US embassy cable - 04ANKARA2336

UNCLAS SECTION 01 OF 03 ANKARA 002336 
 
SIPDIS 
 
 
STATE FOR E, EB AND EUR/SE 
TREASURY FOR OASIA 
DEPT PLEASE PASS USTR FOR LERRION 
FAS FOR ITP/THORBURN 
USDOC FOR 5102/FOREIGN TRADE ZONES (ITA/IA) 
 
 
SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, TU 
SUBJECT: INFORMATION ON TURKISH FOREIGN FREE TRADE 
ZONES 
 
 
REF: SECSTATE 72748 
 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE ACCORDINGLY 
 
 
1. (U) THE TURKISH FOREIGN TRADE UNDERSECRETARIAT 
PROVIDED THE FOLLOWING INFORMATION KEYED TO REFTEL 
QUESTIONS ON TURKISH FREE ZONES (FZS) RULES AND 
APPLICATIONS.  THE FOLLOWING IS A TRANSLATION OF 
FOREIGN TRADE'S WRITTEN RESPONSE: 
 
 
2. (U) BEGIN INFORMAL EMBASSY TRANSLATION: 
 
 
A.  WITH THE AIM OF INCREASING AND PROMOTING EXPORT- 
ORIENTED INVESTMENT AND PRODUCTION, SINCE 1987 21 FREE 
ZONES HAVE BECOME OPERATIONAL WHICH ARE, AT THE 
MEDITERRANEAN REGION, MERSIN (1987), ANTALYA (1987), 
ADANA YUMURTALIK (1999) FREE ZONES, AT THE AEGEAN 
REGION, AGEAN (1990), IZMIR MENEMEN-LEATHER (1998), 
DENIZLI (2001) FREE ZONES, AT THE MARMARA REGION, 
ISTANBUL ATATURK AIRPORT (1990), ISTANBUL-LEATHER AND 
INDUSTRY (1995), ISE ISTANBUL INTERNATIONAL STOCK 
EXCHANGE (1997), ISTANBUL THRACE (CATALCA) (1998), 
EUROPA (1999), BURSA (2001), KOCAELI (2001) AND TUBITAK- 
MARMARA RESEARCH CENTER TECHNOLOGY (2002) FREE ZONES, 
AT THE SOUTHEAST ANATOLIA REGION GAZIANTEP (1999), 
MARDIN (1995) FREE ZONES, AT THE BLACK SEA REGION, 
TRABZON (1992), RIZE (1998), SAMSUN (1998) FREE ZONES, 
IN THE CENTRAL ANATOLIA AND EASTERN ANATOLIA REGIONS, 
KAYSERI (1998) AND EASTERN ANATOLIA (ERZURUM) (1995) 
FREE ZONES, RESPECTIVELY. 
 
 
THERE IS ONE TYPE OF FREE ZONE BUT ALL THE ACTIVITIES 
SUCH AS PURCHASING-SELLING, ASSEMBLING-DISSEMBLING, 
WAREHOUSING, MANUFACTURING, ETC. CAN BE PERFORMED 
THERE.  THE COUNCIL OF MINISTERS HAS THE AUTHORITY TO 
DETERMINE THE LOCATION AND BOUNDARIES OF THE FREE 
ZONES. THE COUNCIL OF MINISTERS GRANTS PERMISSION FOR 
THE ESTABLISHMENT AND OPERATION OF FREE ZONES TO PUBLIC 
INSTITUTIONS AND AGENCIES, RESIDENT OR NON-RESIDENT 
REAL PERSONS OR LEGAL ENTITIES. 
 
 
EMBASSY COMMENT: 
MOST TURKISH FZS HAVE NOT BEEN SUCCESSFUL IN ATTRACTING 
SIGNIFICANT FOREIGN DIRECT INVESTMENT.  THEY HAVE ALSO 
BEEN NET GOODS IMPORTERS FOR TURKEY.  END COMMENT. 
 
