YESTERDAY we went through and accumulated several Cablegate cables from Turkey. As part of becoming a good citizen/member of the European Union, Turkey has been changing some of its domestic and foreign inclinations. Patents appear to be among those.
UNCLAS SECTION 01 OF 09 ANKARA 000100
SIPDIS
E.O. 12958: N/A TAGS: ECONââ¬â°[Economic Conditions], EINVââ¬â°[Foreign Investments], KTDBââ¬â°[National Trade Data Bank], TUââ¬â°[Turkey], OPICââ¬â°[Overseas Private Investment Corporation], USTRââ¬â°[Office of the Special Representative for Trade Negotiations] SUBJECT: TURKEY: 2006 INVESTMENT CLIMATE STATEMENT
REF: 05 STATE 202943
The following is the 2006 Investment Climate Statement for Turkey:
ۦ1. Openness To Foreign Investment The Government of Turkey (GOT) views foreign direct investment as vital to the country's economic development and prosperity. Accordingly, Turkey has one of the most liberal legal regimes for FDI in the OECD. With the exception of some sectors (see below), areas open to the Turkish private sector are generally open to foreign participation and investment. However, all investors - regardless of nationality - face a number of challenges: excessive bureaucracy, weaknesses in the judicial system, high and inconsistently collected taxes, weaknesses in corporate governance, sometimes unpredictable decisions taken at the municipal level, and frequent, sometimes unclear changes in the legal and regulatory environment. Historically, investment has also been discouraged by high inflation and political and macroeconomic uncertainties. As a result, FDI inflows have historically been far below levels received by more investor-friendly emerging markets. Along with the GOT's far-reaching economic reform program, which is supported by the World Bank and IMF, the EU accession that was launched in 2005 has begun to address some of the structural impediments to FDI. Regulations governing foreign investment are, in general, transparent. Turkey provides national treatment, including in the acquisition of real estate by foreign-owned corporate entities registered under Turkish law, and not have an investment screening system (only notification is required). In 2005, the Constitutional Court ruled unconstitutional legislation enabling property acquisition by non-Turkish individuals. However, Parliament is considering new legislation that will provide limited acquisition rights to foreigners. The equity participation ratio of foreign shareholders is restricted to 25 percent in broadcasting and 49 percent in aviation and maritime transportation. However, companies receive full national treatment once they are established. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT for both domestic and foreign investors. In practice, regulators have not restricted foreign ownership in the financial sector: in 2005 a series of foreign acquisitions in the sector were approved, and several foreign financial houses had longstanding operations in Turkey. The GOT privatizes State Economic Enterprises through block sales, public offerings, or a combination of both. The sale of 55 percent of Turk Telekom to Saudi Oger Telecom in 2005 for USD 6.6 billion was a turning point for the Turkish privatization program. Two other major privatizations in 2005 were the sale of 51 percent of oil-refinery TUPRAS to Turkish business giant Koc Group (with Dutch Shell having a minor share of 2 percent), and the sale of 46 percent of Erdemir to another Turkish company Oyak Group (the Oyak Group then sold 41 percent of its winning consortium shares to Arcelor). Turkish privatization revenues in 2005 totaled USD 16.8 billion, most of which will be collected in subsequent years. Bureaucratic "red tape" has been a significant barrier to companies, both foreign and domestic. However recent laws have simplified company establishment procedures, reduced permit requirements, instituted a single company registration form, and enabled individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges. The government is also considering other measures to streamline other business procedures as part of its effort to improve the business climate. Turkey is also making progress in making the taxation system more investor-friendly. In 2006, the basic corporate tax rate will be reduced from 30 to 20 percent and a uniform withholding tax of 15% will be applied to income from financial investment. Turkish law and regulation affecting the investment climate continues to evolve. Potential investors should check with appropriate Turkish government sources for current and detailed information. The following web site provides the text of regulations governing foreign investment and incentives as well as other useful background information: http://www.treasury.gov.tr/for_inv.htm. Additional information is available at: http://www.investinginturkey.gov.tr ۦ2. Conversion And Transfer Policies Turkish law guarantees the free transfer of profits, fees and royalties, and repatriation of capital. This guarantee is reflected in Turkey's 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freely usable currency at a legal market-clearing rate for all funds related to an investment. There is no difficulty in obtaining foreign exchange, and there are no foreign exchange restrictions. However, as the result of a 1997 court decision, the Turkish Government has blocked full repatriation of investments by oil companies under Article 116 of the 1954 Petroleum Law, which protected foreign investors from the impact of lira depreciation. Affected companies have challenged the 1997 decision and the case is currently in the Turkish court system. ۦ3. Expropriation And Compensation Under the BIT, expropriation can only occur in accordance with due process of law. Expropriations must be for public purpose and non-discriminatory. Compensation must be reasonably prompt, adequate, and effective. Under the BIT, U.S. investors have full access to the local court system and the ability to take the host government directly to third party international binding arbitration to settle investment disputes. There is also a provision for state-to- state dispute settlement. As a practical matter, the GOT occasionally expropriates private real property for public works or for State Enterprise industrial projects. The GOT agency expropriating the property negotiates and proposes a purchase price. If the owners of the property do not agree with the proposed price, they can go to court to challenge the expropriation or ask for more compensation. There are no outstanding expropriation or nationalization cases. ۦ4. Dispute Settlement There are several outstanding investment disputes between U.S. companies and Turkish government bodies, particularly in the energy and tourism sectors. Turkey's legal system provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws. However, the court system is overburdened, which sometimes results in slow decisions and judges lacking sufficient time to grasp complex issues. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders. Judgments of foreign courts, under certain circumstances, need to be executed by local courts before they are accepted and enforced. Monetary judgments are usually made in local currency, but there are provisions for incorporating exchange rate differentials in claims. Turkey is a member of the International Center for the Settlement of Investment Disputes (ICSID), and is a signatory of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Turkey ratified the Convention of the Multinational Investment Guarantee Agency (MIGA) in 1987. There is currently one arbitration cases pending before ICSID. Turkish law accepts binding international arbitration of investment disputes between foreign investors and the state. In practice, however, Turkish courts have on at least one occasion failed to uphold an international arbitration ruling involving private companies. ۦ5. Performance Requirements/Incentives Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS). Law 5084, which went into effect in early 2004, encourages investment in provinces with annual per capita income below USD 1,500 and to high priority development regions. For low income provinces and under certain conditions, the law provides for withholding tax incentives on income tax, social security premium incentives, free land, and electricity price support. These incentives will remain in effect until the end of 2008, except for allocation of free public land, which has no expiration date. The same law also limits certain tax preferences previously enjoyed by Turkey's free zones (see below). There are no performance requirements imposed as a condition for establishing, maintaining, or expanding an investment. There are no requirements that investors purchase from local sources or export a certain percentage of output. Investors' access to foreign exchange is not conditioned on exports. There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms. There are no government imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content - for goods or services - or local equity, import substitution, export requirements or targets, employment of host country nationals, technology transfer, or local financing. The GOT does not require that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report, and balance sheets to the Treasury's Foreign Investment Directorate every year by May. With the exceptions noted under "Openness to Foreign Investment" and "Transparency of the Regulatory System," Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign capital and business on a most-favored-nation (MFN) basis. American and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis. Turkey harmonized its export incentive regime with the European Union in 1995, prior to the start of the Customs Union. Turkey currently offers a number of export incentives, including credits through the Turkish Eximbank, energy incentives, and research and development incentives. Foreign investors can participate in these export incentive programs on a national treatment basis. More information on Turkey's trade regime can be found at www.foreigntrade.gov.tr. Military procurement generally requires an offset provision in tender specifications. The offset guidelines were modified to encourage direct investment and technology transfer. ۦ6. Right To Private Ownership And Establishment With the exceptions noted above, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100 percent. Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Turkey has an independent Competition Board. ۦ7. Protection Of Property Rights Secured interests in property, both movable and real, are recognized and enforced. There is a recognized and reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow in rendering decisions and that they are susceptible to external influence (see "Dispute Settlement"). Turkey's intellectual property rights regime has improved in recent years, but still presents serious problems. Turkey remained on the U.S. Special 301 Priority Watch List in 2005 due to concerns about insufficient protection for confidential pharmaceutical test data and continued high
SIPDIS levels of piracy and counterfeiting of copyright and trademark materials.
Turkey's copyright law provides deterrent penalties for copyright infringement. However, it does not prohibit circumvention of technical protection measures, a key feature of the World Intellectual Property Organization (WIPO) "Internet" treaties. In addition, Turkish courts have failed to render deterrent penalties to pirates as provided in the copyright law but have instead applied the Turkish Cinema Law, which has much lower penalties. Recently enacted legislation contained several strong anti- piracy provisions, including a ban on street sales of all copyright products and authorization for law enforcement authorities to take action without a complaint by the rights holder. However, the law also reduces potential prison sentences for piracy convictions. U.S. industry estimated losses to piracy in 2004 at $50 million for motion pictures, $15 million for records/music and $23 million for books. There are signs that anti-piracy measures introduced in 2004 may be having a positive impact on industry.
Turkey is a signatory to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the research and development "pipeline".
Turkey's recently amended Patent Law provides for penalties for infringement of up to 3 years in prison, or 47,000 YTL (approximately $32,000) in fines, or both, and closure of the business for up to one year. However, research-based companies in the pharmaceuticals sector have criticized provisions which delay the initiation of infringement suits until after the patent is approved and published, permit use of a patented invention to generate data needed for the marketing approval of generic pharmaceutical products, and give judges wider discretion over penalties in infringement cases. There is concern that amendments proposed this year to the patent law could lead to weaker enforcement and penalties and dilute basic intellectual and industrial property protections.
Turkey does not currently have a system for patent linkage, which could create confusion and possibly allow generic pharmaceutical manufacturers to register a copy of a brand name drug with a valid Turkish patent.
The Ministry of Health introduced limited protection for confidential test data submitted in support of applications
SIPDIS to market pharmaceutical products in a regulation issued in January and revised in June 2005. However, several of the regulation's provisions severely undermine protection for confidential test data. Data exclusivity is limited to
SIPDIS original products licensed in a European Customs Union country after January 1, 2001, for which no generic manufacturers had applied for licenses in Turkey as of January 1, 2005, and the term of exclusivity is limited to the duration of the drug patent. Also, the six-year term of data protection starts on the date of licensing in a European Customs Union country, implying a shorter term of protection because of the length of the marketing approval process in Turkey.
Trademark holders also contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey, especially in apparel, film, cosmetics, detergent and other products.
Turkey recently published its first Plant Variety Protection (PVP) Law. A subsidiary of a major U.S. seed company, however, has been unable to obtain protection for its commercial seed under this new law, reportedly at great cost to the company. Further information on the intellectual property situation in Turkey is available in the National Trade Estimate report, available at the U.S. Trade Representative's website: www.ustr.gov. ۦ8. Transparency Of The Regulatory System The GOT has adopted policies and laws that in principle should foster competition and transparency. However, foreign companies in several sectors claim that regulations are sometimes applied in a nontransparent manner. Turkish legislation generally requires competitive bidding procedures in the public sector. Law 4734 on Public Procurement established a board to oversee public tenders. Law 4761 lowered the original minimum bidding threshold at which foreign companies can participate in state tenders. The law gives preference to domestic bidders, Turkish citizens and legal entities established by them, as well as to corporate entities established under Turkish law by foreign companies. The public procurement law has been amended eight times since its enactment and may be further amended in the future. In general, labor, health and safety laws and policies do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy. Certain tax policies distort investment decisions. High taxation of cola drinks discourages investment in this sector. Generous tax preferences for free zones have provided a stimulus to investment in these zones, though these preferences will be trimmed in the future (see free zones section). Similarly, incentives for investment in certain low-income provinces appear to be stimulating investment there (see "Performance Requirements/Incentives"). ۦ9. Efficient Capital Markets And Portfolio Investment The government has taken a number of important steps in recent years to strengthen and better regulate the banking system, whose weaknesses had contributed to macroeconomic instability over the previous decade and played an important role in the 2000-2001 financial crisis. A 2005 revision of the Banking Law helps to bring the bank regulatory framework closer to European Union norms. The new law will tighten bank regulation, notably by broadening the range of expertise inspectors can draw on when conducting on-site inspections. An independent Banking and Regulation Supervision Agency (BRSA) monitors and supervises Turkey's banks. The BRSA is headed by a board whose seven members are appointed by the cabinet for six-year terms. In addition, bank deposits are protected by an independent deposit insurance agency, the State Deposit Insurance Fund (SDIF). Because of high local borrowing costs and short repayment periods, foreign and local firms frequently seek credit from international markets to finance their activities. As of end- 2005, there are 46 commercial banks (including 13 foreign banks) and 13 development or investment banks operating in Turkey. Sector assets as of August 2005 totaled approximately USD 260 billion, or about 74 percent of GNP, according to BRSA data. There is a regulatory system established to encourage and facilitate portfolio investments, though it needs improvements in transparency, accounting, and enforcement provisions to bring it up to U.S. and EU standards. The Istanbul Stock Exchange (ISE), formed in 1986, is becoming a significant emerging market stock exchange. As of December 31 2005, 282 companies were listed on the exchange. However, Turkey has yet to develop other capital markets. The Capital Markets Board is responsible for overseeing the activities of capital markets, including activities of ISE-quoted companies, and securities and investment houses. The Turkish private sector is dominated by a number of large holding companies, whose upper management is family-controlled. Most large businesses continue to float publicly only a minority portion of company shares in order to limit outside interference in company management. There has been no attempt at a hostile takeover by either international or domestic parties in recent memory. ۦ10. Political Violence In recent years, terrorist bombings -- some with significant numbers of casualties -- have struck religious, political, and business targets in a variety of locations in Turkey. The potential remains throughout Turkey for violence and terrorist actions against U.S. citizens and interests, both by transnational and indigenous terrorist organizations. In November 2003 the Al-Qa'ida network was responsible for four large suicide bombings in Istanbul that, among other targets, hit western interests. Indigenous terrorist groups also continue to target Turkish as well as U.S. and Western interests. In June 2004 the indigenous terrorist group PKK/KADEK/KONGRA GEL announced an end to their "unilateral ceasefire." Since the announcement, there have been repeated attacks against Turkish targets in the southeast region of Turkey, where the group has traditionally concentrated its activities. In addition, there have been bombings and other incidents in Istanbul, Bodrum, Antalya, Cesme, Kusadasi and Mersin. Other terrorist groups, including the Turkish group Revolutionary People's Liberation Party/Front (DHKP/C), continue to target Turkish officials and various civilian facilities and may use terrorist activity to make political statements. In 2002, 2003, 2004, and 2005 civilian venues such as courthouses, fast food restaurants, and public transportation were the targets of minor bomb attacks, resulting in small numbers of casualties. Similar, random bombings are likely to continue in unpredictable locations. Americans traveling to Southeastern Turkey, the site of PKK/KADEK/KONGRA GEL actions, should exercise caution. Although the Turkish government takes air safety seriously and maintains strict controls, particularly on international flights, hijacking attempts have occurred as recently as 2003. For the latest security information on Turkey and throughout the world, travelers should monitor the State Department web site http://travel.state.gov, where the current Worldwide Caution Public Announcement, Travel Warnings, and Public Announcements can be found. ۦ11. Corruption Corruption is perceived to be a major problem in Turkey by private enterprise and the public at large, particularly in government procurement. American companies operating in Turkey have complained about being solicited, with varying degrees of pressure, by municipal or local authorities for "contributions to the community". Parliament continues to probe corruption allegations involving senior officials in previous governments, particularly in connection with energy projects. Recent public procurement reforms were designed to make procurement more transparent and less susceptible to political interference, including through the establishment of an independent public procurement board with the power to void contracts. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders to some degree. Turkish legislation outlaws bribery and some prosecutions of government officials for corruption have taken place, but enforcement is uneven. Turkey ratified the OECD Convention on Combating Bribery of Public Officials, and passed implementing legislation in January 2003 to provide that bribes of foreign officials, as well as domestic, are illegal and not tax deductible. In 2005, Turkey's Foreign Affairs Committee approved a draft law ratifying the UN Convention Against Corruption, which was signed in 2003. Amendments in 2005 to Turkey's Criminal Code make it unlawful to promise or to give any advantage to foreign government officials in exchange for their assistance in providing improper advantage in the conduct of international business. In the event that such a crime makes an unlawful benefit to a legal entity, such legal entity shall be subject to certain security measures. The provisions of the Criminal Law regarding the bribing of foreign governmental officials are in line with the provisions of the Foreign Corrupt Practices Act of 1977 of the United States (the "FCPA"). There are, however, a number of differences between the Turkish law and the FCPA. For example, there is not an exception under the Turkish law for payments to facilitate or expedite performance of a "routine governmental action" in terms of the FCPA. Another difference between the provisions of the FCPA and the Turkish law is that the FCPA does not provide for a punishment of imprisonment, while the Turkish law provides a punishment of imprisonment from four years to 12 years. The Prime Ministry's Inspection Board, which advises a new Corruption Investigations Committee, is responsible for investigating major corruption cases. Nearly every state agency has its own inspector corps responsible for investigating internal corruption. The parliament can establish investigative commissions to examine corruption allegations concerning Cabinet Ministers for the Prime Minister. A majority vote is needed to send these cases to the Supreme Court for further action. Transparency International has an affiliated NGO in Istanbul. Transparency International noted that Turkey improved its fight against corruption in 2005, moving Turkey from 77th to 65th in the transparency ranking of 159 countries. ۦ12. Bilateral Investment Agreements Since 1985, Turkey has been negotiating and signing agreements for the reciprocal promotion and protection of investments. Turkey has signed bilateral investment treaties with 74 countries and has initiated negotiations with nine countries. 