US embassy cable - 02ANKARA8255

CITIBANK CLIENTS GET SLAPPED WITH $1.5 BILLION TURKISH CLAIM FOR BACK TAXES: POTENTIAL GIANT INVESTMENT DISPUTE

Identifier: 02ANKARA8255
Wikileaks: View 02ANKARA8255 at Wikileaks.org
Origin: Embassy Ankara
Created: 2002-11-15 11:22:00
Classification: CONFIDENTIAL//NOFORN
Tags: EINV EFIN TU
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008255 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB, AND EUR/SE 
TREASURY FOR OASIA - MILLS AND GUNARATNE 
USDOC FOR 4212/ITA/MAC/OEURA/CDP/DDEFALCO 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: EINV, EFIN, TU 
SUBJECT: CITIBANK CLIENTS GET SLAPPED WITH $1.5 BILLION 
TURKISH CLAIM FOR BACK TAXES:  POTENTIAL GIANT INVESTMENT 
DISPUTE 
 
 
Classified by the Ambassador for reason 1.5 (b). 
 
 
1.  (C) SUMMARY:  Citibank's foreign investor clients in 
Turkey were recently disallowed long-standing preferential 
tax treatment on T-bill income.  These investors' T-bill 
income from 1997 to present was reassessed at a 44 percent 
tax rate, rather than the preferential 11 percent tax rate, 
resulting in a whopping tax claim of $1.5 billion submitted 
to Citibank as these investors' custodian in Turkey. 
Citibank is quietly working with GOT bureaucrats now, but is 
concerned that this issue not surface in the local media. 
The Ambassador told Citibank execs in Ankara that we will 
coordinate a high-level  approach, starting with the new 
Finance Minister, as soon as the new GOT is in place.  END 
SUMMARY. 
 
 
2.  (C) Citigroup's London-based Director of Global 
Securities for Europe, Japan and MidEast Jim Donovan, and 
Citibank GM for Turkey Mark Robinson briefed the Ambassador 
on a serious new issue with the Government of Turkey.  Last 
month a Turkish tax inspector disallowed - only for Citibank 
and its clients - the long-standing preferential tax 
treatment of T-bill income of non-Turkish residents.  The 
result is a claim for back taxes, with penalties and 
interest, of $1.5 billion.  The tax inspectorate requested 
that Citibank deposit $500 million in collateral in advance 
of resolving this claim.  Donovan told the Ambassador that 
the collateral deposit has been dropped, but the tax 
assessment is outstanding, and Citibank is treating it very 
seriously. 
3.  (C) Citibank, JP Morgan/Chase and several Turkish banks 
(including Garanti Bankasi) have foreign clients who invest 
in the local T-bill market, through custodial accounts kept 
in the banks.  In Turkish legal parlance, the bank is the 
"permanent representative" for these investments. 
Investments by corporations formed outside of Turkey, which 
are have no Turkish residence, and which bring funds into 
Turkey have long benefited from preferential tax treatment. 
This treatment is spelled out in a Capital Markets Board 
circular.  It  states that foreign investment in the local 
T-bill market is taxed at the rate of 11 percent (versus the 
44 percent rate at which Turkish residents are taxed on 
T-bill income).   If 25 percent or more of the foreign 
investment is put in the Turkish equities market, then the 
tax rate on income from the whole investment is zero. 
 
 
4.  (C) According to the Citibank execs, the Finance 
Ministry's tax inspector recently disallowed the preferential 
tax treatment for Citibank and its clients, and applied the 
44 percent tax rate retroactively for the period 1997-2000. 
Per Citibank, this is the action of one tax inspector, and 
this kind of assessment has not been applied to other banks 
with foreign investor clients. 
 
 
5.  (C) Citibank execs Donovan and Robinson met November 14 
with the Finance Ministry's DG for revenue Mete Sahin, 
Treasury U/S Faik Oztrak and others in Ankara.  They told the 
Ambassador that these bureaucrats were supportive of 
Citibank's position - that this retroactive change in tax 
treatment is unfair to foreign investors, and Citibank will 
not agree to submit this claim to a settlement commission. 
But the bureaucrats also noted the need to get the incoming 
government's approval before making any decisions on this 
case.  Citibank will wait for the new GOT to be formed before 
raising this issue with the new Finance Ministry. 
 
 
6.  (C) At present, Citibank is not asking the USG to 
intervene with the GOT, per Donovan and Robinson.  They have 
hired local accountants Price Waterhouse and Ernest and 
Young, and local attorneys, to begin talking with AK Party 
figures.  They will stay in touch with us, and coordinate 
approaches at the ministerial level, very soon after the new 
GOT is formed.  Citibank is concerned that, if this issue 
leaks into the local press, then the chances of quietly 
resolving the claim are much less.  The Ambassador agreed 
with this approach, and expressed his willingness to raise 
this with the new GOT once it is formed. 
 
 
7.  (C) Comment: Citibank has been in Turkey for 25 years. 
While maintaining a small commercial banking presence, it has 
trained a whole generation of Turkish banking executives 
(including BRSA Chairman Akcakoca, former State Bank Board 
Chairman Akisik, Kocbank CEO Karacaham and others). 
Furthermore, its investor clients (including Goldman Sachs, 
Merrill Lynch) have at times been major players in the local 
T-bill market.  Press criticism of "foreign banks" surfaces 
from time to time and calls them a bunch of speculators. 
This outrageous tax assessment raises new risks to all 
foreign portfolio investors.  We will work with Citibank to 
nip it in the bud with the AK government. 
PEARSON 

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