Turkey’s civil aviation sector has developed and expanded dramatically both in domestic
and international arenas since the early 2000’s when the Justice and Development Party
(AKP) came to power.
The figures speak for themselves. The number of passengers passing through Turkish
airports in 2016 had reached 173 million, over five times the 34 million figure for 2003.
The figure for 2017 is expected to be over 190 million. The increase in the number of
domestic passengers has been especially remarkable with the 2003 figure of 9 million
surging up 10 times to 102 million in 2016. International routes also showed strong
growth from 25 million in 2003 to 71 million in 2016, an increase of 184%.
The main reason behind this dramatic growth was undoubtedly Turkey’s strong economic growth over the past 15 years. Turkey’s civil aviation
grew on the tail of this economic growth. There was keen interest by foreign investors in Turkey as a fast developing emerging market and capital
inflows were strong. Turkey’s geographical location as a crossroads between Europe, Asia and Africa also afforded a great opportunity for growth.
Most importantly was the increase in disposable income per capita creating strong demand and allowing more investment in infrastructure such
as domestic airports.
The rapid expansion in the number of airports in Turkey was a boost to domestic air transport. Turkey has presently 55 airports, the largest of
which have been built and are operated by the private sector. Airports operated on a public-private partnership (PPP) model handle 70% and
97% of Turkey’s domestic and international passenger traffic, respectively. The third airport for Istanbul, a giant USD 14 billion facility currently
under construction, is also a PPP project, designed to handle 200 million passengers per year. In order to attract further investment in the sector,
the Turkish government offered incentives which removed customs duties on jet fuel, and encouraged investment in new private airlines such as
Pegasus and also in charter services. At the end of 2016, the total number of planes operated by Turkish airlines was 540, of which 515 were
passenger aircraft, with a total with a capacity of more than 100,000 seats, and 25 were cargo planes.
Leading the sector’s rapid expansion was Türk Hava Yolları (THY), Turkey’s national carrier. THY was restructured with a view to enlarging its
foreign passenger market in particular, and within a short period, the company significantly expanded its fleet and added scores of new routes.
It was especially successful in attracting international transfer passengers with connecting flights in Turkey, through its membership of the Star
Alliance since April 2008, and Istanbul became an attractive global stopover hub as a result. THY currently has more than 330 aircraft including
passenger and cargo planes. In 2017, the total number of passengers carried by the airline reached 68.6 million, a 9.3% increase on the previous
year, and which represented a 79.1% occupancy rate in 2017, a figure 4.7% higher than that of 2016.
As of 2017, THY operates scheduled services to 302 destinations in Europe, Asia, Africa, and the Americas, making it the fourth-largest carrier in
the world by number of destinations. It serves more destinations non-stop from a single airport than any other airline in Europe. THY flies to
120 countries, more than any other airline. With an operational fleet of fourteen cargo aircraft, the airline’s cargo division serves 64 destinations.
İstanbul Atatürk Airport is its main base, and there are secondary hubs at Esenboğa International Airport, Sabiha Gökçen International Airport,
and Adnan Menderes Airport.
THY’s staggering growth was parallel to that of the Turkish economy, Just as the Turkish government took risks to expand the economy by
successfully betting on the availability of global funding and capital inflows to fund investments and current account deficits, so THY betted on
increasing demand from higher consumption levels in Turkey and higher international interest in visiting Turkey as a business, tourism or hub
destination. The bet seems to have paid off so far.
There have been claims that many of the decisions behind THY’s selection of new routes were political rather than economic. It would seem that
THY was prepared to fly anywhere in the world without due prior analysis of the financial costs involved. Some of the route decisions indeed
seemed very brave, as if THY assumed that it would generate the passengers by the simple knowledge that the route was now available.
With the recent increases in the cost of jet fuel, rising geo-political tensions, and the borrowing costs relating to the continual expansion of its
fleet of aircraft and routes, it has been suggested that the dream may finally be coming to a close. Indeed, THY closed 2016 with operating losses
of TL 374 million (USD 98.4 million), but to be fair, the airline was adversely affected by the failed coup attempt on July 15th, 2016, and was forced
to cut routes and carry out a major reorganisation. However, fears have since recently been allayed by the announcement by THY of an operating
profit of TL 639 million (USD 168.2 million) for 2017. THY also announced that its total sales revenue had risen to TL 39.7 billion (USD 10.4 billion)
in 2017, a 35% increase compared to 2016.
