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Tax_Harmonization

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					  European Union Indirect Tax
Requirements and Implications for
      the Harmonization of
      Turkey’s Tax System

             Jorge Martinez-Vazquez
   Conference on Tax Options in the Wake of EU
 Accession for Turkey, Ankara, January12-13, 2009


                                                1
  Indirect Taxation Regime in the
                EU
 The indirect taxation acquis
harmonized legislation in VAT and excise taxes
  as in the Sixth Directive (of 1977 and codified
  in 2006 for VAT) and Council
   Directive 92/12 for excises
 VAT non-cumulative general proportional tax on consumption
  prices, on all stages on production and distribution, providing
  equal treatment for domestic and import transactions
 Excise taxes duties to be charged, with minimum rates, on
  domestic and import transactions for energy products, tobacco
  products, and alcoholic beverages.



                                                                2
                Customs Duties
 Customs tariffs
 The tariff is common to all EU members, although the
  rates of duty differ from one kind of import to another.

 The Customs tariff will not be discussed any further in
  this presentation




                                                             3
        Degree of Alignment for the
          Value Added Tax (1)
 Overall, Turkey is largely aligned with the EU in the
  field of VAT
 But some issues remain:
On tax rates
  -- Turkey applies one standard rate (18%) and two
  reduced rates (8% and 1%). By EU standards, the
  standard rate may not be less that 15% and the one or
  two reduced rates can not less than 5%
  -- So, usage of the 1% rate is not in line with the EU
  acquis and part of the base for the 8% rate as applied to
  supplies of textile products prior to the retail stage is not
  in compliance either

                                                              4
           Value Added Tax
LIST OF VAT RATES APPLIED IN THE MEMBER STATES
Member States     Code           Super Reduced Rate      Reduced Rate     Standard Rate   Parking Rate
Belgium           BE                      -                   6/12             21              12
Bulgaria          BG                      7                    20
Czech Republic    CZ                      -                     9              19             -
Denmark           DK                      -                     -              25             -
Germany           DE                      -                     7              19             -
Estonia           EE                      -                     5              18             -
Greece            EL                     4.5                    9              19             -
Spain             ES                      4                     7              16             -
France            FR                     2.1                   5.5            19.6            -
Ireland           IE                     4.8                  13.5             21            13.5
Italy             IT                      4                    10              20
Cyprus            CY                      -                    5/8             15              -
Latvia            LV                      -                     5              18              -
Lithuania         LT                      -                    5/9             18              -
Luxembourg        LU                      3                   6/12             15             12
Hungary           HU                      -                     5              20              -
Malta             MT                      -                     5              18              -
Netherlands       NL                      -                     6              19              -
Austria           AT                      -                    10              20             12
Poland            PL                      3                     7              22              -
Portugal          PT                      -                   5/12             20             12
Romania           RO                      9                    19
Slovenia          SI                      -                    8.5             20              -
Slovakia          SK                      -                    10              19              -
Finland           FI                      -                   8/17             22              -
Sweden            SE                      -                   6/12             25              -
United Kingdom    UK                      -                     5             17.5             -
Source: DOC.2441/2008 - EN, European Commission, Taxation and Customs Union

                                                                                                         5
    Degree of Alignment for the
       Value Added Tax (2)
 Other issues:
  -- Differences remain in the usage of
  some deductions, exemptions (for small
  enterprises), etc.
  -- Streamlining definitions for
  “taxpayer,” “economic activity” and
  using the acquis “place of supply” as
  opposed to “place of delivery” (this
  latter is also an issue for excise duties)

                                               6
 Degree of Alignment for Excise
             Duties
 Important issues stand with regard to the
  taxation of “alcoholic beverages” and
  “tobacco products”
 Some less difficult issues remain in the
  alignment for the taxation of “energy
  products”



                                              7
     Issues with the taxation of
      “alcoholic beverages”(1)
 Main issue is that Turkey‟s current
  structure results in higher taxation on
  those alcoholic beverages that are
  “mainly imported” and on lower taxation
  on “mainly domestic” products, which
  represents a breach of the Customs
  Union


