Turkey to unveil corporate tax overhaul

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Turkey is set to unveil a corporate tax overhaul, including a 10 per cent minimum rate, as policymakers seek to cool the country’s $1tn economy and boost government coffers.

President Recep Tayyip Erdoğan’s ruling Justice and Development party (AKP) is poised to announce a new tax package in parliament as soon as Tuesday, according to two people familiar with the matter.

The reforms aim to broaden the tax base and contribute to efforts to cool scorching inflation by tightening fiscal policy. They come as part of a wider economic turnaround programme that began after Erdoğan’s re-election in May 2023.

Erdoğan’s AKP, which leads a coalition that controls parliament, will set out plans that include a minimum corporate tax rate and changes to the treatment of property investment trusts, one of the people said. 

Under the proposal, Turkey will impose a minimum tax rate of 10 per cent for most established companies regardless of exemptions. The standard statutory corporate income tax rate is set at 25 per cent, but some companies use exemptions to achieve a much lower effective rate.

The tax plans would give authorities a broader toolkit to audit companies and apply penalties to those found in breach of rules — a move aimed at curtailing Turkey’s sprawling underground economy.

The country’s economic team, led by finance minister Mehmet Şimşek, has tightened fiscal policy over the past year as part of its goal of cooling runaway inflation, which registered 71.6 per cent in June. Policymakers are looking to correct other severe imbalances caused by Erdoğan’s previous unorthodox economic policies, which included ultra-low interest rates and big pre-election giveaways.

The proposed corporate tax package comes after the government last year increased value added tax on a range of goods and services and tripled levies on petrol, among actions aimed at restoring “rational” economic policymaking.

These measures have amplified the pressure on everyday Turks and contributed to a severe erosion in the popularity of Erdoğan’s AKP in March’s local elections.

The new tax package is intended to spread some of the burden of economic reform to companies, one of the people briefed on the matter said.

Officials are betting that these changes will help reduce Turkey’s government budget deficit, which has widened as a result of costs stemming from last February’s devastating earthquake in the country’s south.

Massive stimulus measures employed by Erdoğan’s government ahead of the May 2023 election, including rises in public sector salaries and pensions, also hit public finances.

The general government budget deficit reached 5.3 per cent of gross domestic product last year, the highest since 2009 and well above the average of 2 per cent from 2006 to 2022, according to Financial Times calculations based on official data.

The new taxes are also meant to complement a tightening in monetary policy by the central bank, which has boosted its main interest rate to 50 per cent in March from 8.5 per cent in June 2023, after Erdoğan abandoned his insistence on keeping rates low.

Turkey’s new economic programme has slowly lured back international fund managers who had abandoned the market, with foreign investors pumping almost $12bn into lira-denominated government debt in the past year, according to central bank data.

There are also signs of progress on repairing the economy, with central bank foreign currency reserves, which had been severely depleted in recent years, rising sharply and the current account deficit narrowing.