The international business community is facing a new Turkey: new in the sense that the nation has been undergoing a profound structural change over the past three decades. The results of which have been both significant and promising. Turkey now boasts the 17th largest economy in the world and is currently the sixth largest economy in Europe, so doing business in Turkey is more accessible than ever.
Turkey is one of the largest free market economies in the world and is assimilated into the European market by way of the customs union. It is described by economists as a ‘Newly Industrialized Country’ along with the likes of China and South Africa. Transcontinental Turkey serves as an ideal investment destination between Asia, the UK and the Euro Zone.
Turkey’s recent growth performance makes it one of the growth engines of the emerging multipolar global system. The country capitalises on this by investing and building-up its technological and financial infrastructure, so it is fast becoming a global financial centre.
Why do business in Turkey?
More and more UK companies are establishing their headquarters in the country’s capital, Istanbul, not only because of Turkey’s huge domestic market but also because of easy access to the region.
Over 2,000 UK enterprises including Shell, Vodafone and BAE and Unilever (UK) are now conducting their business in Turkey after having achieved a much improved investment climate in recent years. This is due mainly to effective economic and social policies, macroeconomic stability, growth-friendly monetary and fiscal policies, a new commercial code, a new incentive program and a solid financial system.
Turkey is increasingly compliant with global business standards because of the economic liberalisation policies and harmonisation of tax, investment and business-related legislation. Turkey enacted the new Customs Law in 1999; a new law for Foreign Direct Investment back in 2003; and the new Corporate Income Tax Law, which was introduced in 2006.
Business in Turkey: where to begin
The new Turkish Commercial Code—which entered force on 1 July 2012—and the new Capital Market Law address the need for enhanced transparency and reduced bureaucracy and flexibility in directorship, which aims to ensure enhanced international confidence in the country.
The new Corporation Tax Law, in particular, is significant as it sets forth rules governing ‘Disguised Profit Distribution through Transfer Pricing’ for transactions between related parties in line with the transfer pricing guidelines of the OECD and those rules governing ‘Controlled Foreign Companies’.
The introduction of the new Turkish Commercial Code has initiated Turkish accounting regulations to be in compliance with worldwide financial reporting standards (IFRS). These include audit requirements and several new regulations about the establishment, organisation and legal operations of different legal entities, rights and duties of shareholders and mergers, de-mergers, conversions and liquidations.
Turkey’s EU accession negotiations have meant that Turkey has come to be viewed as a springboard to the markets of central Asia and the Middle East. With the EU customs union, firms in the UK and the EU do not encounter the same barriers-to-entry as they may face in other high-growth markets.
It is important to be aware that exporting particular goods into Turkey can involve them being passing through various regulatory institutions in sectors such as energy, IT and privatisation.
Frequent regulatory changes that occur with limited implementation timeframes and incomplete assessment of the broader repercussions for the sectors affected has been a concern for in the past for investors considering doing business in Turkey.
Feedback from Turkish businesses indicated that they believe that British businesses are risk-averse. For the British businesses to prosper with their business in Turkey, they must work to build strong professional relationships and develop their business’s visibility within the country. This could involve frequent visits to the market and a readiness to commit to projects and opportunities early.
To be able to commit to projects early, British companies will need to be able to react to short tender timelines in Turkey. Turkish companies are often interested in partnerships and information transfer, rather than a purely transactional commercial exchange.
UK companies aspiring to do business in Turkey will find incentives to spur investments including export-oriented incentives and a range of other tax and non-tax incentives.
Tariffs and non-tariff barriers on imports from non-European countries are three percent above European Union (EU) rates but vary on a product-by-product basis. VAT applies in Turkey irrespective of the country of origin. For most agricultural products, VAT ranges from one to eight percent and for some processed products, this value can reach up to 18 percent.
In Turkey, such things as capital goods, imports by government agencies and state-owned enterprises and products for investments with incentive certificates and some raw materials are exempt from import fees. Import duties are calculated on the cost, insurance and freight value.
The Turkish government has adopted the EU’s common external trade standards so that customs tariffs and duties (with a few exceptions) are equal to those of the EU. Although Turkey is a member of the WTO and is generally in compliance with their trade agreement, Turkey often fails to notify the WTO of changes to import requirements. When this occurs, a business’s views are often not taken into account, nor are they given ample time in which to comply and adapt to new changes.
These changes to import requirements can serve as non-tariff barriers such as the implementation of reference price systems, the lack of control certificates, and new documentation requirements.
Agricultural trade is also the subject of strict tariff quotas and price regulation. These have produced with them a level of high protectionism of agricultural goods which are safeguarded with steep tariffs. Obstacles such as these have also emerged in other industries such as medical devices, apparel and e-commerce. Turkish procurement remains prone to opaque and lengthy tendering processes, onerous terms and conditions and substantial delays, which can hamper procurement deals.
Turkey’s weighted rate of protection for imports of non-sensitive industrial products is zero for items originating in the EU and European Free Trade Association (EFTA) countries. Rates for other countries have dropped to 4.1 percent on most items.
In 2010, the UK signed a ‘strategic partnership’ initiative with Turkey meaning that there are plenty of exporting opportunities for UK-based businesses and entrepreneurs looking to do business in Turkey. The most popular UK exports to Turkey include machinery, pharmaceuticals and vehicles. The healthcare, airport and energy sectors are growing and present new opportunities for UK exporters.
Turkey can be described as a rising star in a shifting global environment, but it remains a complex and challenging market, demanding adaptability and tenacity. Careful preparation and perseverance are the essentials to success if British exporters hope to conduct their business in Turkey.