Financial Regulatory Forum

Turkey watchdog backs 10 pct tax for foreign investors

By Reuters Staff
February 17, 2010

  By Hatice Aydogdu

ANKARA, Feb 17 (Reuters) – Turkey’s Capital Markets Board Chairman Vedat Akgiray said on Wednesday it was “reasonable” for foreign investors to pay a 10 percent withholding tax on stocks, bonds and mutual funds, as domestic investors do.

Akgiray said, during a breakfast with an economic correspondents club, that he expected the tax issue to be settled within weeks.

The Constitutional Court ruled last year in favour of making the tax equal for domestic and foreign investors, after the government scrapped the tax for foreigners in 2006 in a bid to calm markets when the lira lost about a fifth of its value.

The ruling knocked investor sentiment and Finance Minister Mehmet Simsek said the government would overhaul the withholding tax before the court ruling takes effect. The final decision is Simsek’s to make, but Akgiray is consulted in the process.

Foreign ownership rates in the stock exchange were not falling and will not fall, he said, adding foreigners own 66 percent of the exchange according to most recent data.

“Foreigners (approach to Turkey) would not be affected by this (tax),” Akgiray said.

“There is a very fast rising investment demand (for Turkey) in every shape and in every sector.”

European Union candidate Turkey has attracted record levels of foreign investment in recent years as the economy enjoyed unprecedented strong growth and the government pushed through market-friendly reforms.

But inflows stalled last year due to investors becoming more risk averse in the wake of the global financial crisis.

Nevertheless, the main stock exchange index <.XU100> jumped 97 percent in 2009, as the market recovered strongly from the slump in values following the onset of the crisis in late 2008.

 

BOND IMPACT

Economists cautioned that a tax on investment returns would hurt the financial markets.

“History tells us that a jump from a 0 percent level to a 10 percent rate would hit the domestic bond market. In 2006, local bond issuance to non-residents almost came to a standstill as a result,” said Simon Quijano-Evans, economist at C.A. Cheuvreux.

The yield on the benchmark Nov. 16, 2011 bond <0#TRTSYSUM=IS> was 8.82 percent on Wednesday, having climbed from a historic low of 7.59 percent in October.

The central bank ended a cycle of monetary easing late last year and yields have risen since on expectations of rising inflation.

Investors are hoping the government finds some way to lessen the impact of the withholding tax.

“Up to now, indications have been in the direction of lowering the general withholding tax rate for all, and the government is unlikely to rock the boat in our view,” Quijano-Evans said.

Akgiray said he expected 20-30 initial public offerings this year, barring surprises.

He did not think that a possible loan accord with the International Monetary Fund still affected market expectations, and added that he did not see a purpose in having long-running negotiations if Turkey does not need the IMF’s support.

Turkey and the IMF have been locked into negotiations since the previous $10 billion stand-by accord expired in May 2008. The government has given conflicting signals in recent weeks over whether any accord with the IMF will be reached. (Writing by Selcuk Gokoluk; Editing by Simon Cameron-Moore and Toby Chppra) ((selcuk.gokoluk@reuters.com; +90 312 292 7012; Reuters messaging: selcuk.gokoluk.reuters.com@reuters.net))

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