Turkey tightens vise on tax havens

Not much is known in Turkey about Guernsey — a tiny and prosperous island economy in the English Channel located to the northwest of France. It is a British crown dependency whose defense obligations and international representation were assumed by the UK, yet it is not part of the British Overseas Territories. It has a population of 65,000 and its size is roughly 32 times smaller in area than the Turkish capital.

This island recently appeared on the Turkish Parliament’s radar when the government submitted an agreement between Turkey and Guernsey on the exchange of information regarding taxation with an additional protocol on Aug. 1, 2012. The agreement was originally signed in London on March 13, 2012 between Mehmet Kilci, head of Turkey’s Revenue Administration, and Lyndon S. Trott, former chief minister of Guernsey.

The agreement aims to poke holes in tax evasion by providing a legal platform for the exchange of information between the relevant authorities and to possibly supply sensitive information for criminal proceedings against those who fail to pay their taxes in Turkey. It covers all taxes except the customs tariff, and there is no expiry date for this agreement. The agreement was debated in the parliamentary Foreign Relations Commission on Nov. 7, 2012 and was approved unanimously. It is currently on the agenda of the General Assembly for possible approval. The ratification process on Guernsey’s side has already been completed.

Guernsey is actually the top tax haven for companies, and the wealthy are attracted to this tiny island to exploit its low taxes and confidentiality in banking. The island generally taxes companies at zero percent. As such, its economy is fairly dependent on the financial and banking industries. After the US-led financial crisis of 2008 and amid the current sovereign-debt and growth woes in Europe, all tax havens have become the target of most governments who are increasingly concerned about the disappearance of national wealth and assets to these countries without paying their dues at home.

The issue was highlighted at the G-20 meetings attended by the world’s major economies held in London in 2009. World leaders have decided to crack down on secretive financial centers by announcing measures to force tax haven jurisdictions to clean up their act by agreeing to universal tax standards as laid down by the Organization for Economic Cooperation and Development (OECD). Turkey is one of the countries leading the campaign on these issues within the G-20. Turkey also signed the multilateral Convention on Mutual Administrative Assistance on Tax Matters during the G-20 meeting in the French city of Cannes in November 2011. The convention will help Turkey fight tax evasion overseas more effectively.

As part of the drive to bring down the number of tax evaders, Turkey is pursuing each and every jurisdiction to pressure these tax havens into signing treaties allowing government authorities to investigate the finances of the wealthy and of companies whether or not there are incidents of tax evasion. Guernsey, a non- EU member, is simply one of these countries Turkey identified as a possible tax evasion jurisdiction and therefore decided to establish a legal base from which to cooperate with Guernsey on tax issues. This is also important from the perspective of monitoring portfolio funds considering that in 2011, almost $600 million in portfolio investment came from Guernsey to Turkey.

According to a report by the UK-based financial transparency group, the Tax Justice Network (TJN), the amount of money kept in offshore bank accounts by Turkey’s wealthiest individuals and businesses is worth $158 billion. The amount is around one-and-a-half times the total foreign exchange reserves Turkey holds at home. In total, TJN claims that the amount of funds held offshore by individuals is about $11.5 trillion — with a resulting annual loss of tax revenue of $250 billion on the income from these assets. We do not know the exact figure of Turkey’s share in this loss, but it is estimated at billions of dollars in lost tax revenue.

A recent example that Revenue Administration investigators discovered in July was that a major mining company operating in Turkey set up a front company in the Virgin Islands and billed the export of marble as below the listed price to this “company” instead of the actual receiving company in another country. Therefore it evaded a large amount in taxes incurred from the sale because of the low prices it reported to Turkish authorities. It is obvious that this is an issue Turkey must urgently tackle. As the government finalizes deals with these tax haven countries, Turkish companies and businesspeople who hold large amounts of non-taxable funds in foreign banks will soon feel the heat.

Turkey signed a double taxation prevention treaty with Switzerland on June 18, 2010. The agreement, which is expected to take effect in 2013, enables the Finance Ministry to access information from the past five years on Turkish citizens’ accounts in Swiss banks in a bid to combat tax evasion. Since the agreement covers past years, the Turkish government would be able to identity Turkish citizens who have previously transferred funds from Swiss banks to other tax havens before the changes take place.

The government also signed a double taxation agreement with Luxembourg in October 2009, enabling the Finance Ministry to access information on Turkish citizens’ accounts in that country’s banks. The last agreement Turkey signed on financial information exchange was on Nov. 24 in London, where the deal was signed with the Jersey Islands. Kilci signed similar deal with Bermuda’s Premier Paula A. Cox on Nov. 1, 2012 in New York.

According to the Finance Ministry’s investigations, six jurisdictions out of 35 tax havens were identified as the places where Turkish nationals or companies transfer their wealth and money the most: the Bahamas, the Virgin Islands, the Cayman Islands, Jersey, Bermuda and the Isle of Man. The Finance Ministry has already signed various financial information exchange agreements with some of these top tax haven countries and is currently negotiating deals with the rest including Gibraltar, the Cayman Islands, the Bahamas, Barbados, the Virgin Islands, the Isle of Man, Seychelles and Panama.

All these agreements are crucial because portfolio funds are expected to flow into Turkey at a much faster rate following the rating upgrade for Turkey to investment grade by Fitch Ratings in November. The resilient Turkish economy is one of the best-performing emerging markets for portfolio funds in recent years and is well placed in the list of target countries by profit-hungry investors. Whether Moody’s and S&P, both still rating Turkey below investment grade, will follow suit remains to be seen. In the event that either one of them follows Fitch, the country could receive as much as an additional $100 billion over the next decade.

Even without these upgrades, according to central bank figures for the period between 2000 and 2010, the amount of foreign direct investment (FDI) soared, increasing eightfold and reaching $180 billion in 2010. A significant portion comes from these tax haven jurisdictions; therefore, it makes sense for Turkey to maintain pressure on these havens to collect more in tax revenue.

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