There have been claims that THY, despite being a public company with 51% of its shares traded on the Istanbul stock exchange, lacks transparency.
The remaining 49% of THY’s shares are owned by the state. and as a public entity linked to the Treasury, is not liable to an audit by the Court of
Accounts which controls public institutions on behalf of Turkish Parliament. THY’s state owned shares were transferred to the Wealth Fund, which
was founded in 2016.
The profit announced by THY for 2017 means that we will have to give the airline the benefit of doubt for another year. The prospects for the
airline over the coming few years may appear difficult as the Turkish economy is expected to slow down, as geo-political tensions continue, as the
airline moves to its new location at Istanbul’s new third airport, and as higher jet fuel costs continue.
Health insurance was introduced in Turkey in 1945, at first covering blue-collar workers and
later other groups, and from 1960 onwards, universal health coverage became a political
objective. Despite the new constitution in 1982 which guaranteed rights to health insurance
and health services, Turkish governments, faced by serious economic and other problems,
failed to give the necessary impetus and priority to improving health coverage and services.
As a result, universal coverage failed to materialise, and the poor and unemployed remained
without effective coverage. Although the “Green Card” scheme was introduced in 1992 to
cover low-income households, it was poorly coordinated and lacked will, and indeed provided limited financial assistance for inpatient
care and none for outpatient consultations, diagnostic tests, or medicines. The result was that this scheme failed to generate interest.
The Turkish health system, faced by insufficient and inequitable financing, a shortage and inequitable distribution of physical
infrastructure and human resources, and public dissatisfaction, was in a desperate state by the turn of the century. Turkey’s aggregate
health indicators lagged behind those of OECD member states and other middle-income countries. Less than 70% of the population was
insured and even those with insurance did not have adequate access to timely health services. The health financing system was
fragmented, with four separate insurance schemes and a “Green Card” programme for the poor, each with distinct benefit packages and
access rules. Both the Ministry of Labour and Social Security and Ministry of Health were providers and financiers of the health system,
and four different ministries were directly involved in the public health care delivery system.
However, in 2002, a new political party, the Justice and Development Party (AKP), won a parliamentary majority and created a
government committed to economic and social reforms. In 2003, it introduced a Health Transformation Program (HTP) that aimed to
improve public health, provide health insurance for all citizens, expand access to care, and develop a patient-orientated system that
could address health inequities and improve outcomes, especially for women and children. The 2003 Directive on Patient Rights defined
citizens' rights to health insurance and choice of health care providers. It clearly outlined providers' obligations regarding information
provision, confidentiality, and patient consent for interventions and established systems for citizens to express their views about health
Health reforms introduced between 2003 and 2010 separated the roles of policymaking, regulatory, financing, and service provision.
To this end, the Ministry of Health would focus on policy and strategy development, while other agencies oversaw public health and
delivery of personal health services. The Social Security Institution was established and given sole responsibility to manage funds from
contributory health insurance and the government-financed Green Card scheme, from which it would meet all risks and liabilities of
providing health services, including strategic purchasing from providers. Above all, it was charged with improving service quality and
efficiency. Between 2008 and 2012, Turkey's various insurance schemes were transferred to the newly established Social Security
Institution and merged to establish general health insurance with a unified risk pool and a harmonized benefits package covering
preventive health care and family medicine services (provided free at the point of delivery) plus targeted health promotion and
Family medicine primary care was introduced in 2005. By 2011, the Ministry of Health had contracts with 20,000 new family medicine
teams at 6,250 centres, providing expanded primary care services including prevention, women's and pediatric health care, mobile
health care for rural residents, and home care for the homebound. The number of primary care visits increased from 74.8 million in
2002 to 244.3 million in 2011.
Hospital capacity was expanded from fewer than 2.0 acute care beds per 1000 population in 2000 to 2.6 per 1000 in 2011. By 2010,
the Social Security Institution had contracted with 421 private hospitals (90% of large hospitals) to provide diagnostic and curative
care and complex emergency services such as burn care, intensive care, cardiovascular surgery, and neonatal care. Hospital visits,
including inpatient admissions, increased from 124.3 million in 2002 to 337.8 million in 2011, even as active purchasing by the Social
Security Institution drove efficiency gains by establishing tariffs for paying hospitals, reducing the average length of stay from 5.8 days
in 2002 to 4.1 in 2010, and improving occupancy from 59.4% in 2002 to 65.6% in 2011.
