Tourism sector faces new tax as Turkey’s Erdoğan seeks funds
Though dogged by disputes abroad and increasing opposition at home, the biggest issue Turkish President Recep Tayyip Erdoğan faces is the economy. Erdoğan is fast running out of funding sources, depriving the government of room to manoeuvre.
It is this that led Erdoğan’s government to sack the head of the central bank last week, and the same motivation lies behind the government’s steps to create an unregulated fund worth hundreds of millions of dollars with a tax on tourism businesses, to impose a massive departure tax hike on Turks flying out of the country, and to extend a cash repatriation law that does away with taxes and controls on money moved to Turkey from abroad.
Similar laws have been implemented several times since the 2008 global financial crisis, when it was estimated that Turkish businesses and individuals were holding $200 billion of unregistered wealth outside the country, and has brought tens of billions of dollars back into the country, also raising billions of dollars in taxes.
Nevertheless, when a new iteration of the law was introduced in May 2018, estimates of the unregistered wealth held outside Turkey remained high at between $130 billion and $150 billion. The amnesty apparently failed to meet its targets and was extended past its original expiry date of Dec. 31, 2018 to June 30, 2019. A new omnibus bill introduced by the ruling party seeks to extend it again to the end of 2019.
The difference this time, the law says, is that no tax will be paid on the cash, foreign currency, gold and other valuables that enter the country, and those bringing them in will not be asked to declare the source of the incoming wealth. The identity of persons bringing wealth in can remain secret, and they can assign third parties to bring it into the country, according to the new law. They will not even be obliged to deposit it in a bank.
The problem is, Erdoğan’s decision to dismiss the central bank governor last week, in contravention of legal guarantees and established precedent, has raised serious concerns about the government’s attitudes to the law.
The talk around political and economic circles in Ankara is that the legal guarantees afforded by the cash repatriation law do not carry much weight given the treatment of the central bank governor. With trust in the rule of law at rock bottom in Turkey, it is unrealistic to expect many to bring their wealth back to the country, omnibus bill or not.
So what is left for the Erdoğan government is ever more extreme measures. For one thing, the government has advanced plans to tap the central bank’s legal reserves with the omnibus bill, a move that some view as leading to the possibility of unrestrained printing of money and the government clearing out the bank’s vaults.
Besides that, the bill includes a 330 percent hike to departure tax for Turks leaving the country, bringing the amount from 15 liras ($2.63) to 50 liras ($8.78).
Then there is Erdoğan’s plan to create a new, unregulated fund – the “Turkey Tourism, Promotion and Development Agency” – using taxes from the tourism sector, which has stood out for its success in recent years. A draft amendment has been brought to parliament on Erdoğan’s orders and is reportedly swiftly passing through parliamentary commissions.
The draft proposes to take a 1-percent cut from the turnover of tourism companies in every field, from hotels, to tour guides, to travel agents, regardless of whether or not those companies are in profit, and transfer it to an unregulated fund from August. Tourism sector organisations are up in arms.
The fund will come under the Tourism Ministry, but has been envisaged as a private legal entity, meaning its funding sources will not be overseen by the ministry and it would be exempt both from public tender law and from auditing by the court of accounts.
With the fund’s board likely to be dominated by the tourism minister, his deputies and other government officials during the first six-month stage. The power to spend money in the fund will lie with the government, whose need for cash is so pressing that Aug. 1 has been set as the date to begin gathering funds. Estimates say that as much as $150 million dollars could be gathered between then and the year’s end.
The tourism sector calls this a supplementary tax, and has lamented its introduction mid-season, when there is no chance to factor it in to business models and pricing.
A long list of non-governmental organisations from the sector have presented a letter to the AKP and other parties, demanding representation on the fund and a say in how it is used. The letter also demands transparent regulation of tenders granted and expenses incurred by the fund, and a delay until Jan. 1, 2020 until it begins deducting contributions from tourism companies.
Besides the 1 percent deduction from tourism companies, the fund could also receive cash from the general budget, though the exact amount is unclear. Tourism companies insist that this should be no less than half the amount of their own contributions.
The tourism fund joins the various sources of cash Erdoğan has created or tied directly to himself, from the Turkey Wealth Fund to the unemployment insurance fund, and its exemption from oversight by parliament or the court of accounts makes the cash collected available for his arbitrary use. Perfect for a time when the president is on a mission to overcome the economic bottleneck he has found himself in.