 
B.  AT THE TOP OF THE FREE ZONES ADMINISTRATION STANDS 
THE UNDERSECRETARIAT FOR FOREIGN TRADE, DIRECTORATE 
GENERAL OF FREE ZONES. THE DIRECTORATE GENERAL OF FREE 
ZONES IS RESPONSIBLE FOR SETTING PRINCIPLES AND 
POLICIES FOR ESTABLISHMENT, ADMINISTRATION, AND 
MANAGEMENT OF FREE ZONES; CONDUCTING RESEARCH, 
PLANNING, AND COORDINATION ACTIVITIES; DETERMINING AND 
EXAMINING THE ACTIVITIES IN FREE ZONES; GRANTING AND 
CANCELING OPERATING LICENSES TO ENGAGE IN COMMERCIAL 
ACTIVITIES IN FREE ZONES. 
 
 
AT THE LOCAL LEVEL, THERE ARE FREE ZONE DIRECTORATES AT 
EACH ZONE. ZONE DIRECTORS REPORT TO THE GENERAL 
DIRECTOR OF FREE ZONES AND THEY ARE RESPONSIBLE FOR THE 
NECESSARY SUPERVISION, INSPECTION, AND IMPLEMENTATION 
IN THE ZONES. 
 
 
THERE ARE ALSO ZONE OPERATOR OR ZONE FOUNDER AND 
OPERATOR COMPANIES AT EACH ZONE THAT ARE RESPONSIBLE 
FOR PROVIDING OF SERVICES AND UTILITIES, BUT THAT DO 
NOT HOLD ANY ADMINISTRATIVE POWER. 
 
 
THE ENTRY AND EXIT POINTS ARE CONTROLLED BY CUSTOMS. 
 
 
C.  IN ORDER TO ENGAGE IN OPERATIONS IN FREE ZONES, AN 
OPERATING LICENSE SHOULD BE GRANTED BY THE 
UNDERSECRETARIAT FOR FOREIGN TRADE, DIRECTORATE GENERAL 
OF FREE ZONES. THE ASSESSMENT OF AN APPLICATION TAKES 5- 
7 DAYS IF THE DOCUMENTS ARE COMPLETE. AFTER APPROVAL OF 
THE APPLICATION, THE APPLICANT SHOULD MAKE A RENTAL OR 
SALE CONTRACT FOR OFFICE AND ACTIVITY SPACE. AFTER THE 
CONTRACT IS SENT TO THE UNDERSECRETARIAT FOR FOREIGN 
TRADE, THE LICENSE CAN BE GRANTED IN 3-5 DAYS. 
 
 
D.  YES. IN CONTRAST TO MOST FREE ZONES IN THE WORLD, 
SALES INTO THE DOMESTIC MARKET ARE ALLOWED (SEE ALSO 
ANSWER E). THE ADVANTAGES PROVIDED IN THE FREE ZONES 
ARE AVAILABLE TO ALL FIRMS REGARDLESS OF THEIR ORIGIN. 
THERE IS NO DISCRIMINATION BETWEEN FOREIGN OR DOMESTIC 
INPUTS. 
 
 
E.  LEGISLATIVE PROVISIONS PERTAINING TO CUSTOMS AND 
FOREIGN EXCHANGE OBLIGATIONS ARE NOT APPLICABLE IN 
THESE ZONES. SINCE THE TRADE CONDUCTED BETWEEN TURKEY 
AND THE FREE ZONES IS SUBJECT TO THE FOREIGN TRADE 
REGIME, FREE ZONE USERS CAN PURCHASE GOODS AND SERVICES 
FROM TURKEY. SINCE FREE ZONES ARE PART OF THE TURKEY-EU 
CUSTOMS TERRITORY, THE GOODS OF THIRD COUNTRY ORIGIN 
THAT ARE NOT IN FREE CIRCULATION ARE SENT TO THE EU 
COUNTRIES BY AN A.TR CERTIFICATE (NOTE: THIS IS A 
CUSTOMS CERTIFICATE USED WHEN IMPORTING THIRD COUNTRY 
GOODS TO EU COUNTRIES.  END NOTE), ONLY AFTER THE 
CUSTOMS DUTIES ARE PAID OVER THE RATES DETERMINED IN 
THE COMMON CUSTOMS TARIFF. 
 