Utilisation of maternal and child health services and child mortality improved significantly between 2003 and 2008, especially among
rural and socioeconomically disadvantaged populations. Pregnant women having four antenatal care visits increased from 54 to 82%
between 2003 and 2010. Perhaps of most importance, the provision of free health care services for costly interventions and reduced
cost sharing greatly relieved high out-of-pocket. With 98% of the population insured by 2012, it was not surprising that satisfaction
with health services had grown from 39.5% in 2003 to 75.9% in 2011.
Between 2003 and 2011, the number of Green Card beneficiaries increased from 2.4 million to 10.2 million (13.8% of the population),
including more than 60% of those in the lowest income decile. A further 24% of the lowest population decile was covered by
contributory health insurance. Insurance coverage also improved in all other income deciles, and 85 to 96% of people in the top
deciles were covered by contributory health insurance by 2011. The cost of the Green Card scheme is scheme had however spiralled
up to TL 40 billion in 2010, and it was therefore reformed in 2011 such that the number of people who could benefit were reduced.
With the implementation of Law No 5510 Universal Health Insurance Law on 01.01.2012, the Green Card system was abolished. This
new law aimed to ensure all-inclusiveness for Turkey’s health system such that all insured and uninsured individuals which live in
Turkey have access to a comprehensive, fair and equitable service regardless of their economic status.
There were a number of reasons why the revolution in Turkey’s health system was so successfully implemented :
1. Turkey's population was receptive to reforms that promised health rights and better, more accessible care, and such popular
legitimacy helped to overcome the medical profession's resistance. New found political stability had invigorated Turkey after
20 years of ineffective governing coalitions, and the new government's absolute majority in the Grand National Assembly
permitted swift development and implementation of legislation and policies.
2. Sustained economic growth and a broadened tax base provided Turkey's government with the means to expand its
non-contributory insurance scheme, while rising employment levels helped increase coverage through contributory health
insurance. This economic growth enabled the government to increase health expenditures at an average annual rate of 9.1%.
Public-sector funding increased from 63% of total health expenditures in 2000 to 75.2% in 2010, the highest in the E7 group of
countries with emerging economies -- including Brazil (47%), China (53.6%), India (29.2%), Indonesia (49.1%), Mexico (48.9%),
and Russia (62.1%) — while health expenditures rose from 4.1% of the gross domestic product in 2002 to 6.1% in 2010.
3. Sustained support from the Council of Ministers helped to overcome opposition from medical professionals and the civil service
and a committed transformation team led by the health minister also provided continuity and strategic direction for the HTP,
mobilised provincial leadership, and addressed implementation challenges as they arose without requiring the support of other
ministries. Swift policy formulation and carefully planned and determined implementation helped fend off organised opposition
and bureaucratic resistance to reform. The Ministry of Health, having gained public support, also overcame well-organized
interest group opposition to the reforms by splintering their support or delegitimizing their views. Furthermore, Turkey asserted
its own domestic priorities over those of the IMF and World Bank in cases of direct conflict.
4. Reforms in the health system were achieved through comprehensive improvements which combined demand-side changes
(health insurance) with supply-side changes (increased human resources and strong primary care). Health services expansion
was made possible by increasing the size of the workforce; improving its distribution by means of compulsory service, higher
remuneration, and contracting; scaling up primary care services; strengthening emergency medical services; and enabling
insured people (other than Green Card holders) to choose private-sector providers.
5. Reforms in the health system were carefully sequenced, with flexible implementation taking into consideration public
receptivity to change. Major policy changes were implemented when the socio-cultural, economic, and political contexts were
favourable, and tactical changes, such as reduced co-payments and expanded choice of providers, were used to improve users'
experience of the health system, increasing their satisfaction and support. Indeed, public support provided legitimacy for
Turkey's reforms and helped to overcome opposition.
6. Implementation was facilitated in Turkey because the transformation team worked closely with field coordinators, who
oversee day-to-day operations and gather real-time intelligence to rapidly address implementation bottlenecks, such that the
scope, speed, and sequence of reforms could be refined where necessary. Turkey's transformation team drew on international
experience and collaborated with agencies including the World Bank, the World Health Organization, and the Organization for
Economic Cooperation and Development.
