What does the new stimulus package stand for?

What does the new stimulus package stand for?

Diyadin Yakut
Investment, production and employment incentives have been sporadically employed by successive governments for decades as fiscal policy tools to harvest economic gains and keep up with developmental needs, as an integral part of wider and more conventional economic programs.

On April 2, 2015, an investment, production and employment incentive package of that nature, incorporating very generous benefits for private sector actors willing to invest, produce and contribute to national employment, was presented to the public.

This stimulus package was tailored within the context of the so-called Economic Transformation Programs, prepared by the Development Ministry and introduced by the government in January to reach the economic targets set out for the year 2023, the centennial of the Turkish Republic.

Benefits and incentives granted to individuals and corporations within the scope of the aforementioned stimulus package are divers such as a salary rise for pensioners, employment support for businesses and even lower tax rates for new investments.

Support for pensioners, new employment and lower tax rates

For the sake of lifting the standard of living for approximately 5 million pensioners nationwide, pension wages under 1,100 Turkish Liras are to be increased by 100 liras. Moreover, pensioners with commercial activities are also granted the benefit to pay lower rate of social security contributions, down from 15 to 10 percent.

According to this stimulus package, virtually all employment-related expenses of private-sector firms hiring employees within the scope of “job training programs” will be covered for a period of at least six months by the Public Employment Services Authority (İŞKUR), a governmental body tasked with introducing labor programs with the aim of mass job trainings and placements to tackle the hurdle of unemployment.

Not only will the salaries of employees hired by the firms abiding by the rules and procedures of “job training programs” be covered for at least six months, but also the social security contributions corresponding to the employer’s share will be compensated for a period up to 42 months by the government, if those amounts of contributions are related to extra job creation. 

To add, the rest of employment-related expenses of newly hired employees will be eligible for deduction from the annual tax base of the concerned employers.

By the same token, to boost domestic production with high technology content and enhance the country’s international competitiveness, some vital improvements will be introduced with respect to investment benefits, particularly pertaining to lower tax rates, which were originally included in an investment incentive package put in place in 2012. That package, which still stands as the most comprehensive in its scope and most generous in terms of variety of benefits it offers to would-be investors, went into effect with the enactment of the Council of Ministers Resolution on State Aids to Investments in June 2012.

Benefits for initial public offerings and importation of investment goods

Various tax advantages are granted to equity financing through outright deduction of a good proportion of extra cash capital from annual tax base to encourage firms to opt for equity capital rather than debt financing. This move, taken to channel idle financial resources to preferred investment areas, is likely to fortify, in general, the resilience of the economy in the face of possible shocks, by strengthening the capital structure of domestic firms via reducing debt-to-equity ratios.

Another significant aspect of this stimulus package is the abolishment of the 6 percent Resource Utilization Support Fund (KKDF), an extra financial burden introduced in 1988 with the aim of orienting investments across the country toward the importation of investment and intermediate goods.

Additional support for SMEs, woman entrepreneurs and the reorganization of the Development Bank
The scope and extent of the collaterals extended to entrepreneurs, be it small- and medium-sized enterprises (SMEs) or woman entrepreneurs, via the Credit Guarantee Fund will be substantially enhanced.

The amount of financial resources injected into the aforementioned fund by the government with budgetary means will increase two fold, from 1 billion to 2 billion liras, making it possible to provide up to a 20 billion liras’ worth of Treasury collateral for private sector borrowing through the Credit Guarantee Fund. The Treasury-backed collateral limit will be up from 1.5 million to 2.5 million liras for manufacturer SMEs and from 2 million to 3 million liras for each risk group of collateral-receiving SMEs. Furthermore, the eight-year long maximum maturity for repayment will be prolonged to 10 years and rate of collateral to the borrowed credit will rise from 75 percent to 80 percent. Additionally, woman entrepreneurs will be offered 85 percent collateral for a maturity of five years to finance credits as large as 100,000 liras.

In the meantime, the Development Bank of Turkey, the public lender vested with the task and authority to support development and sustainable growth, will undergo a process of structural transformation in line with international best practices to be able to deliver on developmental needs and expectations.