Turkey's Strategy to Attract Foreign Investors and Taxation of Domestic Investors

It is important for the development of capital markets to ensure equality and fairness between domestic and foreign investors when taxing stocks.

• Dr. Ali Yürüdü 

Every developing country needs resources to achieve its potential growth rate. This resource can come from within the country or from outside. At this point, international investors have played a key role for Turkey, as they have for many other developing countries. In periods of high interest rates, foreign inflows are expected through capital and in periods of low interest rates, foreign inflows are expected through direct investments. Today interest rates are high. Therefore, we can say that it is time to access capital through financial markets.

For years, Turkey has pursued and continues to pursue various policies to attract international investors and increase capital inflows through financial markets. One of the ways to attract capital is, of course, through tax incentives. However, Turkey's taxation system in capital markets is controversial due to the differences between domestic and foreign investors.

The 15 percent withholding tax on share trading gains in the stock market, which started in 2006, aimed to tax domestic and foreign investors equally. However, this policy was later modified and reduced to a 0% withholding tax rate in favor of foreign investors. This change led to a perception of injustice among domestic investors. 

Following these discussions, the Constitutional Court's decision numbered 2006/119 and 2009/145 was overturned in favor of domestic investors. Thus, it was ensured that domestic investors' stock exchange earnings were excluded from tax by applying a 0% withholding tax on their share purchase and sale earnings in Borsa Istanbul. In essence, while the Court aimed to make Borsa Istanbul attractive for international investors, it was considered unfair to tax domestic investors' gains on the stock exchange. 

In this context, it is crucial to strike a balance between Turkey's strategy to attract foreign investors and the taxation of domestic investors. While tax advantages are provided to attract foreign investors, the taxation of domestic investors should be determined in a fair and transparent manner. This will increase the confidence of both domestic and foreign investors and contribute to the development of financial markets.

The taxation of stock exchange transactions in a country depends on the tax policy and economic situation of that country. As I have tried to underline, providing tax advantages to foreign investors may create negative perceptions on the taxation of domestic investors. However, if only the trading gains of domestic investors are taxed and foreign investors are given this advantage, I can summarize the possible consequences of the negative perception that may arise in both domestic and foreign markets under four headings.

1. Perception of Injustice: Providing tax advantages to foreign investors may lead to a perception of injustice among domestic investors. This may reduce the confidence of domestic investors in the market and lead to imbalances in capital markets.

2. Investment flight: Domestic investors may find it difficult to compete with foreign investors who enjoy tax advantages. This may cause domestic investors to direct their investments abroad and reduce domestic capital accumulation.

3. Weakening of International Image: Providing tax advantages to foreign investors but not to domestic investors will undermine the permanence of this practice. This may weaken Turkey's image in the eyes of international investors. This may negatively affect Turkey's perception of investability and reduce capital inflows. Such discriminatory decisions that may raise questions of fairness in capital markets should not be taken sharply.

4. Economic Growth and Development: Inequitable tax policies can adversely affect economic growth and development. Taxing domestic investors and providing tax advantages to foreign investors may lead to a decrease in capital accumulation and slow economic growth. It may prevent domestic investors from utilizing their savings in capital markets.

As a result, taxing only the trading gains of domestic investors and not imposing taxes on foreign investors will also be viewed negatively by foreign investors. At the end of the day, even if there is no tax in favor of foreign investors in the stock market, there will be concerns that one day a tax may be imposed on foreign investors. Because laws in Turkey can be applied retrospectively. If stock market investments are to grow, I believe that the practice of excluding both domestic and foreign investors from taxation should be continued. 

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