Turkey's experience shows that with committed leadership, middle-income countries can achieve universal health coverage and
simultaneously improve population health, financial risk protection, and user satisfaction. However, risks still lie ahead. Turkey needs
strong economic growth in order to sustain investments in a health system faced by increasing burdens of chronic illness and disability.
It also need close collaboration between the life-sciences industry, universities, and the health system in order to generate meaningful
research, development, and innovation, and must make more effort to meet the public’s increased expectations for an accountable,
transparent, and responsive executive.
The weekly ECONOMIST magazine published in its European edition, on January 4th, 2018, its article
“Firing on all cylinders. Turkey’s Economy is one of the world’s fastest-growing. But for how long ?”
“These have been testing times for Emin Taha and his Turkish transport company. The war against the
so-called Islamic State has reduced much of Mosul, Iraq’s second city and a big market for Turkish goods,
to rubble. Trade with Iraqi Kurdistan ground to a halt when the federal government in Baghdad reacted
furiously to an independence referendum in September. (It deployed troops to the contested city of Kirkuk,
seized the nearby oilfields and closed Kurdish airspace to international flights.) Mr Taha, whose company relies on trade with
Iraq for the bulk of its revenues, refused to give up. “We told our customers not to worry, to keep selling to Iraq, and that we
would stand by them,” he says. A 20m lira ($5m) loan backed by Turkey’s credit guarantee fund (KGF) helped the company
regain its footing and complete work on a number of projects, including new warehouses in Iraq.
Like Mr Taha’s business, Turkey’s economy is doing surprisingly well. In the third quarter of 2017 GDP surged by 11.1% year-on-year,
outperforming all major countries. This is partly because Turkey did so badly in the same period in 2016, when the economy shrank by
0.8% after a failed coup. But it owes more to a wave of easy credit that has washed over the country, helping thousands of companies
cope with the effects of a sharp drop in tourism, the imposition of emergency law, and a government crackdown that has cost 60,000
people their freedom. Under the recently expanded KGF, the government has provided 221bn lira in loans to small and medium-sized
businesses, Mr Taha’s included. Tax breaks have helped trigger an increase in household spending, which shot up by 11.7% in the year
to the third quarter.
Yet the outlook is not entirely rosy. Turkey’s current-account deficit has swelled from $33.7bn at the end of 2016 to $41.9bn
(4.7% of GDP) now. Foreign direct investment is roughly half what it was a decade ago. Stirred by the credit boom, the spectre of high
inflation, which haunted Turkey from the 1970s until the early 2000s, has returned. Prices surged by 13% in the year to November, the
highest rate in 14 years, and more than double the central bank’s target. Without fiscal and monetary restraint, a prolonged bout of
double-digit inflation may be in store, says William Jackson of Capital Economics, a London consultancy.
Years of political turmoil, terror attacks, rows with allies, and most recently fears of American fines against Turkish banks suspected of
violating sanctions against Iran, have also taken their toll on the country’s currency. The lira has lost about a tenth of its value against
the dollar since the start of 2017 and nearly 40% since early 2015. For Turkish companies, especially small ones, saddled with
foreign-currency debt worth a total of $211bn, this is bad news. In early December the government announced it would take measures
to prevent 23,000 of the weakest businesses from taking out more foreign-currency loans.
Scared stiff by Turkey’s authoritarian and growth-obsessed president, Recep Tayyip Erdogan, the country’s central bank has done little
to help, preferring to make cosmetic adjustments to its byzantine system of lending rates, instead of the decisive increase needed to
bring inflation under control. At its last meeting on December 14th, the bank raised its key rate from 12.25% to 12.75%, much less than
markets expected. Investors reacted by dumping the lira, which immediately nosedived, before recovering slightly. The bank is stuck
between a rock and a hard place, says Murat Ucer, an economist. “If they do nothing they risk a market backlash, and if they move
sharply they face a political one,” he says. Mr Erdogan may pile on even more pressure to keep rates low ahead of parliamentary and
presidential elections in 2019.
Either way, a slowdown this year looks inevitable. Turkey’s banks lack the funding base needed for another mass injection of credit
under the KGF, analysts say. Its companies have borrowed from abroad at a faster rate than any emerging market save China’s.
