2019 Edition Critical Debates in Public Finance 2019

Critical Debates in Public Finance
Adnan Gerçek and Metin Taş (eds.)

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DOI 10.3726/b16603
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Preface
This book examines the main issues discussed in the field of public finance today.
These issues are perhaps identified among policy areas that will come to the
agenda of many governments over the next decade. Topics covered in the book
are as follows; revenue forecasting models, the taxation of sharing economy, tax
incentives provided to green bonds in financing of energy efficiency, the impor-
tance of tax literacy in tax compliance, the concept of collective investment
institutions, digitalization of tax administration and complexity of tax system,
macro determinants of pharmaceutical spending, tax expenditures as internal
tax bleedıng, the size of the public sector and the Armey Curve, Okun’s Law,
subsidies granted to the private educational institutions, and taxation of arti-
ficial intelligence. The book consists of twelve chapters on “controversial issues
in the public finance” mentioned above. The large part of chapters published in
this volume was selected among the presented papers in the 34th International
Public Finance Conference/Turkey in April 2019. They also went through a
review process before publication.
Erdoğdu and Yorulmaz compare the performance of three forecasting
tax revenue models such as Random Walk, SARIMA, and BATS for Turkey
throughout 2006:01 to 2018:12. They find that using the BATS model, rather
than classical (SARIMA) in forecasting series of monthly tax revenues of Turkey,
provides more accurate forecasts. The empirical findings of this study help the
experts in the preparation process of the government’s budgets.
Bozdoğanoğlu emphasizes that the sharing economy is a functioning
economy through online platforms and makes it difficult to evaluate within the
framework of tax and legal regulations, such as the traditional economy. In this
study, taxes, which are the subject of sharing economy, which is a new economic
model, and cooperation with platforms and determination of taxpayer aware-
ness, are included.
Yiğit Şakar discusses the financing of energy efficiency and argued that as
an alternative to financing energy efficiency, green bonds are developing rapidly
all over the World. Green bonds are financial instruments that provide oppor-
tunities for investors to participate in the financing of “green” projects that help
reduce the negative impacts of climate change and adapt to the effects of climate
change, reduce CO2 emissions, prevent environmental pollution, and improve
social welfare. These structures have an essential impact on the realization of
sustainable development.
6 Preface
Çetin Gerger, Bakar Türegün and Gerçek highlight the importance of tax
literacy as one of the factors that determine tax compliance. They also examine
arrangements and projects related to tax literacy in the OECD countries and the
United States, along with the presentation of the projects and research related to
tax literacy in Turkey. In the study, they conclude that the level of tax literacy in
Turkey is not at the desired level. Thus they provide suggestions regarding the
activities that could be conducted to increase tax literacy.
Keskin evaluates the importance of collective investment institutions oper-
ating in the World under three legal structures, namely investment company,
trust, and contractual model, to enable investors with low savings to work in the
financial markets. Also, she analyses the advantages provided to these institutions
and their investors in Turkish tax legislation.
Giray argues that the digital tax paradigm would inevitably necessitate a
change in countries’ tax systems. The digital tax administration can create an
opportunity to raise tax-income without raising the tax burden. This study
investigates the impacts of the digitalization of tax administration on the com-
plexity of the tax system with the indicators of some OECD countries.
Varol İyidoğan, Balıkçıoğlu and Yılmaz examine the effect of aging, chronic
diseases, health care expenditures and social spending on pharmaceutical
spending for 22 OECD countries by employing General Method of Moments
(GMM) procedure of Arellano and Bond (1991) which utilizes the difference of
dependent variable to eliminate the individual fixed effects. In this paper, they
conclude that the rise in the elderly population leads to an increase in pharma-
ceutical spending, which is consistent with our expectations.
Saygılıoğlu investigates the concept of tax expenditure and its meaning in
theory. It is used as a concept that reduces the tax burden of taxpayers for var-
ious purposes and expresses regulations such as exemptions and exemptions
in public. The study describes the theoretical framework and reasons for assets
of tax expenditures, and discussing its size and results in Turkey to attract the
attention of business and politics.
Yüksel studies the relationship between economic growth and public spending
as a percent of GDP (government size). One of the essential explanations of
these debates is the Armey curve. The parabolic structure of the Armey curve is
critical for estimating the optimal government size. This study aims to test the
Armey curve using the ARDL bounds testing approach of time-series techniques
between the years 1981–2018 in the Turkish economy.
Mercan and Özpençe investigate the relationship between economic growth
and unemployment via Okun’s Law. In this study, the relationship between eco-
nomic growth and unemployment for the Turkish economy is calculated. In this
Preface 7
context, the growth policies determined by governments will contribute to min-

imizing this problem by encouraging employment.
Özel Özer, Özer and Akın evaluate the subsidies granted to the private edu-
cational institutions within the framework of the Turkish tax system. This study
elucidates and analyses the arrangements and recent developments concerning
grants of space and location for investments and exceptions regarding the insur-
ance and tax exceptions and exemption within a general framework in Turkey
for educational institutions.
Biyan and Yılmaz discuss the issues of how artificial intelligence can be taxed
in accordance with the discussions going on about the same. The main point
derived implies that it does not seem plausible that artificial intelligence could
become a taxpayer as per the applicable legal system in force.
We hope that the current volume would be very useful for both academics
and policymakers not only in Turkey but also in many developing and developed
countries alike.
Adnan Gerçek
Metin Taş
Contents
List of Contributors .................................................................................................. 11
Hamza Erdoğdu and Recep Yorulmaz

Comparison of Tax Revenue Forecasting Models for Turkey ............................ 13
Burçin Bozdoğanoğlu
Examination of Tax Administration by Digitalization: Taxation of
Sharing Economy; Country Examples and Evaluation of Turkey ..................... 25
Ayşe Yiğit Şakar

Tax Incentives Provided to Green Bonds in Financing of Energy
Efficiency and Its Importance for Turkey .............................................................. 37
Güneş Çetin Gerger, Feride Bakar Türegün, and Adnan Gerçek

The Importance of Tax Literacy in Tax Compliance ........................................... 57
Filiz Keskin
The Concept of Collective Investment Institution and Specific Tax
Advantages Provided for These Institutions and Their Investors in Turkey .... 77
Filiz Giray
The Impacts of Digitalization of Tax Administration on the Complexity
of Tax System: OECD Countries Example ............................................................ 95
Pelin Varol İyidoğan, Eda Balıkçıoğlu, and H. Hakan Yılmaz

Empirical Findings on Macro Determinants of Pharmaceutical
Spending in Selected OECD Countries ............................................................... 113
Nevzat Saygılıoğlu
Example of Internal Tax Bleeding: “Tax Expenditures” .................................... 121
Cihan Yüksel
The Size of the Public Sector and the Armey Curve: The Case of Turkey ...... 137
Nedim Mercan and Özay Özpençe

Okun’s Law: Turkey Case ...................................................................................... 155
10 Contents
Aslıhan Özel Özer, Buğra Özer, and Sercan Akın

An Evaluation of Subsidies Granted to the Private Educational
Institutions within the Framework of Turkish Tax System .............................. 169
Özgür Biyan and Güneş Yılmaz

Artificial Intelligence: If It’s Taxed, But How? .................................................... 183
List of Figures .......................................................................................................... 205
List of Tables ........................................................................................................... 207

List of Contributors
Sercan Akın Adnan Gerçek

Manager for Mavişehir Science Prof. PhD., Bursa Uludağ University,
Private Educational Courses, Turkey, Department of Public Finance,
akinsercan1@gmail.com Turkey, agercek@uludag.edu.tr
Eda Balıkçıoğlu Filiz Giray
Assoc. Prof., PhD., Kırıkkale University, Prof. PhD., Bursa Uludağ University,
Turkey, edabalikcioglu@kku.edu.tr Department of Public Finance,
Turkey, giray@uludag.edu.tr
Özgür Biyan
Assoc. Prof. PhD., Bandırma Pelin Varol İyidoğan
Onyedi Eylul University, Faculty Assoc. Prof., PhD., Hacettepe
of Economics and Administrative University, Turkey, pelinv@hacettepe.
Sciences, Department of Public edu.tr (corresponding author)
Finance, Turkey, ozgurbiyan@
Filiz Keskin
hotmail.com
Prof. PhD, Istanbul Arel
Burçin Bozdoğanoğlu University, Faculty of Economics
Assoc.Prof. PhD., Bandırma Onyedi and Administrative Sciences,
Eylul University, Faculty of Economics Department of Political Science
and Administrative Sciences, and Public Administration,
Department of Public Finance, Turkey, Turkey, av.filizkeskin@gmail.com,
burcindogan@gmail.com filizkeskin@arel.edu.tr
Hamza Erdoğdu Nedim Mercan
Assist. Prof. PhD., Harran PhD. Student, Pamukkale University,
University, Faculty of Economics Turkey, nedimmercann@gmail.com
and Administrative Sciences,
Aslıhan Özel Özer
Department of Econometrics, Turkey,
Assist. Prof., PhD., Manisa Celal
hamzaerdogdu@harran.edu.tr
Bayar University, Ahmetli Vocational
Güneş Çetin Gerger College, Tax and Accounting
Assoc. Prof. PhD., Manisa Celal Bayar Applications Program, Turkey,
University, Turkey, gunes.cetin@ aslihanozel@yahoo.com
hotmail.com, (corresponding author)
12 List of Contributors
Buğra Özer H. Hakan Yılmaz

Assoc. Prof., PhD., Manisa Celal Prof., PhD., Ankara University,
Bayar University, Faculty of Turkey, hhyilmaz@politics.ankara.
Economics and Administrative edu.tr
Sciences, Department of Political
Recep Yorulmaz
Science and International Relations,
Assist. Prof. PhD., Ankara Yıldırım
Turkey, bugraozer@gmail.com
Beyazıt University, Faculty of Political
Özay Özpençe Sciences, Department of Public
Assoc. Prof. PhD., Pamukkale Finance, Turkey, ryorulmaz@ybu.
University, Turkey, oozpence@pau. edu.tr
edu.tr
Cihan Yüksel
Ayşe Yiğit Şakar Assist. Prof. PhD., Mersin University,
Prof. PhD., Istanbul Arel University, Department of Public Finance,
Faculty of Economics and Turkey, cihanyuksel@mersin.edu.tr
Administrative Sciences, Department
Güneş Yılmaz
of Business Administration, Turkey,
Assoc. Prof. PhD., Alanya Alaaaddin
aysesakar@arel.edu.tr, ayseyigitsakar@
Keykubat University, Faculty of
gmail.com
Business Administration, Department
Nevzat Saygılıoğlu of International Trade, Turkey, gunes.
Prof. PhD., Atılım University, Faculty yilmaz@alanya.edu.tr
of Business Administration, Turkey,
nevzat.saygilioglu@atilim.edu.tr
Feride Bakar Türegün
Assist. Prof. PhD., Bursa Uludağ
University, Department of Public
Finance, Turkey, feridebakar@uludag.
edu.tr
Hamza Erdoğdu and Recep Yorulmaz
Comparison of Tax Revenue Forecasting

Models for Turkey
Abstract The objective of this study is to compare the performance of three forecasting
tax revenue models for Turkey throughout 2006:01 to 2018:12. Three different time
series forecasting techniques such as Random Walk, SARIMA (Seasonal Autoregressive
Integrated Moving Average), and BATS (Exponential Smoothing State Space Model with
Box-Cox Transformation, ARMA Errors, Trend and Seasonal Components) are used in the
study. At the beginning of the analysis, the data set was apportioned into two parts: training
and testing. The training period is from 2006:01 to 2014:12, and the testing part is from
2015:01 to 2018:12. Based on different evaluation criteria, forecast points of 36 months
are obtained for each forecasting model. We find that using the BATS model, rather than
classical (SARIMA) in forecasting series of monthly tax revenues of Turkey, provides more
accurate forecasts. The empirical findings of this study help the experts in the preparation
process of the government’s budgets.
Keywords: Forecasting, Tax Revenue, BATS, SARIMA, Turkey
JEL Codes: C1, C5, H20
1 Introduction
Tax revenues are considered amongst the fundamental sources of government
budget planning. Governments collect taxes not only to finance their expenses
but also aiming of stabilization, distribution, and allocation in the economy.
They use taxes to stabilize the employment levels, the balance of payments, and/
or prizes. They might try to intervene with the income and wealth distribution
by playing with the tax structure. Further, they might want to use taxes to the
allocation of resources in the economy by using their allocative effects on certain
goods (Brown and Jackson, 1986, p. 297).
There are three fundamental classifications in the Turkish tax system. These
are income taxes, taxes on expenditure, and taxes on wealth. The relative impor-
tance of these taxes in the Turkish tax system is presented in Tab. 1. Income taxes
are classified as individual income and corporate income taxes. Income taxes
yield about 30% of total revenues in the Turkish tax system.
Taxes on expenditures, on the other hand, contain approximately 68% of
total revenues in the Turkish tax system. Taxing expenditures are considered the
standard and easy way to collect taxes for governments. Hence, that significant
14 Erdoğdu and Yorulmaz
Tab. 1: Percentage Distribution of Tax Revenues in Turkey
amount of taxes is comprised of expenditures in Turkey. Finally, taxes on wealth

only yield approximately 2% of total revenues. Tax analysis and forecasting of tax
revenues for governments are crucial to ensure stability in tax and expenditure
policies (Jenkins et al., 2000).
Budgetary uncertainties directed governments to rely heavily on economic
analysis in recent decades. Because of the extent of these fiscal problems
forecasting tax revenues is essential for governments to manage their budget
planning process. Recent fiscal problems of governments created reliability
issues on economic and revenue forecasting. Hence, there are plenty of methods
that are used to forecast tax revenues by policymakers (Fullerton, 1989).
Transparency and accuracy are the critical components while determining the
method for forecasting. Potential manipulation of forecasts might create govern-
ment problems.
Furthermore, inaccurate forecasts might hinder the abilities of policymakers
to make accurate budget planning and harm levels of productivity in the
economy (Kyobe and Danninger, 2005; Cirincione et al., 1999). It is considered
that countries with high-income levels and relatively small central government
tend to have high formality, accuracy, and transparency forecasts (Kyobe and
Danninger, 2005).
Government revenue forecasting studies for Turkey are rare in the litera-
ture; hence, this study aims to fill this gap. The rest of the study is organized as
follows. Section II outlines the significant studies that make forecasting analysis
Comparison of Tax Revenue Forecasting Models 15
in the literature. Furthermore, Section III describes the methodologies of the

forecasting techniques applied and the data that are used in the study. Section
IV provides the outcomes of selected forecasting methods in the study. Finally,
Section V contains the conclusion and discussions.
2 Literature
Majority of forecasting studies focused on the private sector in the literature so
far, hence the studies focused on government revenue are relatively less than
private-sector studies. For instance, Gajewar and Bansal (2016) conducted a
forecasting analysis for the private sector using machine-learning algorithms.
Accurately, they performed ARIMA, ETS (Exponential Smoothing), STL
(Seasonal and Trend Decomposition using Loess), and Random forest machine-
learning algorithms to obtain revenue forecast for Microsoft. They suggested
that using machine-learning algorithms methods would increase the accuracy of
quarterly revenue forecasting.
Many researchers also focused on state and/or municipal revenue forecasting
analysis so far. Fullerton (1989) analyzed sales tax revenues using a composite
forecasting model for Idaho. Using a time series model and econometric models,
he examined the capability of the composite forecasting model. He found that
the composite forecast model is more effective than baseline forecasts. The com-
bined model was also found more accurate than previous forecast attempts
for Idaho.
Hambor et al. (1974) used an econometric forecasting method using a simple
revenue structure for Hawaii. They forecasted state revenues, including; excise,
personal income, corporate income, and other state tax revenues, for a single
fiscal year of Hawaii. Furthermore, Kyobe and Danninger (2005) analyzed the
revenue forecasting practices in 34 low-income countries, focusing primarily
on institutional prospects. They claimed that there are three critical factors
on forecasting practices, such as “formality, organizational simplicity, and
transparency”. They empirically found that countries’ levels of corruption are
associated with formality and transparency of forecasting. Accordingly, they
found that high levels of corruption are related to less formal and transparent
forecasts.
Cirincione et al. (1999) examined the impact of using time series models,
the length, and the frequency of the data on non-tax general fund revenue
forecasting for the municipalities of Connecticut. They found that exponential
smoothing models are most effective on bimonthly data in which they claim
local governments should rely on rather than monthly or quarterly data.
As we pointed above, there are plenty of methods that were used to forecast
the private sector or government/state/municipal revenues in the literature. It
is also essential to analyze the methods used in these studies. In the case of the
Box-Jenkins Auto-Regressive Integrated Moving Average Model (ARIMA),
researchers found different results in the effectiveness of the ARIMA model.
For instance, Makridakis and Hibon (1995) claimed that the ARIMA model
performs relatively weak than other models. In doing so, Makridakis et al. (1979)
found the reason for this poor performance of the ARIMA model as the usage of
differencing in order to find stationary in the mean of the series.
Similarly, in a series of studies that focused on local government revenue
forecasting for the municipalities of Florida, researchers found similar results.
They claimed that the Box-Jenkins ARIMA model performs poorly than other
methods such as time series models, which produce lower forecast errors.
Furthermore, they found that trend fitting by regression generated more forecast
errors than its counterpart methods (Frank and Gianakis, 1990; Gianakis and
Frank, 1993).
It is important to point out that the studies that found poor performance
for the ARIMA method mainly focused on municipal government revenue
forecasting. Differently, Downs and Rock (1983) found evidence that the multi-
variate Auto Regressive Moving Average (ARMA) method is more effective than
univariate techniques using the ARMA model for municipal government rev-
enue forecasting.
While most of the forecasting studies examine the relative performance of
various methods so far, only a few researchers tested the impact of data quality
on the performance of forecasting methods. Gianakis and Frank (1993), which is
one of these studies, claimed that the length of the data does not have any impact
on the accuracy of forecasting techniques. However, some scholars suggested
that at least fifty observations are necessary to implement the Box-Jenkins
ARIMA method. On the other hand, scholars have kept using this method with
fewer numbers so far (Lorek et al., 1976).
Lorek and McKeown (1978) analyzed the association between observa-
tion numbers and the performance of the Box-Jenkins method on quarterly
market income data. They found that the forecast error is not significantly
different in models based on fifty observations and models based on fewer
observations. They suggested that if the number of observations of the Box-
Jenkins method decreases, forecast error increases. However, the perfor-
mance of the model does not occur until at least twenty-four observations
are made. Similarly, Lusk and Neves (1984) found a result consistent with
the previous cases. They suggested that the performance of the Box-Jenkins
Tax Turkey Tax Revenues (thousand tl), 2006M01-2018M12

