US embassy cable - 05ANKARA320

UNCLAS SECTION 01 OF 06 ANKARA 000320 
 
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: EINV, KTDB, EFIN, TU 
SUBJECT:  2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY 
 
Ref: STATE 250356 
 
This is the first of two cables transmitting the 2005 
Investment Climate Statement for Turkey: 
 
1.  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(Law 4875 on Direct Foreign Investment) repealed 1954 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 
 
2.  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. 
 
3. 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. 
 
4.  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. 
 
5.  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. 
 
6.  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. 
 
7.  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. 
 
8.  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. 
Edelman