Global tightening will make it harder for them to keep doing so. Officials in Ankara predict growth of about 7% for the whole of 2017,
but expect a return to more modest levels this year. Hatice Karahan, a presidential adviser, and one of the few voices of economic
orthodoxy in Mr Erdogan’s circle, says Turkey needs to kick its addiction to debt and to invest in sustainable growth. That is easier
said than done. Turkish ministers have been promising economic reforms for a decade, and have failed to deliver each time. The
economy was firing on all cylinders in 2017. It is beginning to run out of gas.”
FINANCE IN TURKEY
Turkish Banking Sector
Just as Turkey underwent a drastic transformation during 2002–12 as a result of radical reforms on infrastructure and in the economy in general, so financial institutions adapted to meet the changing demands and expectations of customers in this new environment. More efficient, more inclusive and more responsive financial services based on latest technological advances had to be offered in order to maintain competitiveness.
Back in 2002, the Turkish banking system significantly involved investing depositors’ funds into high-yielding government bonds. It was a profitable business and the inflation-adjusted “real” yield on the government bonds averaged a quite high 15% between 2002 and 2005. Lucrative returns on that market left no real appetite for proper retail and/or SME banking. Of overall banking assets, 40% were invested into government securities, and the share of loans were as low as 23% at 2002 yearend. Bank loans were therefore expensive, with government bonds dominating the financial market, and low average household disposable income did not offer potential for personal retail banking.
In the ten years following 2002, inflation was brought down to single-digit levels, GDP per capita increased substantially to USD 10,000 levels from USD 3,500, and public debt-to-GDP ratio fell to 17% in 2012 from 62% in 2002. More easily available financing in global markets and annual FDI inflows averaging around USD 10 billion greatly facilitated growth in the economy. Enjoying returns on equity of above 20% and annual loan growth of around 40%, Turkish banks became popular acquisition targets.
Along with the increased purchasing power and rising consumption, Turkish banks commenced retail banking and invested heavily into branch network and advanced technological infrastructure. The mortgage market blossomed from nowhere and consumer loans grew at a 35% CAGR between 2004 and 2012.
The government allowed banks to operate without imposing suffocating regulatory controls and the banks were therefore able to focus on expanding their core business. Turkey became an attractive market with a growing appetite for new investments. Despite the disastrous effects on the global financial system caused by the 2008-9 global economic meltdown, the Turkish Banking system emerged relatively unscathed. The reason for this was generally accepted as the adoption of the banking reforms following the 2001 economic crisis in Turkey. The current efforts in international markets to increase the capital adequacy of banks in accordance with Basel regulations had already largely been implemented in Turkey. Indeed the Turkish experience, which disciplined Turkish banks to adopt better internal auditing and controlling mechanisms, and to maintain higher levels of liquidity and higher capital adequacy ratios, was a very good example for the rest of the world. Following the temporary GDP contraction of 4.8% caused by the global recession of 2008-9, the economy bounced back with 9.2% growth in 2010. By the end of 2012, Turkish banking was back on the fast track with loans making up around 60% of total assets, and with retail loans (including SMEs) comprising 58% of total loans. Turkish banking assets now reflected a more customer orientated outlook. On the other hand, their liabilities reflected their growing dependence on external borrowings allowed by the abundance of global liquidity, such that the loan-to-deposit ratio in the Turkish banking system exceeded the 100% threshold in 2011. Turkish banks had rid themselves of their classic old fashioned banking structure, and had streamlined their activities such that they now had a very lean and efficient look worthy of modern and developed financial institutions.
After 2012, however, the positive factors which had previously helped to drive the Turkish banking industry forward to make the most of greater growth opportunities and technological advancements, began to fade. Turkey began to be left with the hang-over symptoms of the giddy growth enjoyed in the previous decade. High current account deficits as a result of reliance on capital inflows, rising private sector external debt, consumption-driven economy with a large savings gap, and the slowness in implementing structural reforms, increased the need for fiscal discipline and tighter monetary policies. With the current account deficit running at a very high 9.7% in 2011, the Turkish government decided in 2012 to put the brakes on the overheating economy. Turkey’s average GDP growth rate decreased to 3.1% during the following three years, compared to the 2002–11’s average of 5.5%.
The government’s austerity measures came through the banking system, with higher provision requirements and stricter lending rules being applied on retail loans and credit card business. These measures began to slow the Turkish market which started to struggle to generate profits. Average ROEs decreased substantially to about 12%, and since 2014, the loan-to-deposit ratio has been around or near 120%. With the expected tightening in global liquidity conditions, it was felt that there was now no longer room for the Turkish banking market to grow without improvement in the retail deposit base. It was at this time that some international banks announced their decision to exit Turkey.