54 of these agreements are now in force, including with the United States, United Kingdom, Germany, the Netherlands, Belgium, Luxembourg, Denmark, Austria, Sweden, Switzerland, Spain, Finland, Italy, Portugal, Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh, China, Japan, South Korea, Indonesia, Croatia, Cuba, the Czech Republic, Estonia, Russian Federation, Azerbaijan, Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, Belarus, Lithuania, Latvia, Slovakia, Macedonia, Pakistan, Turkmenistan, Moldova, Kyrgyzstan, Albania, Bulgaria, Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece, Israel, Afghanistan, Ethiopia, and Iran. Turkey's bilateral investment treaty with the United States came into effect on May 18, 1990. A bilateral tax treaty between the two countries took effect on January 1, 1998. Turkey has avoidance of double taxation agreements with 61 countries. ۦ13. OPIC And Other Investment Insurance Programs The Overseas Private Investment Corporation (OPIC) offers a full range of programs in Turkey, including political risk insurance for U.S. investors, under its bilateral agreement with Turkey. OPIC is also active in financing private investment projects implemented by U.S. investors in Turkey. OPIC-supported direct equity funds, including the USD 200 million Soros Private Equity Fund can make direct equity investments in private sector projects in Turkey. Small- and medium-sized U.S. investors in Turkey are also eligible to utilize the new Small Business Center facility at OPIC, offering OPIC finance and insurance support on an expedited basis for loans from USD 100,000 to USD 10 million. In 1987, Turkey became a member of the Multinational Investment Guarantee Agency (MIGA). The U.S. Government annually purchases approximately USD 24 million of local currency. Embassy purchases are made at prevailing market rates, which fluctuate in accordance with Turkey's free floating exchange rate regime. ۦ14. Labor Turkey has a youthful population of 71 million, 65.5 percent of which is in the 15-64 age group and 28.8 percent in the 0- 14 age group. Of the total population, 60.3 percent live in urban areas. The Turkish labor force numbers 24.9 million (22.6 million employed and 2.4 million unemployed); 35.9 percent of the workforce is in agriculture. The official unemployment rate was 9.7 in the third quarter of 2005. The literacy rate in Turkey is 88.3 percent (95.7 percent among men and 81.1 percent among women). Students are required to complete eight years of schooling and to remain in school until they are 15 years old. Those who complete primary school education account for 96.1 percent of the population, of which only 30.3 percent complete vocational or higher educations, including distance education. Turkey has an abundance of unskilled and semi-skilled labor. Although the Ministry of Education launched projects within the framework of EU programs to meet the needs of high-tech industries, there is a shortage of qualified workers. Individual high-tech firms, both local and foreign-owned, have generally conducted their own training programs for such job categories. Vocational training schools for some commercial and industrial skills exist in Turkey at the high school level. Formal apprenticeship programs remain in place, although informal training is dying out in some traditional occupations. Turkey's labor force has a reputation for being hardworking, productive and dependable. Labor-management relations have been generally good in recent years. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. Approximately 2.9 million of the 11 to 12 million wage and salary earners are unionized. The law prohibits discrimination on the basis of union membership but discrimination occurs occasionally in practice. There is no obligation for a worker to become a member of any union and there is no obligation to make a collective labor agreement for any sector. However, in order to be covered by a collective labor agreement, a worker should be a member of a union. In order to be a bargaining agent, a union must have a membership of more than half of the workers employed in a work place and include at least 10 percent of the workers employed in that specific sector. The Labor Law sets a series of steps to be followed, including mediation by an Arbitration Board, before a union may initiate a strike. Facilitating labor- employer relations is among the responsibilities of the Economic and Social Council, which aims at maintaining an effective dialogue between the state and social parties to encourage compromise in industrial relations. Turkey has signed many International Labor Organization (ILO) conventions protecting workers' rights, including conventions on Freedom of Association and Protection of the Right to Organize; Rights to Organize and to Bargain Collectively; Abolition of Forced Labor; Minimum Wage; Occupational Health and Safety; Termination of Employment and Elimination of the Worst Forms of Child Labor. Since 1980, Turkey has faced criticism by the ILO, particularly for shortcomings in enforcement of ILO Convention 87 (Convention Concerning Freedom of Association and Protection of the Right to Organize) and Convention 98 (Convention Concerning the Application of the Principles of the Right to Organize and to Bargain Collectively). However, in 1995 and 2001, constitutional amendments reduced restrictions on freedom of association and political activity on trade unions. The restrictions on the right to strike under Article 54 of the Constitution were preserved intact. Civil servants (defined broadly as all employees of the central government ministries, including teachers) are allowed to form trade unions and to engage in limited collective negotiations, but are prohibited from striking. The Job Security Bill provides basic job security for workers and requiring a valid reason for the termination of the labor contract at the initiative of the employer. Labor Law 4857 provided employers with greater flexibility in the organization of work and weakened to a certain extent the job security provided by the 2002 law. It contains many new provisions in conformity with international regulations of the ILO and the EU. There are no special laws or exemptions from regular labor laws in the country's 21 free trade and export processing zones, although these zones are otherwise regulated by Free Trade Zones Law 3218. Use of technology is encouraged at work. There is a special law concerning establishment of Technology Development Zones (called "techno-parks"). The state also contributes to research and development activities either though reimbursement or providing subsidies. The personnel expenses, cost of machinery, equipment and software, consultancy and other services, fees paid to scientific institutions, registration fees for patent and industrial designs to the Patent Institute, and the cost of R&D related materials may be reimbursed up to 60% by the state. This aid may be extended for up to 3 years. ۦ15. Foreign Trade Zones/Free Ports Firms operating in Turkey's 21 free zones have historically enjoyed many advantages. The zones are open to a wide range of activities, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of any customs or duties. Income generated in the zones is exempt from corporate and individual income taxation and from the value- added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. Sales to the Turkish domestic market are allowed, with goods and revenues transported from the zones into Turkey subject to all relevant import regulations. There are no restrictions on foreign firms operations in the free zones. Indeed, the operator of one of Turkey's most successful free zones located in Izmir is an American firm. Under Law 5084, taxpayers who possessed an operating license as of February 6, 2004, will not have to pay income or corporate tax on their earnings in the zone for the duration of their license. Earnings based on sale of goods manufactured in a zone will be exempt from income and corporate tax until the end of the year in which Turkey becomes a member of the European Union. Earnings secured in a free zone under corporate tax immunity and paid as dividends to real person shareholders in Turkey or to real person or legal-entity shareholders abroad will be subject to 10 percent withholding tax. The tax immunity of the wage and salary income earned by persons employed in the zones by taxpayers possessing an operating license as of February 6, 2004, will remain in effect until December 31, 2008, or the expiration date of the operating license, whichever is earlier. The implications of the new rules are complex, and interested parties may want to consult with a tax advisor and/or the Foreign Trade Undersecretariat (web site: www.dtm.gov.tr). ۦ16. Foreign Direct Investment Statistics With the foreign investment permit requirement in place until 2003, the Turkish Treasury collected detailed sector and country of origin data for authorized FDI. Data collected since the abolition of the permit requirement, by the Central Bank and other entities, may not be directly comparable to data collected prior to 2003. According to Turkish Treasury data, as of November 2005, there are 10,984 foreign firms invested and operating in Turkey. The aggregate actual inflows reached USD 21.7 billion. In 2004, EU countries accounted for 79.5 percent of FDI inflows to Turkey, OECD countries accounted for 16.7 percent, and Middle East countries for 3.8 percent. Over the past two decades, the Netherlands (32.3 percent) has been the top source of foreign investment, followed by Germany (10.1 percent), United Kingdom (10.0 percent) and the U.S. (9.7 percent) Because of the absence of a bilateral tax treaty until 1998, much U.S.-origin capital was invested in Turkey through third-country subsidiaries. According to U.S. Commerce Department data, U.S. company investment amounted to about USD 2 billion in 2003. By unofficial estimates, the U.S. may be one of the largest sources of foreign investment in Turkey. In 2004, about 75.8 percent of foreign direct investment took place in services, 18.0 percent in manufacturing, 5.9 percent in mining and 0.3 percent in agriculture. FDI Inflow by Years (million USD) Year Actual Inflow(Cumulative) Inflow/GDP No firms
1980-1988 1,172 1989 663 0.80 1,525 1990 684 0.67 1,856 1991 907 0.69 2,123 1992 911 0.78 2,330 1993 746 0.56 2,554 1994 636 0.64 2,830 1995 934 0.66 3,163 1996 914 0.53 3,582 1997 852 0.54 4,068 1998 953 0.49 4,533 1999 813 0.41 4,950 2000 1,707 0.85 5,328 2001 3,288 2.21 5,841 2002 1,042 0.48 6,280 2003 1,702 0.71 6,511 2004 2,765 0.92 8,661 2005* 3,742 1.42 10,984 TOTAL 21,666 10,984 Source: Central Bank of Turkey, State Institute of Statistics, (*)January through September 2005. (**) Includes capital inflows, foreign loans and real estate investment. FDI Stock by Source Country (end of 2004/ million USD) Country Value Share (percent) Netherlands 9,526 32.3 Germany 2,969 10.1 United Kingdom 2,952 10.0 U.S.A 2,859 9.7 France 2,450 8.3 Italy 1,207 4.1 Switzerland 1,072 3.6 Finland 1,043 3.5 Belgium 864 2.9 Japan 846 2.8 Canada 825 2.8 Others 2,897 9.8 Total 29,510 100.0 Source: Central Bank of Turkey. The investment permit requirement lifted as of 2004. Turkey's External Investment by Country (As of December 2005) Country Amount Share (USD millions) Netherlands 2,485.2 31.9 Azerbaijan 1,891.6 24.3 United Kingdom 521.0 6.7 Germany 461.9 5.9 Kazakhstan 442.2 5.7 Luxembourg 249.9 3.2 United States 186.7 2.4 Russia 170.4 2.2 Romania 158.4 2.0 Switzerland 108.8 1.4 France 94.3 1.2 Others 1,020.7 13.1 Total 7,791.1 100.0 Source: General Directorate of Banking and Foreign Exchange, Treasury Major foreign investors Turkey's foreign investors include Telecom Italia, Renault, Toyota, Fiat, Castrol, Enron Power, Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler, Chase Manhattan, AEG, Bridgestone-Firestone, Cargill, Novartis, Coca Cola, Colgate-Palmolive, General Electric, ITT, Ford Motor Co., Lockheed Martin, Goodyear, Aventis, McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen, Abbot Laboratories, Aria, Bechtel, Shell, Delphi-Packard, Toreador/Madison Oil, AES, GE, NRG, Normandy Mining, Marsa- Kraft-Jacobs Suchard, ESBAS A.S., Archer Daniels Midland, Merck, Sharp Dohme, Bunge, and Bausch and Lomb. McEldowney
UNCLAS SECTION 01 OF 12 ANKARA 000304
SIPDIS
STATE FOR EB/IFD/OIA TREASURY FOR OASIA DEPT PLEASE PASS USTR FAS FOR ITP/PAUL SPENCER USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: EINVââ¬â°[Foreign Investments], KTDBââ¬â°[National Trade Data Bank], EFINââ¬â°[Financial and Monetary Affairs], TUââ¬â°[Turkey] SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY
Ref: STATE 250356
This is the first of two cables transmitting e following is the 2005 Investment Climate Statement for Turkey:
ۦ1. OPENNESS TO FOREIGN INVESTMENT
The Government of Turkey (GOT) views foreign direct investment as vital to the country's economic development and prosperity. Accordingly, Turkey has one of the most liberal legal regimes for FDI in the OECD. With the exception of some sectors (see below), areas open to the Turkish private sector are generally open to foreign participation and investment. However, all companies - regardless of nationality of ownership - face a number of obstacles: excessive bureaucracy, weaknesses in the judicial system, high and inconsistently collected taxes, weaknesses in corporate governance, sometimes unpredictable decisions taken at the municipal level, and frequent, sometimes unclear changes in the legal and regulatory environment. Historically, investment has also been discouraged by high inflation and political and macroeconomic uncertainties, though Turkey has become much more stable in the years following the 2001 economic and financial crisis.
As a result, FDI inflows, at well below one percent of GDP over the last decade, have been far below FDI received by more investor-friendly emerging markets and also below Turkey's potential. The GOT's far-reaching economic reform program agreed with the World Bank and IMF, and motivated also by multilateral agreements and EU accession, has begun to address these problems and should allow FDI inflows to grow.
Regulations governing foreign investment are, in general, transparent. Legislation approved by Parliament in 2003 (Law 4875 on Direct Foreign Investment) repealed 1954 legislation on foreign investment. The 2003 law liberalized the foreign direct investment regime by eliminating screening of foreign investors in favor of a notification system and providing national treatment in acquisition of real estate by foreign-owned entities registered under Turkish law. The law also abolished specific minimum capital requirement for foreign investments (general capital requirements apply to all companies); the requirement to seek permission from Treasury if a capital increase would change the participation ratio between the foreign investor and any local partners; and the requirement for Turkish companies to register with Treasury any licensing, management, or franchising agreements concluded with foreign persons.
Foreign investors are subject to restrictions on establishment in certain sectors. The equity participation ratio of foreign shareholders is restricted to 20 percent in broadcasting and 49 percent in aviation, maritime transportation, and many value-added telecommunication services (though telecommunications legislation has been amended to allow certain company- specific exceptions to these limits). However, companies receive full national treatment once they are established. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT for both domestic and foreign investors.
The GOT privatizes State Economic Enterprises through block sales, public offerings, or a combination of both. Foreign investors generally receive national treatment in privatization programs. Law 5189 of 2004 removed the limit on foreign ownership of Turk Telecom, the dominant provider of voice and other telecommunications services. The company's privatization plan foresees a block sale of 55 percent of the company.
The Turkish Parliament passed legislation in 2003 streamlining the company registration process (see Section 8 - Transparency of the Regulatory System). Another 2003 law on work permits for foreign citizens gave the Labor and Social Security Ministry additional authority in this area (see Section 5 - Performance Requirements/Incentives). Inflation accounting was introduced at the end of 2003. Law 5177, published in June 2004, amended existing legislation on mining with a view toward making this sector more accessible to foreign investment by streamlining permit requirements and procedures and removing limits on mining on certain types of land. At the end of 2003, Parliament replaced a complex series of taxes on financial instruments with a 15 percent tax on all of them. In 2005, Turkey also plans to reduce the rate of corporate tax and to broaden the set of goods and services eligible for lower value added tax rates.
Turkish law and regulation affecting the investment climate continues to evolve. Potential investors should check with appropriate Turkish government sources for current and detailed information. The following web site provides the text of regulations governing foreign investment and incentives as well as other useful background information: http://www.treasury.gov.tr/for_inv.htm. Additional information is available at: http://www.investinginturkey.gov.tr
ۦ2. CONVERSION AND TRANSFER POLICIES
Turkish law guarantees the free transfer of profits, fees and royalties, and repatriation of capital. This guarantee is reflected in Turkey's Bilateral Investment Treaty with the United States, which mandates unrestricted and prompt transfer in a freely usable currency at a legal market-clearing rate for all funds related to an investment. There is no difficulty in obtaining foreign exchange. However, as the result of a 1997 court decision, the Turkish Government has blocked full repatriation of investments by oil companies under Article 116 of the 1954 Petroleum Law, which protected foreign investors from the impact of lira depreciation. Affected companies have challenged the 1997 decision and the case is currently in the Turkish court system.
ۦ3. EXPROPRIATION AND COMPENSATION
Under the 1990 Bilateral Investment Treaty with the United States (codifying existing Turkish law), expropriation can only occur in accordance with international law and due process. Expropriations must be for public purpose and non-discriminatory. Compensation must be reasonably prompt, adequate, and effective. Under the Bilateral Investment Treaty, U.S. investors have full access to the local court system and the ability to take the host government directly to third party international binding arbitration to settle investment disputes. There is also a provision for state-to-state dispute settlement.
As a practical matter, the GOT occasionally expropriates private property for public works or for State Enterprise industrial projects. The GOT agency expropriating the property negotiates and proposes a purchase price. If the owners of the property do not agree with the proposed price, they can go to court to challenge the expropriation or ask for more compensation. There are no outstanding expropriation or nationalization cases.
ۦ4. DISPUTE SETTLEMENT
There are several outstanding investment disputes between U.S. companies and Turkish government bodies, particularly in the energy and tourism sectors.
Turkey's legal system provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws. The court system is overburdened, however, which sometimes results in slow decisions and judges lacking sufficient time to grasp complex issues. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders. Judgments of foreign courts, under certain circumstances, need to be reconsidered by local courts before they are accepted and enforced. . Monetary judgments are usually made in local currency, but there are provisions for incorporating exchange rate differentials in claims.
Turkey is a member of the International Center for the Settlement of Investment Disputes (ICSID), and is a signatory of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Turkey ratified the Convention of the Multinational Investment Guarantee Agency (MIGA) in 1987.
Turkish law accepts binding international arbitration of investment disputes between foreign investors and the state; this principle is included in the U.S.-Turkish Bilateral Investment Treaty (BIT). In practice, however, Turkish courts have on at least one occasion failed to uphold an international arbitration ruling involving private companies.
ۦ5. PERFORMANCE REQUIREMENTS/INCENTIVES
Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS).
Turkey provides investment incentives to both domestic and foreign investors. These include a corporate tax exemption of 40 percent of specified investment expenses deductible from future taxable profits for investments greater than 5,000 new TL (approximately USD 3,700). (New Turkish currency was issued on January 1, 2005, with 1 new Turkish lira equal to 1,000,000 (old) Turkish lira.) Certain other incentives may require an incentive certificate from the Turkish Treasury Undersecretariat.
Law 5084, which went into effect in early 2004, encourages investment in provinces with annual per capita income below USD 1,500 as well as to high priority development regions. For low income provinces and under certain conditions, the law provides for withholding tax incentives on income tax; social security premium incentives; free land; and electricity price support. These incentives will remain in effect until the end of 2008, except for allocation of free public land, which has no expiration date. The same law also limits certain tax preferences previously enjoyed by Turkey's free zones (see below). The Turkish Government is reported to be considering expanding the number of provinces eligible for the investment incentives.
