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2012 Investment Climate Statement - Turkey


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
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In 2011, Turkey was the 17th largest economy in the world, with a GDP of $766 billion. Over the last three years, Turkey has been one of the fastest growing economies in the world, growing at 8.9% in 2010 and expected to have grown at 8% in 2011. Turkey has set an ambitious target to become one of the ten largest economies in the world by 2023, the centenary of the foundation of the Turkish republic. Doing so will require Turkey to triple its economy to more than $2 trillion, develop an export sector of $500 billion, and make significant upgrades to its energy, information technology, finance, and physical infrastructures. While achieving this goal will be a challenge, it should be noted that Turkey more than doubled the size of its economy since 1990 and transformed it from roughly 20% industrial/80% lightly processed or raw materials to 75% industrial and manufactured. The proportion of urban to rural population also changed significantly, and, over the last decade, Turkey has broadened the base of its economy beyond the traditional industrial centers of Istanbul, Ankara, and Izmir to encompass a number of other cities that exported more than $1 billion to the world economy in 2011.

While Turkey’s long-term prospects are bright, there are concerns about the size of Turkey’s Current Account Deficit (CAD), which now exceeds 10% of GDP, and the speed with which the CAD grew in 2011 (53% increase over 2010). There is also a concern that rapid economic growth has allowed inflation to return to levels above 10%, roughly double the government’s target of 5.5%. Turkey is also concerned that prospects for slow growth in its main export market - the EU - will limit Turkey’s ability to grow. This is pushing Turkey to develop new or expanded export markets in the Middle East, Africa, and the United States. Turkey needs to improve the time it takes to open and close a business, transparency and predictability in regulation development, overall governmental transparency, protection of intellectual property rights, and enforcement of foreign judicial decisions. The World Bank’s Ease of Doing Business Index (http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-FullReport.pdf), as well as the Heritage Foundation-Wall Street Journal’s Index of Economic Freedom (http://www.heritage.org/index/country/Turkey), offer useful summaries of key issues.

Relations with the United States

In 2009, President Obama called for the elevation of our economic and commercial ties to the same strategic level as our security and political ties. In October 2010, the United States and Turkey held the first meeting of the Framework for Strategic Economic and Commercial Cooperation (FSECC), a Cabinet-level dialogue aimed at enhancing economic relations and boosting bilateral trade and investment. Under the FSECC process, the two governments hold a regular series of working groups, including the Economic Partnership Commission (EPC) and the Trade and Investment Framework Agreement Council (TIFA), aimed at addressing specific trade and investment issues, as well as opening new areas of cooperation. Under the State-Department led EPC, the two sides are discussing specific steps to increase bilateral cooperation on finance, energy, innovation, and infrastructure sectors, as well as increasing cooperation in third countries. The United States and Turkey have also established an FSECC Business Council, which held its first meeting in September 2011, and has already suggested several ways to improve bilateral business ties. In October 2010, the United States and Turkey signed a Science and Technology (S&T) agreement that will deepen and diversify relations between the U.S. and Turkey by facilitating more joint research; exchanges of scientists, researchers, and specialists; and establishment of science-based public-private partnerships. The United States and Turkey also cooperate on a range of entrepreneurship programs, including the State Department’s Global Entrepreneurship Program and the private-sector-led Partners for a New Beginning. Turkey has been a leader in both initiatives, which are aimed at supporting growth of entrepreneurship and small and medium enterprises in Turkey and the region.

The strong bilateral political relations, as well as cooperation in the region, have helped support a significant increase in bilateral trade over the last three years. According to Central Bank of Turkey data, trade during the 2009-2011 time period increased approximately 75%, with U.S. exports up by over 85%. In 2011, bilateral trade approached $20 billion, a record high, while U.S. exports set a record of approximately $16 billion, and Turkish exports to the U.S. rose to almost $4.6 billion. U.S. agricultural exporters to Turkey have been particularly successful, growing approximately 18% in 2011. The U.S. Government has designated Turkey one of our top six export markets under the National Export Initiative.


U.S. - TURKEY BILATERAL TRADE

       

YEAR

U.S. IMPORTS

U.S. EXPORTS

BILATERAL TRADE

2007

4,170,688

8,166,068

12,336,756

2008

4,299,941

11,975,929

16,275,870

2009

3,240,597

8,575,737

11,816,334

2010

3,762,919

12,318,745

16,081,665

2011

4,596,878

16,033,972

20,630,850

Source: Central Bank of Turkey

Openness to Foreign Investment

In 2011, the ruling Justice and Development Party (AKP) won a third term in office. As part of its election campaign, the AKP heavily promoted its plan to become a top ten economy by 2023 (http://www.akparti.org.tr/english). The government has developed specific strategies for 24 industrial sectors, including 8 priority sectors, to achieve this goal. It has also established specific plans for physical infrastructure upgrades, as well as a major expansion of Turkey’s health, information technology, and education sectors, all of which are geared to making Turkish companies more competitive. The Turkish Government recognizes that the domestic economy will not be sufficient to reach all of these goals – Turkey will need to attract significant new foreign direct investment (FDI). In that regard, Turkey was pleased that it attracted $15.7 billion in FDI in 2011, although a significant portion of this came from portfolio investment. Commentators believe this level is far below Turkey’s potential, and likely below the levels needed for Turkey to reach its 2023 goals. The Turkish Government is actively seeking greater U.S. investment in Turkey. Last year, U.S. firms invested approximately $700 million of a total of $12 billion FDI in Turkey.

