US embassy cable - 04ANKARA4047

UNCLAS SECTION 01 OF 02 ANKARA 004047 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA FOR ALEXANDER BRYAN 
TREASURY FOR OASIA 
DEPT PLEASE PASS USTR 
FAS FOR ITP/THORBURN 
USDOC FOR ITA/MAC/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: EINV, KTDB, EFIN, TU 
SUBJECT:  JULY 2004 APPENDIX TO THE 2003 INVESTMENT 
CLIMATE STATEMENT FOR TURKEY 
 
Ref: STATE 141379 
 
This appendix serves as an update to the 2003 Investment 
Climate Statement for Turkey.  It has been provided to 
assist investors in the interim period resulting from 
the U.S. Government's decision to begin publishing the 
Country Commercial Guide (of which the Investment 
Climate Statement is a chapter) on a calendar year 
basis, in January instead of August. 
 
The U.S. Government has reviewed the 2003 Investment 
Climate Statement for Turkey (ICS), and has noted the 
following changes that have occurred since its 
publication.  In most circumstances, if a portion of the 
ICS has not been modified in this appendix, it is 
because the U.S. Government is satisfied that it 
continues to accurately reflect the state of affairs in 
Turkey as of July 2004. 
 
Openness to Foreign Investment:  There have been several 
changes in investment-related legislation and regulation 
since mid-2003, though not all have been fully 
implemented.  Implementing regulations for Law 4875 on 
Direct Foreign Investment have been issued.  Law 5189, 
published in the State Gazette in July 2004, lifts the 
limit on foreign ownership of telecommunications firms 
Turk Telecom and Telsim.  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.  An additional source of information on 
investment-related legislation is the Turkish Treasury 
Undersecretariat website www.hazine.gov.tr. 
 
Conversion and Transfer Policies:  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. 
For more than 40 years, the law had been interpreted and 
implemented to allow exploration investments to be 
recovered from current revenues at the exchange rate 
prevailing when the registered investment was actually 
made.  Two companies have challenged the 1997 decision 
and the case is currently in the Turkish court system. 
Parliament is considering amendments to the petroleum 
law. 
 
Expropriation and Compensation:  No significant changes 
since 2003. 
 
Dispute Settlement:  No significant changes since 2003. 
 
Performance Requirements/Incentives:  Law 5084, which 
went into effect in early 2004, encourages investment in 
provinces with per capita income below USD 1,500 
annually as well as to high priority development 
regions.  For low income provinces and under certain 
conditions, the law provides:  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 enjoyed by Turkey's free zones 
(see below). 
 
Right to Private Ownership and Establishment:  See the 
Openness to Foreign Investment section on new 
telecommunications-related legislation. 
 
Protection of Property Rights:  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 piracy and 
counterfeiting of copyright and trademark materials. 
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.  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 of 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 (Bolar use). 
 
Transparency of the Regulatory System:  Amendments to 
the public procurement law in 2003 enlarged the 
definition of domestic bidder (enjoying bidding 
preference) to include corporate entities established 
under Turkish law, including those established by 
foreign companies.  See below on changes in tax 
incentives for Turkey's free zones. 
 
Efficient Capital Markets and Portfolio Investment:  No 
significant changes since 2003. 
 
Political Violence:  Turkey experienced several major 
acts of terrorism in the last year.  Please check the 
current Consular Information Sheet for Turkey 
(http://travel.state.gov) for further information on 
security conditions. 
 
Corruption:  No significant changes since 2003. 
 
Bilateral Investment Agreements:  No significant changes 
since 2003. 
 
OPIC and Other Investment Insurance Programs:  No 
significant changes since 2003. 
 
Labor:  No significant changes since 2003. 
 
FOREIGN TRADE ZONES/FREE PORTS:  LAW 5084 REVISES THE 
FREE ZONES LAW AND EFFECTIVELY ELIMINATES CERTAIN INCOME 
AND CORPORATE TAX IMMUNITIES FOR THE FREE 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.  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.  IF EARNINGS THAT ARE SECURED IN A FREE 
ZONE UNDER CORPORATE TAX IMMUNITY ARE 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.  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. 
 
Foreign Direct Investment Statistics:  Statistics will 
be updated in the next full revision of the Investment 
Climate Statement, which will be published in January 
2005.  Deutsch