The AKP government is hammering out a new debt restructuring plan that is estimated to become the widest in Turkish history in its scope and quantity, with an estimated TL 100 billion in taxpayer debts.
Added to a recently expired tax amnesty plan, which didn’t bear the expected results in terms of the sum of tax collections, the new design is fomenting concerns that such moves by the government are establishing a permanent moral hazard problem by encouraging those loyal to their payments to become less willing to pay their debts, as deferral will be rewarded and punctuality will be punished.
Taxpayers are becoming addicted to amnesty in a vicious cycle: They see no harm in reneging on their liabilities to the state, as they are conditioned that a new amnesty will kick in any day now. Meanwhile, the government finds no easier way to rake in money than from taxes, luring hesitant people with such amnesty schemes.
Proponents of the plan say it doesn’t require any write-offs, so calling it “amnesty” doesn’t completely reflect the truth. “Restructuring plan” is the preferred way of labeling it, they say. However, considering the fact that government officials are using the term “amnesty” to describe the scheme in their speeches and that this word is widely popular, it is appropriate to use it interchangeably with “restructuring.”
Value-added tax (KDV), private consumption tax (ÖTV), income tax, corporate tax, insurance premiums, unemployment premiums, administrative fines and minimum labor premiums accrued throughout 2014 will fall under the scope of the amnesty package. Additionally, all administrative fines below TL 120 will be written off, except for fines levied for violations of the ban on smoking in enclosed areas.
Early this year, Finance Minister Mehmet Şimşek rejected the idea of launching a new tax amnesty plan during an interview in a television program. He said it was “definitely out of the question.” And the last bid wasn’t Şimşek’s idea, Reuters reported on Wednesday, citing anonymous government officials. The draft was prepared by ruling party lawmakers at Prime Minister Recep Tayyip Erdoğan’s orders, and Şimşek was not even consulted, they said. “Prime Minister Erdoğan has personally convinced economy officials on this. … In the lead up to the presidential polls, Erdoğan is taking steps to draw support from the people,” one of the officials said. Another official confirmed the same, saying, “[The government is] fulfilling the requirements of the current political environment, not necessarily those of the economy.”
There is a risk of a political iniquity in tax amnesties since the political authority may exploit them as a bribe to voters. Considering that Turkey is on the cusp of a very critical presidential election in August, such an extensive scheme is seen as a government ploy to attract the favor of the people.
Erdoğan is quite likely to run for president in the upcoming election, which would make him the first popularly elected head of state. His popular support stands at 43 percent as of the most recent local elections in March, indicating that he still needs to cajole at least another 7 percentage points to support his quest for more political clout.
İstanbul Chamber of Public Accountants and Financial Advisors (İSMMMO) President Yahya Arıkan spoke to Sunday’s Zaman and highlighted attention to the timing of the new restructuring plan, pointing to the upcoming presidential election as well as the general elections to be held in 2015. “Interestingly enough, a tax debt restructuring plan is put in front of the people whenever an election is on the horizon,” he said.
It is understandable and even reasonable to launch such a scheme if the aims are to turn over a new leaf with regard to the tax system, reform tax compliance and strengthen the accord between the state and the people on public finance revenues and expenditures. Arıkan said none of the previous practices had that aim. Instead, many similar policies of amnesty have “degenerated the system” to such an extent that even ordinary taxpayers are growing more averse to paying taxes on time, he added.
In Turkey, a clear majority of the taxpayers — Arıkan says more than 85 percent — pay their taxes on time. “I know some people face financial strains to be able to pay their taxes, and that some [have to] sell their homes or take loans so they can pay their debts to the state,” he told Sunday’s Zaman. But even those people are losing confidence in the system and starting to wait for amnesty, feeding the moral hazard within society, he explained.
It is often argued that tax amnesty and debt restructuring for delinquent taxpayers are a punishment for compliant taxpayers. Could it be possible to provide advantages to them as well so that they won’t feel like fools for following the rules? Experts don’t think this would be a good idea, since this could in turn provide justification for amnesty.
Association for the Protection of Taxpayers’ Rights (MÜHAK) President Oğuz Çetinkaya sees this approach as problematic, since it will lead to unnatural divisions among types of taxpayers. “A type-A system for pro-government businesses, type-B for those who are critical of the government and type-C for wage earners, and so on. … This leads to the normalization of amnesty,” he told Sunday’s Zaman.
Arıkan said introducing special benefits, like applying lower rates or granting better payment conditions, may provide some psychological relief for punctual taxpayers but “this is not the main problem that needs to be addressed. What is required is to get rid of amnesties completely.” Arıkan went a step further to claim that an article should be added to the Constitution to prevent such corrosive practices.
The Finance Ministry’s Tax Office Automation Project (VEDOP), for instance, is a huge step in toward eliminating amnesties, said Arıkan, who also mentioned recent projects to increase the effectiveness of state services through a transition to electronic systems. This will end up in a fully automated tax system, in which interventions such as amnesties will be extremely difficult and even unnecessary.
Experts warn of another danger. Many people have started to think that debt-restructuring programs are specifically designed to benefit businesses with close relations with the government. Çetinkaya says this suspicion evokes the expression “the rumor of an occurrence is worse than it actually happening,” and that the public must be convinced no such crony capitalism is underway, which isn’t so easy. Speculation that the amnesty was designed specifically for the benefit of certain pro-government businesspeople was hotly debated on social media last week.
Arıkan is in the same camp as Çetinkaya. “Who takes advantage of an amnesty? It must be determined whether pro-government businessmen are getting benefits from it,” Arıkan said, adding that certainty on this point is very hard due to tax secrecy rules and taxpayer information confidentiality.
Nothing wrong with tax amnesties
Certified Public Accountant Yusuf Keleş, another expert on tax issues who worked as a high official at the Finance Ministry, however, thinks the tax amnesty should not be thrown out completely as it brings a number of benefits to society as a whole. The economic crisis has put many businesspeople in the hole, and a considerable number of business owners behind on their taxes because they really aren’t able to pay them. So restructuring plans should be viewed as a good thing since they provide relief to the markets, he told Sunday’s Zaman in a phone interview. Besides, Keleş noted, the scheme doesn’t waive the principal but only partially reduces interest accrued on the principal tax. Furthermore, the collection of back taxes alleviates burdens on those who pay their liabilities regularly, since the government would otherwise impose more pecuniary obligations on them, to square off revenues with projected expenditures.
What Keleş sees lacking in the current amnesty plan is that its scope is not wide enough to cover all overdue obligations. The draft bill has only the specified tax debts in its scope, as defined in Article 2, Section 2 of Law No. 6111 and it must be expanded to include the articles 3, 4 and 5. Article 3 deals with undue debts — a debt that one is not yet required to pay — or specified debts, which are subject to a court proceeding. Article 4 deals with taxes that are in the auditing and assessment process, and Article 5 regards debts in the reconciliation phase.
For Çetinkaya, successive restructuring plans and amnesties hinder the process of forming robust tax laws; he likened the process to snapping twigs off trees before they can grow into branches.
He said MÜHAK has gained a detailed and comprehensive perspective on the issue through conducting numerous studies. What they are most worried about is the growing numbers of taxpayers who are adjusting their taxpaying habits in accordance with expectation of a debt restructuring plan. Çetinkaya is particularly opposed to the inclusion of administrative fines in the amnesty plan, and believes this will shake confidence in the laws.