Turkey unveiled sweeping cuts in corporate, income and investment taxes on Tuesday, in a push to lure more investment to his EU candidate country amid intense rivalry among emerging markets.
Economists welcomed the move which is expected to take effect from 2006, saying it would help Turkish companies to compete more effectively and said it should not undermine Turkey's latest $10 billion IMF-backed economic programme.
"The cuts in tax rates will increase Turkey's capacity to compete with its neighbours and EU member countries in terms of attracting global capital investments," Prime Minister Tayyip Erdogan told a gathering of his ruling Justice and Development Party (AKP).
"(These changes) will help attract real investments to Turkey and accelerate direct global capital investment."
Erdogan said corporate tax would fall to 20 percent from 30 percent - a bigger cut than expected - and income tax for top bracket earners would decline to 35 percent from 40 percent. Tax for the lowest income earners will remain at 15 percent.
The total tax burden on foreign investment will fall to 28 percent from 37 percent, said Erdogan, who has helped Turkey recover from a deep financial crisis in 2001.
"This is a very strong positive because it shows the government is listening to market concerns given that foreign direct investment (FDI) is important to counter the current account deficit," said Simon Quijano-Evans, senior emerging markets analyst at CAIB/Bank Austria.
The tax cuts are expected to contribute to Turkey's competitiveness compared with other emerging market economies such as Poland and Romania.
Turkey's economy is now at its strongest for decades, with growth at 10 percent last year and forecast at five percent for 2005. Inflation has fallen to single figures for the first time in a generation, consumer confidence is back and privatisation are again on track.
The Paris-based Organisation for Economic Co-operation and Development forecast gross domestic product growing by around six percent in 2006 and 2007 on the back of further improvements in domestic and international confidence following the opening of accession negotiations with the EU on October 3.
Erdogan did not specify when the long-awaited tax cuts would take effect, but officials said they would be from 2006. The current account deficit remained a worry, analysts said. It rose to $16.35 billion in the first nine months of 2005 from $10.62 billion a year ago, outstripping all original estimates.
"(The cuts) give Turkey a good competitive stance vis-a-vis EU accession peers as far as FDI is concerned and it's obviously supportive for the ratings outlook," Quijano-Evans said.
If Turkey meets accession conditions, the nation of 72 million is not expected to join the wealthy bloc before 2015.
Finance Minister Kemal Unakitan said separately the 2006 budget had been drawn up after factoring in the planned tax cuts, adding: "The cuts will not create any problem."
Erdogan said his government aimed to simplify the overall tax system to increase its effectiveness and to end the investment incentives scheme.
The International Monetary Fund has said it expects Turkey's planned tax measures for 2006 to meet the original objectives of its $10 billion funding programme with the Fund.
A finance ministry official, who declined to be named, said the cuts in corporate and income taxes would impose a burden of less than two billion lira ($1.48 billion) in the 157.3-billion lira budget for 2006, but the loss would be compensated.