
(IN TURKEY'S CASE THIS TRANSACTION IS CALLED AN IMPORT
AS THE FREE ZONES ARE DEEMED TO BE OUTSIDE OF THE
CUSTOMS TERRITORY). THE VALUE IS DETERMINED ACCORDING
TO THE STATUS OF THE GOODS. IF THE GOODS ARE IN FREE
CIRCULATION ACCORDING TO THE TERMS OF THE CUSTOMS UNION
DECISION BETWEEN TURKEY AND THE EU, THERE IS NO CUSTOMS
DUTY. THE IMPORTER PAYS THE DUTIES, NOT THE
MANUFACTURER. THE RATE IS DETERMINED ACCORDING TO THE
STATUS OF THE GOODS. IF THE GOODS ARE IN FREE
CIRCULATION, THERE IS NO CUSTOMS DUTY. HOWEVER, IF A
THIRD-COUNTRY COMPONENT/INPUT IS INVOLVED THE DUTY RATE
IS DETERMINED ON THE VALUE ADDED IN THE ZONE. IF THE
PRODUCT IS COMPLETELY OF THIRD COUNTRY ORIGIN, THEN THE
RATE IS DETERMINED USING THE VALUE OF THE FINISHED
PRODUCT. THE MANUFACTURER HAS NO CHOICE OF RATES. THE
SAME RULES APPLY FOR ALL IMPORTERS.


F. THERE ARE NO SPECIAL PROVISIONS (FOR SMES OR NEW
FDI).


G. BY THE LAW NO. 5084 ON THE ENCOURAGEMENT OF
INVESTMENTS AND EMPLOYMENT AND AMENDMENT OF CERTAIN
ACTS, DATED 6.2.2004, NEW ARRANGEMENTS ARE MADE
REGARDING TAX INCENTIVES IN THE FREE ZONES LAW NO.
3218.


EMBASSY COMMENT:


TAX INCENTIVES ARE GOVERNED BY ARTICLE 6 OF THE FREE
ZONES LAW. BEFORE THE LATEST CHANGES, THIS ARTICLE
STATED THAT THE PROVISIONS OF TURKISH LAWS CONCERNING
TAX, DUTY, AND CHARGE LIABILITIES DID NOT APPLY IN FREE
ZONES AND THAT INCOME SECURED IN FREE ZONES WAS IMMUNE
FROM INCOME AND CORPORATE TAX WHEN IT WAS BROUGHT INTO
OTHER PARTS OF TURKEY. THE CHANGE MADE BY ARTICLE 8 OF
STATUTE 5084 REVISES ARTICLE 6 OF THE FREE ZONES LAW
AND EFFECTIVELY ELIMINATES THESE TAX IMMUNITIES. UNDER
THE NEW RULES:


1. TAXPAYERS WHO POSSESSED AN OPERATING LICENSE AS OF
FEBRUARY 6, 2004 WILL NOT HAVE TO PAY INCOME OR
CORPORATE TAX ON THEIR EARNINGS IN THE ZONE FOR THE
DURATION OF THEIR LICENSE.


2. THE EARNINGS THAT TAXPAYERS ENGAGED IN MANUFACTURING
ACTIVITIES IN THE ZONE SECURE FROM THE SALE OF THE
PRODUCTS WILL BE EXEMPT FROM INCOME TAX AND CORPORATE
TAX UNTIL THE END OF THE YEAR IN WHICH TURKEY BECOMES A
FULL MEMBER OF THE EUROPEAN UNION.


3. IF EARNINGS THAT ARE SECURED IN A FREE ZONE UNDER A
CORPORATE TAX IMMUNITY ARE DISTRIBUTED (PAID AS A
DIVIDEND) TO REAL-PERSON SHAREHOLDERS IN TURKEY OR TO
REAL-PERSON OR LEGAL-ENTITY SHAREHOLDERS ABROAD, THEY
WILL BE LIABLE FOR WITHHOLDING AT THE RATE OF 10
PERCENT.


4. THE INCOME TAX IMMUNITY APPLICABLE TO THE WAGE AND
SALARY INCOME EARNED BY PERSONS EMPLOYED IN THE ZONE BY
TAXPAYERS POSSESSING AN OPERATING LICENSE AS OF
FEBRUARY 6, 2004 WILL REMAIN IN EFFECT UNTIL DECEMBER
31, 2008, EXCEPT THAT THIS IMMUNITY WILL CEASE IF THE
OPERATING LICENSE EXPIRES BEFORE THAT DATE.