According to the United Nations Conference on Trade and Development (UNCTAD) 2010 World Investment Prospects Survey, Turkey was the 32nd most attractive destination for FDI in the world and the 15th most attractive FDI destination among developing countries. A number of measures have served to increase national and foreign investors’ confidence in Turkey’s economy: structural reforms undertaken by the Government of Turkey (GOT) over the last decade, a strong banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increasing flexibility of the labor market, improving skills of workers, and continuing privatization of State Economic Enterprises. The GOT has privatized State Economic Enterprises through block sales, public offerings, or a combination of both. Transactions completed under the Turkish privatization program generated $3.1 billion in 2010 and total more than $24 billion since 2006. The Turkish government is committed to continuing the privatization process despite contraction in global capital flows. Turkey has one of the most liberal legal regimes for FDI in the OECD.

With the exception of some sectors (highlighted below), areas open to the Turkish private sector are also generally open to foreign participation and investment. However, all investors – regardless of nationality – face a number of challenges: excessive bureaucracy, a slow judicial system, high and sometimes inconsistently applied taxes, weaknesses in corporate governance, sometimes unpredictable decisions made at the local government level, and frequent changes in the legal and regulatory environment. The Parliament amended the Law of Obligations (debt regulations) and passed a new Commercial Code in early January 2011 (effective July 2012). These are major structural reforms and are expected to create a more transparent, equal, fair and modern investment and business environment. Venture capital is currently nascent in Turkey, but the new Commercial Code is expected to facilitate development of more venture capital infrastructure.

 

Turkish Industrial Strategy

In January 2011, the Ministry of Science, Industry, and Technology announced Turkey’s Industrial Strategy, which identifies key areas to increase Turkey’s competitiveness and productivity and targets aimed at transforming Turkey into a technology base for manufacturing of medium to high-technology products. The document identifies the following areas as major potential drivers of the Turkish economy that can help increase exports and FDI growth and transform Turkey into Eurasia’s technology base: innovation-led productivity; increasing production of medium and high-technology goods; increasing capital for knowledge-intensive sectors; creation of a stronger knowledge-based economy; and a well-educated and highly qualified work force. Specifically, the Ministry of Science, Industry, and Technology (http://www.sanayi.gov.tr/Default.aspx?lng=en) has identified 24 industrial sectors that will help Turkey achieve its goal of becoming a top ten economy by 2023 and is developing specific strategies for 6 priority sectors: iron and steel, automotive, chemicals, machinery, electrionic equipment, and ceramics.

Partnerships in Improving the Investment Climate

Since 2001, the Turkish government has pursued a comprehensive investment climate reform program aimed at streamlining investment-related procedures and attracting more FDI. The Coordination Council for the Improvement of Investment Environment (YOIKK), a national platform jointly formed by the public and private sectors, provides technical guidance for issues relating to the investment environment.

In 2004, the Investment Advisory Council of Turkey (IAC) was created to provide an international perspective for Turkey’s reform agenda. IAC members include executives from multinational companies, representatives of international institutions such as the IMF, World Bank and European Investment Bank, and the heads of Turkish NGOs representing the private sector. The Council, chaired by the Prime Minister, convenes yearly to advise the government on the direction of its reform program. The Council’s recommendations serve as guidelines for the Coordination Council for the Improvement of the Investment Environment (
YOIKK) platform, and Council recommendations are published in the Turkish Treasury’s annual IAC Progress Reports.

In addition to structural reforms, Turkey’s Investment Support and Promotion Agency (ISPAT), whose main objective is to support new investors throughout the business establishment process and solve problems that arise after establishment, plays an important role in promoting a business and investment-friendly environment. ISPAT serves as an advocate within the GOT for reforms that promote investment and works to raise both domestic and international awareness of the benefits of investment.

Investment Issues

Renewable Energy

The Turkish Government took several actions in 2010 to improve the investment climate. Turkey’s Parliament passed a new Renewable Energy Law in December 2010. Additional incentives for using domestically manufactured energy equipment and materials were also announced. The GOT expects this will bring more international investors to the renewable energy arena. Turkey’s Energy Strategy sets a goal of producing 20000 megawatts of energy from renewable sources by 2023, highlighting a new national focus on renewable energy resources.

Under the Renewable Energy Incentives Law, the Turkish government currently offers power purchase guarantees for electricity produced from renewable sources, but does not offer similar power purchase agreements for thermal power plants which must sell to the spot market or through bilateral contracts.

Health, Information Technology, and Physical Infrastructure

To meet ambitious export goals, the Government of Turkey is planning significant new investment in infrastructure, including in the health care (particularly hospitals) and transportation sectors (port, rail, and light-rail infrastructure). Turkey plans to make significant infrastructure upgrades for ports, airports, road, and rail over the next decade. Similarly, Turkey plans to add 40,000 hospital beds in a number of large new hospital complexes designed to create health industry clusters. Turkey is also embarking on an $8 billion project to provide Turkish students with tablet computers and schools with smartboards, as the first stage of a multi-stage effort to improve Turkey’s education system. Turkey is also planning to develop much greater cloud computing capacity. For all of these sectors, the Turkish Government is looking for American investors and partners, including for financing.