Revenues 70,000,000
Mean 26127815
60,000,000
Median 23373839
Maximum 67930091 50,000,000
Minimum 9591739
40,000,000
Std. Dev. 13173330
Skewness 0.838831 30,000,000
Kurtosis 3.031952
20,000,000
ADF 5.52*
Jarque-Bera 18.30122 10,000,000
Probability 0.000106 0
Observations 156 06 07 08 09 10 11 12 13 14 15 16 17 18
Fig. 1: Turkey Tax Revenues, 2006M01 – 2018M12. Source: General Directorate of

Budget and Fiscal Control and General Directorate of Budget and Fiscal Control. * the
t – statistic value of the Augmented Dickey-Fuller test, indicating nonstationarity of the
series at level 0.05.
model does not associate with the length of data or the frequency in their
private-sector study.
3 Data and Methodology

3.1 Data
In the analysis, the series of monthly tax revenues in the central government
budget realizations, from January 2006 to December 2018 is used. The data is
obtained from the web site of the General Directorate of Budget and Fiscal Control
(BÜMKO). The series is plotted and shown in Fig. 1, also provides some descrip-
tive statistics about the data to help better understanding the structure of the
series. From the plot, it is clear that the series has a trend and seasonal component.
3.1 Methodology
In this section, we provide the fundamentals of the forecasting methods used in
the study, such as Random Walk, SARIMA, and BATS.
3.1.1
Random Walk-RW
The random walk model is widely used in econometric forecasting studies as a
benchmark.
A time series is said to follow a random walk process if the first differences
are random.
For a time seriesYt , a random walk can be written as differences changes from
one period to the next,
Yt = Yt−1 + εt
where Yt−1 is the value in time period t − 1 and εt is a discrete white noise in
time period t .
3.1.2
SARIMA
Introduced by Box and Jenkins (1970), ARIMA (Auto-Regressive Integrated
Moving Average) models are a broad category of univariate models. In
forecasting a time series, these models bring together three components: the
auto-regressive (AR), the moving average (MA) part, and the integrated (I) part.
The AR part indicates that linear models can describe individual values in a vari-
able of interest based on its own lagged values. The MA part assumes that regres-
sion error is a long combination error terms. The integrated part (I) shows the
degree of difference.
The ARMA (AutoRegressive, MovingAverage) model is defined as follows:
Yt = φ1 Yt−1 + φ2 Yt−2 + ... + φp Yt−p + αt − ψ1 αt−1 − ψ2 αt−2 − ... − ψq αt−q
(1)
where the Yt s is the original time series, they φ s are the unknown autoregressive
parameters, they ψ s are the unknown moving average parameters, and they
α s are the white noise error terms.
A modification for nonstationary series, known as ARIMA( p, d, q) is;
d
φp (B)(1 − B) Yt = ψq (B)αt (2)
where B is the backshift operator, thus BYt = Yt−1and B2 Yt = Yt−2and the d
parameter indicates the order of differencing?
For seasonal series, a more general form of the above equation, and known
as the multiplicative seasonal ARIMA –SARIMA ( p, d, q)(P, D, Q)s process is
given by;
d D
φp (B)ΦP (B)(1 − B) (1 − Bs ) Yt = ψq (B)ΘQ (Bs )αt (3)
(1 − Bs )Yt = Yt − Yt−s s Where and is the number of seasons per year, (1 − Bs )
d Dand are the orders of differencing. Also φp ΦP ψq, and ΘQ are the polynomial
functions of orders p, P, q and Q, respectively.
3.1.3
BATS
To model series having only one seasonal pattern, Winters (1960) introduces
the standard Holt-Winters method. However, Taylor(2003) extends the standard
method to a double seasonal Holt-Winters method, following mainly De Livera
et al. (2011);
(1) (2)
Yt = Lt−1 + Bt−1 + St + St + Dt , (1A)
Lt = Lt−1 + Bt−1 + αDt , (1B)
Bt = Bt−1 + βDt , (1C)

(1) (1)
St = St−k1 + λ1 Dt , (1D)
(2) (1)
St = St−k2 + λ2 Dt , (1E)
where Lt represents the level component of the series Yt at time t ,
Bt represents the trend component of the series Yt at time t ,
(i)
St represents the ith seasonal component at time t ,
k1 and k2 are the periods of the seasonal cycles,
Dt is the disturbance (or prediction error),
α, β, λ1 and λ2 are the smoothing parameters,
Proposed by De Livera et al. (2011), the BATS models (Exponential Smoothing
State Space Model with Box-Cox Transformation, ARMA Errors, Trend and
Seasonal Components) are designed in the exponential smoothing framework.
The models are constructed to handle more than one seasonality as well as complex
seasonalities, for example, non-nested, non-integer, and substantial period season-
ality. De Livera et al. (2011) extends the second seasonal Holt-Winters method by
adding a Box-Cox transformation, ARMA errors, and T seasonal patterns:
® Ytw −1
(w) w ,w 0,
=
Yt =
log Yt , w = 0,
(2A)
T

(w) (i)
Yt = Lt−1 + φBt−1 + St−ki + Dt ,
i=1 (2B)
Lt = Lt−1 + φBt−1 + αDt , (2C)

Bt = (1 − φ)B + φBt−1 + βDt , (2D)

(i) (i)
St = St−ki + λi Dt ,
(2E)
p q

Dt = ψi Dt−1 + ζi ηt−i + ηt ,
i=1 i=1 (2F)
where; Lt represents the local level in period t ,
Bt represents the short-run trend in period t ,
B represents the long-run trend in period t ,
φ represents the damping parameter,
(i)
St represents the iseasonal component at time t ,
k1 , k2 , ..., kT are the seasonal periods,
Dt is an ARMA( p, q ) process,
ηt is a Gaussian process with zero mean and constant variance σ 2 ,
α, β, λ1and λ2 are the smoothing parameters,
4 Analysis and Empirical Results

At the beginning of the analysis, we split the data into a training and testing set.
The training set covers the period from 2006:01 to 2014:12, and the testing part
covers the period from 2015:01 to 2018:12. The training data set is used only to
estimate unknown model parameters. Once the model coefficients are estimated,
forecasts for each model are made for the testing part. To evaluate the forecast
accuracy of each model, the testing data is used.
The results of the best ARIMA(0,1,2)(0,1,1)12 model for the tax revenues
series is given in the following Tab. 2. The automatic ARIMA selection option
was used in the forecast package in R, and the details can be found in Hyndman
and Khandahar (2008).
The results of the BATS(0.377, {0,0}, 1, {12}) model for the series is provided
in Tab. 3. The forecast package in R is used to get the results.
Tab. 2: The Results of the ARIMA(0,1,2)(0,1,1)12 Model
Lagged Length Coefficients Standard Error

MA 1 -1.0682 0.0963
MA 2 0.3932 0.0969
SMA -0.4693 0.0908
Tab. 3: The Results of the BATS (0.377, {0,0}, 1, {12}) Model
Parameters Coefficients
Lambda 0.376905
Alpha 0.2432854
Beta 0.01566971
Damping 1
Gamma Values -0.1082185
After fitting three-time series models: random walk, SARIMA, and BATS,
forecasts for the testing period, 2015:01 to 2018:12, are obtained in Tab. 4.
Finally, the accuracy of each model is measured on the testing set. Tab. 5
provides statistical measures of accuracy of each method based on various
forecast evaluation criteria: ME, RMSE, MAE, MPE, MAPE, MASE, and
Theil’s U.
Among the three generated models, the accuracies of the models are tested
based on seven forecast evaluation criteria. From the Tab. 5 results, BATS is pre-
ferred as the best forecasting model for the tax revenues series of Turkey, since
it provides lesser values of seven evaluation criteria: ME, RMSE, MAE, MPE,
MAPE, MASE and Theil’s U.
5 Conclusion and Discussion

This study aims to evaluate the performance of three forecasting tax revenue
models for Turkey throughout 2006:01 to 2018:12. Three different time series
forecasting techniques such as Random Walk, SARIMA (Seasonal Autoregressive
Integrated Moving Average), and BATS (Exponential Smoothing State Space
Model with Box-Cox Transformation, ARMA Errors, Trend and Seasonal
Components) are used in the study. At the beginning of the analysis, the data set
was apportioned into two parts: training and testing. The training period is from
2006:01 to 2014:12, and the testing part is from 2015:01 to 2018:12. Based on
different evaluation criteria, forecast points of 36 months are obtained for each
forecasting model.
The BATS model outperforms the benchmark RW and SARIMA models
based on all evaluation criteria. We find that using the BATS model, rather than
seasonal ARIMA Yılmaz (2019) in forecasting series of monthly tax revenues
of Turkey, provide more accurate forecasts. The empirical findings of this study
help the experts in the preparation process of the government’s budgets. For
further forecasting of other tax types such as Corporate Income Tax, Value
Tab. 4: Point Forecasts of the Methods for the Testing Data (2016M01–2018M12)
Forecast Horizon ACTUAL Forecasting Methods

Random Walk SARIMA BATS
Jan 2016 39685212 34729587 39551109 38989627
Feb 2016 38361380 34729587 38414335 37396828
Mar 2016 30496694 34729587 31463837 30878845
Apr 2016 32446011 34729587 35440194 34802877
May 2016 42368600 34729587 40607697 41212156
Jun 2016 33195345 34729587 34699758 35611013
Jul 2016 36111701 34729587 39678120 38694089
Aug 2016 45425215 34729587 41889999 43894982
Sep 2016 30883849 34729587 34262776 34663442
Oct 2016 36060795 34729587 38123593 38056660
Nov 2016 54060129 34729587 43576351 44574433
Dec 2016 39906810 34729587 38712079 38555889
Jan 2017 48420673 34729587 43405126 43683557
Feb 2017 39994384 34729587 42309290 41972917
Mar 2017 33201256 34729587 35358791 34951174
Apr 2017 37082457 34729587 39335148 39182860
May 2017 50949456 34729587 44502651 46067487
Jun 2017 36422643 34729587 38594712 40052674
Jul 2017 46062984 34729587 43573075 43366295
Aug 2017 51377479 34729587 45784953 48940777
Sep 2017 41837993 34729587 38157730 39032728
Oct 2017 45559415 34729587 42018548 42681794
Nov 2017 58372034 34729587 47471306 49667752
Dec 2017 46766884 34729587 42607034 43217915
Jan 2018 51995609 34729587 47300081 48714507
Feb 2018 52558220 34729587 46204244 46882727
Mar 2018 41249512 34729587 39253745 39342516
Apr 2018 45049034 34729587 43230102 43890960
May 2018 61218542 34729587 48397605 51264277
Jun 2018 42749559 34729587 42489666 44824230
Jul 2018 54360053 34729587 47468029 48374916
Aug 2018 60934207 34729587 49679907 54333154
Sep 2018 49235735 34729587 42052684 43729821
Oct 2018 48504135 34729587 45913502 47642028
Nov 2018 67930091 34729587 51366260 55108914
Dec 2018 45525901 34729587 46501988 48216072
Tab. 5: Measures Accuracy of the Methods for Testing Set (2016M01–2018M12)
Methods ME RMSE MAE MPE MAPE MASE Theil’s U

Random 10159746.6 13580773 10905568 19.50 21.87 3.93 1.27
Walk
SARIMA 2961666.3 5761357 4317229 4.84 8.73 1.56 0.55
BATS 2042864.3 4578144 3583768 3.13 7.43 1.29 0.44
The measures calculated are ME: Mean Error, RMSE: Root Mean Squared Error, MAE: Mean
Absolute Error, MPE: Mean Percentage Error, MAPE: Mean Absolute Percentage Error, MASE:
Mean Absolute Scaled Error, Theil’s U: Theil Inequality Coefficient.
Added Tax, and Total Tax, the BATS model may provide better performance.
Also, the empirical results of the current study will be used to develop combined
forecasting models.
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Burçin Bozdoğanoğlu
Examination of Tax Administration by

Digitalization: Taxation of Sharing Economy;
Country Examples and Evaluation of Turkey
Abstract: The sharing economy or collaborative economy is a new economic model that
uses online platforms to share individuals’ assets, resources, time, and capabilities on a
scale that was not previously possible. There is no clear consensus among international
economic institutions on its definition. Service providers, users, and platforms that bring
them together are the sides of this economy. Airbnb, Uber, Taskrabbit are the platforms
created by this new economic model.The fact that the sharing economy is a functioning
economy through online platforms makes it difficult to evaluate within the framework of
tax and legal regulations, such as the traditional economy. It should adopt a ‘one-size-fits-
all’ approach to determine whether the revenue from the sharing economy is the primary
or an auxiliary source of income, to clarify the status of the parties involved in the sharing
economy transactions, to clarify tax obligations and to ensure efficiency in taxation.In
this study, taxes, which are the subject of sharing economy, which is a new economic
model, and cooperation with platforms and determination of taxpayer awareness, will be
included. Models and practices for increasing awareness of the taxpayers implemented
in collaboration with the platforms of the sharing economy taxation in the EU countries
will be examined further assessment will be made regarding the size of the economy and
taxation in Turkey.
Keywords: Sharing Economy, Taxation, Digital platforms, Tax compliance
JEL Codes: H2, H24, K34
1 Introduction
The sharing economy is technology applications that allow individuals to share
goods and services through information and communication technologies,
internet platforms, and are also known to the user as “peer to peer economy”
or “collaborative economy”. The sharing economy, which has begun to be seen
in the last few years, is an economic model that enables the emergence of new
platforms that allow the production and consumption of goods and services.
Uber, Airbnb, TaskRabbit platforms within the sharing economy provide the
possibility of renting a variety of services on a daily or hourly basis, including
driving, renting, or using personal skills from other users through a personal
computer or mobile application for their payment to consumers.
26 Burçin Bozdoğanoğlu
At this point, these economic models, which are based on individuals making
agreements on the internet to share the assets or skills they possess, signifi-
cantly affect the enterprises operating in traditional commercial structures such
as taxis, limousine services, and hotels. For this reason, the concept of sharing
economy should be made in terms of new legal arrangements, whether the flex-
ibility or changes in existing regulations should be ensured, the new rules or
modifications will be made, how these will be done and propose the agenda for
how can be the proper relationship between technological arrangements and
technological reforms.
First of all, the concept of sharing economy will be tried to be defined pri-
marily in the context of international literature. In the second part of the study,
the parties operating in the sharing economy will be explained, and the coopera-
tion platforms, which are the most important actors in terms of taxation, will be
included on a sectoral level. In the third part of the study, the size of the sharing
economy, the taxes it is the subject, and the taxpayers of these taxes will be men-
tioned. In the fourth chapter, the importance of cooperation with platforms
in the taxation of the sharing economy and the related country practices are
included. In the last part of the study, data and evaluations concerning the tax-
ation of the economic model of the size of the sharing economy in Turkey are
evaluated.
2 The Concept of Sharing Economy