There are no performance requirements imposed as a condition for establishing, maintaining, or expanding an investment. There are no requirements that investors purchase from local sources or export a certain percentage of output. However, domestic or foreign investors who commit to realizing USD 10,000 of exports upon completion of the investment may be exempt from certain fees and taxes, such as those related to land registration or company establishment. Investors' access to foreign exchange is not conditioned on exports.
There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms. There are no government imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content - for goods or services - or local equity, import substitution, export requirements or targets, employment of host country nationals, technology transfer, or local financing.
The GOT does not require that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report, and balance sheets to the Treasury's Foreign Investment Directorate every year by May.
With the exceptions noted under Section 1 "Openness to Foreign Investment" and Section 8 "Transparency of the Regulatory System", Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign capital and business on an MFN basis. American and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis. Expatriates may be assigned as managers or technical staff. We are aware of one case in the tourism sector in which denial of a residence permit has hindered operations for a foreign investor. A 2003 law (no. 4817) on work authorizations for foreign nationals gave the Ministry of Labor and Social Security more authority over work permits.
Outside of the agricultural sector and many services, Turkey generally has a liberal foreign trade regime. There are no discriminatory or preferential export or import policies directly affecting foreign investors. Turkey harmonized its export incentive regime with the European Union in 1995, prior to the start of the Customs Union. Turkey currently offers a number of export incentives, including credits through the Turkish Eximbank, energy incentives, and research and development incentives. Foreign investors can participate in these export incentive programs on a national treatment basis. More information on Turkey's trade regime can be found at www.foreigntrade.gov.tr.
Military procurement generally requires an offset provision in tender specifications. The offset guidelines were modified to encourage direct investment and technology transfer.
ۦ6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
With the exceptions noted in Section 1, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100 percent.
Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Turkey is adopting the EU's competition policy; a Competition Board was established in 1997 to implement the 1994 competition (anti-monopoly) law.
ۦ7. PROTECTION OF PROPERTY RIGHTS
Secured interests in property, both movable and real, are recognized and enforced. There is a recognized and reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow in rendering decisions and that they are susceptible to external influence (see "Dispute Settlement").
Turkey's intellectual property rights regime has improved in recent years, but still presents serious problems. Turkey was elevated from the Special 301 Watch List to the Priority Watch List in 2004, due to concerns about lack of pharmaceuticals data exclusivity protection and continued high levels of piracy and counterfeiting of copyrighted and trademarked materials.
Turkey's 2001 copyright law substantially modernized the legal regime, providing deterrent penalties for copyright infringement. However, it does not prohibit circumvention of technical protection measures, a key feature of the World Intellectual Property Organization (WIPO) "Internet" treaties. In addition, the Turkish courts have generally not rendered deterrent penalties to pirates as provided in the copyright law. Legislation enacted in March 2004 contains several strong anti-piracy provisions, including a ban on street sales of all copyright products and authorization for law enforcement authorities to take action without a complaint by the rightholder. However, the law also reduces potential prison sentences in piracy convictions.
In 1995, new patent, trademark, industrial design, and geographic indicator laws revamped Turkey's foundation for industrial property protection. Turkey also acceded to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. The Turkish Patent Institute (TPI) was established in 1994 to support technological progress, protect intellectual property rights and provide public information on intellectual property rights, but its effectiveness has reportedly been limited by lack of resources.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline."
Parliament amended the Patent Law in June 2004. The new law provides for penalties for infringement of up to 3 years or 47,000 new TL (approximately USD 35,000) in fines, or both, and closure of the business for up to one year. However, some companies in the pharmaceutical sector have criticized provisions that give judges wider discretion over penalties in infringement cases, delay the initiation of infringement suits until after the patent is approved and published, and permit use of a patented invention to generate data needed for the marketing approval of generic pharmaceutical products.
The Health Ministry has accepted applications to register generic copies of products which have a valid patent in Turkey; in the absence of a system for patent linkage, it may become possible for generics manufacturers to register a copy of a brand name drug with a valid Turkish patent, damaging the interests of the patent owner.
The key intellectual property concern for research-based pharmaceutical companies is Turkey's lack of data exclusivity protection for confidential test data. U.S. industry contends that numerous products infringing data exclusivity have been approved or are pending review by the Turkish Health Ministry.
Trademark holders also contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey, especially of apparel, pharmaceuticals, film, cosmetics, detergent and other products.
In 2004, Turkey published its first Plant Variety Protection (PVP) Law. However, at least one subsidiary of a U.S. seed company has been unable to obtain protection for its commercial seed under this new law.
Further information on the intellectual property situation in Turkey is available in the National Trade Estimate report, available at the U.S. Trade Representative's website: www.ustr.gov.
ۦ8. TRANSPARENCY OF THE REGULATORY SYSTEM
The GOT has adopted policies and laws that in principle should foster competition and transparency. However, foreign companies in several sectors claim that regulations are sometimes applied in a nontransparent manner.
Turkish legislation generally requires competitive bidding procedures in the public sector. In 2003, Law 4734 on Public Procurement entered into force. The law established a board to oversee public tenders, and lowered the minimum bidding threshold at which foreign companies can participate in state tenders. The law gives preferences to domestic bidders, Turkish citizens and legal entities established by them, as well as to corporate entities established under Turkish law by foreign companies. The public procurement law may be further amended in the future.
In general, labor, health and safety laws and policies do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy. Certain tax policies distort investment decisions. High taxation of cola drinks discourages investment in this sector. Generous tax preferences for free zones have provided a stimulus to investment in these zones, though these preferences will be trimmed in the future (see free zones section). Similarly, incentives for investment in certain low-income provinces appear to be stimulating investment there (see Performance Requirements/Incentives Section).
Bureaucratic "red tape" has been a significant barrier to companies, both foreign and domestic. Law 4884 of June 2003 simplifies company establishment procedures. The law repeals the permit requirement from the Industry and Commerce Ministry for certain firms, institutes a single company registration form and enables individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges. The goal is to enable registration to be completed in as little as one day and to encourage electronic sharing of documents. The government is also considering other measures to streamline other business procedures as part of its effort to improve the business climate.
ۦ9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
The government has taken a number of important steps in recent years to strengthen and better regulate the banking system, whose weaknesses had contributed to macroeconomic instability over the previous decade and played an important role in the 2000-2001 financial crisis.
A 1999 banking law established an independent Banking and Regulation and Supervision Agency (BRSA) to monitor and supervise Turkey's banks. The BRSA, which began functioning in 2000, is headed by a board whose seven members are appointed by the cabinet for six-year terms. The law's provision's also toughened conditions for establishing new banks or branches, set credit limits to protect bank solvency, and strengthen regulatory and sanctioning powers, including authorizing the board to merge weak banks with stronger ones.
The law also created an independent deposit insurance agency, the State Deposit Insurance Fund (SDIF). Until 2004, BRSA and SDIF had the same board and shared staff and offices, though they were separate legal entities. Since the beginning of 2004, BRSA and SDIF's boards and staffing have been separated and SDIF's headquarters moved to Istanbul.
During and after the 2000-2001 financial crisis, many Turkish banks became insolvent or undercapitalized, and SDIF, in coordination with BRSA, took over 21 financial institutions. This includes Imar Bank, which was taken over on July 4, 2003. The SDIF has recapitalized these banks, and has been selling or liquidating them, at the same time as it is negotiating repayment agreements from the banks' former owners covering these banks' portfolio of credits to affiliated companies. The BRSA also has issued a regulation limiting the extent of connected lending (between a bank and related corporate entities) and requiring frequent BRSA on-site monitoring.
In early 2005, the government is preparing a new banking law that helps to bring the bank regulatory framework in line with European Union norms. Once enacted, the new law is expected to further tighten bank regulation, notably by broadening the range of expertise inspectors can draw on when conducting on-site inspections.
Following the 2001 crisis, the government restructured state-owned banks, minimizing the scope for political interference, liquidating one of the banks, and slating these banks for eventual privatization. However, the process of privatizing the three remaining state-owned banks has stalled.
Because of high local borrowing costs and short repayment periods, both foreign and local firms frequently seek credit from international markets to finance their activities. As of end-2004, there were 48 commercial banks (including 12 foreign banks) and 14 development or investment banks operating in Turkey. Total sectoral assets were approximately USD 184 billion, or about 70 percent of GNP, as of July 2004 according to data from the Banking Regulation and Supervision Board. The three state- owned commercial banks and the top 4 privately-capitalized banks hold approximately 74 percent of total assets.
There is a regulatory system established to encourage and facilitate portfolio investments, though it needs improvements in transparency, accounting, and enforcement provisions to bring it up to EU and U.S. standards. The Istanbul Stock Exchange (ISE), formed in 1986, is becoming a significant emerging market stock exchange. As of January 2005, 276 companies were listed on the exchange. However, Turkey has yet to develop other capital markets. The Capital Markets Board is responsible for overseeing the activities of capital markets, including activities of ISE-quoted companies, and securities and investment houses. A new Capital Markets Law is under consideration.
The Turkish private sector is dominated by a number of large holding companies, whose upper management is family- controlled. Most large businesses continue to float publicly only a minority portion of company shares in order to limit outside interference in company management. There has been no attempt at a hostile takeover by either international or domestic parties in recent memory.
There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation or association in order to limit or prohibit foreign investment, participation, or control. Neither is there any attempt by the private sector or government to restrict foreign participation in industry standard- setting consortia or organizations.
ۦ10. POLITICAL VIOLENCE
Terrorist bombings -- some with significant numbers of casualties -- over the past two years have struck religious, political, and business targets in a variety of locations in Turkey. The potential remains throughout Turkey for violence and terrorist actions against U.S. citizens and interests, both by transnational and indigenous terrorist organizations. In November 2003 the Al-Qa'ida network was responsible for four large suicide bombings in Istanbul that, among other targets, hit western interests. Indigenous terrorist groups also continue to target Turkish as well as U.S. and Western interests. In June 2004 the indigenous terrorist group PKK/KADEK/KONGRA GEL announced an end to their "unilateral ceasefire." Since the announcement, there have been repeated attacks against Turkish targets in the southeast region of Turkey, where the group has traditionally concentrated its activities. In addition, there have been bombings and other incidents in Istanbul, Bodrum, Antalya, and Mersin. Other terrorist groups, including the Turkish group Revolutionary People's Liberation Party/Front (DHKP/C), continue to target Turkish officials and various civilian facilities and may use terrorist activity to make political statements. In 2002, 2003, and 2004, civilian venues such as courthouses and fast food restaurants were the targets of minor bomb attacks, which have resulted in small numbers of casualties among bystanders. Similar, random bombings are likely to continue in unpredictable locations. Americans traveling to Southeastern Turkey, the site of PKK/KADEK/KONGRA GEL actions, should exercise caution.
Although the Turkish government takes air safety seriously and maintains strict controls, particularly on international flights, hijacking attempts have occurred as recently as 2003. For the latest security information on Turkey and throughout the world, travelers should monitor the State Department web site http://travel.state.gov, where the current Worldwide Caution Public Announcement, Travel Warnings, and Public Announcements can be found.
ۦ11. CORRUPTION
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT LARGE, PARTICULARLY IN GOVERNMENT PROCUREMENT. AMERICAN COMPANIES OPERATING IN TURKEY HAVE COMPLAINED ABOUT BEING SOLICITED, WITH VARYING DEGREES OF PRESSURE, BY MUNICIPAL OR LOCAL AUTHORITIES FOR "CONTRIBUTIONS TO THE COMMUNITY". PARLIAMENT CONTINUES TO PROBE CORRUPTION ALLEGATIONS INVOLVING SENIOR OFFICIALS IN PREVIOUS GOVERNMENTS, PARTICULARLY IN CONNECTION WITH ENERGY PROJECTS. IN 2003, AFTER THE GOVERNMENT INTERVENED IN A BANK OWNED BY THE UZAN GROUP, EVIDENCE OF CORRUPT PRACTICES AT THE BANK EMERGED. Recent public procurement reforms were designed to make procurement more transparent and less susceptible to political interference, including through the establishment of an independent public procurement board with the power to void contracts. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders to some degree.
Turkish legislation outlaws bribery and some prosecutions of government officials for corruption have taken place, but enforcement is uneven. Turkey ratified the OECD Convention on Combating Bribery of Public Officials, and passed implementing legislation in January 2003 to provide that bribes of foreign officials, as well as domestic, are illegal and not tax deductible. In 2003, Turkey signed the UN Convention Against Corruption.
The Prime Ministry's Inspection Board, which advises a new Corruption Investigations Committee, is responsible for investigating major corruption cases. Nearly every state agency has its own inspector corps responsible for investigating internal corruption. The National Assembly can establish investigative commissions to examine corruption allegations concerning Cabinet Ministers for the Prime Minister; a majority vote in the parliament is needed to send these cases to the Supreme Court for further action.
Transparency International has an affiliated NGO in Istanbul.
ۦ12. BILATERAL INVESTMENT AGREEMENTS
Since 1985, Turkey has been negotiating and signing agreements for the reciprocal promotion and protection of investments. Turkey has signed or initiated negotiations on bilateral investment treaties with 69 countries. Fifty- two of these agreements are now in force, including with the United States, United Kingdom, Germany, the Netherlands, Belgium, Luxembourg, Denmark, Austria, Sweden, Switzerland, Spain, Finland, Italy, Portugal, Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh, China, Japan, South Korea, Indonesia, Croatia, Cuba, the Czech Republic, Estonia, Russian Federation, Azerbaijan, Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, Belarus, Lithuania, Latvia, Slovakia, Macedonia, Pakistan, Turkmenistan, Moldova, Kyrgyzstan, Albania, Bulgaria, Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece and Israel.
Turkey's bilateral investment treaty with the United States came into effect on May 18, 1990. A bilateral tax treaty between the two countries took effect on January 1, 1998. Turkey has signed avoidance of double taxation agreements with 59 countries; 39 of these are in force.
ۦ13. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
The Overseas Private Investment Corporation (OPIC) offers a full range of programs in Turkey, including political risk insurance for U.S. investors, under its bilateral agreement with Turkey. OPIC is also active in financing private investment projects implemented by U.S. investors in Turkey. OPIC-supported direct equity funds, including the USD 200 million Soros Private Equity Fund can make direct equity investments in private sector projects in Turkey. Small- and medium-sized U.S. investors in Turkey are also eligible to utilize the new Small Business Center facility at OPIC, offering OPIC finance and insurance support on an expedited basis for loans from USD 100,000 to USD 10 million. In 1987, Turkey became a member of the Multinational Investment Guarantee Agency (MIGA).
The U.S. Government annually purchases approximately USD 24 million of local currency. Embassy purchases are made at prevailing market rates, which fluctuate in accordance with Turkey's free floating exchange rate regime.
ۦ14. LABOR
The Turkish labor force numbers 25.3 million (22.9 million employed and 2.4 million unemployed); 35.9 percent of the workforce is in agriculture. The official unemployment rate was 9.5 in the third quarter of 2004.
Students are required to complete eight years of schooling and to remain in school until they are 15 years old. Turkey has an abundance of unskilled and semi-skilled labor. However, there is a shortage of qualified workers for highly automated high-tech industries. Individual high-tech firms, both local and foreign-owned, have generally conducted their own training programs for such job categories. Vocational training schools for some commercial and industrial skills exist in Turkey at the high school level. Apprenticeship programs, both formal and informal, remain in place, although they are dying out in some traditional occupations. Turkey's labor force has a reputation for being hardworking, productive and dependable.
Labor-management relations have been generally good in recent years. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. Since 1980 Turkey has faced criticism by the ILO, particularly for shortcomings in enforcement of ILO Convention 87 (Convention concerning Freedom of Association and Protection of the Right to Organize) and Convention 98 (Convention concerning the Application of the Principles of the Right to Organize and to Bargain Collectively).
IN 2002, PARLIAMENT APPROVED A JOB SECURITY BILL, PROVIDING BASIC JOB SECURITY FOR WORKERS AND REQUIRING A VALID REASON FOR THE TERMINATION OF THE LABOR CONTRACT AT THE INITIATIVE OF THE EMPLOYER. THE LAW CAME INTO EFFECT ON 15 MARCH 2003. IN 2003, THE LABOR LAW OF 1971 (NO.1475) WAS REPLACED BY A NEW LABOR LAW (NO.4857), WHICH PROVIDED EMPLOYERS WITH GREATER FLEXIBILITY IN THE ORGANIZATION OF WORK AND WEAKENED TO A CERTAIN EXTENT THE JOB SECURITY PROVIDED BY THE 2002 LAW.
In 1995 and 2001, constitutional amendments reduced restrictions on freedom of association and political activity of trade unions. However, the restrictions on the right to strike under Article 54 of the Constitution were preserved intact. Under the Law on Collective Labor Agreements, Strikes and Lockouts, some restrictions on the right to strike were repealed in 1988. Civil servants (defined broadly as all employees of central government ministries, including teachers) are allowed to form trade unions and to engage in limited collective negotiations, but are prohibited from striking.
ۦ15. FOREIGN TRADE ZONES/FREE PORTS
Firms operating in Turkey's free zones have historically enjoyed many advantages, but these will be limited in the future by recent legislation. Twenty-one zones have been established since passage of the Turkish law on free zones in 1985. The zones are open to a wide range of activities, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of any customs or duties. Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. Sales to the Turkish domestic market are allowed, with goods and revenues transported from the zones into Turkey subject to all relevant import regulations. There are no restrictions on foreign firms operations in the free zones. Indeed, the operator of one of Turkey's most successful free zones located in Izmir is an American firm.
Law 5084 revised the free zones law to effectively eliminate certain income and corporate tax immunities for the zones. Under the new rules, taxpayers who possessed an operating license as of February 6, 2004 will not have to pay income or corporate tax on their earnings in the zone for the duration of their license. Earnings based on sale of goods manufacturing in a zone will be exempt from income and corporate tax until the end of the year in which Turkey becomes a member of the European Union. Earnings secured in a free zone under corporate tax immunity and paid as dividends to real person shareholders in Turkey or to real person or legal-entity shareholders abroad will be subject to 10 percent withholding tax. The tax immunity of the wage and salary income earned by persons employed in the zones by taxpayers possessing an operating license as of February 6, 2004 will remain in effect until December 31, 2008, or the expiration date of the operating license, whichever is earlier. The implications of the new rules are complex, and interested parties may want to consult with a tax advisor and/or the Foreign Trade Undersecretariat (web site: www.dtm.gov.tr).