Pharmaceuticals

Turkey’s pharmaceutical sector is a good example of a sector in which GOT policies complicate Turkey’s ability to fully realize its development potential. Health sector reform in 2006 created a much larger market dominated by Turkey’s state health care system. Coupled with Turkey’s young and growing population, this should have made Turkey an attractive market for pharmaceutical investment. However, two significant issues continue to inhibit innovative pharmaceutical firms’ trade and investment in Turkey: a pricing/exchange rate issue and the slow pace of Turkish Ministry of Health (MOH) GMP (Good Manufacturing Practices) inspections. The Turkish Ministry of Health (MOH) and the Turkish Ministry of Labor and Social Security (MLSS) both play important roles in pharmaceutical pricing. The MOH sets the maximum price that can be charged for medicines, and the MLSS negotiates pharmaceutical bulk prices for products that are distributed through Turkey’s national health care system. In 2009 the MOH negotiated a Global Budget Agreement with industry that provided for significant discounts on pharmaceutical purchases of products distributed through the Turkey’s national health care system, within the context of an overall gradual increase in pharmaceutical spending each year through 2012. In mid 2010 and late 2011, MOH and MLSS noted budget shortfalls and requested greater discounts.

In addition to the pricing/exchange rate issues, innovative pharmaceutical firms also complain about the slow pace of MOH GMP inspections. Roughly two years ago the MOH began enforcing an existing law requiring that all companies applying to market pharmaceutical products on the Turkish market have a GMP certificate issued by the MOH. The MOH continues to build inspection capacity, and its inspection numbers are improving, albeit slowly. Companies also note that, since MOH does not allow marketing authorization and GMP applications to be done simultaneously, they are delayed because they must first complete the GMP inspection process and then apply for a separate marketing authorization. MOH has recently begun prioritizing GMP inspections, which has helped get some drugs to market more quickly. However, companies still say that, given delays due to the slow rate of GMP inspections, patent protection for many drugs often comes close to running out before they even enter the Turkish market. Innovative pharmaceutical companies have complained that the lack of predictability and transparency in these actions make them reluctant to consider making new investments in Turkey.

Business Registration

Recent reforms in Turkey have simplified the procedures to establish a company, reduced permit requirements, instituted a single company registration form, and enabled individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges (TOBB). According to the Heritage Foundation-Wall Street Journal “Index of Economic Freedom” (IEF) report (see http://www.heritage.org/index/country/Turkey) released in January 2012 – which evaluates countries based on rule of law (property rights and freedom from corruption), limited government (fiscal freedom and government spending), regulatory efficiency (business freedom, labor freedom, and monetary freedom); and open markets (trade freedom, investment freedom, and financial freedom), Turkey is ranked 73rd globally and 34th among 43 European countries. Turkey’s IEF score, above the world average since 2009, climbed during 2005-2011, moving Turkey from “mostly unfree” status in 2008 to “moderately free” status since 2009. According to the International Finance Corporation/World Bank 2012 Doing Business Report for Turkey, Turkey ranked 71st among 183 world economies, up from 73rd in 2011. This reports notes that starting a business in Turkey requires a similar number of procedures as in other OECD countries, but it takes half the number of days and costs almost 140% more to start a business in Turkey than in other OECD countries. The 2012 Doing Business in Turkey report can be found at: http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/profiles/country/TUR.pdf.

Judicial Reforms

The GOT continues to implement judicial reforms, some of which aim to attract foreign investment to Turkey. The National Judiciary Network project on automation and integration project, overseen by the Ministry of Justice, is speeding up processing of commercial cases by facilitating document-sharing and court records, as well as allowing for filing of suits online. The GOT has also improved foreign investors’ access to judiciary recourse, including legal aid and Alternative Dispute Resolution mechanisms supported by the U.S., the EU, and the World Bank. The Competition Authority in Turkey is an autonomous agency that plays an important role in assuring equal, fair, and transparent competition and consumer welfare-oriented market mechanisms, regardless of corporate nationality.

Taxation

In recent years, Turkish Government policies have made the taxation system more investor-friendly. In 2006, the basic corporate tax rate was reduced from 30% to 20%. The Government also cancelled the withholding tax for foreign investors' holdings of bonds, bills, and stocks - while retaining it for bank deposits and repurchase agreements. The Tax Administration also established a separate unit in 2007 to handle tax collection from large corporations. Despite these improvements, the GOT has not yet been able to implement further planned tax reforms, including reducing the employment tax, which is among the highest in the OECD.

In December 2010, the Finance Ministry announced new tax rates for capital accounts aimed at encouraging the issuance of corporate bonds with longer-term maturity. For non-domestic bonds, the withholding tax on interest will be 0% for 5-year-maturity or higher bonds, 5% for bonds with 3 to 5-year maturity, and 10% for bonds with maturity less than three years. In addition, the banking and insurance transactions tax applied to sale or repo transactions of domestically issued corporate bonds was reduced from 5% to 1%.

The GOT is aware that between 30-50% of the economy is unregistered, which represents a competitive disadvantage for legitimate firms. Turkish industrialists anticipate that the Government of Turkey will implement more tax reform in 2012 that will help to reduce the unregistered economy and broaden the tax base while also improving Turkey’s competitiveness. More information on the Turkish tax system can be found at http://www.yoikk.gov.tr/eng/investors_guide/taxation_government_incentives%20/47.

The GOT increased the VAT on leasing activities from 1% to 18% in 2007, but in the December 27 Official Gazette, it was announced that the Council of Ministers had reduced the VAT tax on leasing activities from 18% to 1% for companies that hold an investment incentive certificate and are leasing new and amortizable machinery and equipment meeting certain specified customs tariff positions. In 2011, the Government of Turkey also restructured the tax debt and public receivables and began to allow installment payments. This has proved to be very successful, resulting in $7.2 billion in collections.

Conversion and Transfer Policies


Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital. This guarantee is reflected in Turkey's 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freely-usable currency at a legal market-clearing rate for all investment- related funds. There is no difficulty in obtaining foreign exchange, and there are no foreign exchange restrictions. However, foreign petroleum companies operating in Turkey complain that amendments to the Turkish Petroleum law make it difficult for foreign companies to transfer profits. Affected companies have unsuccessfully challenged this in court. A new Petroleum Law that would alleviate this problem and improve the investment environment for oil and gas exploration is in development but has not yet been brought before Parliament.