5. THE CHANGES INTRODUCED BY THE NEW LAW HAVE NO
IMPACT ON VAT, PCT (PRIVATE CONSUMPTION TAX), AND
CUSTOMS DUTIES. FOR THIS REASON, SALES MADE FROM TURKEY
INTO FREE ZONES WILL CONTINUE TO BE TREATED AS EXPORTS
AND SUCH SALES WILL NOT BE LIABLE FOR THESE TAXES. END
COMMENT.
H. THERE ARE NO OTHER FINANCIAL INCENTIVES.
I. ONLY: PROVISIONS OF MUNICIPALITY LAW NR. 1580 EXCEPT
PARAGRAPHS 5, 22, 25, 32 AND 47 OF ARTICLE 15; PASSPORT
LAW NR. 5682; LAW NR. 5683 FOR FOREIGNERS TRAVELING AND
RESIDING IN TURKEY AND LAW NR. 2007 ON PROFESSIONS AND
SERVICES ALLOCATED FOR TURKISH CITIZENS INCLUDING ITS
ANNEXES AND AMENDMENTS; FOREIGN INVESTMENT AND
ENCOURAGEMENT LAW NO 6224; LAW NR. 2677 ON THE
IMPLEMENTATION OF DUTIES AND SERVICES AT THE CIVILIAN
AIRPORTS, PORTS AND BORDER GATES ARE NOT APPLICABLE.


J. THE ADVANTAGES PROVIDED IN THE FREE ZONES ARE
AVAILABLE TO ALL FIRMS REGARDLESS OF THEIR ORIGIN.
THERE ARE NO LOCAL CONTENT, EXPORT OR OWNERSHIP
REQUIREMENTS IN THE TURKISH FREE ZONES. THIS RULE
APPLIES IN THE CUSTOMS TERRITORY AS WELL.


COMMENT
-------


3. (U) THE GOT'S RATIONALE FOR CUTTING BACK FREE ZONE
TAX INCENTIVES - A MOVE STRONGLY ENCOURAGED BY THE IMF
AND WORLD BANK -- IS TO ELIMINATE A SOURCE OF UNFAIR
COMPETITION, GAIN TAX REVENUE AND COMPLY WITH EU
DIRECTIVES. THERE IS ALSO THE PERCEPTION IN PARTS OF
THE GOT, PARTICULARLY OUTSIDE THE FOREIGN TRADE
UNDERSECRETARIAT, THAT THE FZS HAVE DONE MORE TO
FACILITATE IMPORTS THAN EXPORTS.


4. (SBU) MANAGEMENT OF ONE OF THE MORE SUCCESSFUL FREE
ZONES - THE AEGEAN FZ OUTSIDE IZMIR - TOLD ECONOFF IN
MARCH THAT THE DRAMATIC CUTBACK IN INCENTIVES WOULD
HURT BOTH EXISTING INVESTORS IN THE FZ AS WELL AS
SERIOUSLY COMPROMISING EFFORTS TO ATTRACT NEW
INVESTORS. MANAGEMENT INDICATED THAT IT WAS
CONSIDERING LEGAL ACTION TO COMPEL THE GOT TO CANCEL
THE RECENT LEGAL AMENDMENTS OR PROVIDE COMPENSATION.
HOWEVER, THE DIRECTOR GENERAL OF FREE ZONES AT THE
TURKISH FOREIGN TRADE UNDERSECRETARIAT HAS SAID THAT
THE FZ OPERATORS AND TENANTS HAD NO LEGAL RIGHTS TO
THESE INCENTIVES OR TO COMPENSATION FOR THEIR
CANCELLATION.


5. (U) POST PLANS TO REPORT FURTHER ON FZS IN THE
UPCOMING INVESTMENT CLIMATE STATEMENT. IN THE INTERIM,
WASHINGTON AGENCIES MAY CONTACT DEFNE SADIKLAR ARSLAN,
ECONOMIC SPECIALIST, WITH ANY FURTHER QUESTIONS ON FREE
ZONES, EMAIL: SADIKLARD@STATE.GOV, PHONE: 312 455 5555,
EXTENSION 2257.


EDELMAN

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