ۦ16. FOREIGN DIRECT INVESTMENT STATISTICS
With the foreign investment permit requirement in place until 2003, the Turkish Treasury collected detailed sectoral and country of origin data for authorized FDI. Data collected since the abolition of the permit requirement, by the Central Bank and other entities, is not directly comparable to data collected prior to 2003.
According to Turkish Treasury data, as of June 2003, there are 6,511 foreign firms invested and are operating in Turkey. The Turkish government has provided permits for foreign capital since 1980 amounting to USD 35.2 billion, and aggregate actual inflows reached USD 16.4 billion. In 2003, EU countries accounted for 74.3 percent of authorized new foreign investment, OECD countries accounted for 93.7 percent, and Islamic countries for 3.7 percent. Over the past two decades, France (16.4 percent) has been the top source of foreign investment, followed by the Netherlands (15.8 percent), Germany (13.0 percent) and the U.S. (11.5 percent) (Note that these figures are based on the amount of authorized investment, not on actual capital inflows.) Because of the absence of a bilateral tax treaty until 1998, much U.S.-origin capital was invested in Turkey through third-country subsidiaries. According to U.S. Commerce Department data, U.S. company investment amounted to about USD 2 billion in 2003. By unofficial estimates, the U.S. may be one of the largest sources of foreign investment in Turkey.
In 2003, about 58.9 percent of authorized foreign investment took place in manufacturing, 30.23 percent in services, 10.3 percent in mining and 0.6 percent in agriculture. The sub-sectors with the greatest amount of authorized foreign investment include banking (10.6 percent); communications (9.4 percent); food, beverage and tobacco processing (8.0 percent); and trade (6.5 percent). Between 1980 and June 2003, 53.0 percent of actual capital inflows were invested in manufacturing, 44.0 percent in services, 1.8 percent in agriculture, and 1.2 percent in mining. The finance and communications sectors received the highest share of increased foreign direct investment permits in 2003.
FDI Inflow by Years (million USD)
Year Actual Inflow/GDP No firms Inflow (Cumulative) 1980-1988 1,172 1989 663 0.80 1,525 1990 684 0.67 1,856 1991 907 0.69 2,123 1992 911 0.78 2,330 1993 746 0.56 2,554 1994 636 0.64 2,830 1995 934 0.66 3,163 1996 914 0.53 3,582 1997 852 0.54 4,068 1998 953 0.49 4,533 1999 813 0.41 4,950 2000 1,707 0.85 5,328 2001 3,288 2.21 5,841 2002 1,042 0.48 6,280 2003 1,702 0.71 6,511 2004(*) 2,216 1.02 N/A TOTAL 20,140 6,511
Source: Central Bank of Turkey, State Institute of Statistics, (*)January through November 2004. (**) Includes capital inflows, foreign loans and real estate investment.
FDI Inflow by Source Country (1999-2002/ million USD)
Country Cumulative Value Share (percent)
Italy 1,968 30.9 Netherlands 962 15.1 U.S.A. 793 12.4 United Kingdom 647 10.1 Germany 514 8.1 Bahrain 323 5.1 Japan 267 4.2 France 263 4.1 Switzerland 104 1.6 Belgium-Luxemburg 25 0.4 Spain 23 0.4 Others 488 7.7
Total 6,377 100.0
Source: Turkish Treasury Undersecretariat, General Directorate of Foreign Investment. Updated information has not been issued for the period following 2002.
Sectoral Breakdown of FDI Permits (1980-2003*/ million USD) Sector Cumulative Value Share (percent)
Manufacturing 18,641 53.0 Services 15,453 44.0 Agriculture 616 1.8 Mining 442 1.2
Total 35,152 100.0
Source: General Directorate of Foreign Capital (*) as of June 2003
Main Manufacturing Industry Sub-Sectors Receiving FDI Permits
Industry Sub-Sector Share in Manufacturing Industry (percent)*
Chemical Products 18.3 Food 14.7 Transport Equipment 12.3 Electrical Machinery 5.8 Garment Industry 3.9 Iron and Steel 3.4
Source: General Directorate of Foreign Capital (*) as of June 2003
Turkey's External Investment by Country (As of December 2004)
Country Amount Share (USD millions) Netherlands 2,248.8 34.8 Azerbaijan 1,043.6 16.1 United Kingdom 524.2 8.1 Germany 472.1 7.2 Kazakhstan 434.5 6.7 Luxembourg 248.7 3.9 United States 179.8 2.8 Russia 159.7 2.5 France 93.4 1.4 Switzerland 84.9 1.3 Others 976.5 15.1
Total 6,466.2 100.0 Source: General Directorate of Banking and Foreign Exchange, Treasury
Major foreign investors
Turkey's foreign investors include Telecom Italia, Renault, Toyota, Fiat, Castrol, Enron Power, Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler, Chase Manhattan, AEG, Bridgestone-Firestone, Cargill, Novartis, Coca Cola, Colgate-Palmolive, General Electric, ITT, Ford Motor Co., Lockheed Martin, Goodyear, Aventis, McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen, Abbot Laboratories, Aria, Bechtel, Shell, Delphi-Packard, Toreador/Madison Oil, AES, GE, NRG, Normandy Mining, Marsa-Kraft-Jacobs Suchard, ESBAS A.S., Archer Daniels Midland, Merck, Sharp Dohme, Bunge, and Bausch and Lomb. Edelman
UNCLAS SECTION 01 OF 03 ANKARA 004548
SIPDIS
STATE FOR EB/IFD/OIA TREASURY FOR OASIA DEPT PLEASE PASS USTR FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: EINVââ¬â°[Foreign Investments], KTDBââ¬â°[National Trade Data Bank], EFINââ¬â°[Financial and Monetary Affairs], TUââ¬â°[Turkey] SUBJECT: 2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY - PART II
Ref: STATE 128494
The following is the second of four cables transmitting the 2003 Investment Climate Statement for Turkey:
ۦ5. PERFORMANCE REQUIREMENTS/INCENTIVES
Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS).
Turkey provides investment incentives to both domestic and foreign investors, though these were scaled back in 2003. These include a corporate tax exemption of 40 percent of specified investment expenses deductible from future taxable profits for investments greater than 5 billion TL (approximately USD 3,600). Certain other incentives may require an incentive certificate from the Turkish Treasury Undersecretariat. Investment incentives are defined in a May 2003 Finance Ministry decree. For more information on the Turkish incentive system, please visit: www.investinturkey.gov.tr/incentives.htm).
There are no performance requirements imposed as a condition for establishing, maintaining, or expanding an investment. There are no requirements that investors purchase from local sources or export a certain percentage of output. However, domestic or foreign investors who commit to realizing USD 10,000 of exports upon completion of the investment may be exempt from certain fees and taxes, such as those related to land registration or company establishment. Investors' access to foreign exchange has no relation to exports.
There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms. There are no government imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content - for goods or services - or local equity, import substitution, export requirements or targets, employment of host country nationals, technology transfer, or local financing.
The GOT does not request that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report, and balance sheets to the Treasury's Foreign Investment Directorate every year by May.
With the exceptions noted under Section 1 "Openness to Foreign Investment" and Section 8 "Transparency of the Regulatory System", Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign capital and business, on a MFN basis. American and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.
Visa, residence, or work permit requirements have not generally inhibited foreign investors. Expatriates may be assigned as managers or technical staff. We are aware of one case in the tourism sector in which denial of a residence permit has hindered operations for a foreign investor. A 2003 law (no. 4817) on work authorizations for foreign nationals should give the Ministry of Labor and Social Security more authority over work permits. Implementing regulations are to be issued later this year.
Outside of the agricultural sector, Turkey generally has a liberal foreign trade regime. There are no discriminatory or preferential export or import policies directly affecting foreign investors. Turkey harmonized its export incentive regime with the European Union in 1995, prior to the start of the Customs Union. Turkey currently offers a number of export incentives, including credits through the Turkish Eximbank, energy incentives, and research and development incentives. Cash incentives for exporters have been eliminated. Foreign investors can participate in these export incentive programs on a national treatment basis. More information on Turkey's trade regime can be found at www.foreigntrade.gov.tr. Military procurement generally requires an offset provision in tender specifications when the estimated value of the imported goods and/or services exceeds five million dollars. Turkish procedures provide little incentive for U.S. companies to satisfy offset requirements (the obligation to invest or buy Turkish exports as a condition of winning defense contracts) by investing in non-defense industries. ۦ6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
Foreign and domestic private entities have the right to freely establish and own business enterprises and engage in all forms of remunerative activity. As noted above, restrictions exist in the establishment of firms in certain sectors where the share of foreign ownership is limited to 20 percent in broadcasting and up to 49 percent in aviation, maritime transportation, and value-added telecommunication services. Certain activities are reserved for GOT owned enterprises. For example, by law, Turk Telekom has a monopoly until December 31, 2003 on providing basic telephone services. Beyond these areas, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100 percent.
Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Turkey is adopting the EU's competition policy; a Competition Board was established in 1997 to implement the 1994 competition (anti-monopoly) law.
ۦ7. PROTECTION OF PROPERTY RIGHTS
Secured interests in property, both chattel and real are recognized and enforced. There is a recognized and reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow in rendering decisions and that they are susceptible to external influence (see "Dispute Settlement").
Turkey's intellectual property rights regime has improved, but still presents problems. In 1995, the Turkish Parliament approved new patent, trademark and copyright laws in connection with preparations for Turkey's customs union with the EU. In 2001, the Parliament enacted amendments to the copyright law, which provide retroactive protection, expand the list of protected items and include deterrent penalties against piracy. These amendments brought Turkey into compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in most areas. In recognition of Turkey's progress in the IPR area, USTR removed Turkey from its Special 301 Priority Watch List and placed the country on its Watch List in 2002, where it remains in 2003.
Intellectual property holders have praised Turkey's 2001 legislation as a significant improvement in the legal regime. In the software area, piracy rates have come down in recent years following an anti-piracy campaign and a directive to legalize software used in government bodies. However, piracy rates for recorded music remain persistently high. Trademark holders contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey.
Turkey's 1995 patent law replaced a law originally passed in 1879. New trademark, industrial design, and geographic indicator laws were passed at the same time, completely revamping Turkey's foundation for industrial property protection. Turkey also acceded to a number of international conventions in 1995, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. The Turkish Patent Institute (TPI) was established in 1994 as an independent legal entity (Law No. 4004, June 16, 1994) under the Ministry of Industry and Trade. TPI's mission is to support technological development in Turkey, establish and protect intellectual property rights and provide public information on intellectual property rights. Currently, TPI is understaffed to affect countrywide protection.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline."
The key IPR concern for research-based pharmaceutical companies is Turkey's lack of data exclusivity protection, which is required by the TRIPS agreement. The lack of data exclusivity, combined with the lack of interim patent protection, poses substantial problems for research-based pharmaceutical companies.
ۦ8. TRANSPARENCY OF THE REGULATORY SYSTEM
The GOT has adopted policies and laws, which in principle should foster competition and transparency. However, foreign companies in several sectors claim that regulations are sometimes applied in a nontransparent manner. In 2002, the GOT published a report on transparency and good governance in Turkey's public sector and established an interagency steering committee to implement it. The plan calls for: greater public access to information from the government and public sector entities; financial disclosure by elected public officials; and decentralization of most public services.
The government in principle follows competitive bidding procedures. In 2003, Law 4734 on Public Procurement entered into force. The law established a board to oversee public tenders, and lowered the minimum bidding threshold at which foreign companies can participate in state tenders. However, the law restricts preferences for domestic bidders to Turkish citizens and legal entities established by them. Domestic bidders who form joint ventures with foreign bidders are not eligible for the preference. The public procurement law may be further amended in the future.
In general, labor, health and safety laws and policies do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy. Certain tax policies distort investment decisions. High taxation of cola drinks discourage investment in this sector. Generous tax preferences for free zones provide a stimulus to investment in these zones, perhaps at the expense of investment elsewhere in Turkey. These preferences may be trimmed under legislation currently under consideration.
Particularly beyond the establishment phase, bureaucratic "red tape" has been a significant barrier to companies, both foreign and domestic. Parliament passed Law 4884 in June 2003 which should simplify company establishment procedures. The law repeals the permit requirement from the Industry and Commerce Ministry for certain firms, institutes a single company registration form and enables individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges. The goal is to enable registration to be completed in as little as one day and to encourage electronic sharing of documents. Turkish government agencies are expected to issue implementing regulations needed to bring the law into force. The government is also considering other measures to streamline procedures for establishing and operating a business in Turkey, based on recommendations made in a World Bank-funded study on administrative barriers to investment. Pearson
UNCLAS SECTION 01 OF 13 ANKARA 004387
SIPDIS
STATE FOR EB/IFD/OIA TREASURY FOR OASIA DEPT PLEASE PASS USTR FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: EINVââ¬â°[Foreign Investments], KTDBââ¬â°[National Trade Data Bank], EFINââ¬â°[Financial and Monetary Affairs], TUââ¬â°[Turkey] SUBJECT: 20032 INVESTMENT CLIMATE STATEMENT FOR TURKEY
Ref: STATE 12849488106
The following is the 20032 Investment Climate Statement for Turkey:
ۦ1. OPENNESS TO FOREIGN INVESTMENT
Turkey has been pursuing liberal and outward-oriented economic policies since the mid-1980s. The Government of Turkey (GOT) views foreign direct investment as vital to the country's economic development and prosperity. Accordingly, on paper Turkey has one of the most liberal legal investment regimes for FDI in of the OECD. With the exception of some sectors (see below), areas open to the Turkish private sector are generally open to foreign participation and investment. However, aAll companies - regardless of nationality of ownership - face a number of obstacles: political and macroeconomic uncertainties, excessive bureaucracy, weaknesses in the judicial system, high tax rates, weaknesses in corporate governance, arbitrary decisions taken at the municipal level, and frequent, sometimes unclear changes in the legal and regulatory environment. As a result, FDI inflows, at well below one percent of GDP over the last decade, have been far below that of more investor- friendly emerging markets as well as of Turkey's potential. The GOT's far-reaching program of economic and political reform agreed with the World Bank and IMF, and motivated also by multilateral agreements and EU accession, should address many of these problems.
Regulations governing foreign investment are, in general, transparent. A 1954 law on foreign investment (Law No. 6224) was substantially modified and liberalized by a 1995 Decree (Decree No. 95/6990) and associated communiqu. Draft lLegislation approved bysubmitted to Parliament in June 20032 (Law 4875 on Direct Foreign Investment) would further liberalized the foreign direct investment regime by: eliminating screening of foreign investors in favor of a notification system; providing national treatment in acquisition of real estate to foreign-owned entities registered under Turkish law; and abolishing the specific minimum capital requirement for foreign investments (general capital requirements for all companies contained in the Turkish Commercial Code will continue to apply). However, implementing regulations for the new law are not yet in place.
(The text of regulations governing foreign investment and incentives can be obtained on the Internet at: www.treasury.gov.tr/english/ybsweb A summary of these regulations can be found at: www.dtm.gov.tr/english/doing/iginvest/invest/ htm and www.igeme.org.tr/introeng.htm
The General Directorate of Foreign Investments of the Undersecretariat of the Treasury screens foreign investments. Treasury has refused permission for a number of small investments because the activity involved was deemed to constitute retail trade rather than investment, or because of security concerns about the individual investors. Screening mechanisms are routine and non-discriminatory, and have not generally impeded serious investment. However, because domestic investment proposals are not routinely screened, foreign investors are not accorded national treatment in the pre- establishment phase.
Turkish law included several additionalspecifies several other requirements for foreign investors, all of which were scrapped in the new foreign investment law. These included: Real or legal persons resident abroad must invest a minimum of USD 50,000 investment requirement to establish a corporation, become partners in an existing company, or open a branch office; the requirement to . Foreign investors wishing to increase their capital must seek permission from Treasury if the capital increase would change the participation ratio between the foreign investor and any local partners; and. Turkish companies wereare required to register with Treasury any licensing, management, or franchising agreements concluded with foreign persons. Foreign investors owning ten percent or more of a company established in Turkey must inform Treasury of their participation in any directors' or shareholders' meetings. Note: The foregoing requirements would be dropped by the draft foreign investment law.
Foreign investors are subject to restrictions on establishment in certain sectors. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT. The equity participation ratio of foreign shareholders is restricted to 20 percent in broadcasting, and 49 percent in aviation, value-added telecommunication services, and maritime transportation. However, companies receive full national treatment once they are established. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT for both domestic and foreign investors.
The GOT privatizes State Economic Enterprises through block sales, public offerings, or a combination of both. Foreign investors generally receive national treatment in privatization programs. Turkish law allows foreign investors to acquire up to 45 percent of Turk Telecom, the monopoly provider of voice and other telecommunications services, with the Turkish government retain a single "golden" (blocking) share, in the company's upcoming privatization.
The Turkish Parliament also passed legislation in June 2003 which should streamline the company registration process (see Section 8 - Transparency of the Regulatory System). Another new law on work permits for foreign citizens which will take effect later in 2003 should give the Labor and Social Security Ministry additional authority in this area (see Section 5 - Performance Requirements/Incentives).
This report was prepared in July 2003. To find the text of regulations governing foreign investment and incentives, please consult the Internet at: www.treasury.gov.tr/english/ybsweb. A summary of these regulations can be found at: www.dtm.gov.tr/english/doing/iginvest/invest/ htm and www.igeme.org.tr/introeng.htm.)