The phenomenon of sharing economy, especially in the media and in the aca-
demic literature, which has shown significant growth since the crisis of 2008,
attracts much attention as an umbrella concept, whose borders are still blurred.
Therefore, it is not easy to provide an integrated and formal definition.
In the literature, it is seen that the concept of ‘sharing economy’ is interpreted
under different labels: like “collaborative consumption”,”cooperation economy”,
“economy on demand “, “peer-to-peer economy”, “zero marginal cost economy”
and “crowd-based capitalism”, terms are considered in connection with the con-
cept of sharing economy (Selloni, 2017: 15).
It should be noted that there is no consensus on the definition of the sharing
economy. This uncertainty about meaning is one of the reasons for the problems
of sharing economy. It is seen that the term “collaborative economy” and “sharing
economy” are used interchangeably primarily in European Union based sources.
In its decisions of September 2015 and October 2015, the European Parliament
announced the sharing economy as follows: “the sharing economy, or collabo-
rative consumption, is a new socio-economic model that has taken off thanks to
Examination of Tax Administration by Digitalization 27
the technological revolution, with the internet connecting people through online
platforms on which transactions involving goods and services can be conducted
securely and transparently” (EPRS, 2016b:3).
The term “collaborative economy” refers to “business models where activities
are facilitated by collaborative platforms that create an open marketplace for the
temporary usage of goods or services often provided by private individuals” (EC,
2016:5).
3 Parties of Sharing Economy

According to the European Commission, the actors involved in the sharing
economy can be classified into three categories. (EPRS, 2016a:6):
– Service providers sharing assets, resources, time, and skills: these may be
private individuals serving at regular periods (peers) or professional service
providers
– Users of services offered by service providers,
– collaborative economy platforms that connect providers with users and
facilitate transactions between them, also ensuring the quality of these
transactions, e.g., through after-sales services (handling complaints), insur-
ance services, etc.
4 Evaluation of the Value Created by the

Sharing Economy and Its Taxation
4.1 Services Offered in the Sharing Economy
and Estimated Economic Value
The rapid change in technology, the economic crises experienced, the change
in consumer models in the business world, changing the consumption models,
and acting with environmental concerns, led many people to search for different
sources of finance and shopping and changing the way they made holidays. From
private renters, office space, renters of vehicles and other goods, to trade serv-
ices, there are plenty of new platforms to suit the demand and supply of goods
and services. The five sectors with the most activity in the sharing economy and
the platforms in these sectors (with high economic value) are listed as follows.
(EPRS, 2016b:4):
– transportation (Uber, BlaBlaCar),
– retail (Etsy, eBay),
– accommodation (Airbnb, ShareDesk),
– service and labour (TaskRabbit, Shareyourmeal, Elance),

– finance (Kickstarter, Kiva, Indiegogo),
The annual growth rate of the sharing economy exceeds 25% (EPRS, 2016b:4).
In 2016, the size of the sharing economy was 26.5 billion Euros. While service
providers earn € 22.7 billion, it is stated that platforms generate revenue of € 3.8
billion due to intermediation. The largest share of revenues was in the financial
sector with 9.6 billion euros, followed by the accommodation sector with 7.3 bil-
lion euros, the online service sector with 5.6 billion euros, and the transportation
sector with 4 billion euros (EC, 2018:9).
4.2 Determination of Taxes and Taxpayers on the Sharing Economy

Since several transactions are conducted in tripartite relations through a plat-
form, each taxpayer and each tax case must be considered separately. This sit-
uation will result in an obligation related to income tax and VAT if the revenue
obtained exceeds a certain threshold.
The challenge is to collect data on individuals using the platforms and raise
their awareness of relevant tax obligations. However, since transactions are usu-
ally paid electronically, it may be possible to use the data to contribute to better
identification of taxpayers and revenue tracking, especially if platforms report
data they hold in transactions (EPRS, 2018:17).
Platforms can act as intermediaries and undertake legal responsibility for the
collection of income in this activity. They can also contribute to this process while
offering the service offered through the platform. Therefore, as an employer, the
said tax liability can be given to the platforms. This may lead to concerns sim-
ilar to the concerns of B2C platforms in the sharing economy, their size, and tax
implications caused by other multinational companies. (EPRS, 2018:18).
As can be seen here, taxes on the sharing economy include personal income
tax, corporate tax, VAT, and other taxes.
In this context, personal income tax is to be considered as a tax that must be
taken into consideration for the services provided by service providers. If the
supplier conducts its activities within the framework of its capacity, the income
earned by the individual supplier is included in the income tax base. (EPRS,
2018:19). When the supplier operates within a business, it no longer falls under
the subject of income tax. Both the service providers and online platforms in the
sharing economy are, in principle, subject to indirect taxes starting with VAT
obligations.
In the EU, the VAT framework is being reviewed to better understand the tax-
ation of digital economic models, including the sharing economy. The EU VAT
regime for online sales has recently been updated, and the one-stop-shop will be
expanded until December 31, 2020 (EPRS, 2018:19).
5 The Role of Cooperation with Platforms in the Taxation

of Sharing Economy and Country Applications
5.1 Role of Cooperation with Platforms
The sharing economy is considered to be at risk of expanding the informal
economy, as existing and new activities are not reported. International studies
on the fight against the informal economy, especially the OECD, address this
(OECD, 2017:48).
The fact that all transactions on a platform where data is recorded, leaving
digital traces allows the platforms to report these operations objectively. This
provides the possibility to benefit from technology to improve tax management
and frees sharing actors from monitoring a large number of small-scale P2P
participants, especially small providers and self-employed. (EPRS, 2018:22). This
also prevents a potential tax mismatch on behalf of small businesses and avoids
the administrative burden of taxation (Aqib&Shah, 2017:26). Service provider’s
tax compliance can be improved by raising awareness (EPRS, 2018:20).
For this reason, the first step regarding tax obligations is to increase awareness
(P2P) for individuals acting as service providers, especially on sharing economy
platforms. P2P providers serving as failures are not naturally experienced in
required tax record-keeping and filing obligations (Rahim et al., 2017:453).
If the platform collects tax and if record keeping is supported by information
technologies reporting from the sharing-based economic platform, some of
the administrative burdens will be alleviated. At this point, the most funda-
mental requirement is to determine the threshold at which the service provider
determines the taxpayer.
Collaboration with sharing economy platforms is of critical importance
to validating the revenue reported by P2P vendors because platforms keep
records of information about transactions that they facilitate or mediate. In
other words, there is the possibility to use the large data generated by the
platforms themselves to ‘pre-filled’ most of the tax declarations of taxpayers
involved in the collaborative economy. This is particularly important in P2P
transactions to be declared by service providers. A system that allows tax
administrations to provide direct access to information held by platforms,
or that the platforms allow tax deductions from P2P users through with-
holding and then transfer them to the tax administration will reduce tax loss.
Collaboration between sharing economy platforms and tax administration
can begin by sharing information about transactions carried out by service

providers and may develop to automatically report relevant revenue informa-
tion to tax authorities by the platform. Indeed, some country practices show
that this is possible.
5.2 Country Applications
In the EU, some countries have taken various measures to promote tax compli-
ance in the sharing economy.
Ireland created a “sharing economy tax center” in August 2016. The website
of this center provides information and resources on the taxation of the sharing
economy. Thus, individuals who earn income through platforms can fulfill their
tax obligations (EPRS, 2018: 21).
In France, the tax return form, known as ‘automatic reporting of revenues for
online platforms’, and a number of information elements for each user respon-
sible for taxation, are attached directly to the tax statement (total gross revenue
generated by the user during the calendar year, online e-mail address, personal
or professional status, or total gross income paid over the platform and the cat-
egory in which gross revenue will be deducted for activities on the online plat-
form). In this tax declaration, a copy of the information per user is sent to the
relevant user online (OECD, 2018:98).
A system established in Estonia, in September 2015 and since February 2016,
allows drivers to register with a system where the transaction between service
providers and the user is recorded by the platform. The platform then sends the
information to the tax office about the income generated by the drivers involved
in the ride-sharing system, which are automatically added to the tax returns
based on the advanced online tax system (OECD, 2018:99).
In the Netherlands, an agreement was signed between the Amsterdam city
administration and Airbnb in 2014, requiring the platform to collect the city’s
tourism tax on behalf of service providers (EPRS, 2016a: 161). Airbnb has been
the pioneer of this model by transferring the tourist taxes that constitute 5% of
the accommodation fee and transferring them to the state, in this model, where
the homeowners also pay tourist tax (determined as %5 of the accommodation
price) as well as the tax they will pay for the short-term lease.
In Italy, revenues up to € 1000, which are included in the sharing economy,
will be taxed at a rate of 10%, and income above € 1000 will be subject to the rate
applicable to the professional income of the service provider. Platforms collect
the taxes collected through deductions and transfer them to the state (OECD,
2018:97).
6 The Value Created by the Sharing Economy in

Turkey and Its Evaluation in Terms of Taxation
6.1 The Size of Sharing Economy in Turkey
There is no research in the European Commission or the OECD level about the
size of the sharing economy in Turkey. This new economic model, most cur-
rent data about Turkey, contained in the report by PWC carried out the market
research institute Faktenkontor GmbH between June and August 2017 and
based on a survey which represents on over 4500 consumers from six countries
including Turkey and Austria, Belgium, Germany, the Netherlands, Switzerland
(PWC, 2017:5).
The report explores the sharing economy in seven sub-headings such as; Media
and Entertainment, Hotel and Hospitality, Automotive and Transportation,
Retail and Consumer Goods, Services, Finance, and Industry (PWC, 2017:5).
The sharing economy throughout the year among the countries surveyed,
with expenditure amounting to 1,031 euros per person to use Turkey, realized
the highest average spending (PWC, 2017:6).
The estimated size of the market share in Turkey’s economy is 38.3 billion
euros. The high market size can be explained by the presence of a well-developed
sharing economy finance sector and in general high acceptance rate in Turkey.
The size of this sector is approximately 11.2 billion Euros, followed by the Retail
and Consumer Goods and Hotels and Accommodation sectors, with a turnover
of 6.5 billion Euros and 6.3 billion Euros. Total revenues for Automotive and
Transport are 4.6 billion Euros, 4.2 billion Euros for Services, 3.3 billion Euros
for Machinery, and 2.2 billion Euros for Media and Entertainment. The esti-
mated market size of the sharing economy in Turkey is 71.5 billion euros for the
coming period (PWC, 2017:11).
6.2 The Taxes Which Are Sharing Economy Subject to in Turkey

In Turkey, service providers and platforms as a player of the sharing economy
actions are evaluated in the framework of income tax and value added tax and
corporation tax. Income Tax Law Article 37 deals with the income generated
from commercial activities without the definition of commercial activity and
is considered to be commercial gain. Given that business activities are carried
out within a commercial organization based on continuity, based on the com-
bined use of labor and capital, and activities in the sharing economy are eval-
uated within this framework, it is clear that if the event includes a “continuity”
component for the service providers, it will be considered as commercial gain.
At this point, the “continuity” element enables the activity to become profitable.
However, there is no specific regulation as to which activity should be considered
for how long. This situation makes it difficult to determine what gain component
will be affected by the activity. If the activity does not include continuity, the
profit in question will be considered as failure, and the exemption from tax will
be exempted for 2019 ₺33.000.
Concerning the income tax law, real estate capital income; Article 70 provides
that the income obtained from the leasing of the goods and rights shall be con-
sidered as the real estate capital income. When the provisions of the income tax
related to income from the immovable property are evaluated in the context of
sharing economy, “for the benefit of the economic assets left for use by others”,
the income tax law under Article 70 can be accepted as income from immovable
property.
For example, it is the subject of the income tax if an individual rent his house
in a summer location at specific periods of the year or if a person is living in the
metropolitan area rents for his own housing needs or shares a dwelling that is
owned and owned by a tourist.
If the activities are evaluated within the scope of commercial earnings, VAT
will be born as delivery/service will be deemed realized. However, delivery and
services shall not be subject to VAT in case of incidental commercial activity.
The real estate capital income is subject to VAT, provided that these goods are
included in an economic enterprise. Therefore, VAT will not be included in the
rental transactions for natural persons. However, this situation is specific to real
estate. In other words, VAT will be subject to the rental of goods other than real
estate.
The parties must be members of the relevant platform to access the share.
Platforms receive commissions for this intermediation service. Although the
legal nature of the activity is commercial, it is realized in an electronic envi-
ronment, and users can use the platforms by using mobile applications. In this
context, since the intermediation is a commercial activity, income/corporate tax
liability will be established according to the platform is a real/legal person. In ad-
dition, intermediation services are subject to VAT within the scope of the com-
mercial activity.
On value-added tax against the state of the platform that mediates the sharing
economy in Turkey, Law No. 7061, an arrangement was made within the frame-
work of law VAT added to the stipulation of Article 9. The provision in ques-
tion as follows; “In so far residence in Turkey, the workplace, the legal center, and
business center value-added tax on real people who are not payers of value-added
tax by not regarding the services offered electronically paid shall be declared by
those who offer this service. Ministry of Finance is authorized to determine the
scope and principles and procedures of the services provided by electronically”.
Subsequently, 31.08.2018 date and 30318 numbered Official Gazette within
17 Serial No. VAT Application, determined that; the residence, the workplace,
the legal center, and business center are not found in Turkey at a price to the real
people who are not VAT payers electronically, It is stated that service providers
will declare the VAT related to these services by establishing “Special VAT
Liability for Electronic Service Providers “.
Provisions added to Article 9 of the Act and regulations made by
Communique Serial No. 17 along, taking place within the legal and business
center of Turkey’s borders and encompasses organizations and institutions in
the performance of services through electronic platforms. According to the
communiqué mentioned above, service providers declare the Value Added Tax
related to these transactions electronically with the VAT declaration no. 3. At
this point, if the service provided by the said platforms is provided only on
the internet, and the transactions are realized in a virtual environment without
coming face to face with the beneficiaries as buyers or sellers on the internet,
there is no obligation to use payment recording devices for the services pro-
vided and therefore each customer invoices must be issued within a maximum
of seven days from the date on which the individual facility or transaction takes
place (Özdemir, 2019). However, before this declaration, the form prepared
by the tax administration shall be filled out electronically, and accordingly, a
special VAT liability shall be provided to the Electronic Service Providers on
behalf of the service provider in the Big Taxpayers Tax Office (Kara, 2018).
Considering the regulations made in terms of VAT with both the law and the
communiqué is understood that legislation applications may face problems in
the face of the digital economy.
Namely, these institutions shall issue a VAT Declaration No. 3 within the
framework of the said regulations; in the event, they regulate commission
invoices for the transactions they mediate. First of all, invoice arrangements will
not be possible for service providers that do not have VAT liability. In addition,
considering the fact that the platforms which are in the limited taxpayer category
and which mediate the services have calculated the commission price on the
basis of the transactions they mediate, the amount in the commission invoice for
the intermediary will be at the discretion of the platform since there is no invoice
in accordance with the legislation.
Therefore, although the target capture system to digitalize said, this economic
model cooperation arising from the taxable value through processing platform
that can point to is of critical importance for Turkey because the provision and
the applicability of the VAT declaration and the provisions added in Article 9 of
the VAT Law depend on this cooperation to a large extent.
At this point, it is thought that it is possible to develop a system suitable for
our country by taking the model of tax compliance and cooperation with the
platforms applied in EU countries and to understand the tax base by using the
knowledge of the platforms.
7 Conclusion
The sharing economy, which is a relatively new phenomenon, has recently
become widespread in some areas of activity, such as ride-sharing or short-term
rentals. Although it is now a well-known term - from sharing to the peer-to-peer
economy, it refers to cheap access to information on an enormous scale through
a digital platform that meets supply and demands beyond the central feature to
which potential consumers and providers are connected. The platforms that play
an essential role in the development of this economy make it possible for non-
professional service providers to offer goods and services in a wide variety of
areas, to generate value and to develop more development potential.
The sharing economy covering these situations is a rapidly developing phe-
nomenon. However, the names used to describe this phenomenon, in partic-
ular, blur the lines with the use of the new three concepts: traditional consumer,
business, and ‘user-provider-platforms’ that do not match the agent concepts.
Moreover, the regulatory frameworks on which the legal provisions to be used for
their implementation are based do not contain clarity. Three-sided transactions
cover a wide range of applications, from non-monetary sharing to real person
businesses, and in particular from business to consumer (B2C) business models.
In this context, this new digital economic model raises the need to make some
market arrangements, including taxation.
In order to determine the tax requirements that arise in this new digital eco-
nomic model, an approach that is appropriate to each event and a tax-based plan
should be adopted, not a strategy that fits all, in order to clarify the situation of
the parties involved in the sharing economy transactions and to ensure efficiency
in taxation.
Based on the existing examples of national and local regulatory approaches
adopted so far, it may be possible to create alternative and practical solutions that
are specific to some areas in which the sharing economy is developed and which
address the defined side effects. Collaborating with platforms to ensure tax com-
pliance of participants is one of these alternatives. Platforms may play a role in
cooperation with tax authorities to exchange information on tax obligations.
They can help with the tax statement process and may even take on the part of
collecting some taxes (such as local taxes on tourism) by simplifying the collec-
tion of tax authorities.
It is the first step to clarify the definitions to address the tax challenges of the
sharing economy, to comprehend the rapidly developing, multifaceted reality,
and to understand exactly what the sharing economy means. Arrangements
made for the electronic service providers for Turkey in the understanding of the
economic value created by these new digital models include some difficulties in
practice. It may be possible to overcome these difficulties in cooperation with
platforms by taking into account the implementation examples in EU countries.
Acknowledgements
This study was supported by Scientific Research Projects Coordination Unit of
Bandırma Onyedi Eylül University. Project Number: BAP-19-1009-019.
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Ayşe Yiğit Şakar
Tax Incentives Provided to Green Bonds

