VZCZCXYZ0008
PP RUEHWEB

DE RUEHAK #0298/01 0561535
ZNR UUUUU ZZH
P 251535Z FEB 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 8900
INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 5431
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RHEHAAA/NSC WASHDC PRIORITY

UNCLAS ANKARA 000298 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR FRANCISCO PARODI, JOANNA VELTRI AND JASON WEISS 
EUR/SE AND EUR/PPD FOR STEFANIE ALTMAN-WINANS 
 
E.O. 12958: N/A 
TAGS: KPAO ECON TU
SUBJECT: TAX FRAUD CHARGE AGAINST DOGAN MEDIA SEEN AS 
EFFORT TO SILENCE OPPOSITION PRESS 
 
REF: A. 08 ANKARA 1723 
     ¶B. 08 ANKARA 1643 
 
 ¶1. (SBU) Summary: The GOT Revenue Administration charged 
Dogan Media with criminal tax fraud on November 18 and 
imposed a TL 860 million ($505 million) fine.  Dogan and the 
opposition CHP party claim the charges are intended to 
silence Turkey's largest media company, which has lately been 
critical of the ruling AKP.  The criminal charge follows an 
acrimonious and public argument in September between Prime 
Minister Erdogan and Dogan Group Chairman Aydin Dogan over 
Dogan press reports on the Deniz Feneri scandal (reftels).  A 
long court battle is likely.  Dogan Media views the size and 
criminal nature of the charges as an existential threat, but 
also as the inevitable result of their critical reporting on 
AKP.  If this case succeeds in changing the tone of Dogan 
Media's coverage of the AKP, it may explain why the GOT has 
long opposed Revenue Administration independence in IMF 
negotiations. End summary. 
 
¶2. (U) The Finance Ministry,s Revenue Administration 
(equivalent to the IRS) charged the Dogan Media company with 
tax fraud on February 18 and imposed a TL 860 million (USD 
$505 million) tax penalty.  The tax fraud charge mainly 
relates to the timing of the sale of 25% of the company to a 
German media company.  Dogan registered the sale in 2007, but 
the Revenue Administration ruled the sale actually took place 
between 2004 and 2006 and taxes should have been paid at that 
time.  Dogan Media owns top-selling dailies Hurriyet and 
Milliyet and national broadcasters CNN Turk and Kanal D.  The 
penalty and charge seriously depressed the share price of 
Dogan Media and its parent, Dogan Holding, which fell 21.5% 
and 18.5% respectively on February 18. 
 
¶3. (U) The tax charge quickly became a political issue, with 
Dogan Media's chief executive labelling the tax penalty "a 
fine against the freedom of the press," with a similar 
condemnation coming from Deniz Baykal, leader of the 
opposition CHP. On the campaign trail, PM Erdogan denied that 
the Revenue Administration,s decision was political or aimed 
at silencing the Group,s journalists. 
 
¶4. (SBU) Both the size of the fine and the criminal charge 
were very unusual.  The fine is substantially larger than 
Dogan Media's current TL 315 million ($185 million) market 
capitalization.  In 2007, a record TL 1 billion civil tax 
fine against Dogan Holding subsidiary Petrol Ofisi (Turkish 
Petroleum company) was negotiated between the firm and the 
tax authorities down to 28% of the original fine.  However, 
the Revenue Administration's decision to pursue this as a 
criminal case not only increased the fine to three times the 
alleged unpaid tax but also rules out the possibility of 
arbitration.  The criminal charge also enables prosecutors to 
bring criminal charges against the company's board members, 
including its Chairman, Aydin Dogan, the most powerful person 
in the Turkish media business. His conglomerate, Dogan 
Holdings, operates in 12 countries with 20,000 employees, 
controls seven Turkish newspapers, a wire service, three 
network TV stations, and a range of specialty digital 
channels, radio stations, internet sites, a publishing house 
and numerous magazines, as well as gasoline, electricity, 
tourism and other interests. 
 
¶5. (U) The charge comes after an acrimonious debate in 
September between Prime Minister Erdogan and Dogan Holding 
owner and Board Chairman Aydin Dogan, in which the two 
publicly traded personal attacks for more than two weeks. The 
battle related to Dogan Media reporting on a German court,s 
conviction of three men for transferring money from the Deniz 
Feneri charity to non-charitable causes allegedly connected 
to the AKP (ref B).  Erdogan characterized the coverage of 
the case in the Dogan Media as "media terror" and called on 
his supporters to boycott Dogan newspapers.  Dogan replied by 
accusing Erdogan of seeking to silence independent media 
groups. Erdogan again called for a boycott on Dogan papers in 
January of this year when he felt remarks he had made about 
the Gaza conflict were misreported.  &Let's boycott the 
media that covers false stories,8 he said. 
 
