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