in Financing of Energy Efficiency and Its
Importance for Turkey
Abstract: Energy efficiency is of vital importance for Turkey as one of the elements of
sustainable development. Turkey is faced with difficulties in providing sustainable devel-
opment due to its dependence on imported energy. Besides, the impacts of climate change
have a negative effect on Turkey’s environment and economy. Turkey is therefore involved
in international efforts to combat global climate change and reduce greenhouse gas emis-
sions. As for many countries, financing of energy efficiency is also a significant issue for
Turkey. As an alternative to financing energy efficiency, green bonds are developing rapidly
all over the world. Green bonds are financial instruments that provide opportunities for
investors to participate in the financing of “green” projects that help reduce the negative
impacts of climate change and adapt to the effects of climate change, reduce CO2 emis-
sions, prevent environmental pollution, and improve social welfare. These structures have
an essential impact on the realization of sustainable development. Turkey’s first and only
green bond was issued by the Industrial Development Bank of Turkey in 2016 and attracted
investors’ attention. Countries such as the US, China, and Chile apply tax incentives for
green bonds to attract investors. However, the level of awareness of green bonds in Turkey
is low, and there are no tax incentives yet. Necessary measures should be taken to facilitate
the financing of energy efficiency in Turkey, and tax incentives should be implemented for
green bonds. In this paper, the development and types of green bonds in the world and
Turkey, tax incentives provided for green bonds in the financing of energy efficiency in the
world and Turkey, and recommendations for Turkey were discussed.
Keywords: Green bonds, green bond principles, tax incentives, energy efficiency, sustain-
able energy, sustainable development
JEL Codes: H23, K34, P18, P48, Q01, Q28, Q42, Q48, Q54, Q56
1 Introduction
Natural disasters stemmed from climate change in 2017 are estimated to cause
US$320 billion in losses (Bahuet, October 8, 2018). Turkey is one of the most
affected countries by global climate change, especially by desertification and
deterioration of water resources. Therefore, efforts are made at the national
and international levels to ensure a sustainable environment and development.
Combating climate change is not solely an environmental problem. Within the
38 Ayşe Yiğit Şakar
scope of the combat, the global transition to the low carbon economy will deter-
mine the countries’ sustainable development, energy, health, agriculture and
food security, water resources utilization policies and bring about a social and
economic transformation.
Sustainable development can only be successful if environmental, economic,
and social policies are implemented in a coherent and balanced manner. Energy
efficiency is one of the elements of sustainable development. Environmental,
economic, political, and social concerns increase the importance of energy effi-
ciency policies.
Recently, green bonds have attracted the attention of investors as a sustain-
able financing instrument in the financing of energy efficiency investments.
Stock markets such as Italy, Oslo, London, Mexico, Luxembourg, Shanghai, and
Shenzhen have established a specific green bond market segment to strengthen
the green bond market (Reboredo, 2018: 39).
Incomes obtained from green bonds are provided with tax incentives in the
US, China, India, Brazil, and Chile. However, there are no tax incentives in
Turkey. In this paper, tax incentives that can be provided to green bonds in the
financing of energy efficiency in Turkey and its importance will be discussed.
2 Methods of Financing Energy Efficiency in Turkey

Financing energy efficiency in Turkey is of considerable importance in terms of its
benefits and results. In Turkey, which is dependent on foreign energy and whose
economy is adversely affected by global climate change, financing energy effi-
ciency projects provide significant and environmental benefits. Energy efficiency
projects contribute to the increase of efficiency in the use of energy resources and
the reduction of greenhouse gas emissions. They support the reduction of external
dependency and current account deficit by ensuring supply security in energy.
Energy efficiency investments in Turkey are not at the desired level due to dif-
ficulties arising from access to finance, and for Turkey to reach its 2023 energy
intensity goal, it is necessary to remove the obstacles to the financing of energy
efficiency (Ata, 2013:99).
Necessary supports in the financing of energy efficiency in Turkey can be
listed as such (http://www.yegm.gov.tr/verimlilik/destekler.aspx.):
• Support for Efficiency Enhancing Projects in industrial enterprises.
• Benefiting from 5th Region incentives for Energy Efficiency Investment
Projects.
• Support for reducing energy intensity by making Voluntary Agreements for
industrial enterprises.
Tax Incentives Provided to Green Bonds 39
• Support provided for energy efficiency projects by the industrial enterprises

of the Technology Development Foundation of Turkey.
• Support provided by KOSGEB to small and medium enterprises for surveys
and energy efficiency consultancy services taken from energy efficiency con-
sultancy companies.
• Loans provided by international development agencies and financial
institutions and by national banks and financial institutions under favorable
conditions.
Efficiency Enhancing Project (EEP) is a project designed to implement the neces-
sary measures to eliminate energy wastes, losses, and inefficiencies in industrial
enterprises. (http://www.yegm.gov.tr/verimlilik/d_VAP.aspx). EEP is submitted
to the General Directorate of Energy Affairs by the industrial enterprises and
approved by the Ministry of Energy and Natural Resources. These projects are
supported by up to thirty percent of the application project costs. Application
project costs cannot exceed five million Turkish Liras (Energy Efficiency Law
No: 5627, art. 8/1 -a-1).
Voluntary agreements for industrial enterprises include support for reducing
energy densities. The Voluntary Agreement is concluded between the indus-
trial enterprise and the General Directorate of Energy Affairs. This agreement
takes an enterprise’s energy intensity for the past five years as a reference. The
industrial enterprise commits to reduce the energy density by an average of
10% within three years of the agreement. 30% of the energy expenditure for the
year in which the deal is made of the industrial enterprise fulfilling its commit-
ment is covered. This amount cannot exceed one million Turkish Liras (Energy
Efficiency Law No: 5627, art. 8/1 -b-1).
In accordance with the Decision on State Aids in Investments No.2012/35,
Energy Efficiency Investment Projects are evaluated within the scope of 5th
Region Incentives and provided with incentives such as tax, insurance premium
support, and interest support.
Support is provided to Industrial organizations’ future Energy Efficiency
Projects with three new support programs launched in August 2006 by the
Technology Development Foundation of Turkey (http://www.yegm.gov.tr/
verimlilik/d_kobi_en_ver_destek.aspx).
KOSGEB supports Small and Medium Enterprises with their studies, consul-
tancy, and training services within the scope of energy efficiency. It includes the
support given to energy efficiency studies and consultancy services from Energy
Efficiency Consultancy Companies authorized under the Energy Efficiency Law
No. 5627. (http://www.yegm.gov.tr/verimlilik/d_kobi_en_ver_destek.aspx.)
In addition, loans are provided by international development agencies and

financial institutions and by national banks and financial institutions under
favorable conditions. Furthermore, green bonds began to be used more and
more in the financing of energy efficiency in Turkey and worldwide.
3 Green Bonds in Financing Energy Efficiency

3.1 The Concept of Green Bond and Its Development
A green bond is a debt security that is issued to raise capital specifically to sup-
port climate-related or environmental projects (IBRD, 2015:23; Berensmann
vd., 2016:2; Kandır &Yakar, 2017a:161; Tang & Zhang, 2018: 4). This financial
instrument is attractive as an alternative investment tool for investors focusing
on integrating Environmental-Social-Governance issues into investment pro-
cesses in international financial markets (ESCARUS, 2018:42). Green bonds are
financial instruments that provide opportunities for investors to participate in
the financing of “green” projects that help reduce the negative impacts of cli-
mate change and adapt to the effects of climate change (Reichelt, 2010: 2; Tang &
Zhang, 2018: 4; Kandır &Yakar, 2017a:161).
Green Bonds can be defined as “any bond instrument where the proceeds
will be exclusively applied to finance or re-finance, in part or in full, new and/
or existing eligible Green Projects and which are aligned with the four core
components of the GBP” (International Capital Market Association, 2018).
A vital feature of these bonds valued by many investors is the due diligence
process that the issuer of green bonds conducts to identify and monitor ‘green’
projects (Reichelt, 2010: 2). The difference of green bonds from other bonds is
that the funds obtained from the bond issuance must be used in green projects
(Kandır &Yakar, 2017 b: 92).
As can be seen in Tab. 1, renewable energy and energy efficiency investments
have the largest share. In 2017, the share of renewable energy decreased by 3.7%,
while the share of energy efficiency increased by 2.4% compared to 2016.
The private sector, international financial institutions, supranational
institutions as well as national level states, regional governments and municipal-
ities can also issue green bonds (Flaherty vd., 2017: 471–472). As seen from Tab.
2, while financial institutions had the largest share with 36.45% of green bond
issuers in 2016, its share in 2017 decreased to 16.59%. The most drastic increase
in green bond issuance in 2017 occurred in agency and sovereign bonds.
The global green bond market started in 2007 with an issue from the European
Investment Bank. In 2008, the World Bank issued the first fixed-rate bond car-
rying a green label (Chiang, 2017:8).
Tab. 1: Comparison of the Use of Proceeds for 2016 and 2017. Reference: Green
Bonds: Review of 2017, s. 11. https://www.environmentalfinance.com/assets/files/
Green%20Bonds%20Review%20of%202017.pdf (16.02.2019).
2016 2017
Renewable Energy 29.1% 25.4%
Energy Efficiency 19.4% 21.8%
Clean Transportation 14.02% 14.06%
Sustainable Water Management 11.2% 9.95%
Pollution Prevention and Control 11.3% 9.95%
Terrestrial and Aquatic Biodiversity Conservation 2.1% 7.8%
Eco-Efficient Products, Production Technologies, and Processes 1.2% 5.6%
Sustainable Management of Living Natural Resources 2.1% 5.24%
Climate Change Adaptation 5.6% 0.2%
Tab. 2: Comparison of Issuer Types (2016–2017). Reference: Green Bonds: Review of

2017, s. 11. https://www.environmentalfinance.com/assets/files/Green%20Bonds%20
Review%20of%202017.pdf (16.02.2019).
2016 2017
Agency 10.% 31.27%
Corporate 31.5% 29.73%
Financial Institution 36.45% 16.59%
Municipal 10.5% 8.9%
Sovereign 0.85% 7.07%
Supranational 10.5% 6.41%
Poland was the first national government to issue a green bond valued
US$800 million in December 2016. It was followed in January 2017 by France.
Argentina, Chile, Fiji, Lithuania, Malaysia, Nigeria, Singapore, Switzerland, and
the UAE joined the fray in 2017 (Green Bonds: Review of 2017, s. 3). In March
2018, the Government of Indonesia issued the first Green Islamic Bond (green
sovereign Sukuk). The five-year issuance reached US$1.25 billion (Bahuet,
October 8, 2018).
The US, China, and France are the leading countries in the green bond market.
China’s first green bonds were issued in 2015 (Boulle et al., 2017: 4). Whereas
in the US and China, issuers were mainly agencies and financial institutions in
2017, French issuers were more diverse. The French sovereign bond accounts
for 53% of the value of issuance from the country, but corporates account for
32%, agencies 10%, and financial institutions and municipals the remaining 5%
(Green Bonds: Review of 2017, s. 3).
The first green municipality bond was issued in June 2013 in Massachusetts.
In October 2013, Gothenburg issued its green city bond. There are different US
states, Ontario state (Canada), Johannesburg city (South Africa), and La Rioja
state (Argentina) among the large scale green bond issuers. The green bond issu-
ance of regional governments is also ongoing (ESCARUS, 2018: 39).
On May, 18th 2016, the Industrial Development Bank of Turkey was the first
to issue a 5-year term $ 300 million green/sustainable bond. The bond issuance
received approximately $ 4 billion in demand from 317 institutional investors in
international markets. 44% of the need for the bond issue came from England,
39% from Continental Europe, 9% from US off-shore funds, 8% from Asia,
and the Middle East (TSKB, 2017:13). Industrial Development Bank of Turkey
financed 75 projects in green bonds, automotive, iron and steel, cement, chem-
ical and plastics, and other sectors. These projects are expected to contribute 4.6
billion energy savings (kcal/year) and reduce 3.6 million CO₂ emissions (TSKB,
2017: 7).
3.2 The Green Bond Principles