The banking industry has had an important respite as a result of the Turkish government’s fiscal impetus measures introduced towards the end of 2016 to compensate for the negative economic effects of the failed coup attempt in July 2016. The introduction of the government’s credit guarantee scheme greatly improved banks’ profits. Growth has soared to an expected 7% for the year 2017. The fears of inflation increasing and the economy overheating means that the government will continue with its tight monetary policy for the foreseeable future, and the growth rate for 2018 is expected to fall back to 4-5%.
Turkey undoubtedly still has great potential for growth as a result of its favourable demographics. However, the low household savings ratio is a problem waiting to be solved, and the low profitability environment now facing the banking industry requires banks to re-evaluate the way they operate. They will need to even further focus on improving operational excellence, technology infrastructure, risk management and governance.
As of December 2016, Turkey has a total of 52 banks operating 11,741 branches and employing some 211,000 people. The number of branches fell by 533 branches (4.3%) from 2015 and the number of employees decreased by 6,400 people (some 3%) from 218,000 in 2015. The private banks are leading the sector with 35.2% of the overall branches, followed by public banks with 31.5%, foreign banks with 24.8% and participation and investment banks with 8.5%. Similarly, 35% of the workforce employed in the Turkish banking sector work for private banks, 27.5% for public banks, 28% work for foreign banks, and the remaining 9.5% for participation and investment banks.
Total assets of the Turkish banking sector comprised TL 2,731 billion (USD 776 billion) as of 2016 yearend, a 15.9% increase over 2015 in TL terms (4% fall in USD value). Credits issued comprised TL 1,747 billion (USD 496 billion) as of 2016 yearend, a 16.7% increase over 2015 in TL terms (3.1% fall in USD value), representing 64% of total assets. Deposits comprised TL 1,454 billon (USD 413 billion) as of 2016 yearend, a 16.8% increase over 2015 in TL terms (3.3% fall in USD value), and representing 53.2% of total assets. As of 2016 yearend, the net profit of the Turkish banking sector comprised TL 37.5 billion (USD 10.7 billion), an increase of 43.7% over 2015.
As of December 2016, the Capital Adequacy Ratio of the banks operating in the Turkish market is 15.6%, and the doubtful debts ratio is 3.4%, up from 3.2% in 2015.
For conversion purposes regarding the above Turkish lira statistics, as of 31.12.2016, the Turkish Central Bank’s buying rate for US Dollars is USD 1 = TL 3.5192.
The Borsa Istanbul (BIST) is the sole exchange entity of Turkey combining the former Istanbul Stock Exchange (İstanbul Menkul Kıymetler Borsası, IMKB), the Istanbul Gold Exchange (İstanbul Altın Borsası, İAB) and the Derivatives Exchange of Turkey (Vadeli İşlem Opsiyon Borsası, VOB) under one roof. It was established as an incorporated company on April 3rd, 2013, and began to operate on April 5th, 2013.
The founding capital of the Borsa Istanbul is 423,234,000 Turkish liras. The main shareholders comprise the Turkish Government (49%) and old Istanbul Stock Exchange entity (IMKB) (41%). It is planned for the Government-owned shares to be eventually offered for sale.
The Istanbul Stock Exchange (İMKB) was the only corporation in Turkey for securities exchange and was established to provide trading in equities, bonds, bills, revenue-sharing certificates, private sector bonds, foreign securities and real estate certificates as well as international securities. The ISE was founded as an autonomous, professional organization in early 1986.
416 national companies are quoted on the new Borsa. Trading hours are 09:30–12:30 for the first session and 14:00–17:30 for the second session, on workdays. All members are incorporated banks and brokerage houses. The Borsa’s stock index, National 100 Index XU100, reached an all-time high of 120,845.29 index points on January 29th, 2018. This capitalization-weighted index, with a base value of 1 as of January 1986, is a major stock market index which tracks the performance of 100 companies selected from the National Market, and capital and real estate investment trusts quoted on the exchange.