ۦ2. CONVERSION AND TRANSFER POLICIES
Turkish law guarantees the free transfer of profits, fees and royalties, and repatriation of capital. This guarantee is reflected in Turkey's Bilateral Investment Treaty with the United States, which mandates unrestricted and prompt transfer in a freely usable currency at a legal market clearing rate for all funds related to an investment. There is no difficulty in obtaining foreign exchange. There are no limitations on the inflow or outflow of funds for remittances.
ۦ3. EXPROPRIATION AND COMPENSATION
Under the 1990 Bilateral Investment Treaty with the United States (codifying existing Turkish law), expropriation can only occur in accordance with international law and due process. Expropriations must be for public purpose and non-discriminatory. Compensation must be reasonably prompt, adequate, and effective. Under the Bilateral Investment Treaty, U.S. investors have full access to the local court system and the ability to take the host government directly to third party international binding arbitration to settle investment disputes. There is also a provision for state-to-state dispute settlement.
As a practical matter, the GOT occasionally expropriates private property for public works or for State Enterprise industrial projects. The GOT agency expropriating the property negotiates and proposes a purchase price. If the owners of the property do not agree with the proposed price, they can go to court to challenge the expropriation or ask for more compensation.
ۦ4. DISPUTE SETTLEMENT
There are no outstanding expropriation or nationalization cases. However, there are several investment disputes between U.S. companies and Turkish government bodies, particularly in the energy and tourism sectors.. In one case, local authorities have shut down an American-owned hotel and restaurant by denying operating permission and residency permits, apparently without legal basis. Claimant has reportedly initiated four lawsuits against the provincial governor and government agencies, but these cases have not yet been decided by the courts. In the energy sector, the Government of Turkey has not implemented a number of contracts with U.S. firms for build-operate-transfer (BOT) and transfer-of-operating-rights (TOR) power projects. One company filed an international arbitration case against the GOT in 2002. A 2002 Constitutional Court ruling requires the GOT to either proceed with the projects according to the signed contracts, or cancel them and compensate the companies accordingly. The GOT has indicated it will seek a negotiated settlement with those companies, but as of mid-June, the GOT had not contacted any of the companies to pursue a settlement.
Turkey's legal system provides means for enforcing property and contractual rights. The court system is overburdened, however, which sometimes resultsing in slow decisions and judges lacking sufficient time to grasp complex issues. The judicial system is also perceived by the public and by business to be susceptible to external political and commercial influence to some degree. Judgments of foreign courts need to be reconsidered by local courts before they are accepted and enforced. Turkey has written and consistently applied commercial and bankruptcy laws. Monetary judgements are usually made in local currency, but there are provisions for incorporating exchange rate differentials in claims.
Turkey is a signatory of the Washington Convention, and a member of the International Center for the Settlement of Investment Disputes (ICSID), also known as the Washington Convention, and is a signatory of the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. Turkey ratified the Convention of the Multinational Investment Guarantee Agency (MIGA) in 1987.
The Turkish government accepts binding international arbitration of investment disputes between foreign investors and the state; this principle is included in the U.S.-Turkish Bilateral Investment Treaty (BIT). For many years, there was an exception for "concessions" involving private (primarily foreign) investment in public services. In 1999, the Parliament passed amendments to the constitution allowing foreign companies access to international arbitration for concessionary contracts. In 2000, the Turkish government completed implementing legislation for arbitration. In 2001, the Parliament approved a law further expanding the scope of international arbitration in Turkish contracts. In practice, however, Turkish courts have on at least one occasion failed to uphold an international arbitration ruling involving private companies.
ۦ5. PERFORMANCE REQUIREMENTS/INCENTIVES
Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS).
Turkey provides a variety of investment incentives to both domestic and foreign investors, though these were scaled back in 2003. These include corporate tax exemptions, with up to 40100 percent of specified investment expenses - 200 percent for investments over USD 250 million - deductible from future taxable profits for investments about 5 billion TL (an incentive certificate is not required for this exemption). In addition, there are: ; exemptions from value-added taxes for machinery and equipment purchased locally or imported for the investment; duty-free import of machinery and equipment (though not raw materials or intermediate goods) to be used in the investment; and soft loans for research and development. Investment incentives are defined in a May 2003 Finance Ministry decree. clearly specified in regulations (a government decree issued March 25, 1998, and a related communiqu dated May 6, 1998 Feb 18, 2001).
In order to take advantage of investment incentives, an investor must obtain an "incentive certificate" from the Treasury. The size of the incentive depends upon the geographic location, sector, and value of the investment. Investment incentives are greater in the less-developed "priority" and "normal" areas or sectors, and eligibility depends on a minimum value. According to the current incentive regime, a minimum fixed investment of TL200 billion. (approximately USD 120,000 in July 2002) is required for priority regions, TL 400 billion (approximately USD 240,000 in July 2002) for normal regions and 600 billion TL (approximately USD 360,000 in July 2002) for developed regions. (For more information on the Turkish incentive system, please visit: www.investinturkey.gov.tr/incentives.htm).
The GOT has introduced several special investment incentives for the eastern and southeastern regions. For example, new investments made in these provinces before the end of 2000 are exempt from corporate and income taxes for five years, investors can receive substantial discounts on electricity payments, and state- owned banks will provide reduced rate loans for industrial or employment producing investments.The GOT is considering further tax and social insurance premium reductions for businesses investing in provinces with per capita income below USD 1,500.
There are no performance requirements imposed as a condition for establishing, maintaining, or expanding an investment. There are no requirements that investors purchase from local sources or export a certain percentage of output. However, domestic or foreign investors who commit to realizing USD 10,000 of exports upon completion of the investment may be exempt from certain fees and taxes, such as those related to land registration or company establishment. Investors' access to foreign exchange has no relation to exports.
There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms.
There are no government imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content - for goods or services - or local equity, import substitution, export requirements or targets, employment of host country nationals, technology transfer, or local financing.
The GOT does not request that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report, and balance sheets to the Treasury's Foreign Investment Directorate every year by May.
With the exceptions noted under "Openness to Foreign Investment", Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign capital and business, on a MFN basis. American and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.
With one exception noted under "Dispute Settlement", vVisa, residence, or work permit requirements have not generally inhibited foreign investors. Expatriates may be assigned as managers or technical staff. We are aware of one case in the tourism sector in which denial of a residence permit has hindered operations for a foreign investor. A 2003 law (no. 4817) on work authorizations for foreign nationals should give the Ministry of Labor and Social Security more authority over work permits. Implementing regulations are to be issued later this year.
Turkey has a liberal foreign trade regime. There are no discriminatory or preferential export or import policies directly affecting foreign investors. Turkey harmonized its export incentive regime with the European Union in 1995, prior to the start of the Customs Union. Turkey currently offers a number of export incentives, including credits through the Turkish Eximbank, energy incentives, and research and development incentives. Cash incentives for exporters have been eliminated. Foreign investors can participate in these export incentive programs on a national treatment basis. More information on Turkey's trade regime can be found at www.foreigntrade.gov.tr.
Military procurement generally requires an offset provision in tender specifications when the estimated value of the imported goods and/or services exceeds five million dollars. Turkish procedures provide little incentive for U.S. companies to satisfy offset requirements (the obligation to invest or buy Turkish exports as a condition of winning defense contracts) by investing in non-defense industries.
ۦ6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
Foreign and domestic private entities have the right to freely establish and own business enterprises and engage in all forms of remunerative activity. As noted above, restrictions exist in the establishment of firms in certain sectors where the share of foreign ownership is limited to 20 percent in broadcasting and up to 49 percent in aviation, maritime transportation, and value- added telecommunication services. Certain activities are reserved for GOT owned enterprises. For example, by law, Turk Telekom has a monopoly until December 31, 2003 on providing basic telephone services. Beyond these areas, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100 percent.
However, non-resident investors in companies with foreign capital must seek permission from the Treasury prior to selling part or all of their shares to real or legal persons resident in Turkey. Treasury approval is not required for sales to other foreigners or for sales of securities or capital market instruments through a financial intermediary. Note: This restriction would be removed by the draft foreign investment law currently before parliament.
Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Turkey is adopting the EU's competition policy; a Competition Board was established in 1997 to implement the 1994 competition (anti-monopoly) law.
ۦ7. PROTECTION OF PROPERTY RIGHTS
Secured interests in property, both chattel and real are recognized and enforced. There is a recognized and reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow in rendering decisions and that they are susceptible to external influence (see "Dispute Settlement").
In 1995, the Turkish Parliament approved new patent, trademark and copyright laws in connection with preparations for Turkey's customs union with the EU. Turkey also acceded to a number of multilateral intellectual property rights (IPR) conventions, including the 1971 Paris Act of the Berne Copyright Convention. In 2001, the Parliament enacted amendments to the copyright law, which provide retroactive protection, expand the list of protected items and include deterrent penalties against piracy. These amendments brought Turkey into compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in most areas. In recognition of Turkey's progress in the IPR area, USTR removed Turkey from its Special 301 Priority Watch List and placed the country on its Watch List in 2002, where it remains in 2003.1.
Although iIntellectual property holders have praised Turkey's 2001new legislation as a significant improvement in the legal regime, implementing regulations in the area of broadcasting include an arbitration provision which could lead to compulsory licensing of musical and possibly other works. In the software area, piracy rates have come down in recent years following an anti-piracy campaign and a directive to legalize software used in government bodies. However, piracy rates for recorded music remain persistently high. Trademark holders contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey.
Turkey's 1995 patent law replaced a law originally passed in 1879. New trademark, industrial design, and geographic indicator laws were passed at the same time, completely revamping Turkey's foundation for industrial property protection. Turkey also adhered to a number of international conventions in 1995, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. The Turkish Patent Institute (TPI) was established in 1994 as an independent legal entity (Law No. 4004, June 16, 1994) under the Ministry of Industry and Trade. TPI's mission is to support technological development in Turkey, establish and protect intellectual property rights and provide public information on intellectual property rights. Currently, TPI is understaffed to affect countrywide protection.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline." Lack of data exclusivity protection, which is required by the TRIPS agreement, is the key IPR concern for research-based pharmaceuticals companies.
ۦ8. TRANSPARENCY OF THE REGULATORY SYSTEM
The GOT has adopted policies and laws, which in principle should foster competition and transparency. However, foreign companies in several sectors claim that regulations are sometimes applied in a nontransparent manner. In 2002, the GOT published a report on transparency and good governance in Turkey's public sector and established an interagency steering committee to implement it. The plan calls for: greater public access to information from the government and public sector entities; financial disclosure by elected public officials; and decentralization of most public services.
The government in principle follows competitive bidding procedures. In 20032, Law 4734 on Public Procurement entered into force. The Turkey's Parliament approved amendments to the state procurement law law, which established a board to oversee public tenders, and lowered the minimum bidding threshold at which foreign companies can participate in state tenders. However, the law restricts preferences for local bidders to Turkish citizens and legal entities established by them. The public procurement law may be further amended in the future.
In general, labor, health and safety laws and policies do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy. Certain tax policies distort investment decisions. High Turkish taxation of cola drinks discourage investment in this sector. Generous tax preferences for free zones provide a stimulus to investment in these zones, perhaps at the expense of investment elsewhere in Turkey. These preferences may be trimmed under legislation currently under considerationNew free zones law being drafted could consider limiting tax-free status of these zones.
On paper, Turkey's foreign investment regime is liberal. However, pParticularly beyond the establishment phase, bureaucratic "red tape" has been remains a significant barrier to companies, both foreign and domesticproblem. Parliament passed Law 4884 in June 2003 which should simplify company establishment procedures. The law repeals the permit requirement from the Industry and Commerce Ministry for certain firms, institutes a single company registration form and enables individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges. The goal is to enable registration to be completed in as little as one day and to encourage electronic sharing of documents. Turkish government agencies are expected to issue implementing regulations needed to bring the law into force. The government is also considering other imeasures mplementing an action plan designed to streamline procedures for establishing and operating a business in Turkey, based on recommendations made in a World Bank-funded study on administrative barriers to investment.
ۦ9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
Turkey's financial system and policies facilitate the free flow of financial resources. The private sector has access to a variety of credit instruments. Legal, regulatory and accounting systems are transparent and consistent with international norms.
There is a regulatory system established to encourage and facilitate portfolio investments, though it needs improvements in transparency, accounting, and enforcement provisions to bring it up to EU and US standards. The Istanbul Stock Exchange (ISE), formed in 1986, is becoming one of the major players among emerging markets. As of midend-2001, 3102 companies were listed on the exchange. However, Turkey has yet to develop other capital markets. The Capital Markets Board is responsible for overseeing the activities of capital markets, including activities of the ISE- quoted companies, and securitiesy and investment houses.
Commercial credit in Turkey is allocated according to market terms. However, because of high local borrowing costs (real interest rates can exceed 25 percent), short repayment periods, and limited liquidity condition during the current economic crisis, both foreign and local investors frequently seek credit from international markets to finance their activities. As of September July 20031, there were 512 commercial banks (including 1714 foreign banks) and 16 14 development or investment banks operating in Turkey. Total sectoral assets were approximately USD 130.111.8 billion, or about 75 percent of GNP, as of July September 20031 according to data from the Banking Regulation and Supervision Board. of Turkey. The threefour state-owned commercial banks and the top six privately capitalized banks hold approximately 69 percent of total assets.
The parliament passed a new bank regulatory law in June 1999, which was amended in December 1999 and May 2001. The law created an independent agency, the Banking and Regulation and Supervision Agency (BRSA), headed by a board whose seven members would be appointed by the cabinet for six-year terms. The law's provisions also toughen conditions for establishing new banks or branches, set credit limits to protect bank solvency, and strengthen regulatory and sanctioning powers, including authorizing the board to merge weak banks with stronger ones.
The BRSA was established in August 2000 to monitor and supervise Turkey's banks under the new law. The Central Bank transferred to it the State Deposit Insurance Fund. Since 1997 the SDIF has taken over 21, banks, includingtogether with the Imar Bankasi which was , a bank owned by the Uzan Group, taken over on July 4, 2003., which had supervisory control of seven private insolvent banks. In October 2000, the BRSA declared another three banks insolvent and put them under the Deposit Insurance Fund. During the November 2000 financial crisis, Demirbank, one of Turkey's ten largest banks, became insolvent and was taken over by the Deposit Insurance Fund. BRSA took over another two banks in February 2001 and five more in July 2001, bringing the total number of banks under its control to ۦ19. The Government of Turkey has recapitalized the private banks under its control, and is committed to either selling or liquidating them by year-end 2002. The process still continues for Pamukbank, Turkey's sixth largest private bank. A Bbanking auditing and recapitalization program in the first half of 2002 resulted in increased transparency, and better accounting for non-performing loans, and the takeover of Pamukbank, Turkey's sixth largest private bank. The Bank Capital Restructuring program of the BRSA led to more transparency in banks financial statements as a result of application of athe 3-stage auditing process, and application of international standards.
The BRSA is proceeding to issue new regulation limiting the extent of connected lending (between a bank and related corporate entities), modernizing banks' accounting practices, and requiring frequent BRSA on- site monitoring.
One of the most significant achievements of the reform program has been to restructure the state banks, which continue to control more than one-half of Turkish banking assets. The government liquidated one state bank (Emlak Bank), is trying to privatize another (Vakif Bank), and has significantly downsized (Ziraat Bankasi and Halkbank). Also, it largely eliminated state bank duty losses - unreimbursed subsidized loans from these banks - which had created an enormous financial hole that helped bring about the most recent financial crisis
The Turkish private sector is dominated by a number of large holding companies, whose upper management is controlled by prominent families. Most large businesses continue to float publicly only a minority portion of company shares in order to limit outside interference in company management. Hostile takeovers are unknown in Turkey. There has been no attempt at a hostile takeover by either international or domestic parties in recent memory.
There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation or association to limit or prohibit foreign investment, participation, or control. Neither is there any attempt by the private sector or government to restrict foreign participation in industry standard- setting consortia or organizations.
ۦ10. POLITICAL VIOLENCE
The general security situation throughout Turkey is stable, but sporadic incidents involving terrorist groups have occurred. The Turkish government is committed to eliminating terrorist groups such as the Kurdistan Workers' Party (PKK - now renamed Kadek) and various leftist and fundamentalist groups. Although these groups have not completely disbanded, their operational capabilities have greatly diminished. These groups have used terrorist activity to make political statements, particularly in Istanbul and other urban areas of Turkey. In 2000 and 2001, terrorists targeting Turkish officials and various civilian facilities, such as fast food restaurants, in Istanbul were responsible for the deaths and injuries of several dozen people. In 2002 and 2003, civilian venues such as fast food restaurants have been the targets of minor bomb attacks. Operation Iraqi Freedom triggered largely peaceful demonstrations in most major Turkish cities, but a series of bombings also occurred in several of Turkey's larger cities. The PKK retains a residual presence in certain parts of southeastern Turkey, where two provinces remain under a state-of-emergency, and several are deemed "sensitive" by the GOT.
Although the Turkish government takes air safety very seriously and maintains strict controls, particularly on international flights, hijacking attempts have occurred as recently as 2001, when a flight attendant was killed during a hijacking by Chechen terrorists. There have been two hostage-taking incidents at luxury hotels in Istanbul in the past year, both staged by pro-Chechen terrorists and resolved without casualties.
ۦ11. CORRUPTION
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT LARGE. THE TURKISH GOVERNMENT CONDUCTED TWO SIGNIFICANT ANTI-CORRUPTION OPERATIONS IN 2001, ONE IN THE ENERGY MINISTRY AND THE OTHER IN THE PUBLIC WORKS MINISTRY. SEVERAL INDIVIDUALS WERE CHARGED WITH CORRUPTION AND WRONGDOING IN GOVERNMENT CONTRACT TENDERS. THE OPERATIONS RESULTED IN THE RESIGNATION OF BOTH MINISTERS AND THE ARREST OF MANY HIGH-LEVEL OFFICIALS. PARLIAMENT CONTINUES TO PROBE CORRUPTION IN THE ENERGY MINISTRY AND OTHER GOVERNMENT BODIES.
Corruption appears to be most problematic in public procurement, with frequent allegations that contracts are awarded on the basis of personal and political relationships of businesspersons and government officials. The judicial system is also perceived to be susceptible to external political and commercial influence to some degree.