In 2014, the Green Bond Principles, which are in the form of advice and vol-
untary guidance, have been formed (Ceres, 2014:1). Green Bond Principles
are designed for the development of the green bond market. The issuers are
guided and supported at the key points when issuing green bonds. It proposes
the transparency, sharing, and integrity of the information to be reported to the
stakeholders by the issuers. (International Capital Market Association, 2018).
Green Bond helps investors by ensuring the availability of information necessary
to assess the environmental impact of their investments and helps the insurance
companies by moving the market towards standard explanations to facilitate
transactions (Ceres, 2014:1).
The GBP has four core components:
“1. Use of Proceeds
2. Process for Project Evaluation and Selection
3. Management of Proceeds
4. Reporting”
Use of Proceeds: The primary requirement for incomes; green bond income
is used for Green Projects. They should be appropriately identified in the legal
documents for safety. The main green projects, but not limited to the ones below,
areas such (Ceres, 2014: 2; International Capital Market Association, 2018):
• Renewable energy (including generation, transmission, equipment, and

products);
• “Energy efficiency (such as new and renovated buildings, energy storage, central
heating, smart grids, devices, and products);
• Prevention of pollution and its control (including reduction of air emissions,
greenhouse gas control, soil improvement, waste prevention, waste reduction,
waste recycling and energy/emission-efficient waste-to-energy conversion);
• Environmentally sustainable management of living natural resources and
land use (including environmentally sustainable agriculture, environmentally
sustainable livestock, climatic intelligent farm inputs such as biological plant
protection or drip irrigation, environmentally sustainable fishing, and aquacul-
ture, environmentally sustainable forestry, conservation or restoration of natural
landscapes);
• Protection of terrestrial and aquatic biodiversity (including protection of coastal,
marine and watershed environments);
• Clean transport (such as electric, hybrid, public, railway, non-motorized, mul-
timodal transport, infrastructure for clean energy vehicles and reduction of
harmful emissions);
• Sustainable water and wastewater management (including fresh and/or
drinking water, wastewater treatment, sustainable urban drainage systems
and sustainable infrastructure for river reclamation and other forms of flood
reduction);
• Adaptation to climate change (including information support systems such as
climate monitoring and early warning systems);
• Products, production technologies, and processes adapted to the eco-efficient
and/or cyclic economy (such as eco-label or environmental certification,
resource-efficient packaging and distribution, and the development and promo-
tion of sustainable products in an environmental context);
• Green buildings are meeting regional, national, or internationally accepted
standards or requirements of certificates.”
Process for Project Evaluation and Selection: The Green Bond issuer must
clearly inform investors of the relevant eligibility criteria, including e nvironmental
sustainability objectives, the issuer’s method of determining which projects fit
into the Green Projects category, exclusion criteria or other processes applied to
identify and manage potential environmental and social risks associated with the
projects (International Capital Market Association, 2018).
Management of Proceeds: Net revenues of Green Bonds must be moved to
a sub-portfolio or otherwise monitored by the issuer and proven by a formal
internal transaction that will be linked to the lender and investment transactions
for the donor’s projects. As long as Green Bonds are extraordinary, the balance
of tracked revenues should be periodically reduced by amounts that match the
investments made during that period (Ceres, 2014:4).
In order to ensure transparency, it is recommended that the internal mon-
itoring method and resource allocation and management of revenues from
Green Bond revenues should be supported by an auditor or another third party
(International Capital Market Association, 2018).
Reporting: The issuers should keep up-to-date information on the use of the
fund and update it annually or in the event of significant developments until
the allocation is completed. The annual report must include a list of projects
to which Green Bond revenues are allocated, as well as a brief description and
distribution of projects and the estimated impact of the projects (International
Capital Market Association, 2018).
3.3 Types of Green Bonds

There are four types of Green Bonds (International Capital Market
Association, 2018).
• Standard Green Use of Proceeds Bond: It is the obligation of a standard
recourse debt to the issuer aligned with the green bond principles.
• Green Revenue Bond: It is the obligation of a conventional non-recourse
debt to the issuer aligned with the green bond principles in which the credit
risk in the bond depends on pledged cash flows of inflows, wages, taxes,
etc. and where their income is used for the relevant or unrelated green
project(s).
• Green Project Bond: It is the project bond that complies with the princi-
ples of green bonds for one or more green projects where the investor will
be directly exposed to the risk of project/projects with or without potential
recourse to the issuer.
• Green Securitised Bond: It is the bond secured by one or more specific green
projects, such as covered bonds, ABS, MBS, and other structures, and aligned
with the GBP.
Green bonds are also classified as labeled and unlabeled green bonds. While
labeled green bonds can be marketed as green bonds, unlabeled green bonds
cannot be traded as green bonds in the capital market, although they are used
to finance environmentally friendly projects as labeled bonds (Kandır & Yakar,
2017b: 94).
3.4 Tax Incentives Provided for Green Bonds

in the World and Turkey
Tax incentives are one of the public finance instruments used for the growth
of the green bond market in both developed and developing economies. Tax
incentives applicable to green bonds may differ between bond issuers and bond
investors (Climate Bonds Initiative & IISD-International Institute for Sustainable
Development, 2016:10).
The following tax incentives may be provided to issuers: (Asian Development
Bank, 2018: 77):
• A credit, in addition to deduction of bond interest and issuance expenses
from income, which can be used to lower the issuer’s other taxes;
• Reduction or exemption from VAT on social taxes for green bond projects;
• Tax credits with refund policy for some or all green bond issuance; and
• Subsidies or refundable tax credits provided for interest costs.
Investors may find green bonds tempting due to their better post-tax returns
compared to other bonds or investments. The benefits of tax incentives for
investors can be listed as tax credits, deductions from taxable income, appro-
priate tax rates, or tax exemptions. The following tax incentives may be provided
to investors (Asian Development Bank, 2018: 80; Climate Bonds Initiative &
IISD-International Institute for Sustainable Development, 2016:10):
• Investment loans for green bonds that can be used to reduce income from eli-
gible bonds or tax in a broader income.
• Deduction of income from eligible bonds
• Reduced tax rates on income from eligible bonds,
• Exemption from stamp duty and capital gains tax. The incentive can be a goal,
especially at green bonds, or it can be a part of other programs to encourage
the financing of infrastructure or bond markets.
Tax credits or subsidies may promote the issuance. However, incentives can have
a striking effect by encouraging the use of some form of funding, for instance,
project bonds, not to contribute to the financing of a green project, but only to
benefit from the tax incentive. And that will shift the funding from unionized
bank loans to green bonds (Asian Development Bank, 2018: 77).
3.4.1
European Union
The European Commission states that urgent action is needed to adapt public
policies to climate change due to climate change and disasters caused by resource
depletion. The Commission also adds that the sustainable financial system will
play a key role in ensuring the green economy, sustainable development, finan-
cial stability, and transparency in the economy. For these purposes, at the end
of 2016, the Commission appointed a Senior Expert Group on sustainable
financing. On January 31, 2018, the expert group published its final report. “The
Report argues that sustainable finance is about two urgent imperatives:
(1) improving the contribution of finance to sustainable and inclusive growth by
funding society’s long-term needs;
(2) strengthening financial stability by incorporating environmental, social and gover-
nance (ESG) factors into investment decision-making.
The Report proposes eight key recommendations, several cross-cutting

recommendations, and actions targeted at specific sectors of the financial
system”. Based on these recommendations, the European Commission published
an Action Plan on Financing Sustainable Growth in March 2018 (European
Commission, 2018). In Action 2 of the Action Plan, the European Commission
commits to creating standards and labels for green financial products. This ac-
tion will preserve the integrity and trust of sustainable financial markets and
make it easier for investors looking for these products. Thus, access to green
bonds will be more comfortable (European Commission, 2018).
In June 2018, the European Commission set up a Technical Expert Group
(TEG) on sustainable financing to assist in four critical areas of the Action Plan.
In June 2019, TEG published ten recommendations in its report. One of these
recommendations is to encourage green bond investors (EU Technical Expert
Group on Sustainable Finance, 2019: 11): “Recommendation 4: Investors, in
particular, institutional investors are encouraged to use the requirements of the
EU-GBS when designing their green fixed-income investment strategies and to
communicate their preference and expectations actively to green bond issuers as
well as to underwriters”.
In the report, TEG recommends that the European Commission and the EU
Member States consider developing short and long-term financial incentives
to support the development of the EU Green Bond Market in line with the
EU-Green Bond Standard (EU Technical Expert Group on Sustainable Finance,
2019: 47): “Recommendation 7: Consider developing financial incentives to sup-
port the EU Green Bond Market alignment with the EU-GBS.”
TEG recommends giving tax incentives at the issuer and investor level to the
EU countries for the development of the green bond market. In this regard, TEG
shows U.S. federal government Clean Renewable Energy Bonds (CREBs99) and
Qualified Energy Conservation Bonds (QECBs100) programs and Accelerated
Depreciation Scheme as examples for incentives (EU Technical Expert Group on

Sustainable Finance, 2019: 49–50).
3.4.2
United States of America
Tax incentives applied in the United States set an example for many countries,
and there are various tax incentives provided to investors or issuers for green
bonds (https://www.climatebonds.net/policy/policy-areas/tax-incentives):
• Tax credit bonds: Bond investors receive tax credits instead of interest payments.
An example of this in the clean energy field is the US Federal Government’s
Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation
Bonds (QECBs) program. In the program, the issuance of tax credit bonds of
municipalities is allowed; The municipality or the federal government subsidize
a tax credit of up to 70% of the coupon.
• Direct subsidy bonds: Bond issuers receive cashback from the state to subsi-
dize net interest payments. Also, this structure is used under the US federal
government Clean Renewable Energy Bonds (CREBs) and Qualified Energy
Conservation Bonds (QECBs) program.
• Tax-exempt bonds: Bond investors do not have to pay income tax on interest
from their green bonds (which may lower the issuer’s interest rate).
3.4.3
France
Green labels were developed by the French Government to make green assets
more visible. The first label, the TEEC, was granted to 18 funds with 2 billion
euro assets under management (AUM), the second one, the ISR was awarded
to 119 funds with EUR22bn of AUM, and the third label, which targets crowd-
funding platforms and provides funding for green growth projects, was granted
to 16 platforms. Tax incentives for SMEs and the adoption of broader collection
platforms, including green securitization, are other methods to facilitate market
access for small businesses (Filkova et al., 2018:7).
3.4.4
Brazil
Brazil allows the issuance of tax-free bonds for significant infrastructure
investments, construction companies, and wind power plants (Climate Bonds
Initiative & IISD-International Institute for Sustainable Development, 2016:10).
Brazil launched infrastructure debenture bonds in 2011, and investors were
granted tax-free income from bonds that are issued to provide financial support
for priority projects on infrastructure. In 2016, approximately one-third of 68
issues totaling BRL18.3 billion ($5.6 billion) was for renewable energy, and indi-
viduals owned around %45 of them, with major retail investment being made
via mutual funds investing in infrastructure bonds (Asian Development Bank,
2018: 81).”
3.4.5
China
The Chinese government provides various incentives to banks and companies,
such as reduced central bank loan costs and subsidized interest payments on
green bonds. Up to 12 percent of the interest rate on environmentally friendly
loans is subsidized by the state (Morris, 2019).
3.4.6
Malaysia
Malaysia has provided a series of encouraging tax applications that can be
implemented equally to green bonds and sukuks to stimulate the growth of the
bond and Sukuk markets, for example, exemption for resident investors from
income tax, and for foreign investors from withholding tax, on interest income
from ringgit-denominated debt securities and Sukuk, and foreign-currency-
denominated Sukuk issued in Malaysia. Moreover, there is no stamp duty on
sales of securities and no tax on capital gains is imposed in Malaysia (Asian
Development Bank, 2018: 81)
The popularity of environmentally friendly Islamic financial products has
increased with the launch of the Responsible Investment (SRI) framework in
2014. The Securities Commission (SC) offered SRI products compliant with
Islamic rules and stated that it would further strengthen the country’s leading
position in the Sukuk market. The Commission also said that Malaysia could
improve its value proposition as a center for Islamic finance and sustainable
investment. In addition, an incentive package was introduced by the commission
under the SRI initiative to increase the green Sukuk trend further. The kit consists
of tax reductions on issuance costs of any SRI Sukuk authorized by the SC before
2020, tax relief on the use of green technology in energy, transport, building,
waste management, and associated services (https://oxfordbusinessgroup.com/
news/launch-sustainable-finance-sees-malaysia-go green).
One of the nine special categories to be financed with green Sukuk in Malaysia
is energy efficiency projects. The government announced an RM6 million Green
SRI Sukuk Grant Scheme in its 2018 budget. With this program, issuers were
enabled to balance the expenses of external review of applications obtained by
the SC between January 2018 and December 31, 2020. Although significant
incentives seem to be provided for the issuance of green Sukuk, it can be said
that there is not much awareness among market participants about these poten-
tial tax benefits. Issuers can benefit from a tax deduction for the issuance costs
of SRI Sukuk approved by the SC until 2020. Furthermore, to boost renewable
energy investments, there are two incentive programs: the Green Investment Tax
Allowance and Green Income Tax Exemption. It is likely that these programs
elevate green projects’ financial feasibility and thereby contribute to green Sukuk
(Asian Development Bank, 2018: 118; https://www.climatebonds.net/files/
reports/cbi-policyroundup_2017_final_3.pdf).
3.4.7
India
Investors can benefit from tax-saving infrastructure bonds for a tax deduc-
tion. Individual investors can deduct the amount up to ₹20,000 ($315) of
their investments in qualified infrastructure bonds from their taxable income.
Additionally, bond interest income is included in the taxable income of the
bondholder and taxed at the appropriate marginal rate. Non-bank financial
institutions and semi-independent entities designated by the Reserve Bank of
India may issue eligible infrastructure bonds. Individual investors are motivated
to direct investment in infrastructure savings, offering semi-dependent bodies
with non-budgetary funding. The low limit minimizes fiscal costs; on the other
hand, the administrative costs for issuers associated with the typical certificate
value of ₹5,000 ($77) are substantial. The program may additionally contribute
to the wider growth of the bond market by attracting the attention of people
who may not otherwise contemplate investing in bonds (Asian Development
Bank, 2018: 81).
3.4.8
Turkey
In Turkey, there is not a special provision concerning the taxation of green
bonds. In this case, it is necessary to look at the general rules. In Turkey,
income obtained from government bonds and private bonds is subject to with-
holding tax under provisional Article 67 of Income Tax Law. However, interest
yield and trading income from Eurobonds are not subject to withholding tax,
regardless of the issuance date. Eurobond interest yield must be declared if it
exceeds the annual income tax declaration limit (which is 40.000 TL for 2019).
Limited taxpayers are not obliged to submit a declaration for their income from
Eurobonds.
Revenues from government bonds and treasury bills are subject to different
taxation regimes depending on their issuance before and after 1/1/2006 (Gelir
İdaresi Başkanlığı, 2019: 8):
• In accordance with Decision no.2010/926 of Council of Ministers, 10% with-

holding shall be made after 1/10/2010 on full and limited taxpayer natural
entities’ interest yield obtained from the government bonds and treasury
bills issued after 1/1/2006 and their revenues from purchase and sale of these
bonds. The annual declaration shall not be submitted for these revenues,
which are ultimately taxed through withholding.
• Interest yield from government bonds and treasury bills issued before 1/1/2006
and trading income shall not be subject to withholding tax within the scope of
provisional Article 67. The taxation of these incomes shall be made in accor-
dance with the provisions of the legislation in force on 31/12/2005. Therefore,
a reduction rate shall be applied depending on the issue date of the bonds and
bills in question and whether they are issued in Turkish Lira. The amount
remaining after the cost value indexing and exception application for trading
income shall be declared.
Interest yield and trading income on private-sector bonds are subject to with-
holding tax within the scope of provisional article 67. The revenues to be obtained
are subject to different taxation regimes according to their issuance before and
after 1/1/2006 (Gelir İdaresi Başkanlığı, 2019: 9):
• Domestic private sector bond/bill interest yields and trading income are ulti-
mately taxed through withholding after 1/1/2006 within the scope of provi-
sional article 67.
• Private sector bond/bill interest yield and trading income issued before
1/1/2006 are taxed utilizing declarations such as Government bond/
Treasury bill revenues in the same situation. Bonds issued abroad by full
taxpayer institutions are accepted as the securities income stated in the
subparagraph (5) of the second paragraph of Article 75 of the Income Tax
Law. These bonds are not subject to withholding tax within the scope of
provisional article 67 since they are not included in provisional article 67.
However, withholding tax shall be applied to interest yield obtained
from bonds issued abroad by full taxpayer institutions within the scope
of Article 94 of Income Tax Law according to maturity and rates deter-
mined by the Decision No. 2011/1854 of Council of Ministers (Gelir İdaresi
Başkanlığı, 2019: 10).
• Accordingly;
• For interest obtained from bonds with a maturity up to 1 year, %10 of
withholding tax
• For interest earned from bonds with a maturity between 1 and 2 years, %7
of withholding tax
• For interest obtained from bonds with a maturity between 3 and 5 years,
%3 of withholding tax
• For interest earned from bonds with a maturity between 5 and more years,
%0 of withholding tax is applied.
There are no tax incentives for green bonds in Turkey. Providing tax incentives
in financing energy efficiency can increase interest in green bonds (For the same
point of view, see Kandır &Yakar, 2017a: 104). Tab. 3 shows the incentives pro-
vided to green bonds in some countries.
4 Conclusion
In many countries around the world, interest in green bonds is increasing, and
this market is growing to combat climate change, to get rid of the dependence
on fossil fuels in energy, and to ensure sustainable development. In 2016, the
Industrial Development Bank of Turkey (TSKB) became the first establishment
in Turkey to issue green bonds. There are countries such as Poland and France
that issue sovereign bonds; however, Turkey is not one of them. In terms of our
country, which is dependent on external resources in energy and which has a
current account deficit, it is vital to strengthen and encourage the green bond
market as an option for financing energy efficiency. Issuing green bonds in Turkey
does not provide any tax benefits for investors. For the reasons mentioned above,
tax incentives should be used as tools to be able to benefit from green bonds in
financing energy efficiency and to improve the green bond market (See Kandır
& Yakar, 2017a: 104).
Tab. 3: Examples of Tax Incentives Related to Green Bonds. Reference: Climate Bonds
Initiative & IISD-International Institute for Sustainable Development 2016: 14; the Author
Added France, China, and Turkey.
Country Bond Type Degree For Who Description Relevance for

of Tax Green
Exemption
Chile All bonds Full Foreign Foreign The incentive
Institutional institutional can be replicated
Investors investors are for foreign
exempt from tax investment into
on the bond green bonds in
particular
(continued on next page)
Tab. 3: (continued)

of Tax Green
Exemption
India Muni bonds Full Investors Tax-free bonds Examples of tax
and selected issued by public incentives used
corporate corporations to encourage
bonds from and municipal investment in a
public entities government policy priority
USA Muni bonds Full Investors Over 80% of the area. The
US muni bond incentive can
market is tax- be replicated
exempt, intending to apply to all
to increase labeled green
funding for bonds with
municipalities for robust green
infrastructure credentials e.g.,
USA Muni Partial Investors Qualified Energy that comply with
bonds with Conservation set standards
proceeds for Bonds (QECBs)
renewables and Clean
and energy Renewable
efficiency Energy Bonds
(CREBs) offer
special tax
incentives offered
for muni bonds
with proceeds
clean energy
and energy
conservation
Brazil Bonds with Full Investors Tax-free bonds
proceeds for can be issued
infrastructure for significant
including infrastructure
construction investments,
and wind construction
energy conglomerates,
and wind farm
developers
Tab. 3: (continued)

of Tax Green
Exemption
Malaysia Corporate Partial Investors Issuance expenses The incentive can
ABS bonds for asset-backed be replicated to
securities are cover issuance
tax-deductible costs for green
aBS, in particular,
making it
cheaper for
issuers of green,
etc. non-green
aBS
France Green Bond Investors Include tax
incentives for
SMEs
China Green Bond Banks and Form of lower For the most
businesses central bank environmentally
borrowing costs friendly loans,
and subsidized the government
interest payments subsidizes up to
on green bonds 12 percent of the
interest rate
Turkey Green Bond None None None None
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Güneş Çetin Gerger, Feride Bakar Türegün, and Adnan Gerçek
The Importance of Tax Literacy in Tax