Expropriation and Compensation


Under the U.S.-Turkey BIT, expropriation can only occur in accordance with due process of law, can only be for public purpose, and must be non-discriminatory. Compensation must be reasonably prompt, adequate, and effective. The BIT ensures U.S. investors have full access to Turkey’s local courts and the ability to take the host government directly to third-party international binding arbitration to settle investment disputes. There is also a provision for state-to-state dispute settlement.

As a practical matter, the GOT occasionally expropriates private real property for public works or for state industrial projects. The GOT agency expropriating the property negotiates the purchase price. If owners of the property do not agree with the proposed price, they are able to challenge the expropriation in court and ask for additional compensation. There are no outstanding expropriation or nationalization cases.

Dispute Settlement


There are some outstanding investment disputes between U.S. companies and Turkish governmental bodies, particularly in the energy sector.

Turkey’s legal system provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws. However, the court system is overburdened, which sometimes results in slow decisions and judges lacking sufficient time to grasp complex issues. Judgments of foreign courts, under certain circumstances, need to be upheld by local courts before they are accepted and enforced. Monetary judgments are usually made in local currency, but there are provisions for incorporating exchange rate differentials in claims. The Turkish Government is working on judiciary reform that aims at shortening the duration of judicial proceeding and bring greater efficiency to the Turkish judiciary system through specialized courts (such as Intellectual Property Rights courts, a number of which already exist in Turkey).

Turkey is a member of the International Center for the Settlement of Investment Disputes (ICSID) and is a signatory of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Turkey ratified the Convention of the Multinational Investment Guarantee Agency (MIGA) in 1987. There are no arbitration cases involving a U.S. company pending before ICSID. The U.S.-Turkey Bilateral Investment Treaty, which entered into force in 1990, affords protection to U.S. investments in Turkey by providing certain mutual guarantees and creating a more stable and predictable legal framework for U.S. investors.

Turkish law accepts binding international arbitration of investment disputes between foreign investors and the state. In practice, however, Turkish courts have on occasion failed to uphold an international arbitration ruling involving private companies.

Performance Requirements/Incentives


Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS).

Turkey's investment incentive system was substantially amended in 2006 to promote investment in manufacturing services and the energy sector and to encourage exports. In 2009 the Turkish Parliament passed a state investment incentive decree that provides tax benefits and increased credit opportunities. It is applied in diverse ways according to the location, scale, and subject of the investment and includes exemption from customs duties and fund levies, customs, and value-added (VAT) tax exemptions for locally-purchased or imported machinery and equipment. The Turkish Treasury also covers selected parts of investment credit interest rates for SMEs, research and development projects, environmental projects, and projects in prioritized development provinces that have annual per capita income below $1,500.

There are no performance requirements imposed as a condition for establishing, maintaining, or expanding investment in Turkey. There are no requirements that investors purchase from local sources or export a certain percentage of output. Investors' access to foreign exchange is not conditioned on exports.

There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms. There are no government-imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content – for goods or services – or local equity, import substitution, export requirements or targets, technology transfer, or local financing.

GOT requirements for disclosure of proprietary information as part of the regulatory approval process are consistent with internationally accepted practices. Enterprises with foreign capital must send their activity report submitted to shareholders, their auditor's report, and their balance sheets to the Treasury's Foreign Investment Directorate every year by May.

With the exceptions noted under "Openness to Foreign Investment" and "Transparency of the Regulatory System," Turkey grants all rights, incentives, exemptions, and privileges available to national businesses to foreign business on a most-favored-nation (MFN) basis. U.S. and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.

In April 2012 The Government of Turkey announced new incentives that will give priority to high-tech, high-value-added globally competitive sectors and put in place new regional incentive programs to reduce regional economic disparities and increase regional competitiveness. More information on Turkey’s investment incentive system can be found at: http://www.yoikk.gov.tr/eng/investors_guide/taxation_government_incentives%20/56. Turkey has adopted a “tiered” system of offering incentives to invest in less developed parts of the country. The map and explanation of the program can be found at: http://www.invest.gov.tr/en-US/Maps/Pages/InteractiveMap.aspx.

Turkish law and regulations affecting the investment climate continue to evolve. Potential investors should check with appropriate Turkish government sources for current detailed information. The following web site provides the text of regulations governing foreign investment and incentives, as well as other useful background information: www.invest.gov.tr.

Military procurement generally requires an offset provision in tender specifications. The offset guidelines have been modified to encourage direct investment and technology transfer.

More information on Turkey's trade regime can be found at www.foreigntrade.gov.tr.

Right to Private Ownership and Establishment

Foreign-owned interests in the petroleum, mining, broadcasting, maritime transportation, and aviation sectors are subject to special regulatory requirements. In broadcasting, equity participation of foreign shareholders is restricted to 25%; this may soon increase to 50%. Foreign equity participation in the aviation and maritime transportation sectors is 49%. In practice, regulators have not restricted foreign ownership in the financial sector. Real estate trading and fishing are closed to foreign investors.

With the exceptions noted above, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100%.

Turkey has an independent Competition Board. With respect to access to markets, credit, and other business operations, competitive equality is the standard applied to private enterprises that seek to compete with public enterprises.

Regulations governing foreign investment in Turkey are, in general, transparent. In most sectors Turkey does not have an investment screening system for foreign investors; only notification is required. The Government of Turkey uses “reciprocity with the related nation” as a precondition for real estate property purchases by foreigners and sets an upper limit of 2.5 hectares on real estate purchases by foreign individuals. No individual may own more than 10% of land in any given development zone. (More information on purchasing real estate in Turkey can be found at: http://www.yoikk.gov.tr/eng/investors_guide/real_estate_registering_property/).