                                        8
            Comparison of EU and Turkey:
         Taxation of Typical Alcohol Products
                                      Ad
                                    Valorem
                 Specific Rate       Rate     Total Excise Tax   VAT



EU (minimum)      4 euros /liter                4 euros/liter    15%




EU (average      6.2 euros /liter              6.2 euros/liter   19.4%



Turkey



                                               max[35,848 or
 Raki             35,848 YTL        275.6%       275.6%]         18%



                                               max[70,926 or
 Whiskey          70,926 YTL        275.6%       275.6%]         18%




                                                                         9
        Issues with the taxation of
         “alcoholic beverages”(2)
 Other less difficult issues:
  -- The EU only applies specific duties while Turkey applies an ad
  valorem duty replaced by a specific duty only when the ad
  valorem duty yields a lower tax
  -- For certain alcoholic beverages Turkey‟s duties are based on
  “type of product” as opposed to the EU‟s “ alcoholic content”
  -- In Turkey, all alcoholic beverages are subject to tax regardless
  of alcohol content… not so in the EU (de minimis strength of
  0.5% for beer and 1.2% for other beverages
  -- Turkey does not tax pure ethyl alcohol; the acquis provides no
  basis for this exemption but for some isolated cases (denatured
  alcohol, etc)




                                                                   10
     Issues with the taxation of
       “tobacco products”(1)
 Main issue is that Turkey‟s currently
  applies a specific duty on imported
  tobacco and cigarettes to finance the
  “Tobacco Fund. The application of the
  specific duty only to imported products
  represents a breach of the Customs
  Union


                                            11
Different Taxation of Imported Tobacco
Products and Domestically Produced
Tobacco
              Retail    Specific    Ad                            Total                Tobac    Total
              Price/    Excise     Valore   Total Excise Tax/   Excise as               co     Tax as
              Pack       Tax         m            Pack            % of       VAT       Fund     % of
                                   Excise                        Retail                        Retail
                                    Tax                           Price                         Price

EU Criteria             5-55%       NA                            57%                           NA
                                             57% of Retail                    15%
                                                Price                        (min.)
                                                                            0,5Euro*
EU Average               30%       61%                            59%          *                75%
              3,13
              Euro

Turkey                             58%                                       18%                NA
                       1,4YTL/pa              Max[1,4YTL,                              0,12Y
                           ck                    58%]                                    TL
              2,17Y
 Samsun         TL     1,40YTL                  1,40YTL          64,5%      0,33YTL             80%
                                   1,26Y
                                     TL
              4,68Y
 Marlboro       TL     1,40YTL                  2,71YTL           73%       0,71YTL             76%
                                   2,71Y                                               0,12Y
                                     TL                                                  TL


                                                                                                 12
        Issues with the taxation of
          “tobacco products”(2)
 Other less difficult issues:

   -- Turkey defines the cigarettes on the basis of the CN code
   (Combined Nomenclature of Customs) which is not in line with
   the acquis
   -- The minimum excise levels for cigarettes in Turkey are not
   established with reference to the “Most Popular Price Category”
   which is not in line with the acquis
   -- To be in compliance, Turkey needs to levy a specific duty
   (between 5% and 55%) in addition to the current ad valorem rate
   so the levy is at least 57% of the retail selling price and come to a
   total of minimum levy of 64 Euros (VAT inclusive) per 1,000
   cigarettes


                                                                      13
        Issues with the taxation of
            “energy products”
 Turkey still applies excise duty on fewer products( e.g., coal and
  coke are excluded.) Current legislation will need to be enlarged in
  the coverage of energy products
 Turkey‟s Council of Ministers is authorized to either increase the
  highest duty rate on gas and diesel by 50% or decrease down to
  0%. This latter may imply that the EU required minimum rate is
  not applied
 There are several definitional issues:
  -- Need to distinguish taxation on the basis of final use (e,g,
  heating, motor vehicle final use versus as an input of production ,
  etc), although this is done in Turkey for electricity
  -- Currently some energy products still defined in an “unclear
  manner,” („petroleum products,‟ „solvents,‟ etc) not in line with
  the acquis