Compliance
Abstract: Taxes are the economic values received by the governments and tax authorities
under the enforcements according to the rules specified by the law. As tax is the most
important source of income of the state, the approaches that strengthen tax awareness and
increase tax compliance have become essential for the revenue administrations. Tax literacy
is defined as the ability to know and understand the tax-related issues and to interpret
them, staying updated regarding the developments and maintaining the personal budget
most efficiently while considering the tax payments.This study highlights the importance
of tax literacy as one of the factors that determine tax compliance. The study also examines
arrangements and projects related to tax literacy in the OECD countries and the United
States, along with the presentation of the projects and research related to tax literacy in
Turkey. In the study, we conclude that the level of tax literacy in our country is not at
the desired level, and thus we provide suggestions regarding the activities that could be
conducted to increase tax literacy.
Keywords: Tax literacy, tax compliance, tax awareness, tax psychology
JEL Codes: H2, K34, D91, H26
1 Introduction
Tax literacy is a new concept that emerged from developed countries. Tax lit-
eracy can be defined as the individual’s understanding of tax laws related to tax
liability in his/her own financial environment, fulfilling his/her tax obligations,
and evaluating the possible tax risks independently (Cvrlj, 2015: 158). Therefore,
there is a close relationship between tax literacy and tax compliance.
We can classify the factors affecting tax compliance as moral, psychological,
economic, tax management factors, and demographic factors (Çetin Gerger,
2011: 9). There is a positive correlation between tax compliance and education
level, a demographic factor. Tax awareness of taxpayers also develops with an
increase in education level. Therefore, taxpayers’ compliance with tax compli-
ance behavior also increases (Otto et al., 1987: 304).
Today, advanced revenue administrations in the world moved from the
“despite the taxpayer” approach to “with the taxpayer” approach (Gerçek et al.,
2015: 25). In this sense, revenue administrations have an essential role in the
58 Güneş Çetin Gerger et al.
Tab. 1: Actors and Determinants in the Formation of Tax Climate. Source: (Alm et al.,
2012: 136).
ACTORS DETERMINANTS
Government Governance and regulation, the image of taxpayers, tax law, the tax rate
Tax Authorities Images of government, tax accountants, taxpayers, audits, ﬁnes
Accountants Images of government and tax authorities, taxpayers and their goals
Images of government and tax authorities, attitudes, tax morale,
knowledge of tax law, norms (personal, social, societal), justice
Other Taxpayers Taxpayers
(distributive, procedural, retributive)
development of tax literacy. In this study, the concept of de “tax literacy”, which
is a basic sub-factor affecting tax compliance, is examined, the applications in
developed countries are evaluated, and suggestion is listed for future applications
in our country.
2 Factors Affecting Tax Compliance and Tax Literacy

2.1 Factors Affecting Tax Compliance
Paying taxes is not a voluntary action for taxpayers. For this reason, a behavioral
economy has emerged in the 1970s in which the effects of psychological factors
on tax compliance are investigated. This taxpayer centered approach has adopted
the “trust is good; control is better” principle in which intrinsic motivation is
developed through measures. In this case, all the actors in the system determine
the tax climate (Alm et al., 2012: 134).
The following Tab. 1 shows the actors determining tax compliance. A tax cli-
mate is formed as a result of the interactions between occupations, including
government, tax authorities, financial advisors, accountants along with the
taxpayers and interaction among taxpayers. The development of tax literacy
ensures that the tax climate among these actors is positively affected.
Increasing tax compliance has become one of the critical contemporary
tasks of revenue administrations (Gerçek et al., 2015: 162). Successful revenue
administrations have a management approach that includes optimizing tax com-
pliance, risk-based verification programs, simple laws and procedures, and tax-
payer training and assistance (Russel, 2010: 2). In this respect, programs and
exemplary practices that strengthen the communication between the taxpayer
and the administration, including tax literacy, is a common practice in all the
developed countries.
The Importance of Tax Literacy in Tax Compliance 59
Tab. 2: Cognitive-Affective-Psychomotor Scope of Tax Literacy. Source: (Yılar & Akdağ,

2017: 366).
Levels Scope
Being able to know the definition of a tax,
types of tax,
Cognitive Level tax legislation,
tax rates,
important tax payment dates.
Being able to have tax perception,
belief in the necessity of tax payments,
Affective Level positive tax attitude,
tax awareness,
tax ethics.
Psychomotor Level Being able to fill the tax forms related to tax return
Being able to pay the tax debt by the relevant institutions or the
internet
2.2 Importance and Scope of Tax Literacy

A tax literate person is aware of the basic concepts of taxation, has knowl-
edge about the basic functioning of the tax system, is updated regarding the
developments, and knows the rights of taxpayers. Also, he can follow tax updates,
has a positive attitude towards taxation, has a tax ethic, has a clear idea regarding
the place of the tax in the personal budget, and can fulfill obligations related to
the tax. In this sense, passing through cognitive and emotional dimensions, tax
literacy is accomplished at the behavioral aspect (Yılar & Akdağ, 2017: 368).
Empirical studies indicated that the taxpayers’ level of knowledge increases
tax compliance. Tax literacy is a concept that exceeds the taxpayer’s knowledge
level. Tax literacy includes elements such as (i) having tax awareness, (ii) having
the conceptual knowledge and skills, and (III) the ability to rationalize informa-
tion and to make decisions. The first element, tax awareness, refers to the under-
standing of individuals’ role in the financial exchange or social contract with
the state. This awareness forms the basis of the framework as it is a prerequisite
for tax literacy. The second element includes a legal component of conceptual
knowledge and skills, as well as the procedure.
The procedural content allows the use of knowledge and skills to regulate
tax records by the taxpayer’s interacting with tax authorities. The legal scope
refers to the understanding of how taxes are levied. Legal tax information
has two dimensions: understanding the legal requirements and the legisla-
tion. The first dimension is the ability to know whether something is tax-
able, and the second dimension is the ability to apply legal knowledge to the
particular situation to calculate the tax effect (Lai, Zalilawati, Amran and
Choong, 2013).
The third element is to rationalize the information and to make decisions.
The fact that taxpayers participate in the fulfillment of their tax obligations is
to realize their awareness and knowledge based on their perceptions within the
social structure. In other words, awareness, knowledge, skills, and attitudes need
to come together to make decisions to act in compliance with the tax (Bomman
and Wasserman 2018: 1).
Figure 1 presents the concept of tax literacy as a process. An individual’s tax
awareness is linked to tax information. Understanding the tax information is the
key to obtaining the desired result. In other words, the one with tax awareness
can make an informed decision to act by the tax. In this process, other factors,
such as individual and social norms, perceptions, attitudes, and tax ethics, are
also considered to be effective on the individual (Bomman and Wasserman
2018: 1).
Niemirowsaki, Baldwin & Wearing (2003) research shows that there is a rela-
tionship between tax compliance behavior and taxpayer awareness. Eriksen &
Fallan (1996) determined that obtaining additional tax information increases
Fig. 1: Tax Literacy Framework. Source: (Bomman & Wasserman 2018: 7)

tax compliance and reduced tax evasion. Citizens’ tax information increases
the confidence in the use of state taxes, while incomplete or misunderstanding
results in insecurity (Kirchler et al., 2008: 216).
Tax illiterate people may unintentionally have a higher tax incompliance
(Chardon et al., 2016). In the “Building Tax Culture, Compliance and Citizenship”
report of the OECD, the importance of the transformation in the state-citizen re-
lations and the cultural change in the tax administration were emphasized. Tax
authorities once had a culture of fear, but currently, they recognize citizens not
only as “liability holders” but also stakeholders (OECD, 2015: 17). Therefore, this
change requires an understanding of tax perception and increasing tax aware-
ness (Yaltı, 2018: 65). Today, most OECD countries recognize the limitations
of traditional enforcement-based techniques in tax compliance and emphasize
training programs for taxpayers to develop tax compliance and tax morality.
2.3 Regulations Regarding Tax Literacy in OECD Countries

The OECD is a leader in measuring global financial literacy, including compre-
hensive measurement tools for adults and youth. In 2016, it published its second
international financial literacy assessment report covering 30 countries (OECD,
2017: 13). Tax literacy is a sub-discipline of financial literacy. In order to get
a general impression on tax literacy, financial literacy data are included in the
research for G20 countries. The Fig. 2 illustrates the data from this research.
This report shows that, on average, only 52% of adults in G20 countries accom-
plished six levels out of the nine attitudes discussed. Although national surveys
have been conducted in countries for tax literacy, only a report on financial lit-
eracy has been published by the OECD. In a report published by the OECD in
2015, the tax literacy practices in developing countries were mentioned, but a
measure of tax literacy was not included (OECD, 2015). Turkey is a little below
the average financial literacy level of the G20 countries (12.7) with a score of 12.5.
Figure 3 indicates the level of financial literacy in the Netherlands, Switzerland,
and Germany concerning their education level. A positive correlation was found
between financial literacy and education level. Having sufficient knowledge
regarding the basic concepts of financial literacy is notably less likely among
non-university graduates (Lusardi and Mitchell 2007a, 2011c).
In addition, financial literacy is particularly weak for those with lower quanti-
tative education levels (Lusardi 2012). Lusardi, Mitchell, and Curto (2010) found
a positive correlation between financial literacy and cognitive skills among
participants of the NLSY questionnaire and stated that cognitive factors should
be considered seriously.
Fig. 2: Financial Information, Behaviors and Attitudes. Source: (OECD, 2017:8).
2.4 US Tax Literacy Project Implementation

The general purpose of the “Tax Literacy Project” carried out at Tulane University
in the USA is to inform the public about taxation and to ensure that US citi-
zens have knowledge about tax and tax policies and to enable citizens to make
rational decisions in the future US tax policies. The Tax Literacy Project, which
first started in 2013 at Arizona State University (ASU) Sandra Day O’Connor
College of Law and headed by Professor Marjorie E. Kornhauser, has emerged as
a non-political effort to inform the public about taxes. The project has three dif-
ferent concentration areas: (a) Why we are taxed (the purpose of taxes; the link
between tax and expenditure), (b) fairness of the taxation (how the tax burden
will be distributed, including the tax base and the rate structure), and (c) basic
taxation concepts. The project is intended for all ages between 12 and 80 and all
educational levels (https://taxjazz.com/). Web-based games, other internet activ-
ities, and social networks are used in the scope of the project. The project was
supported by the university, volunteer participants, and individual donations,
and it was also structured to receive personal and foundation support to produce
innovative materials.
USA
70 63.8 Netherlands
80
60 69.8
50 44.3 60 54.4 55.4
40 41.7
31.3
30 40 35.1
19.2 28
20
12.6 20
10
0 0
Less than High- Some College Post graduate Primary Lower Middle Upper Higher University
HS school college secondary secondary secondary vocational
Switzerland Germany
80 80
68.9 70.1 72
70 70
60 60 55
51.6 52.4
50 43.1 44.9 50
40 40
30 26.6 30
21.7
20 20
10 10
0 0
Primary or Vocational Upper Tertiary Lower Upper Non-GDR GDR Post- Tertiary
lower secondary secondary secondary secondary
secondary
The Importance of Tax Literacy in Tax Compliance
Fig. 3: Financial Literacy Level by Education Level. Source: (Lusardi & Mitchell, 2014: 19).
63
Tab. 3: Taxjazz Project Processes. Source: http://search.ebscohost.com/login.aspx?direct

=true&db=a9h&AN=48076039&lang=tr&site=ehost-live, The Tax Literacy Project, www
.taxjazz.com (01.04.2109).
2009–2010 2010–2012 2012–…

* Developing information- * Activities through * Taxpayers are supported by
based tax games (developed the website have been Tulane University law school
with the support of ASU developed. These are students with programs
Computer, Informatics, games, competitions, that provide information
and Decision Systems videos, social networks, and framework that enables
Engineering Department). and so on. taxpayers to analyze problems
and make a sensible decision.
* A two-day workshop was * Game Development: * Instructor guides have been
organized for the expert This section is long- developed and presented on
group to be trained by term and includes game the web for individuals who
Sandra Day O’Connor Law development in taxation. can learn at home and want to
School. (Taxation, media, (Theater-like games have lead group discussions such
education and game design). been developed). as teachers and community
leaders.
* The project was developed Generally, the design and * Voluntary donations were
to receive funding from the implementation of such a opened to develop the project.
workshop. game can take up to two
years.
H&R Block office survey in the United States found that most Americans
“failed in tax 101”. People were not aware of the general concepts of taxation,
their tax obligations, and the implementation of laws. Many of the participants
did not even know why taxes exist (Kornhauser, 2009: 9–10).
Tax ignorance hurts individuals and society as a whole. It can prevent
taxpayers from benefiting from the tax benefits they deserve and may cause
excessive tax payments. In the long run, tax ignorance precludes the introduc-
tion of robust tax policies, which increase revenues most fairly and efficiently
possible (Kornhauser, 2009: 9–10). The project applied is a social project. It
helps taxpayers to fill the information gap. The project provides only necessary
information to support any tax structure or rate. The project focuses on federal
income tax, but most of the content has the potential to be applied to other fed-
eral, state, and local taxes.
2.5 Austrian Tax Literacy Project

In a study by Cechovsky (2018) at the Vienna University School of Economics
and Business, concepts and misconceptions about tax literacy were investigated,
and detailed results were presented. The relationship between knowledge and tax
compliance was investigated. The primary audience was students from business
schools in Austria. A three-stage process was adopted for this study. The first one
was carried out by the faculty members with 22 students, and the results were
analyzed by coding and categorizing method. In the next stage, a pilot question-
naire was applied to 94 students. Finally, the pilot study was improved, and data
was collected using a survey method with 688 students. The study was completed
in about two years. Within the scope of the project, students’ knowledge and
skills, interest, tax attitudes, social norms and behavioral controls, tax compliance
intentions, and the effects of demographic factors were quantitatively evaluated.
The result of the study revealed that having information about tax was an
important factor in tax compliance (Cechovsky, 2018: 114). The students had
the knowledge of concepts and misconceptions that was not a form of expert
instruction (Möller, 2007). The lack of awareness of tax payment has led to the
integration of new information into preexisting ones. Although students were
in business school, there were information gaps. Their own experiences and the
media influence their knowledge. Having tax information is positively corre-
lated with tax compliance and negatively associated with tax evasion behavior
(Cechovsky, 2018: 119).
2.6 Tax Literacy Project in the UK