Turkish legislation outlaws bribery and some prosecutions of government officials for corruption have taken place, but enforcement is uneven.
Turkey has ratified the OECD antibribery convention, and but has not yet passed the relevant implementing legislation in January 2003 to which would explicitly provide that bribes of foreign officials, as well as domestic, are illegal and not tax deductible. Bribes cannot be deducted from taxes as a business expense.
The Turkish government became a party to three conventions of the Council of Europe in 2001: the Strasbourg Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; the Criminal Law on Corruption; and the Civil Law on Corruption. By becoming a party to these conventions, the Turkish government agreed to define corruption as a predicate offense for money laundering and to address private sector corruption, as well as public sector corruption, as a crime. The Turkish government has signed the UN Convention against Transnational Organized Crime in 2001 and has submitted a draft proposal to become a party to the UN Convention Against Corruption.
U.S. firms have sometimes alleged that corruption, or at a minimum nontransparent practices, have been a barrier to direct foreign investment. American companies operating in Turkey have complained about contributions to the community solicited, with varying degrees of pressure, by municipal or local authorities.
The Prime Ministry's Inspection BoardDepartment, which advises a new Corruption Investigations Committee, is responsible for investigating major corruption cases. Nearly every state agency has its own inspector corps responsible for investigating internal corruption. The National Assembly can establish investigative commissions to examine corruption allegations concerning Cabinet Ministers for the Prime Minister; a majority vote in the parliament is needed to send these cases to the Ssupreme Ccourt for further action.
Transparency International has an affiliated NGO in Istanbul.
ۦ12. BILATERAL INVESTMENT AGREEMENTS
Since 1985, Turkey has been negotiating and signing agreements for the reciprocal promotion and protection of investments. Turkey has signed or initiated negotiations on bilateral investment treaties with 65 79 countries. Forty-three six of these agreements are now in force, including with the United States, United Kingdom, Germany, the Netherlands, Belgium Luxembourg, Denmark, Austria, Sweden, Switzerland, Spain, Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh, China, Japan, South Korea, Indonesia, Croatia, Cuba, the Czech Republic, Estonia, Russian Federation, Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, Belarus, Macedonia, Pakistan, Turkmenistan, Moldova, Kyrgyzstan, Albania, Bulgaria, Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece and Israel.
Turkey's bilateral investment treaty with the United States came into effect on May 18, 1990. A bilateral tax treaty between the two countries took effect on January 1, 1998. Turkey has signed avoidance of double taxation agreements with 59 countries; 39 of these are in force.
ۦ13. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
The Overseas Private Investment Corporation (OPIC) offers a full range of programs in Turkey, including political risk insurance for U.S. investors, under its bilateral agreement with Turkey. OPIC is also active in financing private investment projects implemented by U.S. investors in Turkey. OPIC-supported direct equity funds, including the $USD 150 million Southeast Europe Equity Fund (SEEF) can make direct equity investments in private sector projects in Turkey. In 1987, Turkey became a member of the Multinational Investment Guarantee Agency (MIGA).
The U.S. Government annually purchases approximately USD 11.319 million of local currency. Embassy purchases are made at prevailing market rates, which fluctuate in accordance with Turkey's free floating exchange rate regime.
ۦ14. LABOR
The Turkish labor force numbers around 20.24 million persons, with nearly 35 percent employed in agriculture. With an official unemployment rate of 12.31.8 percent in the first quarter of 20032 and an average school-leaving age of 14, Turkey has an abundance of unskilled and semi- skilled labor. However, there is a shortage of qualified workers for highly automated high-tech industries. Individual high-tech firms, both local and foreign-owned, have generally conducted their own training programs for such job categories. Vocational training schools for some commercial and industrial skills exist in Turkey at the high school level. Traditional apprenticeship programs, both formal and informal, are also common. Turkey's labor force has a reputation for being hardworking, productive and dependable.
Labor-management relations have been generally good in recent years. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. Since 1980 Turkey has faced criticism by the International Labor Organization (ILO), particularly for shortcomings in enforcement of ILO Convention 98 (right to organize and collective bargaining). In May 2001 the Turkish Government and public sector workers reached agreement on collective agreements through 2002. In 2003, Parliament approved The government is currently considering a Job Security Bill, which will ensure consultation between employers and labor groups over job cuts and safety standards while easing some restrictions on private employers' ability to lay off staff. The constitutional right to strike is restricted. In 1995 and 2001 constitutional amendments were passed which allow "civil servants" (defined broadly as all employees of the central government ministries, including teachers) to form trade unions and to engage in limited collective bargaining, but prohibits them from striking. Workers in the free zones are prohibited from striking for the first 10 years following establishment of a company.
ۦ15. FOREIGN TRADE ZONES/FREE PORTS
Since passage of the Turkish law on free zones in 1985, 210 zones have been established (Defne - can you check # of zones). The zones are open to a wide range of activity, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of any customs or duties. Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. In contrast to most other free zones, sales to the Turkish domestic market are allowed.
GGoods and revenues transported from the zones into Turkey are subject to all relevant import regulations. There are no restrictions on foreign firms operations in the free zones. Indeed, the operator of one of Turkey's most successful free zones located in Izmir is an American firm.
ۦ16. FOREIGN DIRECT INVESTMENT STATISTICS
(Aysem - Please update entire section According to Turkish Treasury data, as of April November 2002, 5,938 6,311 foreign firms invested and are operating in Turkey. Total authorized foreign capital since 1980 was USD 31.9 34.0 billion, and aggregate actual inflows reached USD 15.2 15.7 billion. In 20012, EU countries accounted for 65.9 63.6 percent of authorized new foreign investment, OECD countries accounted for 90.2 90.4 percent, and Islamic countries for 3.1 2.6 percent. Over the past two decades, France (17.7 16.6 percent) has been the top source of foreign investment, followed by the Netherlands (13.6 15.7 percent), Germany (12.8 12.7 percent) and the U.S. (11.6 percent) (Note: these figures are based on the amount of authorized investment, not on actual capital inflows). Because of the absence of a bilateral tax treaty until 1998, much U.S.-origin capital has been invested in Turkey through third-country subsidiaries. By unofficial estimates the U.S. is actually the largest source of foreign investment in Turkey.
In 20012, about 48.2 58.0 percent of authorized foreign investment were in services, 45.9 39.8 percent in manufacturing, and about 6.0 2.2 percent in mining and agriculture combined. The sub-sectors with the greatest amount of authorized foreign investment include banking (18.9 10.3 percent); communications (10.9 percent); trade (8.1 11.4 percent); food, beverage and tobacco processing (5.3 11.9 percent); and insurance (7.7 percent) motor vehicles (6.5 percent); and electronics and electrical machinery (1.5 percent). Between 1980 and November March 2002, 43.0 45.0 percent of actual capital inflows were invested in services, 54.2 52.0 percent in manufacturing, 1.8 2.0 percent in agriculture, and 0.98 1.0 percent in mining. The finance, automotive and telecommunications food industry, trade and finance sectors received the highest share of increased foreign direct investment permits in 20012002. British HSBC Bank's purchase of Demirbank shares, Japanese Toyota S.A.'s investment in the automotive sector, and investments made by Turkcell with its Finnish partner Sonera Koc Financial Services and Kent Food Products Industry participation investments were the major foreign direct investment activities in 20012.
Total Foreign Direct 1999 2000 2001 2002(*) 2003(*) Investment Stock USD millions 10,185 11,892 15,180 18,500 15,749 18,000 (*) Sources: General Directorate of Foreign Investment (*) U.S. Embassy estimate
Cumulative Total Foreign Direct Investment Permits By country of origin, NovemberMarch 2002
Country Value ($mil.) Share
France 5,545.6 5,665 16.6 17.4 Netherlands 4,331.6 5,336 15.7 13.6 Germany 4,129.1 4,329 12.7 12.9 United States 3,710.2 3,929 11.6 11.6 United Kingdom 2,497.9 2,669 7.9 7.8 Switzerland 2,125.8 2,261 6.7 6.7 Italy 1,941.3 1,883 5.5 6.1 Japan 1,745.4 1,819 5.4 5.5 Belgium 385.6 485 1.4 1.2 Saudi Arabia 318.1 321 1.0 1.0 Others 5,142.1 5,308 15.6 16.1 Total 31,872.7 33.995 100.0
Source: General Directorate of Foreign Investment, Treasury.
Foreign Direct Investment by Year (million USD)
FDI permissions
Year Cumulative Annual Actual No. Firms Permits Permits Inflow
To: 1988 3,050 1,172 1989 4,562 1,512 855 1,525 1990 6,423 1,861 1,005 1,856 1991 8,390 1,967 1,041 2,123 1992 10,210 1,820 1,242 2,330 1993 12,274 2,063 1,016 2,554 1994 13,751 1,478 830 2,830 1995 16,690 2,938 1,127 3,163 1996 20,527 3,837 964 3,582 1997 22,205 1,678 1,032 4,068 1998 22,629 1,646 976 4,533 1999 24,319 1,701 817 4,950 2000 27,379 3,060 1,707 5,328 2001 30,118 2,739 3,288 5,841 2002 (*) 31,872 523 N/A 5,938 33,995 2,243 569 6,311 Source: General Directorate of Foreign Investment,; (*) As of March November 2002.
Actual FDI Inflow as Percentage of Turkish GDP
Year FDI flow FDI flow/GDP (USD mil.) (Pct.)
Up to 1988 3,229 1989 855 0.80 1990 1,005 0.67 1991 1,041 0.69 1992 1,242 0.78 1993 1,016 0.56 1994 830 0.64 1995 1,127 0.66 1996 964 0.53 1997 1,032 0.54 1998 976 0.49 1999 817 0.41 2000 1,719 0.85 2001 3,288 2.21 2002 569 0.48
Source: General Directorate of Foreign Investment, and the State Planning Organization.
Turkey's FDI by Country (As of December 20021)
Country Amount (USD millions) Share
Netherlands 1,916.51,868.2 30.9 40.2 United Kingdom 519.4 523.1 8.9 10.9 Germany 440.6 532.7 8.8 9.2 Luxembourg 236.9 245.8 4.1 5.0 Russia 181.4 163.7 2.7 3.8 Azerbaijan 156.6 741.8 12.3 3.3 Kazakhstan 170.6 431.5 7.1 3.6 United States 185.8 192.6 3.2 3.9 Romania 117.9 122.7 2.0 2.5 Others 839.7 1,218.6 20.1 17.6 4,765.4 6,040.8 100.0
Source: General Directorate of Banking and Foreign Exchange, Treasury
Major foreign investors
Turkey's largest foreign investors include Telecom Italia, Renault, Toyota, Fiat, Castrol, Enron Power, Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler, Chase Manhattan, AEG, Bridgestone- Firestone, Cargill, Novartis, Coca Cola, Colgate- Palmolive, General Electric, General Motors-Opel, ITT, Ford Motor Co., Lockheed Martin, Gillette, Goodyear, Hilton International, Aventis, McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen and Shell.
Pearson
UNCLAS SECTION 01 OF 06 ANKARA 007003
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STATE FOR EB/TPP/MTA/MST TREASURY FOR OASIA DEPT PLEASE PASS USTR FOR GBLUE/LERRION FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: ETRDââ¬â°[Foreign Trade], EINVââ¬â°[Foreign Investments], EFINââ¬â°[Financial and Monetary Affairs], ECONââ¬â°[Economic Conditions], KIPRââ¬â°[Intellectual Property Rights], TUââ¬â°[Turkey] SUBJECT: DRAFT NATIONAL TRADE ESTIMATE REPORT
Ref: STATE 240980
The following is Embassy's input for the National Trade Estimate Report for Turkey:
TRADE SUMMARY
Turkey is a beneficiary of GSP, has Bilateral Investment and Tax Treaties with the United States, and has a customs union with the European Union. (Trade/investment statistics to be provided by Washington agencies).
IMPORT POLICIES
Tariffs and Quantitative Restrictions
As a result of its 1996 customs union with the European Union, Turkey applies the EU's common external customs tariff for third country (including U.S.) imports and imposes no duty on non-agricultural items from EU and European Free Trade Association (EFTA) countries. The simple average tariff for industrial products from the United States and other third countries was reduced significantly as a result of the customs union. Turkey's harmonization of trade and customs regulations with those of the EU and the overall decline in tariff rates benefits third country exporters.
Turkey maintains high tariff rates (25 percent average Most-Favored-Nation rate) on many food and agricultural products to protect domestic producers. The Turkish government often increases tariffs on grains during the domestic harvest. High feed prices have negatively impacted Turkish livestock industries, particularly for beef and poultry. Duties on fruits range from 61 percent to 149 percent. Processed fruits, fruit juices and vegetable tariffs range between 41 and 138 percent. The GOT also levies high duties as well as excise taxes and other domestic charges on imported alcoholic beverages that increase wholesale prices by more than 200 percent.
Import Licenses and Other Restrictions
While import licenses generally are not required for industrial products, products which need after-sales service (e.g., photocopiers, ADP equipment, diesel generators) require licenses. A non-transparent licensing system results in costly delays, demurrage charges, and other uncertainties that stifle trade for many agricultural products. For the past four years, the Ministry of Agriculture and Rural Affairs (MARA), through its quarantine service, stopped issuing import licenses for rice and corn prior to the harvest.
In concert with its licensing system, Turkey has recently implemented import quota programs for rice and corn. Import quotas, often dependent on procurement of domestic crops, tend to evolve throughout the marketing year, making it very difficult for commercial traders to plan their import programs, thus disrupting trade.
Turkey is in the process of rewriting its import regulations for agriculture products in order to comply with EU regulations. However, some new regulations have not been fully consistent with those of the EU. For many products, no written standards exist. For example, despite repeated requests, the GOT failed to provide guidelines for red meat and wine imports. The government has privatized the alcohol operations of TEKEL (a parastatal company) and is in the process of privatizing TEKEL's tobacco operations. Recent changes in Turkish law call for a liberalization of the spirits and tobacco market over a five-year period, which should improve the competitive environment.
STANDARDS, TESTING, LABELING AND CERTIFICATION
The Turkish government has not consistently notified the WTO of changes in import policies and phytosanitary requirements, and implementation has been arbitrary. Importers have had increasing difficulty in obtaining information on sanitary and phytosanitary certifications. The GOT often requires laboratory testing on items not normally subject to testing by trading partners, often without any scientific basis. Finally, the GOT often requires phytosanitary certification on quality issues that are normally handled on a contractual basis.
The government requires laboratory tests and certification that quality standards are met for the importation of foods, human and veterinary drugs, and medical equipment and appliances intended for use by humans.
U.S. CE-marked products, particularly medical devices, are often detained by Turkish customs authorities for inspection. In some cases, U.S. products are subject to additional tests, despite their CE marks, while EU CE-marked products gain immediate entry to the Turkish market.
GOVERNMENT PROCUREMENT
Turkey is not a signatory of the WTO Government Procurement Agreement. Although its laws require competitive bidding procedures for tenders, U.S. companies sometimes become frustrated over lengthy and often complicated bidding and negotiating processes.
In 2003, a new public tender law which establishes an independent board to oversee public tenders, and lowers the minimum bidding threshold at which foreign companies can participate in state tenders, entered into force. However, the law gives a price preference of up to 15 percent for domestic bidders and is not applicable to domestic bidders who form a joint venture with foreign bidders. Amendments to the law in 2003 enlarged the definition of domestic bidder to include corporate entities established under Turkish law, including those established by foreign companies.
Military procurement generally requires an offset provision in tender specifications. The offset guidelines were recently modified to encourage foreign direct investment and technology transfer.
The entry into force of a Bilateral Tax Treaty between the United States and Turkey in 1998 eliminated the application of a 15 percent withholding tax on U.S. bidders for Turkish government contracts.
EXPORT SUBSIDIES
Turkey employs a number of incentives to promote exports, although programs have been scaled back in recent years to comply with EU directives and WTO standards. In 2004, however, the Turkish Grain Board (TMO) has been selling domestic wheat to flour and pasta manufacturers against their exports of flour and pasta. This is an implicit subsidy as TMO is selling the manufacturers wheat at world prices, which are well below domestic prices. It is too early to quantify the size of this subsidy. Historically, wheat and sugar were the main subsidized commodities. Export subsidies, ranging from 10 to 20 percent of export values, are granted to 16 agricultural or processed agricultural products. The Turkish Eximbank provides exporters with credits, guarantees, and insurance programs. Certain tax credits also are available to exporters.
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
Turkey's intellectual property rights regime has improved in recent years, but still presents serious problems. Turkey was elevated from the Special 301 Watch List to the Priority Watch List in 2004, due to concerns about lack of pharmaceuticals data exclusivity protection and continued high levels of piracy and counterfeiting of copyright and trademark materials.
Turkey's 2001 copyright law substantially modernized the legal regime, providing deterrent penalties for copyright infringement. However, it does not prohibit circumvention of technical protection measures, a key feature of the World Intellectual Property Organization (WIPO) "Internet" treaties. In addition, the Turkish courts have failed to render deterrent penalties to pirates as provided in the copyright law. They have instead applied the Turkish Cinema Law, which has much lower penalties. Legislation enacted in March 2004 contains several strong anti-piracy provisions, including a ban on street sales of all copyright products and authorization for law enforcement authorities to take action without a complaint by the rightholder. However, the law also reduces potential prison sentences in piracy convictions. U.S. industry estimated losses to piracy in 2003 at USD 50 million for motion pictures, USD 15 million for records/music and USD 25 million for books. There are signs that anti-piracy measures introduced in 2004 may be reducing these losses.
In 1995, new patent, trademark, industrial design, and geographic indicator laws revamped Turkey's foundation for industrial property protection. Turkey also acceded to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. Although the Turkish Patent Institute (TPI) was established in 1994 to support technological progress, protect intellectual property rights and provide public information on intellectual property rights, it is currently understaffed.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline."