The Ministry of Environment and Urbanization completed a new draft law on title deed registration in early January 2012. This law aims to be more flexible in allowing international companies to purchase real property by abandoning the former requirement whereby foreign purchasers of real estate in Turkey had to be in partnership with a Turkish individual or company that owns at least a 50% share in the property. The new draft law also increases the upper limit on real estate purchases by foreign individuals to 30 hectares and allows further increases up to 60 hectares with permission from the Council of Ministers.

Protection of Property Rights


Turkey is signatory to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, and the Strasbourg Agreement. In 2008, Turkey acceded to the WIPO Copyright Treaty and Performances and Phonograms Treaty.
Turkey accepts patent applications in compliance with the TRIPS agreement "mailbox" provisions. Secured interests in property, both movable and real, are recognized and enforced, and there is a reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow to render decisions and are susceptible to external influence (see "Dispute Settlement").

Turkey's intellectual property rights regime has improved in recent years, but deficiencies remain. In 2008, Turkey was on the U.S. Special 301 Priority Watch List. In 2009 it was upgraded to the U.S. Special 301 Watch List, where it remained in 2010 and 2011. Although 2010 and 2011 saw increased Turkish IPR enforcement actions and successful public awareness campaigns, piracy and counterfeiting remain serious problems. There is widespread and often sophisticated counterfeiting of trademarked items, especially apparel. Business software and online music piracy are increasing, and book and entertainment software piracy remain areas of concern.

Turkey has not yet completed legislative reforms needed to ensure effective IPR protection and enforcement. Delays in the judicial and legislative processes contribute to deficiencies in the overall IPR protection and enforcement regime. For example, a Constitutional Court decision in July 2008 annulled certain provisions of the trademark law related to penalties for trademark violations. With no legal basis to prosecute offenders or to destroy confiscated goods, counterfeit trademarked goods seized in the months following have remained in legal limbo since that time. In 2011, a number of U.S. companies were still seeking to prevent goods seized during this period from being released back into the market.


Turkey's copyright law, as amended in 2004, provides deterrent penalties for copyright infringement. The law contains several strong anti-piracy provisions, including a ban on street sales of all copyrighted products and authorization for law enforcement authorities to take action without a complaint by the rights holder. In 2004, after passage of amendments banning street sales, the immediate increase in enforcement actions reduced the number of street vendors in Istanbul by 80% and in Ankara by 50%. While pirated materials are still common, the number of cases brought against producers and/or distributors of copyrighted goods has increased, and deterrent penalties from courts have become more common.

Turkey’s patent law has been in force since 1995 and was amended in 2004. Patents are granted for 20 years to any invention in any field of technology which is novel, involves an inventive step, and has industrial applications. The Turkish Patent Institute and the Turkish Ministry of Justice are working to develop a new patent law that will fully comply with EU law, but this process has taken longer than expected.

In January 2006, Turkey passed data protection legislation to deal with one of the key intellectual property concerns of research-based pharmaceutical companies: data exclusivity protection for confidential test data. The six-year term of data protection starts on the date of licensing in a European Customs Union country, and data exclusivity is limited to original products licensed in a European Customs Union country after January 1, 2001, for which no generic manufacturers had applied for licenses in Turkey as of January 1, 2005. In addition, the term of exclusivity is limited to the duration of the drug patent.

In general, the Ministry of Health provides protection for confidential test data submitted in support of applications to market pharmaceutical products. However, several provisions undermine protection for confidential test data. Due to the relatively short six-year data-exclusivity period and recent delays by the Turkish Ministry of Health in granting Good Manufacturing Practice inspection certificates and marketing approvals, pharmaceutical data protection remains a concern, particularly for innovative products. In addition, Turkey’s patent law does not contain interim protection for pharmaceuticals in the research and development “pipeline”. Research-based pharmaceutical companies have criticized patent provisions which delay the initiation of infringement suits until after the patent is approved and published, permit use of a patented invention to generate data needed for the marketing approval of generic pharmaceutical products, and give judges wider discretion over penalties in infringement cases.

Trademark holders also note that Turkey provides protection for commercial seed under its Plant Variety Protection (PVP) Law.

Turkish intellectual property (IP) law allows both civil and criminal actions. In general, civil actions include requests for determination of infringement, cessation of acts of infringement, seizure of counterfeit goods, and compensation of damages. Criminal actions include imprisonment, pecuniary punishment, closure of job sites, and prohibition from commerce.

Turkey has specialized intellectual property IP courts, presided over by judges who have had training in intellectual property law, in Istanbul, Ankara, and Izmir. IP litigation in Turkey generally begins in these courts and moves to the Supreme Court if an appeal is filed. If the alleged offense does not occur in Istanbul, Ankara or Izmir, the case begins in civil courts that act as IP courts.

Further information on the intellectual property situation in Turkey is available in the National Trade Estimate and Special 301 reports, available under the “reports” tab at the U.S. Trade Representative's website: www.ustr.gov.

Transparency of the Regulatory System


The GOT has adopted policies and laws that in principle should foster competition and transparency. However, foreign companies in several sectors claim that regulations are sometimes applied in a nontransparent manner. Turkey is an observer, but not a member, to the WTO Government Procurement Committee.