In an empirical study conducted and financed by the Chartered Taxation
Institute (CIOT) in the UK, study socio-demographic impacts on financial and
tax literacy (FTL), tax ethics, tax administration, and compliance perceptions
of 377 young adults from two UK universities was obtained. The scope of this
research consisted of students samples from modern universities* (*post 92 uni-
versities) in England. It deals with the relationships between financial literacy
and tax literacy, tax ethics, and tax compliance. Examples include cohorts that
did not receive any tax training and groups that take one or two modules on
UK taxation. Student research was conducted at the beginning and end of the
2015/16 academic year. The result indicated that the students who take a tax-
related module at the university have high financial and tax literacy. It was also
observed that people with employment experience have a higher tax ethic than
those who do not (Alexander et al., 2018: 1–9).
Based on these results, the UK Revenue Administration, HMRC launched a
“Tax Facts” initiative for youth in the UK in 2015. This was followed by the “Tax
Facts for Children” program for the benefit of primary school children in 2016
(Alexander et al., 2018: 1–9).
2.7 Australian Tax Literacy Survey

The research empirically examined the relationship between Australian tax lit-
eracy and demographic factors. A survey was conducted with more than 600
Australians to determine their TLS (Tax Literacy Score). The Australian tax lit-
eracy level was quite elevated. It was found that 81% of the respondents had a
“basic” or higher tax literacy score. This means that only 19% of Australians have
a score classified as “low.” Moreover, it was determined that the TLS scores of
those who were employed were higher than that of unemployed (Chardon et al.,
2016: 323).
Also, the Australian Tax Office (ATO) generally tries to train taxpayers on
various topics such as preventing tax base wear, providing information on poten-
tial tax benefits. Because ensuring financial literacy in general and tax literacy,
in particular, are adopted by the state in the development of public finance pol-
icies. In this respect, the “Financial Literacy of Adults in Australia” survey was
conducted by the ANZ bank in 2003, 2005, 2008, 2011, and 2015. The results
of the survey were considered as financial literacy standards (Chardon et al.,
2016: 326). According to the 2005 ANZ study, 7% of the participants expressed
that they needed more training in taxation. According to the 2005 ANZ survey
report, three main problems arose in the field of financial literacy. These were
(i) the taxpayers are not aware of their financial situation, (ii) the events and
information deficiencies are not in their control, and (iii) they are not able to
decide when to take advice (ANZ, 2005).
3 Tax Literacy in Turkey

It was determined that a small number of studies have directly measured the
tax literacy levels in Turkey. Yardımcıoğlu, Akpınar, and Günay (2014) asked
questions to taxpayers in Kahramanmaraş about tax literacy and tax aware-
ness. They found that the respondents had 65% knowledge of the names of
the taxes in the tax system and 42% knowledge of the tax procedures, prin-
ciples, and rates. In the study by Teyyare et al. (2018), a questionnaire was
applied to students of the Faculty of Economics and Administrative Sciences
at Abant İzzet Baysal University, and the authors determined that tax lit-
eracy levels of the participants were above average. However, some studies
measured tax awareness, perception, and compliance in Turkey, and some of
them have had some measurements to determine the tax-related knowledge
of taxpayers. A table of empirical studies and target groups for these may be
seen below.
Tab. 4: Some Studies Related to Tax Perceptions and Their Target Population in Turkey.
Source: Own Elaboration Based on the Studies Below.
Taxpayers and Citizens University Students Other Students

Muter, Sakınç Manisa Ömürbek, Çiçek Süleyman Sağbaş ve Afyon
ve Çelebi ve Çiçek (2007) Demirel Başoğlu
(1993) (2005)
Yüce ve Bursa Şahin (2010) Gaziosmanpaşa Karaot İzmir
Gerçek (2010)
(1998)
Demir (1999) Afyon İzgi ve Saruç Sakarya Taytak Uşak
(2011) (2010)
Bayraklı, Uşak Sağlam (2013) Hitit Zorlu (2012) Ankara
Sağbaş ve
Ural (2004)
Çoban ve Denizli Gülten (2014) Afyon Kocatepe Çelik ve Zonguldak
Sezgin (2004) Eroğlu
(2014)
Tuay ve 18 City Teyyare ve Abant İzzet Özen, İzmir
Güvenç Kumbaşlı (2016) Baysal, Bülent Altunoğlu
(2007) Ecevit ve ve Öztornacı
Osmangazi (2015)
Çiçek (2006) İstanbul Başdağ (2017) Kilis 7 Aralık Karaca Kütahya
(2015)
Cansız (2006) Afyon Çiçek ve Bitlisli Mehmet Akif Demir ve Afyon
(2017) Ersoy Ciğerci
(2016)
Çelikkaya Eskişehir Gür ve Yıldız Bingöl
ve Gürbüz (2017)
(2008)
İpek ve Çanakkale Koban ve Bulu Gaziantep
Kaynar (2017)
(2009)
Altuğ, Çak, İstanbul Teyyare, Ayyıldız, Abant İzzet
Şeker ve Dirican, Zıvalı ve Baysal
Bingöl (2010) Renkli (2018)
Studies in the table had limited questions directly related to tax literacy.
However, the overall assessment of these studies showed that the tax knowl-
edge of taxpayers in Turkey is low, and it is increased by education on taxes. For
example, in the survey by Teyyare (2018), a questionnaire was applied to univer-
sity students to measure the effectiveness of public financial education on levels
of tax literacy, and it was concluded that education contributes to increasing tax
literacy levels. Additionally, Demir and Ciğerci (2016) conducted a question-
naire on primary school students in Afyon in Turkey, approximately 30 minutes
of tax training was then provided with the help of videos about public ser-
vice advertisements and similar visual media, and the same questionnaire was
repeated. After the training, positive changes were observed in the tax awareness
levels of the students, and it was found that education to be provided, especially
at the primary school age, was significantly essential to increase tax awareness
levels.
There are no specialized tax courses on the primary, middle, and high school
levels in Turkey. However, it is seen that the subject is included in the contents
of other classes. The scope of some courses with the aim of raising excellent
and responsible citizens such as “life sciences”, “human rights” and especially
“social studies” includes “duty to pay taxes”. Especially with the changes made
in the Social Studies Curriculum, tax issues were involved, though to a limited
extent, in economics-related fields limited and in 2017, financial literacy issues
were added. Thus, some course contents from the fourth grade to the seventh
grade were made suitable for explaining tax issues (Yılar & Akdağ, 2017: 370–
375). However, the fact that these courses are very comprehensive, containing
many other subjects, the absence of a separate course, and the deficiency in the
tax-related knowledge of teachers who teach this course, prevent the topic of
taxes from being prepared sufficiently. Tax topics and activities in social studies
textbooks are given in the table below.
In 2007, the “Vergibilir – Training Program for Developing Tax Awareness
in Children” working protocol was signed between the Revenue Administration
Tab. 5: Tax Topics and Activities in Social Studies Education in Turkey. Source: (Yılar &
Akdağ, 2017: 375).
Publisher Class Subjects Activities

Ministry 6 • Taxes I pay a return • Taxes I pay returns to me
of National to me (Preparing slogan)
Education
• Recognize Invoices
Other 6 • Taxes for Better Turkey • Collecting Tax Evidence
• Collecting Tax • Write a letter
Evidence
• You are safe with your tax
(Preparing poster)
and the Ministry of National Education to provide information about tax to chil-
dren in the third, fourth, and fifth grades. The micro-teaching course was given
to the teachers in charge, the training started in 2009, and the project was com-
pleted in 2012. In this context, it is seen that various books, brochures, and espe-
cially a website with games were established (GİB, 2008–2014 Annual Reports).
Additionally, guidance and booklets in different areas prepared by the Revenue
Administration for taxpayers have been significant in increasing tax literacy
(http://www.gib.gov.tr/node/128637). Currently, the Revenue Administration has
developed materials such as web-based videos, games, songs, and presentations
to enable students to learn tax-related concepts on the primary and high school
levels. Furthermore, textbooks were developed for teachers, and these contents
were provided with open access. Until 2018, approximately five and a half mil-
lion students were trained in this program (www.vergibilinci.gov.tr).
The following examples may be given to demonstrate the importance of this
training. In Turkey, Başoğlu and Sağbaş (2005), who conducted the first study on
elementary school students, carried out a survey among students in Afyon and
found that the students could not establish any relationship between taxes and
public services. After training, Karaca (2015) conducted a study on elementary
school students in Kütahya, which has a similar demographic structure. 52.4%
of the participating students were educated; most of them perceived the con-
nection between tax and public services. 59.5% of them stated that the training
increased their habit of taking invoices, and 61% of them said continuous tax
training should be provided.
4 Recommendations for Turkey to Improve Tax Literacy

The development of academic literature in Turkey is required to increase tax
literacy. However, these studies will be useful if they are carried out with broad
participation in the empirical sense. Applications that have a high impact and
can contribute to voluntary compliance must be implemented with the contri-
bution of the Revenue Administration. Taxation concepts are included in social
studies courses in primary education.
Although it is essential to start tax-related education from primary educa-
tion to increase tax literacy, in addition to this, families should transfer their
knowledge to children positively about tax-related topics, and citizens should
be informed at every stage to spread this literacy to the society. This situation,
which is necessary for the development of a conceptual infrastructure, should
be ensured for the target group between the ages of 12 and 80 as in the USA in
pursuit of lifelong learning.
Tax literacy training may be carried out at a low cost with the contribution of
students who are studying public finance or law at universities. These practices
may be considered as an internship. This has the potential to be a practice that
will both improve citizenship awareness and increase tax literacy. Questionnaires
may determine tax compliance levels before and after these training, and the
Revenue Administration may develop a strategy. Furthermore, tax literacy
training within the scope of digital literacy may be planned under Industry 4.0.
Designing long-term activities to improve tax literacy will develop tax com-
pliance, reducing the need for the state to allocate resources to prevent tax eva-
sion and undocumented income. Therefore, it would be useful to implement the
following recommendations for improvements in tax literacy:
– Academic studies should be increased to emphasize the importance of tax
literacy.
– A dataset in terms of tax literacy may be created in Turkey, and tax policies
may be developed using the data obtained as a result of surveys to be applied
periodically.
– Since tax literacy is an issue that may be improved with the increase of finan-
cial literacy and tax knowledge, only studies carried out by the Revenue
Administration remain on the administrative level. The Tax Awareness pro-
ject is a good practice that can improve tax literacy. However, to increase the
widespread impact of this study, quantitative data should be collected before
and after training, and these data should be analyzed, and recommendations
appropriate to the Turkish Tax System and tax culture should be developed.
The readiness of the society and the reaction of it are decisive for the develop-
ment of tax literacy.
– In the organization of tax training, tax administration authorities, taxpayers,
professionals, state officials, and academicians should develop a training
program within the scope of a workshop, and education should be provided
not only for children but also for certain specific target groups.
– Taxpayers should be informed about tax guidelines and brochures, and their
usage should be increased. Increasing the digital literacy of taxpayers will
facilitate access to these brochures.
5 Conclusion
In today’s world, where global realities are changing rapidly, protection of the
tax revenues of nation-states is only possible by optimizing tax compliance.
The main actor in tax compliance is the taxpayers. Education is one of the main
elements that can ensure the compliance of the taxpayer. Many academic and
administrative activities are organized to increase and improve tax literacy,

which may include many concepts such as citizenship awareness, tax awareness,
perceptions of the Revenue Administration, tax perception, tax morality, and tax
awareness. In developed countries, there are more academic activities related to
tax literacy. Studies have shown that there is a parallelism between tax literacy
and tax compliance.
Tax literacy-related activities in Turkey are still seen in the context of a more
administrative level. For this reason, increasing academic studies aimed at raising
tax awareness and increasing tax literacy and conducting them in cooperation
with organizational research will positively affect tax compliance in Turkey.
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Gelişmesinde Maliye Bölümü Eğitiminin Rolü”, AİBÜ Sosyal Bilimler
Enstitüsü Dergisi, 16 (4), 1–29.
Teyyare, E., Ayyıldız, B., Dirican, H., Zıvalı B.S. & Renkli, B. (2018), “İktisadi
ve Mali Okuryazarlık Üzerine Bir Araştırma: Abant İzzet Baysal Üniversitesi
İktisadi ve İdari Bilimler Fakültesi Örneği”, Bolu Abant İzzet Baysal
Üniversitesi İİBF Ekonomik ve Sosyal Araştırmalar Dergisi, 14(1), 99–120.
Tuay, E. & Güvenç, İ. (2007). Türkiye’de Mükelleflerin Vergiye Bakışı, Gelir
İdaresi Başkanlığı, Yayın No:51.
Yaltı B. (2018). Cross-Border Tax Challenges. In the 21st Century-21. Yüzyılda
Sınır Ötesi Vergi Sorunları, 1.Baskı, Istanbul, Onikilevha Yayıncılık.
Yardımcıoğlu, M., Akpınar, Y. & Günay, Y. (2014). “Vergi Okuryazarlığı ve
Vergisel Farkındalık: Kahramanmaraş Araştırması”, Kahramanmaraş Sütçü
İmam Üniversitesi İİBF Dergisi, 4(2), 95–122.
Yılar M. B. & Akdağ H. (2017). “Sosyal Bilgiler Öğretiminde Vergi
Okuryazarlığı”. In Turan R. & Akdağ H., (Eds.), Sosyal Bilgiler Eğitiminde
Yeni Yaklaşımlar III, 1. Baskı, Pegem Akademi, Ankara, 356–388.
Yüce, M. & Gerçek, A. (1998). Mükelleflerin Vergiye Yaklaşımı Açısından Türk
Vergi Sisteminin Değerlendirilmesi, Bursa Ticaret ve Sanayi Odası, Bursa.
Zorlu, Ö. (2012). İlköğretim Çağındaki Öğrencilerin Vergi Bilinci Düzeyi ve Vergi
Bilinci Düzeyi İle İlgili Örnek Uygulama: Ankara İli Örneği, Master Thesis,
Gazi Üniversitesi EBE, Ankara.
Filiz Keskin
The Concept of Collective Investment

Institution and Specific Tax Advantages
Provided for These Institutions and Their
Investors in Turkey
Abstract: The importance of collective investment institutions operating in the world under
three legal structures, namely investment company, trust, and contractual model to enable
investors with low savings to work in the financial markets, has gradually increased in the
countries’ economies. In Turkey, according to regulations in Capital Markets Legislation,
collective investment institutions operate in two legal structures, namely investment com-
panies and investment funds. Advantages provided to these institutions and their investors
in Turkish tax legislation are as follows: for investors; participation income exemption in
Article 5 and deduction in venture capital fund in Article 10 of Corporate Income Tax Law;
deduction in venture capital fund in Article 89 of Income Tax Law; non-declaration of
incomes and %0 rate of withholding tax for income obtained from participation certificates
and share of some funds and companies in Provisional Article of 67, for collective invest-
ment institutions; exception of portfolio management gains or corporate incomes in
Article 5 and %0 rate of withholding tax for exempted gains in Article 15 of Corporate
Income Tax Law; %0 rate of withholding tax for exempted gains and no withholding tax
for some incomes in Provisional Article of 67 of Income Tax Law, exception of BITT for the
money and capital market incomes of some institutions in Law on Taxes on Expenditure,
exceptions of stamp tax for some papers in Stamp Tax Law. The relevant sections of the
study and the conclusion section contain our suggestions and evaluation on the subject.
Keywords: Collective, Investment, Institution, Fund, Company, Tax
JEL Codes: G23, H20, K34
1 Introduction
Collective investment institutions are organizations established to meet the
needs of small savings owners and to have them in the economy. In other words,
the purpose of collective investment institutions is to direct the savings of small
savings holders to financial markets, who do not have the necessary knowl-
edge to invest in financial markets, and hesitate to invest in these markets due
to the risks, and do not have the opportunity to invest in various investment
instruments due to their low savings. Therefore, the investment instruments in
78 Filiz Keskin
which big capital owners have the opportunity to invest also become available for
small investors by minimizing the risks through professional institutions.
Additionally, since trading in financial markets may bring risks, making these
transactions by risk distribution principle through professionals can minimize
the risks. Due to the benefits mentioned above, the shares and participation
certificates of these institutions have become the most invested instruments in
recent years. In order to encourage both these institutions and investors, some
specific regulations can be seen in Turkish tax laws.
The subject of this paper consists of the concept of collective investment insti-
tution and the general provisions of Capital Market Legislation for investment
funds and companies, which are collective investment institutions operating
in Turkey, explaining the regulations that provide tax advantages (excep-
tion, deduction, %0 tax rate, non-declaration) solely for collective investment
institutions and their investors in Turkish tax legislation and evaluating the
problems encountered in practice and giving suggestions about this issue.
2 Concept of Collective Investment Institutions (CII)