Parliament amended the Patent Law in June 2004. The new law provides for penalties for infringement of up to 3 years or 47 billion TL (approximately USD 32,000) in fines, or both, and closure of the business for up to one year. However, some companies in the pharmaceuticals sector have criticized provisions which give judges wider discretion over penalties in infringement cases, delay the initiation of infringement suits until after the patent is approved and published, and permit use of a patented invention to generate data needed for the marketing approval of generic pharmaceutical products.
The Health Ministry has accepted applications to register generic copies of products which have a valid patent in Turkey; in the absence of a system for patent linkage, it may become possible for generics manufacturers to register a copy of a brand name drug with a valid Turkish patent, with enormous damage to the interests of the patent owner.
The key intellectual property concern for research- based pharmaceutical companies is Turkey's lack of data exclusivity protection for confidential test data. U.S. industry contends that numerous products infringing data exclusivity have been approved or are pending review by the Turkish Health Ministry.
Trademark holders also contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey, especially in apparel, pharmaceuticals, film, cosmetics, detergent and other products.
In 2004, Turkey published its first Plant Variety Protection (PVP) Law. A subsidiary of a major U.S. seed company, however, has been unable to obtain protection for its commercial seed under this new law, reportedly at great cost to the company.
SERVICES BARRIERS
Telecommunications Services
State-owned Turk Telecom currently provides voice telephony and most value-added and basic telecommunications services. In the WTO negotiations on Basic Telecommunications Services, Turkey made commitments to provide market access and national treatment for all services at the end of 2005, and permitted value-added telecommunications services to be licensed to the private sector with a 49 percent limit on foreign equity investment. In the interim, Turkey committed to provide national treatment for mobile, paging and private data networks. In 2000, the Turkish government passed a law unilaterally accelerating the opening of the market for basic telephone services to 2004. A 2001 law provides for liberalization of areas under the Turk Telecom monopoly once the state's share in that company falls below 50 percent. The Turkish government has not yet issued implementing regulations. These laws also created an independent regulatory body - the Telecommunications Regulatory Board - and made licensing criteria publicly available. U.S. firms complain that the licensing process still lacks transparency and that revenue sharing with Turk Telecom is required where competition is permitted. There are three private GSM cellular operators in Turkey, with a fourth license held by Turk Telecom.
In November 2004, the Privatization Administration announced the tender for a block sale of 55 percent of Turk Telecom. Law 5189 of 2004 lifted the limit on foreign ownership of Turk Telekom.
Other Services Barriers
There are restrictions on establishment in financial services, the petroleum sector, broadcasting, aviation and maritime transportation (see Investment Barriers section). A 2003 law on work permits for foreigners repealed earlier legislation defining certain professions and services open only to Turkish citizens. This has significantly broadened the range of occupations in which foreigners can be engaged, but there are still restrictions for doctors, attorneys and several other professions.
INVESTMENT BARRIERS
The U.S.-Turkish Bilateral Investment Treaty (BIT) entered into force in May 1990. Turkey has a liberal investment regime in which foreign investments receive national treatment. However, private sector investment has often been hindered, regardless of nationality, by: excessive bureaucracy; political and macroeconomic uncertainty; weaknesses in the judicial system; high tax rates; a weak framework for corporate governance; and frequent changes in the legal and regulatory environment.
Almost all areas open to the Turkish private sector are fully open to foreign participation, but establishments in the financial and petroleum sectors require special permission. The equity participation ratio of foreign shareholders is restricted to 20 percent in broadcasting and 49 percent in aviation, maritime transportation and many value-added telecommunications services (such as GSM, satellite and data, though telecommunications legislation has been amended to allow certain company-specific exceptions to these limits). Nonetheless, once investors have committed to the Turkish market, they sometimes find the rationale for their initial investments significantly undercut by arbitrary legislative action, such as laws imposing limits on the production corn sweeteners.
The Turkish government accepts binding international arbitration of investment disputes between foreign investors and the state. I n 2001 the Parliament approved a law expanding the scope of international arbitration in Turkish contracts. However, at least one American company reports that the judicial system in Turkey has not recognized international arbitration judgments.
The Turkish government passed legislation in February 2001 that aims to introduce a fully liberalized energy market, under which private firms will develop projects with the approval of an independent regulatory body, the Energy Market Regulatory Authority. With respect to electricity, the state company has been unbundled into production, transmission, distribution, and trading companies, but little progress has been made in privatizing power generation and distribution. Targeted liberalization of the natural gas sector has also faced delays. The state pipeline company BOTAS will remain predominant, but legislation requires phased transfer of 80 percent of its gas purchase contracts. Privatization of natural gas distribution is slowly proceeding.
As the result of a 1997 court decision, the Turkish Government has blocked full repatriation of investments by oil companies under Article 116 of the 1954 Petroleum Law, which protected foreign investors from the impact of lira depreciation. Affected companies have challenged the 1997 decision and the case is currently in the Turkish court system.
ANTICOMPETITIVE PRACTICES
As part of its customs union agreement with the EU, Turkey has pledged to adopt EU standards concerning competition and consumer protection. In 1997, a government "Competition Board" commenced operations, putting into force a 1994 competition law. Government monopolies in a number of areas, particularly alcoholic beverages and telecommunications services, have been scaled back in recent years, but currently remain a barrier to certain U.S. products and services.
Corruption
Corruption is perceived to be a major problem in Turkey by private enterprise and the public at large, particularly in government procurement. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders to some degree. American companies operating in Turkey have complained about contributions to the community solicited, with varying degrees of pressure, by municipal or local authorities.
Parliament continues to probe corruption allegations involving senior officials in previous governments, particularly in connection with energy projects. In 2003, after the government intervention in a bank owned by the Uzan group, evidence of corrupt practices at the bank was discovered.
Turkey ratified the OECD antibribery convention, and passed implementing legislation providing that bribes of foreign officials, as well as domestic, are illegal and not tax deductible.
OTHER BARRIERS
Energy: In 2001, the Turkish Government cancelled 46 contracted power projects based on the build-operate- transfer (BOT) and transfer-of-operating-rights (TOR) models. Turkey's constitutional court ruled in 2002 that the government would have to either honor the contracts or compensate the companies involved. To date, the Turkish government has not commenced negotiations with the companies, one (TOR) of which has launched an international arbitration case. In 2002, the government requested BOT projects already in operation -- which include U.S.-owned companies -- to apply for new licenses from the new Energy Market Regulatory Authority (EMRA), and has indirectly pressed them unilaterally to lower their prices while the license application process is still underway. Despite lack of action on new licenses, the Turkish Government has continued to purchase electricity produced per the existing contracts.
Cola tax: Punitive taxation of cola drinks (raised in 2002 to 47.5 percent under Turkey's "Special Consumption Tax") discourages investment by major U.S. cola producers.
Corporate Governance: Weaknesses in the protection of minority shareholder rights and regulatory oversight have left some American companies at a disadvantage in disputes with Turkish partners. Edelman
UNCLAS SECTION 01 OF 06 ANKARA 007777
SIPDIS
STATE FOR EB/TPP/MTA/MST TREASURY FOR OASIA DEPT PLEASE PASS USTR FOR GBLUE/LERRION FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: ETRDââ¬â°[Foreign Trade], EINVââ¬â°[Foreign Investments], EFINââ¬â°[Financial and Monetary Affairs], ECONââ¬â°[Economic Conditions], KIPRââ¬â°[Intellectual Property Rights], TUââ¬â°[Turkey] SUBJECT: DRAFT NATIONAL TRADE ESTIMATE REPORT
Ref: STATE 310953
The following is Embassy's input for the National Trade Estimate Report for Turkey:
TRADE SUMMARY
Turkey is a beneficiary of GSP, has Bilateral Investment and Tax Treaties with the United States, and has a customs union with the European Union. (Trade/investment statistics to be provided by Washington agencies).
IMPORT POLICIES
Tariffs and Quantitative Restrictions
As a result of its 1996 customs union with the European Union, Turkey applies the EU's common external customs tariff for third country (including U.S.) imports and imposes no duty on non-agricultural items from EU and European Free Trade Association (EFTA) countries. The simple average tariff for industrial products from the United States and other third countries dropped to 4.4 percent in 2003. Turkey's harmonization of trade and customs regulations with those of the EU and the overall decline in tariff rates benefits third country exporters.
Turkey maintains high tariff rates (25 percent average Most-Favored-Nation rate) on many food and agricultural products to protect domestic producers. Imports of animal products carry the highest tariffs, with ad valorem rates ranging up to 227.5 percent on meat products and edible meat offal. The Turkish government often increases tariffs during the domestic harvest or during times of high stocks. In 2003, the government increased the tariff on corn from 20 to 70 percent. High feed prices have negatively impacted Turkish livestock industries, particularly for beef and poultry. Duties on fruits range from 61 percent to 149 percent. Processed fruits, fruit juices and vegetable tariffs range between 41 and 138 percent. The GOT also levies high duties as well as excise taxes and other domestic charges on imported alcoholic beverages that increase wholesale prices by more than 200 percent.
Import Licenses and Other Restrictions
While import licenses generally are not required for industrial products, products which need after-sales service (e.g., photocopiers, ADP equipment, diesel generators) require licenses. Non-tariff barriers result in costly delays, demurrage charges, and other uncertainties that stifle trade for many agricultural products.
Private traders report that Turkish import policies are often implemented in a nontransparent manner. In addition, gaps in communication between Ankara and regional offices often result in improper implementation of regulations. Turkey is in the process of rewriting its import regulations for agriculture products in order to comply with EU regulations. However, some new regulations have not been fully consistent with those of the EU. For many products, no written standards exist. For example, despite repeated requests, the GOT failed to provide guidelines for red meat imports. For the past four years, the Ministry of Agriculture and Rural Affairs (MARA), through its quarantine service, stopped issuing import licenses for rice prior to the harvest. In July 2003, the GOT stopped issuing licenses and has not lifted this ban as of December.
The import process for alcoholic beverages is exceedingly complicated, requiring both MARA control certificates and TEKEL (a parastatal company) permits which strictly limit trade and distribution channels and are made available under only limited and unpredictable circumstances. The government is in the process of privatizing the alcohol operations of TEKEL. Recent changes in Turkish law call for a liberalization of the spirits and tobacco market over a five-year period, which should improve the competitive environment.
Turkey applies discriminatory price controls for imported pharmaceuticals, allowing lower mark-ups for imported drugs relative to those produced domestically. U.S. pharmaceuticals companies claim this policy has cost them over USD 250 million since it was last modified in April 2001.
STANDARDS, TESTING, LABELING AND CERTIFICATION The Turkish government has not consistently notified the WTO of changes in import policies and phytosanitary requirements, and implementation has been arbitrary. Importers have had increasing difficulty in obtaining information on sanitary and phytosanitary certifications. The GOT often requires laboratory testing on items not normally subject to testing by trading partners, often without any scientific basis. Finally, the GOT often requires phytosanitary certification on quality issues that are normally handled on a contractual basis.
The government requires laboratory tests and certification that quality standards are met for the importation of foods, human and veterinary drugs, and medical equipment and appliances intended for use by humans.
GOVERNMENT PROCUREMENT
Turkey is not a signatory of the WTO Government Procurement Agreement. Although its laws require competitive bidding procedures for tenders, U.S. companies sometimes become frustrated over lengthy and often complicated bidding and negotiating processes. Some tenders, especially large projects involving co- production, are frequently opened, closed, revised, and opened again.
In 2003, a new public tender law which establishes an independent board to oversee public tenders, and lowers the minimum bidding threshold at which foreign companies can participate in state tenders, entered into force. However, the law gives a price preference of up to 15 percent for domestic bidders and is not applicable to domestic bidders who form a joint venture with foreign bidders. Amendments to the law in 2003 enlarged the definition of domestic bidder to include corporate entities established under Turkish law, including those established by foreign companies.
Military procurement generally requires an offset provision in tender specifications. The offset guidelines were recently modified to encourage foreign direct investment and technology transfer.
The entry into force of a Bilateral Tax Treaty between the United States and Turkey in 1998 eliminated the application of a 15 percent withholding tax on U.S. bidders for Turkish government contracts.
EXPORT SUBSIDIES
Turkey employs a number of incentives to promote exports, although programs have been scaled back in recent years to comply with EU directives and WTO standards. Historically, wheat and sugar were the main subsidized commodities. Export subsidies, ranging from 10 to 20 percent of export values, are granted to 16 agricultural or processed agricultural products. The Turkish Eximbank provides exporters with credits, guarantees, and insurance programs. Certain tax credits also are available to exporters.
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
Turkey's intellectual property rights regime has improved in recent years, but still presents serious problems. Beginning in 1995, the Turkish Parliament approved a series of patent, trademark and copyright laws in connection with Turkey's customs union with the EU and the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). In recognition of Turkey's progress in the IPR area, USTR removed Turkey from its Special 301 Priority Watch List and placed the country on its Watch List in 2002, where it remained in 2003.
Turkey's 2001 copyright law substantially modernized the legal regime, providing deterrent penalties for copyright infringement. However, it does not prohibit circumvention of technical protection measures, a key feature of the World Intellectual Property Organization (WIPO) "Internet" treaties. In addition, the Turkish courts have failed to render deterrent penalties to pirates as provided in the copyright law. They have instead applied the Turkish Cinema Law, which has much lower penalties. The copyright industries' key demand is for better enforcement. Currently, the police generally do not intervene in pirate production or sales unless the rightholder specifically requests that they do so. U.S. industry estimated losses to piracy at USD 93 million in 2002.
In 1995, new patent, trademark, industrial design, and geographic indicator laws revamped Turkey's foundation for industrial property protection. Turkey also acceded to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. Although the Turkish Patent Institute (TPI) was established in 1994 to support technological progress, protect intellectual property rights and provide public information on intellectual property rights, it is currently understaffed.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline."
The key intellectual property concern for research- based pharmaceutical companies is Turkey's lack of data exclusivity protection for confidential test data, which is required by the TRIPS agreement. U.S. industry contends that at least 165 products infringing data exclusivity have been approved or are pending review by the Turkish Health Ministry, and that lack of data exclusivity protection costs U.S. companies some USD 400 million annually in lost sales. Patent holders have also note that the Health Ministry has accepted applications to register generic copies of products which have a valid patent in Turkey.
Trademark holders also contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey. According to one industry association, Turkey is the world's third-largest exporter of counterfeit products.
SERVICES BARRIERS
Telecommunications Services
State-owned Turk Telekom currently provides voice telephony and most value-added and basic telecommunications services. In the WTO negotiations on Basic Telecommunications Services, Turkey made commitments to provide market access and national treatment for all services at the end of 2005, and permitted value-added telecommunications services to be licensed to the private sector with a 49 percent limit on foreign equity investment. In the interim, Turkey committed to provide national treatment for mobile, paging and private data networks. In 2000, the Turkish government passed a law unilaterally accelerating the opening of the market for basic telephone services to January 1, 2004. A 2001 law provides for liberalization of areas under the Turk Telecom monopoly once the state's share in that company falls below 50 percent. The Turkish government has not yet issued implementing regulations. These laws also created an independent regulatory body - the Telecommunications Regulatory Board - and made licensing criteria publicly available. U.S. firms complain that the licensing process still lacks transparency and that revenue sharing with Turk Telecom is required where competition is permitted. There are three private GSM cellular operators in Turkey, with a fourth license held by Turk Telecom.
The Turkish government plans to announce its strategy for privatizing Turk Telekom in the near future. In November 2003, the Transport and Communications Minister said that the Council of Ministers had agreed on a block sale of a majority stake in Turk Telecom by the end of May 2004, with a possible sale of additional shares to the public after that date. The Minister stated that foreign investors would be eligible to buy a majority stake in the company.
Other Services Barriers
There are restrictions on establishment in financial services, the petroleum sector, broadcasting, aviation and maritime transportation (see Investment Barriers section). A 2003 law on work permits for foreigners repealed earlier legislation defining certain professions and services open only to Turkish citizens. This has significantly broadened the range of occupations in which foreigners can be engaged, but there are still restrictions for doctors, attorneys and several other professions.
INVESTMENT BARRIERS
The U.S.-Turkish Bilateral Investment Treaty (BIT) entered into force in May 1990. Turkey has a liberal investment regime in which foreign investments receive national treatment. Once approved, firms with foreign capital are treated as local companies. However, private sector investment is often hindered, regardless of nationality, by: excessive bureaucracy; political and macroeconomic uncertainty; weaknesses in the judicial system; high tax rates; a weak framework for corporate governance; and frequent, sometimes unclear changes in the legal and regulatory environment.
Almost all areas open to the Turkish private sector are fully open to foreign participation, but establishments in the financial and petroleum sectors require special permission. The equity participation ratio of foreign shareholders is restricted to 20 percent in broadcasting and 49 percent in aviation, value-added telecommunications services, and maritime transportation. Nonetheless, once investors have committed to the Turkish market, they sometimes find the rationale for their initial investments significantly undercut by arbitrary legislative action, such as laws imposing limits on the production corn sweeteners.
The Turkish government accepts binding international arbitration of investment disputes between foreign investors and the state; this principle is enshrined in the U.S.-Turkish BIT. For many years, there was an exception for "concessions" involving private (primarily foreign) investment in public services. In 1999, the Parliament passed a package of amendments to the constitution allowing foreign companies access to international arbitration for concessionary contracts. In 2000, the Turkish government completed implementing legislation for arbitration. In 2001, the Parliament approved a law further expanding the scope of international arbitration in Turkish contracts.
In 2003, Parliament passed legislation which streamlined the process of establishing a company in Turkey, and which eliminated screening of foreign investors in favor of a notification system, provided national treatment for foreign-owned entities in acquisition of real estate, and abolished of specific minimum capital requirements for foreign investors. The Turkish government passed legislation in February 2001 that will introduce a fully liberalized energy market, under which private firms will develop projects with the approval of an independent regulatory body, but little progress has been made in privatizing power generation and distribution.
