VZCZCXRO7790
PP RUEHDA
DE RUEHAK #0278 0450716
ZNR UUUUU ZZH
P 140716Z FEB 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 5230
INFO RUCPDOC/USDOC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHIT/AMCONSUL ISTANBUL 3876
RUEHDA/AMCONSUL ADANA 2694

UNCLAS ANKARA 000278 
 
SIPDIS 
 
USDOC FOR ITA/MAC/CRUSNAK 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON TU
SUBJECT: TURKEY: NEW GOT TAX IMPLEMENTATION UPSETS FREE TRADE ZONES 
 
¶1. (U) Summary: A recent communique issued by Turkish Customs levies 
additional taxes against companies operating in Free Trade Zones. 
This unforeseen change in tax policy substantially increased 
production costs in these zones.  The Aegean Free Trade Zone, which 
has majority U.S. ownership, was adversely affected by this new 
decision.  Deputy Prime Minister Hayati Yazici, who holds 
responsibility for Customs, reportedly visited ESBAS on February 7 
and directed Customs personnel to resolve this problem.  Even if 
there is a timely solution, however, this type of arbitrary and 
unexpected policy change sends a bad signal to potential investors 
at a time when Turkey is trying to attract greenfield investment. 
End summary. 
 
¶2. (SBU) Turkish Customs issued a circular on January 21, 2008, that 
required the companies operating in Free Trade Zones (FTZ) to pay 
Value Added Tax (VAT) on the goods they buy for investment, 
consumption and internal use.  Customs based its circular on a 1999 
law that called for all VAT-free materials entering into the FTZs to 
be used for production purposes.  The law states that materials to 
be used for consumption must pay regular VAT.  To date, the 
companies operating in FTZs have been exempt from all taxes, based 
on the 1985 legislation creating these zones.  Although the VAT 
legislation was passed in 1999, it has not been applied before to 
companies operating in the FTZs.  On January 21, however, Customs 
officers started inspecting all trucks bringing goods into these 
zones and requiring companies to pay VAT on materials they use for 
internal consumption purposes.  With the new and unexpected 
requirement to pay VAT on all operating expenses, including fuel for 
heating, the companies face significant cost overruns that have 
already caused some to stop production. 
¶3. (SBU) The new requirements had a serious negative impact on the 
Aegean Free Trade Zone (ESBAS), which is majority owned by the 
American company EAC Turkey International.  ESBAS Marketing 
Coordinator Ertugrul Isiksoy stated that this new interpretation of 
the law has caused significant problems to the companies operating 
in ESBAS, including interruptions in production and reluctance to 
make additional investment in the zone, which currently boasts 55 
million Euro worth of investment.  Isiksoy said Customs officers at 
the entrance to ESBAS have refused entry to trucks carrying 
construction material for new facilities until companies agree to 
pay VAT on these goods.  "Even the fuel our companies use for 
heating purposes is subject to VAT now," complained Isiksoy, "which 
imposes substantial a cost burden on them."  Isiksoy noted that 
Deputy Prime Minister Hayati Yazici, who oversees Customs, visited 
ESBAS on February 7, and directed his staff to find an immediate 
solution to the problem. 
¶4. (SBU) Comment: In recent years, the GOT has been taking important 
steps to improve its investment environment.  While the related 
changes in legislation brought positive developments such as faster 
and more efficient company establishment procedures and a 
streamlined bureaucracy focused on investment, the Turkish 
government must consider the investment implications of unexpected 
and arbitrary shifts in policy.  Such drastic changes that affect 
the operating costs of companies will only send a bad signal to 
companies looking to invest in Turkey. End comment. 
WILSON