Istanbul International Finance Centre Project
The Turkish Government introduced its plan to build a financial centre in Istanbul in 2009. It is the aim of the government to take advantage of Turkey’s geographical location to create a regional financial hub in Istanbul. Land has been allocated and it has been foreseen that this centre will house the head offices of all the private and public banks in Turkey. The location will include 45 million square feet of office, residential, retail, conference, hotel and park space.
Strategically located between Ataşehir and Umraniye on the Asian side of Istanbul, the site offers easy accessibility to all the major central commercial. cultural and historical centres of Istanbul. Major infrastructure improvements include a transportation system featuring a new underground railway line and station as well as new infrastructure for sustainable power, water, data and security. The growth of Turkey’s economy over the last decade and its acceptance as an important emerging market have certainly justified the expectations behind this project to turn Istanbul into a global financial centre. It is certainly an exciting and feasible project. However, this project must become more than just a property development. Turkey will need to make many important changes to its regulations to meet the expectations of such a project. The centre will need to have access to skilled personnel, other international markets, suppliers of professional services, customers, and to the latest communication technology. The Turkish government will need to create a fair and just business environment, an acceptable corporate and personal tax regime, a more flexible work and residence permit regime for foreigners, and a quality of life which is suitable for cosmopolitan life-styles.
Financial Advisory Firms in Turkey
There are many national and international firms in Turkey which can provide expert financial advice and support to foreign investors. These firms may be national or international investment funds, accounting firms, or firms expert in international financial transactions, mergers and acquisitions, capital markets transactions, privatisations, infrastructure projects, restructurings, project financing, as well as other corporate matters in Turkey.
ACCOUNTING IN TURKEY
Accounting principles, Company Law and Taxation
Turkey has a relatively liberal regime toward foreign investors and the establishment procedures for a foreign capital company are, to a large extent, similar to procedures required for local companies. A foreign company may do business in Turkey in the form of a branch, subsidiary (a joint-stock company (“A.Ş.”) or a limited liability company (“Ltd.Şti.”)), or a partner of a joint venture.
Joint-stock companies and limited liability companies are both capital companies regarded as resident taxpayers in Turkey and subject to taxation on their worldwide income. On the other hand, a branch or permanent establishment of a foreign entity is regarded as a non-resident taxpayer in Turkey, subject to taxation only for income originating in Turkey. However, due to its non-resident status, certain payments from Turkish companies to a branch or permanent establishment may be subject to a withholding tax requirement.
From a company taxation perspective, the tax principles apply similarly to all types of companies (irrespective of having a foreigner shareholder or not) and branches, in terms of determining their taxable base.
The corporate tax rate in Turkey is 22% (which is in the low range compared to EU countries) and applies to all forms of companies and branches. Corporate taxes are calculated on fiscal profits over a taxation period (i.e. the calendar year, unless a specific fiscal period is granted by the tax authorities) and after the consideration of certain additions to and deductions from the book profits as defined in Turkish Corporate Tax Law. Corporate income tax is payable by the end of the month in which the tax return was filed (i.e. April, if the fiscal period is the same as the calendar year).
Corporations (including branches) are also required to pay advance corporate income tax based on their quarterly profits at the corporate tax rate (22%). The advance taxes paid during the year are offset against the ultimate corporate income tax liability of the companies. Certain corporate tax exemptions and incentives are available relating to free trade zones, technoparks, R&D activities and investment incentive schemes.
Dividends paid out of a Turkish company are subject to dividend withholding tax at the source when they are paid or distributed to an individual shareholder (resident or non-resident), or to non-resident corporations. The transfer of net profit after tax of a branch to a foreign parent company is also subject to withholding tax on a remittance basis, similar to a company. The rate of dividend withholding tax is 15%, but the rate can be reduced subject to certain conditions under Double Tax Treaties (usually reduced up to 10% or 15%). The Turkish Commercial Code also requires that certain legal reserves be provided before profits are distributed.
Turkish value-added tax (VAT) applies to all supply of goods or services in the course of commercial, industrial, agricultural, or independent professional activities performed in Turkey by taxable entities or persons, and the import of goods and services into Turkey. In Turkey, the standard VAT rate is 18%. Reduced rates of 1% and 8% are also applicable for specific transactions. The transactions of banks and financial institutions are exempt from VAT since they are subject to Banking and Insurance Transactions Tax.
VAT returns have to be filed on a monthly basis. The input VAT (paid on purchases) can be offset against the output VAT (collected from sales). The excess output VAT has to be remitted to the tax authorities, whereas the excess input VAT cannot be refunded in cash but carried to future months.