 
CUSTOMS DUTIES, VALUE ADDED TAX AND OTHER LEVIES SHOULD 
BE PAID WHEN THE GOODS ARE LEAVING FOR THE HOME MARKET. 
(IN TURKEY'S CASE THIS TRANSACTION IS CALLED AN IMPORT 
AS THE FREE ZONES ARE DEEMED TO BE OUTSIDE OF THE 
CUSTOMS TERRITORY).  THE VALUE IS DETERMINED ACCORDING 
TO THE STATUS OF THE GOODS. IF THE GOODS ARE IN FREE 
CIRCULATION ACCORDING TO THE TERMS OF THE CUSTOMS UNION 
DECISION BETWEEN TURKEY AND THE EU, THERE IS NO CUSTOMS 
DUTY.  THE IMPORTER PAYS THE DUTIES, NOT THE 
MANUFACTURER. THE RATE IS DETERMINED ACCORDING TO THE 
STATUS OF THE GOODS. IF THE GOODS ARE IN FREE 
CIRCULATION, THERE IS NO CUSTOMS DUTY. HOWEVER, IF A 
THIRD-COUNTRY COMPONENT/INPUT IS INVOLVED THE DUTY RATE 
IS DETERMINED ON THE VALUE ADDED IN THE ZONE. IF THE 
PRODUCT IS COMPLETELY OF THIRD COUNTRY ORIGIN, THEN THE 
RATE IS DETERMINED USING THE VALUE OF THE FINISHED 
PRODUCT. THE MANUFACTURER HAS NO CHOICE OF RATES. THE 
SAME RULES APPLY FOR ALL IMPORTERS. 
 
 
F. THERE ARE NO SPECIAL PROVISIONS (FOR SMES OR NEW 
FDI). 
 
 
G.  BY THE LAW NO. 5084 ON THE ENCOURAGEMENT OF 
INVESTMENTS AND EMPLOYMENT AND AMENDMENT OF CERTAIN 
ACTS, DATED 6.2.2004, NEW ARRANGEMENTS ARE MADE 
REGARDING TAX INCENTIVES IN THE FREE ZONES LAW NO. 
3218. 
 
 
EMBASSY COMMENT: 
 
 
TAX INCENTIVES ARE GOVERNED BY ARTICLE 6 OF THE FREE 
ZONES LAW. BEFORE THE LATEST CHANGES, THIS ARTICLE 
STATED THAT THE PROVISIONS OF TURKISH LAWS CONCERNING 
TAX, DUTY, AND CHARGE LIABILITIES DID NOT APPLY IN FREE 
ZONES AND THAT INCOME SECURED IN FREE ZONES WAS IMMUNE 
FROM INCOME AND CORPORATE TAX WHEN IT WAS BROUGHT INTO 
OTHER PARTS OF TURKEY. THE CHANGE MADE BY ARTICLE 8 OF 
STATUTE 5084 REVISES ARTICLE 6 OF THE FREE ZONES LAW 
AND EFFECTIVELY ELIMINATES THESE TAX IMMUNITIES. UNDER 
THE NEW RULES: 
 
 
1. 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. 
 
 
2. THE EARNINGS THAT TAXPAYERS ENGAGED IN MANUFACTURING 
ACTIVITIES IN THE ZONE SECURE FROM THE SALE OF THE 
PRODUCTS WILL BE EXEMPT FROM INCOME TAX AND CORPORATE 
TAX UNTIL THE END OF THE YEAR IN WHICH TURKEY BECOMES A 
FULL MEMBER OF THE EUROPEAN UNION. 
 
 
3. IF EARNINGS THAT ARE SECURED IN A FREE ZONE UNDER A 
CORPORATE TAX IMMUNITY ARE DISTRIBUTED (PAID AS A 
DIVIDEND) TO REAL-PERSON SHAREHOLDERS IN TURKEY OR TO 
REAL-PERSON OR LEGAL-ENTITY SHAREHOLDERS ABROAD, THEY 
WILL BE LIABLE FOR WITHHOLDING AT THE RATE OF 10 
PERCENT. 
 
 
4.  THE INCOME TAX IMMUNITY APPLICABLE TO THE WAGE AND 
SALARY INCOME EARNED BY PERSONS EMPLOYED IN THE ZONE BY 
TAXPAYERS POSSESSING AN OPERATING LICENSE AS OF 
FEBRUARY 6, 2004 WILL REMAIN IN EFFECT UNTIL DECEMBER 
31, 2008, EXCEPT THAT THIS IMMUNITY WILL CEASE IF THE 
OPERATING LICENSE EXPIRES BEFORE THAT DATE. 
 
