LEG UP FOR GROWTH

Turkey's new investment promotion strategy aims to rebalance the economy by reducing the current account deficit, boosting domestic production, and creating jobs where they are needed most.


Launched at the beginning of 2012, Turkey's new Investment Incentive Program aims to rebalance the country's economy by reducing the current account deficit and promoting growth in underdeveloped regions. The program provides tax reductions, customs and VAT exemptions, social security premium reductions, and interest support to qualifying foreign or domestic investors.

The objectives of the program are to increase investment in the less-developed eastern and southeastern regions of the country and to reduce dependence on imported intermediate goods, which has been driving up the current account deficit in recent years. As Hayati Yazıcı, Minister of Customs and Trade, explained to TBY, “the foreign trade deficit is on a rapid rise as a result of the fast increase in imports and weak demand in our traditional export markets, as well as by robust domestic consumption, and the high dependency of production on the importation of intermediate goods." In 2011, the current account deficit reached $77.8 billion, equivalent to 10% of GDP, up 65% from 2010. Similarly, the trade deficit in 2011 reached $106 billion, up 47% on the same figure for 2010. The investment program, which came into effect on January 1, 2012, is split into four different investment categories: regional investments, strategic investments, large-scale investments, and general investments.

The Regional Investment Incentives Scheme is focused on promoting investment in Turkey's less-developed regions, particularly in the east and southeast, as well as in regions that are contributing heavily to the country's trade deficit. The scheme divides Turkey's provinces into six categories based on their level of development, economic potential, and the level of support necessary to build economies of scale and make investments both viable and socially beneficial. The incentives available to investors grow progressively larger in each category, from Region I provinces, such as Istanbul and Ankara, which already have high levels of investment, to Region VI provinces, such as Van and Diyarbakır, which have much more untapped potential for growth. Regional income inequality is still a major issue for Turkish development. Turkey has the second-highest level of income inequality in the OECD (behind Mexico), and the southeastern regions of the country lag behind in a range of socio-economic indicators. Investors in these less-developed regions can receive customs and VAT exemption on machinery and equipment; corporate tax reduction; financial support for both employee and employer social security contributions; financial support for interest on business loans; income tax withholding support; and land allocation.

The Strategic Investment Incentives Scheme is focused on increasing domestic production in industries that are currently contributing to, or that can help to reduce, the country's current account deficit. As Zafer Çağlayan, the Minister of Economy explained to TBY, “the main goal of strategic investment incentives is to maintain the domestic production of goods that typically have an import component of more than 50% and hence aggravate the current account deficit." The scheme provides incentives for investment in the domestic production of intermediate goods that have a high level of import dependence, as long as a significant portion of the value-added is done in Turkey. Eligible investors can benefit from the same incentives available through the regional strategy, plus a VAT refund on construction and building expenses.

In conjunction with the strategic and regional programs, the Large-Scale Investment Incentives Scheme aims to promote investments that will improve the competitiveness of Turkey's high-tech, value-added, and export-oriented industrial sectors. The scheme provides incentives for especially large investments in the petrochemical, logistics and transport, automotive, high-tech machinery, electronics, pharmaceutical, and aerospace sectors. Eligible investors can receive most of the incentives available through the Regional and Strategic Schemes initiative.

Any investments that are not eligible for incentives under the Regional, Strategic, or Large-Scale Schemes, but still meet a minimum level of investment (which varies by region), may still be eligible for incentives under the general investment incentives program. This provides customs and VAT exemptions on purchases of machinery and equipment for investors in any sector or region of the country provided they meet minimum investment requirements.

Since the Investment Incentives Program came into effect on January 1, 2012, the economy has already seen signs of increased domestic production and reduced import dependency. The current account deficit for the first four months of 2012 showed a 38% reduction compared to the same period in 2011. Similarly, the trade deficit for 1Q2012 was 20% lower than the same figure in 1Q2011. This trend looks set to continue as an increasing number of investors take advantage of the range of new incentives available through these programs.