Cablegate: July 2004 Appendix to the 2003 Investment

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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