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 Belgium BE 6/12 21 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 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 Hungary HU 5 20 Malta MT 5 18 Netherlands NL 6 19 Austria AT 10 20 Poland PL 3 7 22 Portugal PT 5/12 20 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 Parking Rate 12 13.5 12 12 12 - 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 Specific Rate EU (minimum) EU (average Ad Valorem Rate Total Excise Tax VAT 4 euros /liter 4 euros/liter 15% 6.2 euros /liter 6.2 euros/liter 19.4% Turkey Raki 35,848 YTL 275.6% max[35,848 or 275.6%] 18% Whiskey 70,926 YTL 275.6% max[70,926 or 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 Price/ Pack EU Criteria Specific Excise Tax Ad Valore m Excise Tax 5-55% NA Total Excise Tax/ Pack Total Excise as % of Retail Price 57% 57% of Retail Price EU Average 30% VAT Tobac co Fund 61% 59% Total Tax as % of Retail Price NA 15% (min.) 0,5Euro* * 75% 18% NA 3,13 Euro Turkey Samsun Marlboro 58% 2,17Y TL 4,68Y TL 1,4YTL/pa ck Max[1,4YTL, 58%] 0,12Y TL 1,40YTL 1,40YTL 64,5% 0,33YTL 80% 2,71YTL 73% 0,71YTL 76% 1,26Y TL 1,40YTL 2,71Y TL 0,12Y 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) Business use Non-business use III. Heating fuels and electricity 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