Personal income taxes are applied at rates from 15% to 35% on a progressive income scale. The top marginal rate of 35% applies for income that exceeds TL 70,000 (for non-employment income) and that which exceeds TL 110,000 (for employment income) in 2017. The liability for the proper calculation and payment of income and social security premiums rests on the employer. For other sources of income, an annual income tax declaration may need to be filed by individuals. Premium contributions payable by the employer and employee, in accordance with the mandatory state social security scheme, are calculated in the company payroll.
Turkey currently has double tax treaties with 85 countries. The updated list of these treaties is available on the Turkish Income Administration’s website www.gib.gov.tr. These treaties provide certain tax advantages which need to be analysed on a treaty by treaty basis.
A Decree No. 2012/3305 was passed by the Council of Ministers on July 15th, 2012, which amended the Turkey’s Investment Incentives Regime. This new law was aimed more at specific sectors which would attract high value-added, high technology and export orientated investments. It would help Turkey to move away from its traditional industries and develop more sophisticated products to ensure a more competitive and healthy economy with an improved balance of payments record. 12 decrees have since been introduced amending this law, the latest decree being Decree No. 2017/9917 published in the official gazette dated February 22nd, 2017.
Turkey’s New Commercial Code
Turkey has realised that for it to compete in global markets, its accounting rules must be compatible with global standards. The need for better corporate governance, high-quality financial information and transparency was clear. It is for this reason that the new Turkish Commercial Code No.6102 and Law No.6103 on Validity and Application of the Turkish Commercial Code were passed and became effective as of July 1st, 2012.
The new Commercial Code redefined the rules governing commercial life in Turkey, with a modern approach that will help take Turkey to the next level in terms of transparency, auditability and reliability.
The new Commercial Code and Law on Validity and Application of the Turkish Commercial Code were however amended by Law No. 6335 on June 30th, 2012, one day before they came into effect. The Amendment Law watered down the new Commercial Code both for practical reasons and because some of the new rules were obviously considered too far reaching at this point in time.
Some of the more important new rules brought in by the New Commercial Code, after taking consideration the amendments in Law No.6335, are as follows:
1) Commercial books of companies will continue to be kept in line with the Uniform Chart of Accounts and Turkish Tax Procedural Law.
2) Preparation of yearend financial statements will however be prepared in accordance with Turkish Accounting Standards and Turkish Financial Reporting Standards which are consistent with International Financial Reporting Standards.
3) The Council of Ministers specified on January 13th, 2013 the criteria, applicable as of January 1st, 2013, by which companies are to be audited. These criteria have been amended in subsequent decrees. The latest decree no.2016/8549 dated March 19th, 2016, determined the criteria to be as follows :
a) Companies with total assets equal to or higher than TL 40 million. b) Companies with annual net sales revenues equal to or higher than TL 80 million. c) Companies with total employees equal to or higher than 200.
With regards the above criteria for the year 2018, for example, the financial statements for the years 2016 and 2017 shall be used for calculating assets and annual net sales revenues, and the average number of employees for years 2016 and 2017 shall be used for the number of employees. If at least two of the three conditions are met, the company shall be subject to the independent auditing requirement as of January 1st, 2013.
4) Companies which are subject to an independent audit are obliged to open a website.
5) B.O.D. members who are not shareholders and B.O.D. relatives who are not shareholders are prohibited from borrowing money from the company. Other B.O.D. members are permitted to continue to borrow from the company as are shareholders under certain conditions.
6) Joint-stock companies and limited liability companies are now allowed to be established with a single shareholder or partner, whereas previously, five shareholders and two partners were required, respectively.
The Republic of Turkey has a civil law legal system. Under the Turkish Constitution, the Grand National Assembly is the supreme legislative authority and can create or abolish any law. All state power is derived from the Constitution. Sovereignty belongs to the nation without any reservation or condition and is exercised through competent organisations in compliance with the principles set out in the Constitution. The assembly is composed of deputies elected from 81 provinces and 85 electoral districts.
Turkey held a referendum on April 16th, 2017, with a majority of Turkish citizens voting for constitutional changes. Following the referendum, various articles of the Turkish Constitution have been amended. For example, the number of members of the Turkish Parliament has been increased to from 550 to 600 and the age of political candidacy has been lowered to 18.