Turkish legislation generally requires competitive bidding procedures in the public sector. A Public Procurement board exists to oversee public tenders, and there are minimum bidding thresholds under which foreign companies are prohibited from bidding on public tenders. The law gives preference to domestic bidders, Turkish citizens, and legal entities established by them, as well as to corporate entities established under Turkish law by foreign companies. The public procurement law has been amended eight times since its enactment and has been cited by the EU as not being in conformity with the EU "acquis communautaire" (body of law).

In general, labor, health and safety laws and policies do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy. Certain tax policies distort investment decisions. Generous tax preferences for free zones have provided a stimulus to investment in these zones. Similarly, incentives for investment in certain low-income provinces appear to be stimulating investment there (see “Performance Requirements/Incentives”).

Efficient Capital Markets and Portfolio Investment


The Turkish Government has taken a number of important steps in recent years to strengthen and better regulate the banking system. A 2005 revision of the Banking Law brought tighter bank regulation, notably by broadening the range of expertise inspectors can draw on when conducting on-site inspections. The Turkish Government is working on a new Capital Markets Law which is expected to go into effect in 2012, aimed at bringing about greater corporate accountability, protection of minority-share holders, and financial statement transparency.

As of January 2012, there were 31 deposit-taking commercial banks and 13 development and investment banks operating in Turkey. Sector assets as of September 2011 totaled approximately $643 billion - about 83% of GDP - according to data from the Bank’s Association of Turkey. Total loans for the banking sector totaled $352 billion for the same period. The independent Banking and Regulation Supervision Agency (BRSA) monitors and supervises Turkey's banks. The BRSA is headed by a board whose seven members are appointed by the cabinet for six-year terms. In addition, bank deposits are protected by an independent deposit insurance agency, the State Deposit Insurance Fund (SDIF).

Because of historically high local borrowing costs and short repayment periods, foreign and local firms have frequently sought credit from international markets to finance their activities. With investors increasingly viewing Turkey as a strong emerging economy, Turkey’s risk premium has begun to decrease, while accessibility to medium and long-term financing at lower costs has increased. However, growing economic problems in Europe are expected to limit accessibility to external financing in 2012.

There is a regulatory system established to encourage and facilitate portfolio investments, though it needs improvements in transparency, accounting, and enforcement provisions to bring it up to U.S. and EU standards. The Istanbul Stock Exchange (ISE), formed in 1985, is becoming a significant emerging market stock exchange. As of May 2010, 322 companies were listed on the exchange with total market capitalization of $241 billion. However, Turkey has yet to develop other capital markets and new instruments. The Capital Markets Board is responsible for overseeing the activities of capital markets, including activities of ISE-quoted companies, and securities and investment houses. The Turkish private sector has a number of large holding companies, whose upper management is family-controlled. Most large businesses continue to float publicly only a minority portion of shares in order to limit outside interference in company management. There has been no recent hostile takeover attempt by either international or domestic parties. Capital market instruments are still developing in Turkey. Turkey's first mortgage law was adopted in 2007. Venture capital and hedging instruments are also currently very limited.

Entrepreneurship

Turkey pays close attention to the impact microeconomic factors have on business development and growth and is seeking to foster entrepreneurship and small to medium-sized enterprises. The Government provides various incentives for innovative ideas and cutting edge technologies, in addition to provding SMEs easier access to medium- and long-term funds through the Small and Medium Industry Development Organization (KOSGEB). There is also a signficant number of technology development zones (TDZs) in Turkey, where entreprenuers are given assistance in commercializing strong business plans. The Turkish Government provides support to TDZs, including infrastructure and facilities; exemption from income and corporate taxes for profits derived from software and R&D activities (through December 2013); exemption from all taxes for the wages of researchers, software, and R&D personnel employed within the TDZ (through December 31, 2013); value-added tax (VAT) and corporate tax exemptions for IT specific sectors; and customs and duties exemptions. Turkey's Scientific and Technological Research Council (TUBITAK) has special programs for entrepreneurs in the technology sector and the Turkish Technology Development Foundation (TTGV) has programs that provide capital loans for R&D projects and/or cover R&D-related expenses. Projects eligible for such incentives include concept development, technological research, technical feasibility research, laboratory studies to transform concept into design, design and sketching studies, prototype production, construction of pilot facilities, test production, patent and license studies, and activities related to post-scale problems stemming from product design. Finally, the Turkish government's export incentive program focuses on R&D activities, market research, and participation in exhibitions and international fairs.

Political Violence


Domestic and transnational terrorist groups have targeted Turkish nationals and foreigners in Turkey, including on occasion U.S. government personnel, for more than 40 years. Terrorist groups that have operated in Turkey in the past include Kurdish separatist, Marxist-Leninist, and pro-Chechen groups, as well as al-Qa’ida and its affiliates.

Most prominent among the terrorist groups operating in Turkey is Kongra-Gel (KGK, also known as PKK). Composed primarily of ethnic Kurds with a separatist agenda, the KGK has historically operated from areas in southeastern Turkey and northern Iraq and targeted mainly Turkish security forces. In 2006, 2007, and 2008, KGK violence claimed hundreds of Turkish lives. KGK activity was lower in 2009 but increased again in 2010, particularly during May through October. Following national elections in June 2011, KGK activities increased in both number and lethality, which appeared to indicate a return to the KGK’s targeting civilians and urban areas, in addition to Turkish military and police forces. KGK attacks in 2011 once again demonstrated the nation-wide reach of this group. Typical tactics, techniques, and procedures included ambushes on military patrols in the countryside, improvised explosive devices (IEDs) along known military or police routes, and bombings of both security and civilian targets in urban areas.