¶6. (SBU) In a January 23 meeting with the Ambassador, 
Hurriyet Editor-inChief Ertugrul Ozkok complained that GOT 
financial inspectors had been poring over the company's 
financial records for over six months.  Huriyet Daily News 
Editor-in-Chief David Judson and Hurriyet's Ombudsman and 
Corporate Communications Director Temucin Tuzecan told us 
this week that while Dogan Holdings had expected some sort of 
 
fine, the outcome is worse than they had expected both in the 
nature of the charge and the sheer size of it.  Judson 
believes that this is an "existential" case of PM Erdogan's 
revenge - not just for Deniz Feneri, but for what he 
perceives as Dogan's lack of support during the AKP closure 
case and the Ergenekon investigation.  As such, while this 
plays into ballot politics, Dogan does not believe the Prime 
Minister will retreat after the March municipal elections, 
and has told Turkish and foreign media he intends to fight 
the assessment.  Tuzecan was surprisingly self-critical, 
saying he has told Dogan's senior leadership that the Group's 
critical approach to reporting on the AKP - done in its own 
self-interest - made this clash inevitable.  In his opinion, 
this episode shows the limit of Dogan's power and the 
consequences of the failure of the Group's media to be 
completely objective. 
 
¶7. (SBU) The charge also follows a reported statement by 
Treasury Minister Mehmet Simsek to London investment bankers 
in September, where Simsek was quoted as advising them to 
sell all their Dogan Holding shares because there &would not 
be any Dogan Holding8 within a year. (Note: we have only 
second-hand accounts of this alleged remark, reportedly made 
during an off-the-record meeting that Simsek had with his 
former investment banking colleagues in London.  End note.) 
 
¶8.  (SBU) However, Akif Beki, who was the Prime Minister's 
spokesman and chief advisor until December and is now a 
columnist at the Dogan Media newspaper Radikal, told PDOff 
that he does not believe the Prime Minister is behind these 
charges, noting Islamist-oriented Kanal 7 was hit with a $5 
million tax fine in 2003.  Rather, he believes this was a 
decision by the tax inspectors acting on their own judgment, 
although he conceded they may have been encouraged by the 
Prime Minister's anti-opposition media rhetoric. 
 
¶9. (SBU) According to Dogan Media, over 93% of the fine is 
related to the 2006 sale of shares to Axel Springer for euros 
375 million.  The sales transaction procedures began in 
November 2006 and ended on Jan. 2, 2007, when Alex Springer 
deposited the sale price and Dogan Media transferred the 
shares. Dogan Media paid TL 30 million in tax on this sale in 
April 2007.  Even though the money was deposited into Dogan 
Holding accounts in 2007, and the share transfer was executed 
on the same date, the Revenue Administration ruled that the 
sale took place in prior years and ordered Dogan Media to pay 
133 million TL in unpaid taxes from 2004-06 and 693 million 
TL in late charges and fines.  According to Sukru Kizilot, a 
respected tax expert and Hurriyet columnist, under the 
Turkish Commercial Code, the sale of shares of joint stock 
corporations is completed when the sale is recorded in the 
ledgers and the shares are delivered. 
 
¶10. (SBU) The charge is likely to lead to a protracted legal 
battle (Judson estimated it would take 2-7 years to work its 
way through the judicial process). Dogan management is 
appealing to the tax court, which is likely to refer it to 
the High Administrative Court (Danistay).  To initiate its 
appeal, Dogan Media had to pay a TL 948 million cash bond on 
February 23.  This likely will force the parent Dogan Holding 
Group to financially support Dogan Media and could limit the 
Group's expansion plans, including a bid in a 50-50 joint 
venture with Italy's Lottomatica on the privatization of 
Turkey's national lottery as well as plans to expand in the 
energy sector. This comes at a time of declining ad revenues 
and subsequent layoffs and downsizing at Dogan's TV channels, 
including a recent consolidation of the news operations of 
CNN-Turk and Kanal D. 
 
¶11. (SBU) Atilla Yesilada, a prominent economic and political 
analyst from Global Source based in Istanbul, told Econoffs 
that he personally knows most of the accountants of the Dogan 
Group, whom he said are all former certified auditors and 
&very careful people.8  Yesilada said there could be tax 
avoidance in this case, but not criminal evasion.   Yesilada 
also said the political conflict between the Dogan Group and 
the AKP was obvious, and that such a high tax fine in this 
situation could only be imposed in a &banana republic.8 
 
¶12. (SBU) Comment:  Foreign investors have long cited legal 
and regulatory uncertainty as one of their major concerns 
about investing in Turkey.  Turkish tax regulations are 
highly complex, leaving a lot of room for interpretation by 
tax investigators, and for political interference.  If this 
case succeeds in changing the tone of Dogan media's coverage 
of the AKP, it may explain why the GOT has deemed Revenue 
 
Administration independence to be politically unacceptable in 
negotiations with the IMF.  Reform and full autonomy for the 
tax administration agency has been an unresolved issue 
between the IMF and the GOT since 2001, and was recently 
cited as one of the outstanding issues in negotiations on a 
new Stand-By Agreement.  End Comment. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
Silliman