Taking The Long Way Around

REMZİ AKÇİN 
UGM Chairman of the Board of Directors

The foreign trade deficit is one of the most fundamental issues in our country. When we examine the 23 years since 2000, the overall picture shows that the export-to-import coverage ratio has ranged from 51% to 83%, but on average, 70% of our imports have been financed by export revenues. Therefore, we are faced with the issue that 30% of our annual imports are financed through non-export means.

The largest share of our imports is undoubtedly energy imports. In 2023, Turkey's energy product imports decreased by 28% compared to 2022, amounting to $69.1 billion. Due to international turbulence, this cost fluctuates from time to time, but these fluctuations generally stem from factors beyond our country's control.

Almost everyone agrees that the most effective and sustainable way to address the foreign trade deficit is to increase export revenues. The example we will explain shortly is a clear illustration of how the legislator's intent to increase exports evaporates within the corridors of legislation, and how overcoming legal barriers requires a reverse approach.

EXPORT-ORIENTED PRODUCTION SUPPORT IN FREE ZONES

Article 3 of the Temporary Provision of the Law No. 3218 on Free Zones states: "... Exemption from income tax calculated on wages paid to employees due to the export of at least 85% of the FOB value of the produced goods..." In other words, the legislator has provided an income tax exemption to encourage the export of 85% or more of the products produced in free zones.

Especially due to the employment of qualified personnel, the application of income tax exemption on wages under the 85% export requirement provides significant advantages to companies, as well as an employment-boosting effect. Therefore, production with the 85% export condition is important both for companies operating in free zones and for our country, as it has a positive effect on reducing the foreign trade deficit.

According to Article 3 of the Temporary Provision of the Free Zones Law, the procedures and principles for benefiting from this support are determined by the Ministry of Treasury and Finance. In fact, to fill this gap, the Ministry of Treasury and Finance prepared the General Communiqué on the Free Zones Law No. 3218 (Serial No: 1), which was published in the Official Gazette No. 27167 on March 12, 2009.

To benefit from this support, in addition to exporting the goods, the "Export-Registered Goods Delivery" clause in Article 3.5 of the Communiqué stipulates that: "The products of manufacturing companies operating in the free zone should also be considered as exports if they are delivered to exporters operating in the same or another free zone, with the condition that they are sold abroad." In other words, for a product produced in a free zone to benefit from export support, either the producer must export the product directly, or deliver it to exporters operating in the free zone with export registration. No alternative exports are considered outside of this requirement.

INWARD PROCESSING REGIME

Under the inward processing regime, the inputs used in the production of products to be exported are allowed to be imported by securing customs duties, and the guarantee is refunded once it is proven that the produced goods have been exported. Nearly half of the exports in our country are made under the inward processing regime. Even this alone demonstrates the significant value of this regime for our exports.

Products produced in free zones are occasionally used within products produced under the inward processing regime. In such cases, both the product produced in the free zone and the one produced under the inward processing regime are ultimately exported, but as stated above, according to the regulations, they are not considered exports.

The inward processing regime is carried out by obtaining permission and is monitored by the Ministry of Trade's provincial organizations and exporter unions until the goods are exported. In the event of a violation of the regime, severe penalties are applied under the Customs Law. Therefore, it is mandatory that the goods listed in the document and imported in this manner must be exported as a result of production. They are tracked through registration, declared during both import and export via customs declarations, and are constantly monitored by the customs administration and export unions.

Establishing a regulation that allows the delivery of products produced in free zones to manufacturers under the inward processing regime would not only facilitate the 85% export condition but also contribute to reducing dependency on foreign markets in exports and lowering the current account deficit. These inputs are always imported for the production of goods to be exported. If the inputs are sourced from the free zone instead of being imported, there will be no outflow of foreign currency from the country, and employment will also benefit positively.

TAKING THE LONG WAY AROUND

Manufacturers who wish to benefit from the export support under the Free Zones Law export their products to meet the 85% export requirement. Once these exported products reach buyers abroad, they are sold back to the manufacturer in Turkey to be used as inputs under the inward processing regime. For example, a product produced in a free zone is exported to Denmark, and then re-imported into Bursa. In this way, the producer in the free zone completes the export, while the other manufacturer imports the goods from Denmark. As a result, even though the product produced in the free zone is always exported, additional costs are incurred, including export, import, freight, insurance expenses, and seller profits, which increase the overall cost.

Isn’t it like "showing the right ear with the left hand" when the product produced in the free zone, instead of being given directly to a manufacturer to use as an input in the production of goods to be exported, is exported and then re-imported by the manufacturer? 

I hope that a regulation will be made to recognize the delivery of goods produced in free zones as "exports," both in terms of delivery to free zones and in the context of the inward processing regime. This would help rectify this odd practice.