Other prominent terrorist groups in Turkey include Turkish Hezbollah (unrelated to Hizballah operating in Lebanon) and the Revolutionary People’s Liberation Party/Front (DHKP-C), a militant Marxist-Leninist group with anti-U.S. and anti-NATO views which seeks the violent overthrow of the Turkish state. Public sources also highlight detentions of Islamic Jihad Union (IJU) members, as well as supporters for al-Qa'ida and other groups. The Turkish Workers’ and Peasants’ Liberation Army, though largely inactive, is still considered a potential threat by the Turkish Government. Although the Turkish Government takes air safety seriously and maintains strict controls, particularly on international flights, a hijacking occurred on an Atlasjet flight in August 2007.

For the latest security information on Turkey and other countries, see http://travel.state.gov, where current Worldwide Caution Public Announcements, Travel Warnings, and Public Announcements can be found.

Corruption


Corruption is perceived to be a problem in Turkey by private enterprise and the public at large, particularly in government procurement. American companies operating in Turkey have complained about being solicited, with varying degrees of pressure, by municipal or local authorities for "contributions to the community”. Parliament continues to probe corruption allegations involving senior officials in previous governments, particularly in connection with energy projects.

Public procurement reforms were designed to make procurement more transparent and less susceptible to political interference, including through the establishment of an independent public procurement board with the power to void contracts. With regard to the WTO Government Procurement Agreement, Turkey is not yet a signatory, although it has maintained observer status for over a decade. The judicial system is also perceived to be susceptible to external influence and to be biased against outsiders to some degree.

Turkish legislation outlaws bribery and some prosecutions of government officials for corruption have taken place. However, enforcement is uneven. Turkey ratified the OECD Convention on Combating Bribery of Public Officials and passed implementing legislation in January 2003 to provide that bribes of foreign officials, as well as domestic, are illegal. In 2006, Turkey's Parliament ratified the UN Convention against Corruption.

Turkey’s Criminal Code makes it unlawful to promise or to give any advantage to foreign government officials in exchange for their assistance in providing improper advantage in the conduct of international business. In the event that such a crime makes an unlawful benefit to a legal entity, such legal entity shall be subject to certain security measures. The provisions of the Criminal Law regarding bribing of foreign governmental officials are in line with the provisions of the Foreign Corrupt Practices Act of 1977 of the United States (FCPA).

There are, however, a number of differences between Turkish law and the FCPA. For example, there is not an exception under the Turkish law for payments to facilitate or expedite performance of a "routine governmental action" in terms of the FCPA. Another difference is that the FCPA does not provide for punishment of imprisonment, while the Turkish law provides a punishment of imprisonment from 4 to 12 years. The Prime Ministry’s Inspection Board, which advises the Corruption Investigations Committee, is responsible for investigating major corruption cases brought to its attention by the Committee. Nearly every state agency has its own inspector corps responsible for investigating internal corruption. The Parliament can establish investigative commissions to examine corruption allegations concerning cabinet ministers; a majority vote is needed to send these cases to the Supreme Court for further action.

Transparency International has an affiliated NGO in Istanbul. According to Transparency International’s (TI) annual Corruption Perception Index Data, Turkey moved from 61st to 58th in TI’s ranking of 178 countries in 2010. TI noted that Turkey showed some improvement in perceived levels of domestic and public sector corruption.

Bilateral Investment Agreements


Since 1962, Turkey has been negotiating and signing agreements for the reciprocal promotion and protection of investments. As of January 1, 2010, Turkey has signed Bilateral Investment Treaty (BIT) agreements with 81 countries. Sixty-five (65) of these agreements are in force: Afghanistan, Albania, Argentina, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, Georgia, Germany, Greece, Hungary, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Moldova, Mongolia, Morocco, Netherlands, Oman, Pakistan, Poland, Portugal, Romania, Russian Federation, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Syria, Tajikistan, United Kingdom, United States, Tunisia, Turkmenistan, Ukraine, and Uzbekistan. Sixteen (16) other BIT agreements are in the ratification process: Algeria, Australia, Bahrain, Chile, France, India, Kosovo, Nigeria, Philippines, Qatar, Saudi Arabia, South Africa, Sudan, Thailand, United Arab Emirates, and Yemen.

OPIC and Other Investment Insurance Programs


The Overseas Private Investment Corporation (OPIC) offers a full range of programs in Turkey, including political risk insurance for U.S. investors, under its bilateral agreement with Turkey. OPIC is also active in financing private investment projects implemented by U.S. investors in Turkey. OPIC-supported direct equity funds, including the $200 million Soros Private Equity Fund can make direct equity investments in private sector projects in Turkey. Currently, OPIC is looking to support increased lending for renewable energy and energy efficiency projects in Turkey and other emerging markets in the region. Small and medium-sized U.S. investors in Turkey are also eligible to utilize the new Small Business Center facility at OPIC, offering OPIC finance and insurance support on an expedited basis for loans from $100,000 to $10 million. In 1987, Turkey became a member of the Multinational Investment Guarantee Agency (MIGA).

Labor


Turkey has a population of 74 million, with 30% under the age of 14. Over 76% (76.26%) of the Turkish population lives in urban areas. The Turkish labor force numbers 26.8 million, of which 24.3 million are employed. Approximately 26.2% of the workforce works in agriculture; 19% works in industrial sector. The official unemployment rate was 8.8% as of October 2011, with 17.3% youth unemployment (15-24 years old). According to 2009 figures from the State Statistics Institute of Turkey, the literacy rate is 88%; the literacy rate for men is 94% and for women 82%. Students are required to complete eight years of schooling and remain in school until they are 15 years old. 98.17% of Turkey’s population completes primary school; 36% of those who complete primary school get vocational or higher education.

