Cablegate: International Investors Association Sets 2008 Priorities

DE RUEHAK #2938 3451502
R 111502Z DEC 07




E.O. 12958: N/A

Ref: 06 Ankara 6734

1. (SBU) Summary: Moving Turkey's informal economy (still estimated
at over 40% of the Turkish workforce) into the formal economy and
tax rolls again topped the International Investors Association of
Turkey's (YASED) priorities for 2008. During their November annual
meeting in Ankara, YASED executive board members said they also plan
to push the government to reform its system of taxation and
incentives, reform vocational education, increase intellectual
property rights (IPR) protection, attract more research and
development (R&D), increase greenfield investment, and stay the
course on the EU accession process. These themes are not new and
mirror many of their priorities for 2007. End summary.

2. (SBU) The informal economy, estimated at over 40% of the Turkish
workforce, once again tops the list of international investor
concerns, primarily because of the tremendous tax burden it puts on
foreign companies who follow the rules. According to the Istanbul
Chamber of Industry survey of the top 500 industrial companies in
Turkey, foreign corporations employed 28% of the workforce in 2006,
but they pay a much larger share of the social security premiums and
labor taxes because so many Turkish companies operate wholly or
partly out of the tax system. YASED Secretary General Mustafa Alper
said that while economy-minded officials in the government admit to
the immense problem of the informal economy, there has not been much
focus on implementing the necessary reforms or making progress on
campaign promises since the elections.

3. (SBU) YASED's second, and related, priority is to see the
taxation and incentives system reformed. YASED would like to see the
taxation system changed so that the burden is more evenly shared by
domestic and international companies. During the Ambassador's
November 14 courtesy call with newly appointed Minister of Industry
and Trade, Zafer Caglayan, Caglayan outlined for us the new draft
commercial code his Ministry is preparing with the Ministry of
Justice. On incentive reforms, Caglayan mentioned moving away from
the regional incentive plans currently favored by the GOT and
focusing on attracting high-tech companies by offering tax cuts,
lower social security contributions, and subsidized energy prices.

4. (SBU) Items three through six on YASED's government agenda relate
to Turkey's push to attract greenfield investment from high-tech and
innovative companies. According to Alper, many firms interested in
investing in Turkey have difficulty finding the highly-trained
workforce needed for high-tech production. Therefore, YASED's board
plans to push the government to reform the educational system to
include more vocational education focused on technology.
Complementary to this is YASED's continued push to strengthen
intellectual property protection in Turkey, thereby increasing
investor confidence and international willingness to
produce/manufacture here. By strengthening education and
intellectual property protection, YASED expects FDI in the research
and development (R&D) sector will increase and bring the greenfield
investment and job creation that Turkey needs. As a final agenda
item, YASED members reaffirmed their support for the EU accession
process and will continue to encourage the government to stay the
course on reforms

5. (SBU) Comment: YASED's 2008 agenda indicates that very little
has changed in the past year as far as foreign investors are
concerned. The GOT's privatizations and the spate of recent bank
purchases injected much-needed foreign capital into Turkey's growing
economy. But Turkey has yet to see a shift in its foreign
investment mix from privatizations, mergers and acquisitions to
greenfield investment. That shift may require the government to go
forward with several painful economic reforms. End comment.

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