 
5.  THE CHANGES INTRODUCED BY THE NEW LAW HAVE NO 
IMPACT ON VAT, PCT (PRIVATE CONSUMPTION TAX), AND 
CUSTOMS DUTIES. FOR THIS REASON, SALES MADE FROM TURKEY 
INTO FREE ZONES WILL CONTINUE TO BE TREATED AS EXPORTS 
AND SUCH SALES WILL NOT BE LIABLE FOR THESE TAXES.  END 
COMMENT. 
H. THERE ARE NO OTHER FINANCIAL INCENTIVES. 
I. ONLY: PROVISIONS OF MUNICIPALITY LAW NR. 1580 EXCEPT 
PARAGRAPHS 5, 22, 25, 32 AND 47 OF ARTICLE 15; PASSPORT 
LAW NR. 5682; LAW NR. 5683 FOR FOREIGNERS TRAVELING AND 
RESIDING IN TURKEY AND LAW NR. 2007 ON PROFESSIONS AND 
SERVICES ALLOCATED FOR TURKISH CITIZENS INCLUDING ITS 
ANNEXES AND AMENDMENTS; FOREIGN INVESTMENT AND 
ENCOURAGEMENT LAW NO 6224; LAW NR. 2677 ON THE 
IMPLEMENTATION OF DUTIES AND SERVICES AT THE CIVILIAN 
AIRPORTS, PORTS AND BORDER GATES ARE NOT APPLICABLE. 
 
 
J.  THE ADVANTAGES PROVIDED IN THE FREE ZONES ARE 
AVAILABLE TO ALL FIRMS REGARDLESS OF THEIR ORIGIN. 
THERE ARE NO LOCAL CONTENT, EXPORT OR OWNERSHIP 
REQUIREMENTS IN THE TURKISH FREE ZONES. THIS RULE 
APPLIES IN THE CUSTOMS TERRITORY AS WELL. 
 
 
COMMENT 
------- 
 
 
3. (U) THE GOT'S RATIONALE FOR CUTTING BACK FREE ZONE 
TAX INCENTIVES - A MOVE STRONGLY ENCOURAGED BY THE IMF 
AND WORLD BANK -- IS TO ELIMINATE A SOURCE OF UNFAIR 
COMPETITION, GAIN TAX REVENUE AND COMPLY WITH EU 
DIRECTIVES. THERE IS ALSO THE PERCEPTION IN PARTS OF 
THE GOT, PARTICULARLY OUTSIDE THE FOREIGN TRADE 
UNDERSECRETARIAT, THAT THE FZS HAVE DONE MORE TO 
FACILITATE IMPORTS THAN EXPORTS. 
 
 
4. (SBU) MANAGEMENT OF ONE OF THE MORE SUCCESSFUL FREE 
ZONES - THE AEGEAN FZ OUTSIDE IZMIR - TOLD ECONOFF IN 
MARCH THAT THE DRAMATIC CUTBACK IN INCENTIVES WOULD 
HURT BOTH EXISTING INVESTORS IN THE FZ AS WELL AS 
SERIOUSLY COMPROMISING EFFORTS TO ATTRACT NEW 
INVESTORS.  MANAGEMENT INDICATED THAT IT WAS 
CONSIDERING LEGAL ACTION TO COMPEL THE GOT TO CANCEL 
THE RECENT LEGAL AMENDMENTS OR PROVIDE COMPENSATION. 
HOWEVER, THE DIRECTOR GENERAL OF FREE ZONES AT THE 
TURKISH FOREIGN TRADE UNDERSECRETARIAT HAS SAID THAT 
THE FZ OPERATORS AND TENANTS HAD NO LEGAL RIGHTS TO 
THESE INCENTIVES OR TO COMPENSATION FOR THEIR 
CANCELLATION. 
 
 
5. (U) POST PLANS TO REPORT FURTHER ON FZS IN THE 
UPCOMING INVESTMENT CLIMATE STATEMENT.  IN THE INTERIM, 
WASHINGTON AGENCIES MAY CONTACT DEFNE SADIKLAR ARSLAN, 
ECONOMIC SPECIALIST, WITH ANY FURTHER QUESTIONS ON FREE 
ZONES, EMAIL: SADIKLARD@STATE.GOV, PHONE: 312 455 5555, 
EXTENSION 2257. 
 
 
EDELMAN