Turkey has an abundance of unskilled and semi-skilled labor, and Turkey's labor force has a reputation for being hardworking, productive, and dependable. Vocational training schools exist at the high school level. Some formal apprenticeship programs remain, but informal training in traditional occupations is decreasing rapidly. Although the Ministry of Education launched projects within the framework of EU programs to meet the needs of high-tech industries, there remains a shortage of qualified high-tech workers. Individual high-tech firms, both local and foreign-owned, typically conduct their own training programs. The GOT Ministry of Science, Industry, and Technology launched a program with the Union of Chambers and Commodity Exchanges of Turkey (TOBB) to provide skilled laborers to meet the manufacturing sector needs. Turkey has also undertaken a significant expansion of its university programs, building dozens of new colleges and universities over the last decade to increase the skill and competitiveness of its workforce.

Labor-management relations have been generally good in recent years. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. The law prohibits discrimination on the basis of union membership, but discrimination sometimes occurs in practice. There is no obligation for a worker to become a member of any union and there is no obligation to make a collective labor agreement for any sector. However, in order to be covered by a collective labor agreement, a worker should be a member of a union. In order to be a bargaining agent, a union must have a membership of more than half of the workers employed in a work place and include at least 10% of the workers employed in that specific work branch. The Labor Law sets a series of steps to be followed, including mediation by an Arbitration Board, before a union may initiate a strike.

Turkey’s Economic and Social Council was established by law in 2001. Its President is the Prime Minister. The Council aims to maintain an effective dialogue between the state and social parties to encourage compromise in industrial relations. It is composed of representatives from governmental bodies, labor and employer confederations, employee associations, and umbrella organization of chambers of commerce and industry.

Turkey has signed many International Labor Organization (ILO) conventions protecting workers' rights, including conventions on Freedom of Association and Protection of the Right to Organize; Rights to Organize and to Bargain Collectively; Abolition of Forced Labor; Minimum Wage; Occupational Health and Safety; Termination of Employment; and Elimination of the Worst Forms of Child Labor. Since 1980, Turkey has faced criticism by the ILO, particularly for shortcomings in enforcement of ILO Convention 87 (Convention Concerning Freedom of Association and Protection of the Right to Organize) and Convention 98 (Convention Concerning the Application of the Principles of the Right to Organize and to Bargain Collectively). The government maintains a number of restrictions on the right of association and the right to strike. Civil servants (defined broadly as all employees of central government ministries, including teachers) are allowed to form trade unions and to engage in limited collective negotiations, but are prohibited from striking. Certain vital public employees, such as military and police, cannot form unions.

As of October 2011, Turkey has 19 free trade and export processing zones. There are no special laws or exemptions from regular labor laws within these zones.

Foreign Trade Zones/Free Ports


Firms operating in Turkey's 19 free zones have historically enjoyed many advantages. The zones are open to a wide range of activities, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of customs or duties. Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. Sales to the Turkish domestic market are allowed, with goods and revenues transported from the zones into Turkey subject to all relevant import regulations. There are no restrictions on foreign firm operating in the free zones. Indeed, the operator of one of Turkey's most successful free zones located in Izmir is an American firm.

Taxpayers who possessed an operating license as of February 6, 2004, do not have to pay income or corporate tax on their earnings in free zones for the duration of their license. Earnings based on sale of goods manufactured in free zones is exempt from income and corporate tax until the end of the year in which Turkey becomes a member of the European Union. Earnings secured in a free zone under corporate tax immunity and paid as dividends to real person shareholders in Turkey, or to real person or legal-entity shareholders abroad, are subject to 10% withholding tax. The tax immunity of the wage and salary income earned by persons employed in the zones by taxpayers possessing an operating license expired on December 31, 2008, except for producers that export more than 85% of their products. The GOT passed a law in November 2008, according to which producers' immunities from income and corporate tax and taxes on wage income earned in free zones, were extended to coincide with Turkey's membership in the European Union. More information can be found on the Foreign Trade Undersecretariat’s website: www.dtm.gov.tr.

Foreign Direct Investment (FDI) Statistics

According to Central Bank of Turkey data, FDI inflows to Turkey in 2007 of $22 billion decreased by 12% in 2008 to $19.5 billion and plummeted by 57% in 2009 to $8.4 billion, due largely to the negative impact of the global financial crisis on investment flows worldwide. In 2010, FDI inflows began to rebound - increasing by almost 11% over 2009 to $9.1 billion - and have continued to grow in 2011 - reaching almost $12.1 billion in the first eleven months of the year. Of this $12.1 billion, $10 billion represented net foreign capital inflows, $1.9 billion represented real estate purchases by foreigners, and 130 million represented intra-company loans. The International Investors Association of Turkey (YASED) expects FDI inflows to Turkey to reach $12 billion by the end of 2011, which would represent a 29% increase over 2010.

In the January-November 2011 period, EU countries accounted for 85.6% of FDI inflow to Turkey, as compared to 75% in 2010; Asian and Gulf countries accounted for 5.4%, as compared to 14.7% in 2010; U.S. companies accounted for 5.6%, as compared to 5.0% in 2010; European countries other than the EU accounted for 2.5%, as compared to 4.1% in 2010; Canada accounted for .15%, as compared to .87% in 2010, and Central and South American and Caribbean countries accounted for .48%, as compared to .11% in 2010.

In the first nine months of 2011, according to the Central Bank of Turkey, breakdown of FDI inflows into Turkey’s manufacturing industry were:

food products, beverages and tobacco 33%

electrical and optical equipment 20%

chemical products and man-made fibers 15%

metal products 11%

textiles and textile products 8%

machinery and equipment 3%

transport equipment 3%

other 7%



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