Doing Things The Hard Way

REMZİ AKÇİN 
UGM Chairman of the Board of Directors

The foreign trade deficit is one of the most fundamental problems of our country. When we analyze the 23 years since 2000, we see that the general outlook is that the ratio of exports to imports is between 51% and 83%, but on average 70% of our imports are financed from export revenues. Therefore, we face the problem of financing 30% of our imports each year through non-export means.

The largest share of imports is undoubtedly energy imports. In 2023, Turkey's energy imports amounted to $69.1 billion, down 28% compared to 2022. This cost increases or decreases occasionally due to international turmoil, but these fluctuations are mostly due to factors beyond our country's control.

Almost everyone agrees that the healthiest and most sustainable way to eliminate the foreign trade deficit is to increase export revenues. The following example is a clear example of how the will of the legislator to increase exports evaporates in the corridors of legislation and how the ear has to be pointed backward to overcome the legislative obstacle.

SUPPORT FOR EXPORT-ORIENTED PRODUCTION IN FREE ZONES

Provisional Article 3 of the Free Zones Law No. 3218 provides “...exemption from income tax calculated on the wages paid to the personnel employed due to the export of at least 85% of the FOB value of the products produced abroad...”. In other words, the legislator has provided income tax exemption to encourage the export of 85% or more of the products produced in free zones.

In particular, due to the employment of qualified personnel, the income tax cancellation application on wages, which is utilized within the scope of the 85% export requirement, provides significant advantages to companies and has an employment boosting effect. For this reason, production under the 85% export requirement is important both for the companies producing in the free zone and for our country due to its effect on reducing the foreign trade deficit.

According to the Temporary Article 3 of the Free Zones Law, the procedures and principles for benefiting from this support are determined by the Ministry of Treasury and Finance. To fill this gap, the Ministry of Treasury and Finance prepared the General Communiqué on the Free Zones Law No. 3218 (Serial No: 1), and the Communiqué was published in the Official Gazette dated 12.03.2009 and numbered 27167.

 To benefit from the subsidy; in addition to the export of the goods, under Article 3.5 of the Communiqué titled “Delivery of Goods on the Condition of Export”; “The delivery of the products of the producer companies engaged in production activities in the free zone to the exporters operating in the same or another free zone, provided that they are sold abroad, is also considered as sales abroad”. In other words, for the product produced in the free zone to benefit from export support, either the producer must export this product directly or deliver it to exporters operating in the free zone on the condition of export. Any other alternative is not considered an export.

INWARD PROCESSING REGIME

In the inward processing regime, the import of the inputs used in the production of the products to be exported is allowed by pledging the customs duties as collateral, and the collateral received is returned upon proof that the product produced is exported. Nearly half of our country's exports are exports made under the inward processing regime. This rate alone shows how valuable this regime is for our exports. 

The product produced in free zones is sometimes used within the product produced within the scope of the inward processing regime. In this case, the product produced both in the free zone and in the inward processing regime is ultimately exported, but it is not considered an export by the legislation mentioned above. 

The inward processing regime is carried out by obtaining a permit and is monitored by the provincial organization of the Ministry of Trade and exporters' associations until the goods are exported. In case of violation of the regime, heavy penalties are imposed under the Customs Law. For this reason, the goods included in the document and imported in this way are exported as a result of production, as well as being monitored on the record declared with a customs declaration during import and export, and kept under constant control by the customs administration and exporter associations.

A regulation allowing the delivery of products produced in the free zone to producers within the scope of the inward processing regime will not only facilitate the 85% export requirement but will also help reduce foreign dependency on exports and the current account deficit. These inputs are imported in any case for the production of the product to be exported. If the inputs are supplied from the free zone instead of being imported, there will be no foreign currency outflow from the country and a positive contribution to employment will be made.

SHOWING THE EAR BACKWARDS

Producers who want to benefit from the export support in the Free Zones Law export their products to meet the 85% ratio. After the exported product reaches the buyer abroad, it is sold to the producer in Turkey to be used as input under the inward processing regime. For example, after the product produced in the free zone is exported to Denmark, it is re-imported to Bursa. In this way, the producer in the free zone realizes the export, while the other producer imports the goods from Denmark. As a result, although the product produced in the free zone is exported in any case, the cost increases by adding export, import, freight, and insurance expenses and seller profits in addition to the price of the goods. 

Isn't it “unnecessarily taking the hard way” to import the product produced in the free zone after exporting it, instead of giving it directly to the producer who will use it as input in the production of the goods to be exported?

To return from this unorthodox practice as soon as possible, I hope that a regulation will be made to allow the delivery of goods produced in the free zone within the scope of the inward processing regime as well as the delivery made to the free zones to be accepted “as a delivery deemed as export”.