ANTICOMPETITIVE PRACTICES
As part of its customs union agreement with the EU, Turkey has pledged to adopt EU standards concerning competition and consumer protection. In 1997, a government "Competition Board" commenced operations, putting into force a 1994 competition law. Government monopolies in a number of areas, particularly alcoholic beverages and telecommunications services, have been scaled back in recent years, but currently remain a barrier to certain U.S. products and services.
Corruption
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT LARGE.
Corruption appears to be most problematic in government procurement, with frequent allegations that contracts are awarded on the basis of personal and political relationships of businesspersons and government officials. The judicial system is also perceived to be susceptible to external political and commercial influence to some degree.
U.S. firms have sometimes alleged that corruption, or at a minimum, nontransparent practices, have been a barrier to direct foreign investment. American companies operating in Turkey have complained about contributions to the community solicited, with varying degrees of pressure, by municipal or local authorities.
The Turkish government conducted two significant anti- corruption operations in 2001, one in the energy ministry and the other in the public works ministry. Several individuals were charged with corruption and wrongdoing in government contract tenders. Parliament continues to probe corruption allegations involving senior officials in previous governments, particularly in connection with energy projects. In 2003, after the government intervention in a bank owned by the Uzan group, evidence of corrupt practices at the bank was discovered.
Turkey ratified the OECD antibribery convention, and passed implementing legislation providing that bribes of foreign officials, as well as domestic, are illegal and not tax deductible. In 2003, Turkey ratified the convention on Combatting Bribery of Foreign Public Officials in International Transactions, the Council of Europe's Civil Law on Corruption and the UN Convention against Transnational Organized Crime. The GOT has signed the Council of Europe's Criminal Law on Corruption, but has not ratified it. The Turkish Government signed the UN Convention Against Corruption in Dec 2003.
OTHER BARRIERS
Energy: In 2001, the Turkish Government cancelled 46 contracted power projects based on the build-operate- transfer (BOT) and transfer-of-operating-rights (TOR) models. Turkey's constitutional court ruled in 2002 that the government would have to either honor the contracts or compensate the companies involved. To date, the Turkish government has not commenced negotiations with the companies, one of which has launched an international arbitration case. In 2002, the government required BOT projects already in operation -- which include U.S.-owned companies -- to apply for new licenses from the new Energy Market Regulatory Authority (EMRA), and has pressed them unilaterally to lower their prices while the license application process is still underway. Cola tax: Punitive taxation of cola drinks (raised in 2002 to 47.5 percent under Turkey's "Special Consumption Tax") discourages investment by major U.S. cola producers. Corporate Governance: Weaknesses in the protection of minority shareholder rights and regulatory oversight have left some American companies at a disadvantage in disputes with Turkish partners. Edelman
UNCLAS SECTION 01 OF 06 ANKARA 009054
SIPDIS
STATE FOR EB/TPP/MTA/MST-AWHITTEN TREASURY FOR OASIA DEPT PLEASE PASS USTR FOR GBLUE/DBIRDSEY FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO
E.O. 12958: N/A TAGS: ETRDââ¬â°[Foreign Trade], EINVââ¬â°[Foreign Investments], EFINââ¬â°[Financial and Monetary Affairs], ECONââ¬â°[Economic Conditions], KIPRââ¬â°[Intellectual Property Rights], TUââ¬â°[Turkey] SUBJECT: DRAFT NATIONAL TRADE ESTIMATE REPORT
Ref: STATE 225281
The following is Embassy's input for the National Trade Estimate Report for Turkey:
TRADE SUMMARY
Turkey is a beneficiary of GSP, has Bilateral Investment and Tax Treaties with the United States, and is a member of the EU Customs Union. (Trade/investment statistics to be provided by Washington agencies).
IMPORT POLICIES
Tariffs and Quantitative Restrictions
As a result of its 1996 customs union with the European Union, Turkey applies the EU's common external customs tariff for third country (including U.S.) imports and imposes no duty on non-agricultural items from EU and European Free Trade Association (EFTA) countries. The weighted rate of protection for industrial products from the United States and other third countries dropped to 4.65 percent at the end of 2001. Turkey's harmonization of trade and customs regulations with those of the EU and the overall decline in tariff rates is benefiting third country exporters as well.
Turkey maintains high tariff rates on many agricultural and food products to protect domestic producers. Duties for paddy and milled rice were recently raised to 38 and 46 percent respectively. Corn and milling wheat duties were reduced to 10 percent in early 2002, however the duty on corn was increased to 40 percent during the local harvest season and has yet to be reduced again. In recent years, tariff rates for these grains have been raised to prohibitively high levels in the months following the domestic harvest. Barley duties are maintained at 85 percent year-round. High feed input prices have resulted in high prices for poultry and beef, and have negatively impacted local industries. Under its EU customs union and other bilateral agreements, Turkey imports about 230,000 tons of milling wheat, 100,000 tons durum and 28,000 tons of rice duty-free. Duties on fruits range from 61 percent (apples) to 149 percent (bananas). For processed vegetables and fruits/fruit juices tariffs range from 41 to 138 percent. The Turkish Government also levies high duties, as well as excise taxes and other domestic charges, on imported alcoholic beverages that increase wholesale prices by more than 200 percent. Turkey does not permit any meat imports.
Import Licenses and other Restrictions
While import licenses generally are not required for industrial products, products which need after-sales service (e.g., photocopiers, ADP equipment, diesel generators) require licenses. Non-tariff barriers result in costly delays, demurrage charges, and other uncertainties that stifle trade for many agricultural products. Changes in import policies are not always notified as required by WTO obligations. Import permits for some products that previously were issued by Ministry of Agriculture and Rural Affairs (MARA) officials at ports of entry must now be cleared by headquarters in Ankara. MARA is currently revising its technical import requirements to harmonize with EU standards. In the interim, for many products, no written standards exist. Wheat import permits are only issued to flour product exporters and EU-quota holders.
The MARA also stopped issuing permits for paddy rice during the domestic rice harvest period in 2001 and 2002, and applied quantitative restrictions during the rest of the year, which seriously constrained U.S. export sales. Many quantitative and non-tariff barriers for bananas have recently been resolved, however the 149 percent tariff has had a significant negative affect on trade.
The import process for alcoholic beverages is exceedingly complicated, requiring both MARA control certificates and TEKEL (a parastatal company) permits which strictly limit trade and distribution channels and are made available under only limited and unpredictable circumstances. The government is preparing TEKEL for privatization, but it is still unclear to what degree competition will be permitted in this sector.
STANDARDS, TESTING, LABELING AND CERTIFICATION
The GOT has not notified a number of changes in import policies and phytosanitary requirements to the WTO. These changes are often communicated verbally, rather than in writing, with varying levels of enforcement. In recent years, it has become more difficult for importers to obtain sanitary and phytosanitary certifications. For instance, MARA has begun to require official certification for laboratory results on certain food ingredient imports, including dioxin levels. U.S. regulatory agencies do not require such testing or certify these types of results.
While import licenses generally are not required for industrial products, products which need after-sales service (e.g., office equipment, white goods, electronic and electrical consumer products, ADP equipment, diesel generators) and medical and agricultural commodities require licenses. In addition, the government requires laboratory tests and certification that quality standards are met for the importation of foods, human and veterinary drugs, and medical equipment and appliances intended for use by humans.
GOVERNMENT PROCUREMENT
Turkey is not a signatory of the WTO Government Procurement Agreement. Although its laws require competitive bidding procedures for tenders, U.S. companies sometimes become frustrated over lengthy and often complicated bidding and negotiating processes. Some tenders, especially large projects involving co- production, are frequently opened, closed, revised, and opened again. There are often numerous requests for "best offers."
In 2002, parliament approved a new public tender law which establishes a board to oversee public tenders, and lowers the minimum bidding threshold at which foreign companies can participate in state tenders. However, the law has not yet been implemented. Military procurement generally requires an offset provision in tender specifications when the estimated value of the imported goods or services exceeds five million dollars. The entry into force of a Bilateral Tax Treaty between the United States and Turkey in 1998 eliminated the application of a 15 percent withholding tax on U.S. bidders for Turkish government contracts.
EXPORT SUBSIDIES
Turkey employs a number of incentives to promote exports, although programs have been scaled back in recent years to comply with EU directives and WTO standards. Historically, wheat and sugar were the main subsidized commodities. In 2001, Turkey exceeded its WTO obligations for subsidized barley exports. The Turkish Eximbank provides exporters with credits, guarantees, and insurance programs. Certain tax credits also are available to exporters.
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
In 1995, the Turkish Parliament approved new patent, trademark and copyright laws in connection with preparations for Turkey's customs union with the EU. Turkey also acceded to a number of multilateral intellectual property rights (IPR) conventions, including the 1971 Paris Act of the Berne Copyright Convention. In 2001, the Parliament enacted amendments to the copyright law which provide retroactive protection, expand the list of protected items and include deterrent penalties against piracy. These amendments brought Turkey into compliance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in most areas. In recognition of Turkey's progress in the IPR area, USTR removed Turkey from its Special 301 Priority Watch List and placed the country on its Watch List in 2001.
Although intellectual property holders have praised Turkey's new legislation as a significant improvement in the legal regime, implementing regulations in the area of broadcasting include an arbitration provision which could lead to compulsory licensing of musical and possibly other works. In the software area, piracy rates have come down in recent years following an anti- piracy campaign and a directive to legalize software used in government bodies. Trademark holders contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey.
Turkey's 1995 patent law replaced a law originally passed in 1879. New trademark, industrial design, and geographic indicator laws were passed at the same time, completely revamping Turkey's foundation for industrial property protection. Turkey also adhered to a number of international conventions in 1995, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement.
In accordance with the 1995 patent law and Turkey's agreement with the EU, patent protection for pharmaceuticals began on January 1, 1999. Turkey has been accepting patent applications since 1996 in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the R&D "pipeline." Lack of data exclusivity protection, which is required by the TRIPS agreement, is the key concern for research-based pharmaceuticals companies.
Turkish police and prosecutors are working closely with trademark, patent, and copyright holders to conduct raids against pirates within Turkey. Although several cases have been brought to conclusion successfully, U.S. industry believes continued enforcement efforts are needed.
SERVICES BARRIERS
Accounting
Foreigners are not permitted to acquire, own an interest in, form a partnership with, merge with, establish, or affiliate with Turkish accounting firms. Owners and employees of accounting firms established in Turkey cannot acquire, own an interest in, form a partnership with, merge with, establish, or affiliate with foreign firms. Names of foreign or affiliated firms cannot be used in the legal name of an auditing partnership or corporation, and cannot be used on letterheads and business cards.
Regulations prohibit the formation of partnerships among partners of different levels and titles. Also, qualified non-Turkish auditors are not permitted to practice on a basis equal to qualified Turkish auditors because of non-recognition of foreign-country professional certification and foreign education, and because of nationality requirements.
Legal Services
The practice of Turkish law and membership of the bar is restricted to Turkish nationals. A person cannot provide legal advice on foreign or international law without being licensed in the practice of Turkish law. Turkish lawyers are not permitted to form partnerships with foreign lawyers. However, some foreign law firms have established liaison or branch offices in Turkey, staffed by Turkish lawyers.
Architecture and Engineering
Licensing of architects and engineers is limited to Turkish nationals. The Turkish government has discretionary authority to grant a percentage preference to domestic firms on public construction projects. Licensing of architects and engineers is limited to Turkish nationals. However, some large infrastructure projects including dams, power plants, highways, and railways are tendered for international firms. The foreign firms usually have local partners. All projects with foreign currency or foreign credit guarantees allocated by the Turkish Treasury and State Planning Organization are open to foreign engineering and construction companies. However, Turkish Treasury guarantees for new projects have been significantly reduced in order to meet strict fiscal goals under Turkey's IMF program. Telecommunications Services State-owned Turk Telekom currently provides voice telephony and most value-added and basic telecommunications services. The Turkish government plans to privatize Turk Telekom, with the government retaining a single "golden" (blocking) share. Foreign investors will be able to acquire up to 45 percent of Turk Telekom. The United States has urged the Turkish government to pursue full and complete privatization.
In the WTO negotiations on Basic Telecommunications Services, Turkey made commitments to provide market access and national treatment for all services at the end of 2005, and permitted value-added telecommunications services to be licensed to the private sector with a 49 percent limit on foreign equity investment. In the interim, Turkey committed to provide national treatment for mobile, paging and private data networks. In 2000, the Turkish government passed a law unilaterally accelerating the opening of the market for basic telephone services to January 1, 2004. A 2001 law provides for liberalization of areas under the Turk Telecom monopoly once the state's share in that company falls below 50 percent. These laws also created an independent regulatory body - the Telecommunications Regulatory Board - and made licensing criteria publicly available. U.S. firms complain that the licensing process still lacks transparency and that revenue sharing with Turk Telecom is required where competition is permitted. There are three private GSM cellular operators in Turkey, with a fourth license held by Turk Telecom.
Other Services Barriers
There are restrictions on establishment in financial services, the petroleum sector, broadcasting, aviation and maritime transportation (see Investment Barriers section).
INVESTMENT BARRIERS
The U.S.-Turkish Bilateral Investment Treaty (BIT) entered into force in May 1990. Turkey has a liberal investment regime in which foreign investments receive national treatment. There is a screening process for foreign investments, which the government applies on an MFN basis. Once approved, firms with foreign capital are treated as local companies. Almost all areas open to the Turkish private sector are fully open to foreign participation, but establishments in the financial and petroleum sectors require special permission. The equity participation ratio of foreign shareholders is restricted to 20 percent in broadcasting and 49 percent in aviation, value-added telecommunications services, and maritime transportation. Nonetheless, once investors have committed to the Turkish market, they sometimes find the rationale for their initial investments significantly undercut by arbitrary legislative action, such as laws imposing limits on the production corn sweeteners.
The Turkish government accepts binding international arbitration of investment disputes between foreign investors and the state; this principle is enshrined in the U.S.-Turkish BIT. For many years, there was an exception for "concessions" involving private (primarily foreign) investment in public services. In 1999, the Parliament passed a package of amendments to the constitution allowing foreign companies access to international arbitration for concessionary contracts. In 2000, the Turkish government completed implementing legislation for arbitration. In 2001, the Parliament approved a law further expanding the scope of international arbitration in Turkish contracts.
While Turkey's legal regime for foreign investment is liberal, private sector investment is often hindered, regardless of nationality, by: excessive bureaucracy; political and macroeconomic uncertainty; weaknesses in the judicial system; high tax rates; a weak framework for corporate governance; and frequent, sometimes unclear changes in the legal and regulatory environment. The Turkish government is considering legal and other changes to reduce red tape and dismantle other barriers to investment. Key changes under discussion include: elimination of screening of foreign investors in favor of a notification system; national treatment for foreign-owned entities in acquisition of real estate; abolition of specific minimum capital requirements for foreign investors.
Turkey is a member of several international dispute settlement bodies. Nevertheless, until 1999, Turkish courts did not recognize investors' rights to third party arbitration under any contract defined as a concession. This was particularly problematic in the energy, telecommunications and transportation sectors. Constitutional amendments, accepted by the Parliament in 1999 granting access to international arbitration to foreign investors, largely corrected this problem. Investors in these sectors often expressed concern about the lack of clarity in the government approval process, lack of lender's step-in rights, the lack of lender rights to termination, and disparities between the rights of lenders and the rights of the Turkish Government to claim force majeure. The Turkish government passed legislation in February 2001 that will introduce a fully liberalized energy market in Turkey, under which private firms will develop projects with the approval of an independent regulatory body.
ANTICOMPETITIVE PRACTICES
As part of its customs union agreement with the EU, Turkey has pledged to adopt EU standards concerning competition and consumer protection. In 1997, a government "Competition Board" commenced operations, putting into force a 1994 competition law. Government monopolies in a number of areas, particularly alcoholic beverages and telecommunications services, have been scaled back in recent years, but currently remain a barrier to certain U.S. products and services.
Corruption
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT LARGE. THE TURKISH GOVERNMENT CONDUCTED TWO SIGNIFICANT ANTI-CORRUPTION OPERATIONS IN 2001, ONE IN THE ENERGY MINISTRY AND THE OTHER IN THE PUBLIC WORKS MINISTRY. SEVERAL INDIVIDUALS WERE CHARGED WITH CORRUPTION AND WRONGDOING IN GOVERNMENT CONTRACT TENDERS. THE OPERATIONS RESULTED IN THE RESIGNATION OF BOTH MINISTERS AND THE ARREST OF MANY HIGH-LEVEL OFFICIALS.
Corruption appears to be most problematic in government procurement, with frequent allegations that contracts are awarded on the basis of personal and political relationships of businesspersons and government officials. The judicial system is also perceived to be susceptible to external political and commercial influence to some degree.
Turkey has ratified the OECD antibribery convention, but has not yet passed the relevant implementing legislation which would explicitly provide that bribes of foreign officials, as well as domestic, are illegal and not tax deductible.
U.S. firms have sometimes alleged that corruption, or at a minimum nontransparent practices, have been a barrier to direct foreign investment. American companies operating in Turkey have complained about contributions to the community solicited, with varying degrees of pressure, by municipal or local authorities.
OTHER BARRIERS
Energy: Over the last 5-7 years, U.S. firms have spent tens of millions of dollars pursuing contracts for power projects using the build-operate-transfer (BOT) and transfer-of-operating-rights (TOR) models. The constitutional court ruled in April 1992 that the GOT would have to either honor the contracts or compensate the companies involved. To date, the GOT has not commenced negotiations with the companies, one of which has launched an international arbitration case. Because of the delay, the companies are now required to submit license applications to the Energy Market Regulatory Board (EMRA), which took control of such licenses in September. In addition, BOT projects already in operation filed suit against EMRA on October 2002, claiming that the license requirement was in violation of their implementing contracts.
Cola tax: Punitive taxation of cola drinks (raised in 2002 to 47.5 percent under Turkey's new "Special Consumption Tax") discourages investment by major U.S. cola producers.
Corporate Governance: Weaknesses in the protection of minority shareholder rights and regulatory oversight have left some American companies at a disadvantage in disputes with Turkish partners.