                                                                   14
EU Minimum Excise Duties for Energy Products
           Current minimum levels of taxation for energy producing products and electricity
Product                                                          Minimum excise rates
I. Motor fuels
Petrol (/1000 l.)                                                         421
Unleaded petrol (/1000 l.)                                                359
Diesel (/1000 l.)                                                         302
Kerosene (/1000 l.)                                                       302
LPG (/1000 l.)                                                            125
Natural gas                                                         2.6 (/gigajoule)
II. Fuels for industrial or commercial use
Diesel (/1000 l.)                                                          21
Kerosene (/1000 l.)                                                        21
LPG (/1000 kg.)                                                            41
Natural gas                                                         0.3 (/gigajoule)
III. Heating fuels and electricity                       Business use           Non-business use
Diesel (/1000 l.)                                             21                       21
Heavy fuel oil (/1000 kg.)                                    15                       15
Kerosene (/1000 l.)                                            0                        0
LPG (/1000 kg.)                                                0                        0
Natural gas (/gigajoule)                                     0.15                      0.3
Coal and coke (/gigajoule)                                   0.15                      0.3
Electricity (/MWh)                                            0.5                       1
(The volumes are measured at a temperature of 15° C).



                                                                                                   15
     Summary: Main Issues for
      Harmonization Reform
 Address the different taxation treatment
  of imported tobacco products and
  domestically produced tobacco

 Address the differential treatment of
  Raki relative to other alcoholic
  beverages of similar alcohol content


                                             16
 Recommendations for Tobacco (1)

 Tobacco Fund has to be eliminated
 However, there are possibilities for:
    A graduated phase-in approach to eliminate the Tobacco
     Fund.
    Control impact on relative prices facing domestic consumers
     by introducing differential excise rates for tobacco products
     by type of blend.




                                                                 17
   Revenue Impact (as of 2006-07)
   of Eliminating Tobacco Fund
Elimination of the Tobacco Fund = -260 million YTL.
Change in Excise Tax Due to Increase in Imports of Tobacco
Products= 101 million YTL.
Change in VAT Due to Increase in Imports of Tobacco Products=
2.2 million YTL,
Change in Excise Tax Due to Decline in Consumption of Domestic
Tobacco Products = -43 million YTL.
Change in VAT Due to Decline in Consumption of Domestic
Tobacco Products = -12 million YTL.

Net Change in Tax Revenues = -212 million YTL.
                                                         18
  Economic Impacts of Eliminating
        the Tobacco Fund
 Production: Reduction in domestic production would
  be by 1.52% or 615 tons based on production levels in
  2006.
 Employment: A decline in 2,547 jobs based on
  number of farmers employed in 2007.
 Income loss: 6.4 million YTL (2,500*2,547).




                                                      19
Recommendations for Tobacco (2)

  Introduce a program for income maintenance and
   crop substitution that would soften the blow on the
   poor population in the East and the Southeast of
   Turkey. As part of the negotiations with the EU,
   ask for cost sharing in this income maintenance and
   crop substitution program up to 5 years or until
   accession of Turkey to the EU.
  In the medium term for Turkey to reform the
   structure of its excise tax on tobacco by adopting a
   tax structure that includes both a specific in rem tax
   component and an ad valorem component
   according to EU rules.


                                                       20
 Revenue Impact of Increasing Excise on Raki


 Increase excise tax on Raki from 35.848YTL
  to 70.962YTL.
 one hundred percent increase in the excise tax,
  would imply a 38% decrease in the
  consumption of Raki
 Doubling the excise tax on Raki would
  approximately double its price.
 The excise tax revenues would increase by
  62% or by 404 million YTL.


                                                21
 Economic Impact of Raising Excise on
                Raki

 Production of Raki would decline by
  12.54 million liters.
 Decline in employment in Raki
  production would be 954 jobs.
 The welfare impact would tend to be
  more on low income consumers (?).



                                        22
         Recommendation on Raki

 Another feasible choice is to lower the taxes
  on similar (mostly imported) spirits at a
  revenue loss of about 20 million YTL.
 However, the current tax structure is not
  similar to the EU and it would be necessary to
  adopt a structure similar to that in the EU.
 There is the possibility of negotiating for a
  transition period.


                                               23
Thank you




            24

				
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