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Evaluation of the effects of be exempt from income and corporate tax, on the condition that they were brought to Turkey. The free zone application tax havens on international is generally regarding commercial activities rather than tax competition production and is considered as a harmful tax competition practice due to the tax incentives it provides. Free zones are 1. Introduction therefore included in the list of tax havens published in 1998 by OECD. Measures that could be taken against this application With its effects most perceived in economic, political and social would be the cancellation of the tax exemption applicable to areas in the last twenty years, the globalization process allows income tax and corporate tax or preventing unjust competition the mobility of production factors, mainly capital and labor, through lower tax rates. which has resulted in countries’ entry in a severe international competition. Under the regulation introduced in 2004, the gains generated from the activities carried out in free zones by taxpayers who This process has been observed to erode many basic obtained license to operate in free zones before 06.02.2004 mechanisms of countries as well, primarily tax systems, due to are considered as exempt from income and corporate tax, with various infrastructure investments, conveniences experienced restriction to the timeframe specified in their operating licenses. in the transportation sector and reduction of investment costs For other taxpayers on the other hand (those obtaining license by technological innovations in particular. Consequently, many after the aforementioned date or whose operating license countries have found themselves involved in international expired in this timeframe), the scope of the exemption has tax competition in many areas. The number of multinational been restricted. The gains derived only from the manufacturing companies has increased remarkably, causing many harmful activities by these taxpayers in the free zones are deemed to tax competition factors such as transfer pricing and preferred be exempt from income and corporate tax. This exemption is tax regimes to appear. As one of the most important elements applicable until the end of the annual taxation period including of harmful tax competitions, “tax haven” has become a concept the date when full accession to the European Union is realized. which should be carefully examined within this framework and for which global solution recommendations should be proposed. 4. Measures taken by Turkey against harmful tax competition 2. Initial applications regarding tax havens Certain new applications have been introduced under the The first application resembling tax havens dates back to Corporate Tax Law no. 5520 effective as of 01.01.2006 as Ancient Greece, when the tradesmen avoided tax via countries measures taken against harmful tax competition in Turkey. with lower tax rates. Other notable examples to harmful tax These applications are the “Controlled Foreign Corporation competition practices are the 1st World War when USA and Gains”, “Disguised Profit Distribution through Transfer Pricing” England preferred Bahamas and Canada as safe havens to and “Withholding Tax Application in Payments Made to Tax transfer their assets and the pre-World War II period when Havens” stipulated in the article 7, article 13 and article 30/7 countries transferred money to the bank accounts they set up in of the Corporate Tax Law respectively. Switzerland in search for a stabile country for their capitals, due to the political and economic uncertainty in this period. Similar 4.1. Controlled foreign corporation gains practices began to appear in many countries, mainly USA, in the subsequent periods.[1] With respect to “Controlled Foreign Corporation Gains”, the article 7 of the Corporate Tax Law stipulates that “the corporate In conclusion, having commenced upon the acceleration of gains of foreign affiliates controlled directly or indirectly by the free circulation of capital and labor after globalization, this Turkish resident real persons and entities by holding at least process caused unjust competitions and harmful tax practices 50% of their capital, dividend or voting right separately or to arise due to the differences in countries’ tax systems and together are subject to corporate tax in Turkey if the following resulted in an increase in the current popularity of tax havens, conditions are fulfilled altogether, regardless of whether they which became more attractive due to the tax advantage they are distributed or not.” provide. The purpose of this article is to ensure the taxation of such In addition, tax havens provide real persons and legal entities gains by preventing the taxpayers who direct their investments operating in many areas such as production and tourism to countries with low tax rates and/or tax exemptions through companies, ship operators, owners of immovable property, affiliates, from transferring the incomes they generate in such offshore holdings and finance centers with various tax countries to Turkey. In addition, there is no statement in the advantages.[2] said article of the law regarding a status change resulting from the absence or presence of a Double Tax Treaty (DTT) with the 3. Harmful tax competition practices in Turkey: country where the foreign affiliate is resident. In this regard, free zones and offshore banking it could be said that the presence or absence of such a treaty would not change the situation in terms of application of the law. The most prominent example to Turkey’s position in terms of harmful tax competition practices is “free zones”. Under the Law no. 3218 accepted on 06.06.1985, gains and revenues generated from the activities carried out in free zones could 10 Kasım 2014