With a general definition collective investment institution (CII) generally refers to
incorporated companies or unincorporated undertakings that invest in financial
assets (mainly marketable securities and bank deposits) and/or non-financial as-
sets using the funds collected from investors by means of issuing shares/units
(OECD, 2008: 192).
The concept of collective investment institution is based on 3 basic principles:
– Forming the portfolio with the capital collected from the public (collective
capital),
– Managing the portfolio according to the risk distribution principle1,
– Managing the portfolio by experts (Nomer, 2013: 132).
The first establishment in the world, similar to today’s CII, is The Foreign &
Colonial Government Trust, founded in 1868 in the UK. The purpose of the
fund in the certificate of formation was indicated as; “To provide the investor of
moderate means the same advantage as the large capitals in diminishing risk…
by spreading the investment over several stocks” (St. Giles, Alexeeva, Buxton,
2003: 14).
1 By the risk distribution, it is meant to minimize the investment risk by investing in

businesses and markets operating in very different fields at the same time (Nomer,
2003: 5).
Collective Investment Institution and Tax Advantages 79
It is seen that collective investment institutions around the world can be

e stablished under three different legal frameworks such as investment company2,
trust3 and contractual structure (Hafeez, 2015: 152).
Collective investment institutions established according to the partnership
model are referred as “Yatırım Ortaklığı” in Turkish Law, “Investment Company”
in American Law, whereas the ones with contractual structure are regarded as
“yatırım fonları” in Turkish Law, “Unit Trust” in English Law and “Mutual Fund”
in American Law (Yasaman, 1980: 2).
Various legislative studies were carried out at the international level as the
importance of collective investment institutions in financial markets increased
and became one of the main instruments of investment. A directive on the collec-
tive investment models “Undertakings for Collective Investments in Transferable
Securities – UCITS” issued by the European Community on 20.12.1985 can be
given as an example4.
The Directive has been updated and amended by various directives to this
day, and it is now in force by the UCITS Directive 2009/65/EC of 13 July 20095.
On the other hand, it is observed that studies on collective investment
institutions are given importance in the eyes of OECD. For example, a study
called “Governance System for Collective Investment Scheme in OECD Countries”
was carried out in 2001 (OECD, 2001).
Basic regulations relating to the definition and types of collective investment
institutions in terms of legal aspects in Turkey can be found in Capital Markets
Legislation.
In article 3 of the Capital Markets Law no. 6362 titled “Abbreviations and
Definitions”;
“m) Collective investment institutions shall be defined as investment funds and investment
companies.”
2 Investment companies developed mainly in British-American law and began to operate

in the United States in 1889 and England in 1968 (Berzek, 1995: 7).
3 In a short description, the Trust is an arrangement enabling the property to be held
by a person or persons (the trustees) for the benefit of some other person or persons
(the beneficiaries) (Butler & Isaacs, 1997: 358; For more information on Trust, see
Karayalçın, 1998: 650).
4 The full text of the directive can be found at http://europa.eu.int/comm/internal_
market/securities/ucits, (10.06.2019). Also See Sermaye Piyasası Kurulu, 1997.
5 For the full text of the Directive, see. https://eur-lex.europa.eu/legal-content/EN/
ALL/?uri=CELEX%3A32009L0065, (10.06.2019).
80 Filiz Keskin
In article 35/b of the same law titled “Capital market institutions,” “Collective
investment institutions” are also counted among capital market institutions.
3 Tax Advantages Specific to the Collective

Investment Institutions in Turkey
When tax advantages specific to collective investment institutions in Turkey are
analyzed in historical context, it is seen that in the tax legislation, regulations
were made to support the capital markets especially after the period of 1980
and in private the investment funds and companies and tax advantages were
provided according to the economic realities of the country and the market
conditions (Aydın, 2000: 84).
Tax advantages for these institutions in Turkish tax legislation will be
explained under the following headings by the type of law.
3.1 Corporate Income Tax Law (CITL)

3.1.1
General Explanation
In Article 2 of the Taxpayers Act of the Corporate Tax Law, it is stated that
the funds subject to the regulation and supervision of the Capital Markets
Board and foreign funds similar to these funds shall be considered as capital
companies.
According to the section titled “2.1.2 Funds” of the General Communiqué6 of
CITL Serial No. 1 investment funds and pension investment funds are included
among the main funds subject to the regulation and supervision of the Capital
Markets Board.
Additionally, according to the Communiqué; investment funds, provided in
the bylaws, are named as bonds and bills fund, share fund, sector fund, par-
ticipation fund, group fund, foreign securities fund, precious metal fund, gold
fund, mixed fund, liquid fund, variable fund, index fund, special fund, free
investment fund.
Furthermore, venture capital investment funds and real estate investment
funds shall also be considered as funds in the application of the CITL.
On the other hand, investment companies established as joint stock compa-
nies are considered as CIT taxpayers due to the nature of their qualifications.
6 OG no. 26482, dated 03/04/2007.

3.1.2
Regulations in Article 5 of CITL:
In accordance with article 5 of the CIT Law,
“The dividends obtained from participation shares of full liable venture capital investment
funds and stocks of full liable venture capital investment companies.”
are exempt from CIT. (CITL art. 5-1-a-3). Therefore, this exception is only for
the income of participation share and dividends obtained from full-liable ven-
ture capital investment funds and companies, and the revenues received from
other funds and companies are outside the scope of the exception.
According to article 5 of CITL;
– Incomes derived from portfolio management of securities investment funds or
companies,
– Incomes derived from portfolio management of investment funds or companies
based on gold and precious metals traded on stock exchange whose portfolio is estab-
lished in Turkey,
– Incomes of venture capital investment funds and companies,
– Incomes of real estate investment funds and companies,
– incomes of pension investment funds
are exempt from CIT. (CITL art. 5-1-d)

However, this exemption does not preclude the collection of withholding
taxes from the incomes mentioned above of funds and companies.
Additionally, if the aforementioned institutions have other incomes (such as
management fees in securities investment funds, etc.) not qualifying for exemp-
tion, those incomes are subject to withholding tax.
There are explanations in the section of “5.5. The exception regarding Income
of Investment Funds and Companies located in Turkey” of General Communiqué7
of Corporate Income Tax Law concerning the application of these exceptions.
Accordingly, for investment funds and companies based on gold and precious
metals to qualify for the exception, portfolio structure of funds and companies
that gain profits shall be taken into consideration and those that permanently
invest at least %51 of their portfolio in;
• gold and capital market instruments based on gold operating on the stock
exchange in Turkey shall be considered as “gold fund or company.”
• gold and precious metals, and capital market instruments based on these
metals operating on the stock exchange in Turkey shall be considered as “pre-
cious metals fund or company.”
7 OG no. 26482, dated 03.04.2007.

82 Filiz Keskin
On the other hand, regulation of exceptions regarding real estate investment

funds and companies mainly includes real estates, revenues of real estate invest-
ment funds and companies operating the portfolio that consists of the rights
based on real estate and real estate projects. While creating the portfolios of
these real estate investment funds or companies, the amount remaining from
the ratio of obligation to invest in real estates, real estate projects and the rights
based on real estate determined by CMB can be formed as deposit, participation
account, repo, participation, and other rights and assets, and can benefit from
the exception.
Portfolios, including other rights and assets such as infrastructure investment
and services, etc. cannot benefit from the exception. Even if these funds or com-
panies are built according to capital markets legislation or have the titles of “Real
Estate Investment Fund” or “Real Estate Investment Company”, they cannot ben-
efit from the exception.
3.1.3
Regulation in Article 5/A of CITL
In terms of foreign investment funds, tax advantages are provided in Article 5/A
of CITL in case of certain conditions.
Accordingly, the foreign funds referred to in the first paragraph of Article 2 of
the CITL, due to their incomes obtained from transactions of:
– All kinds of securities and capital market instruments,
– Forward transaction and options contracts,
– Warrants,
– Foreign exchange,
– Forward transaction and options contracts based on commodity,
– Loan and similar financial assets and,
– Products in precious metal exchanges
whether traded on an organized market or not, through full-fledged taxpayer
companies having the portfolio management authorization certificate given by
the Capital Markets Board, those who manage portfolios, in case of fulfilling the
following conditions, shall not be considered as permanent representative for
the funds in question, their workplaces shall not be regarded as the workplace
of these funds, no declaration shall be filed for these earnings and in the event
that notification is filed for other earnings, these incomes shall not be included
in the declaration:
a) the transactions carried out on behalf of the fund must be among the regular
activities of the portfolio management company.
b) the relationship between the foreign fund and company itself must be similar
to the ones operating independently from each other when considering the
commercial, legal, and financial characteristics of the portfolio management
company.
c) In return for the service provided by the portfolio management company,
it is required to obtain the appropriate value for the peers, and the transfer
pricing report must be submitted to the Revenue Administration within the
period of the issuance of the corporate income tax declaration.
ç) The portfolio management company and its related persons should not be
entitled to more than 20% of the foreign fund’s gains directly or indirectly
after deducting the estimated costs in return for the service they provide.
The explanations on the applicable principles and procedures of the article are
given in the General Communiqué Serial No. 78.
3.1.4
Regulation in Article 10 of CITL
According to Article 10/g of the CITL, the portion (not exceeding %10 declared
income) of the amount allocated as venture capital fund in Article 325/A of the
Tax Procedure Law (TPL) can be deducted from the tax base.
In article 325/A titled “Venture Capital Fund” of Tax Procedure Law (TPL) it
is stated that;
– Venture capital funds can be allocated from the related period gains or the declared
income to purchase venture capital investment fund shares or to capitalize venture
capital investment companies established or to be established in Turkey subject to
regulation and supervision of Capital Markets Board.
– This fund cannot exceed 10% of the corporate income or the declared income, and
20% of the equity capital.
– The amount allocated as a venture capital fund shall be kept in a temporary passive
account.
– If the investment is not made in venture capital investment companies or venture
capital investment funds by the taxpayers until the end of the year, taxes that are not
accrued in time shall be collected along with the default interest.
– The transfer of this fund to any other account other than its purpose, withdrawing
it from the business, distributing it to the partners, transferring it to the main center
by the limited taxpayers or dissolving the work, the liquidation, transfer and divi-
sion of the enterprise or in the event that it is not reused for the purpose specified in
this article within six months following the disposal of the shares of venture capital
8 OG no. 28514 (4.rep.), dated 31.12.2012.

84 Filiz Keskin
investment companies or venture capital investment fund participation shares, they

shall be subject to taxation at the time of these transactions or when the term expires.
The explanations regarding the conditions and calculation method related to the
application of deduction in question are included in the General Communiqué
Serial no.7. Requirements for the deduction are as such;
– The amount of funds allocated in the relevant year should not exceed 10% of the
declared income, and the total amount of funds should not exceed 20% of the equity
capital. (Two conditions must be fulfilled together.)
– Investment should be made in venture capital investment funds or companies estab-
lished in Turkey within the framework of regulation and supervision of the Capital
Markets Board until the end of the year in which fund is allocated.
– The amount of funds allocated should be included separately in the declaration of
corporate income tax for the relevant year.
3.1.5
Regulation in Article 15 of CITL
In article 15-(3) titled “Tax Deduction” of CITL, it is stated that;
“barring gains of pension investment funds, a %15 withholding is made within the
corporation from the gains (whether distributed or not) stated in subparagraph (d) of
paragraph 1 of Article 5 of the Law.”
However, the withholding tax rate for investment funds and companies’
portfolio gains/corporate incomes mentioned above and exempted from

CITL is d etermined as 0% with the Council of Ministers9 Decision (CMD)
No. 2009/1459410.
3.2 Income Tax Law (ITL)

3.2.1
Regulation in Article 89 of ITL
According to article 89/12 of ITL similar to the regulation in section 10/g of
CITL, there is a provision that the venture capital fund in article 325A of TPL can
also be deducted in terms of income tax.
9 OG no.27130, dated 03.02.2009

10 According to Provisional Article 67/8 of ITL, which is to be applied until 31.12.2020,
incomes (whether distributed or not) of security investment funds (including
exchange-traded funds) and companies established by CML that are exempt from
CIT, are subject to %15 withholding tax. However, with CMD No. 2006/10731, this
rate was determined as %0.
3.2.2
Regulations in Provisional Article 67 of ITL
With the provisional Article 67 appendant to Income Tax Law to enter into force
as of 01.01.2006 with Law No. 5281, it is aimed to simplify tax applications in
terms of incomes obtained from money and capital market instruments. And
in general preamble of the Law it is stated that with this application, in addi-
tion to simplicity, harmonization in taxation will also be provided for financial
instruments (Sabuncu, Keskin, 2005: 227).
On the other hand Provisional Article 67 of ITL whose validity is in force
till 31.12.2020 requires taxation by means of withholding for security incomes,
which are as follows:
– In paragraph 1, trading income of the stocks and bonds, bond interest, incomes of
investment fund share and lending income,
– In paragraph 2, excluding the payments to banks or intermediary institutions or to
other real persons and legal entities through banks, security incomes (all kinds of
bonds, treasury bill interests) stated in Article 75/5 of ITL,
– In paragraph 3, banks and brokerage houses to acquire a security or other capital
market instrument without being subject to withholding tax under paragraph (1),
– In paragraph 4, security capital incomes stated in subparagraphs of 7 (deposit rates),
12 (for example, dividends paid to creditors not charging interest, and dividends paid
for-profit and lost share certificates) and 14 (repo/reverse repo revenues)
are subject to %15 withholding tax.

The tax advantages regarding collective investment institutions and their
investors in the article will be explained under the following headings.
3.2.2.1 Tax Advantages Specific to Collective Investment Institutions

In Provisional Article of 67/5 of ITL, it is stated that under the provisions of
paragraphs (1) and (4), no withholding tax will be made from incomes of
exchange-traded funds and pension investment funds established according
to CML.
With CMD No. 2006/10731, withholding tax rate was determined as %0 for
the incomes of some funds and companies stated in paragraphs (1), (2), (3) and
(4) of Provisional Article 67.
These are;
– exchange-traded funds
– security investment funds and companies established by CML.
According to Provisional Article 67/8 of ITL, incomes (whether distributed

or not) of security investment funds (including exchange-traded funds) and
86 Filiz Keskin
companies established following CML that are exempt from CIT, are subject to
%15 withholding tax.
However, with CMD No. 2006/10731, this rate was determined as %0.
3.2.2.2 Tax Advantages Specific to Investors

Incomes from investment fund shares defined as capital market instruments fol-
lowing the Capital Markets Legislation can be classified as;
– Incomes arising from the return of the participation shares to the fund,
– Incomes arising from the sale of the shares to the 3rd parties and
– The periodical returns of the participation shares in the holding period.
While the incomes arising from the return of the participation shares to the fund and
the sale to the 3rd parties are taxed through withholding under the provisional Article
67 (1) of ITL, it is not clear whether the periodical returns of these participation
shares will be taxed in accordance with the provisional article 67/1 of ITL or accor-
dance with the general provisions of the ITL regarding the taxation of dividends.
In the tax ruling No. 32965 dated 10.04.2007 of Revenues Administration, it is
stated that;
“… According to paragraph 1 of provisional article 67 of Income Tax Law, withholding must
be implemented on periodical payments made to investors within the scope of Protected
Investment Funds committing with the framework of best effort to repay investor’s partic-
ular part or full amount of initial investment protected with Guaranteed Investment Fund
in accordance with principles set forth in prospectus”.
Moreover, in the guide titled “Tax Applications in Investment Funds and Companies”
prepared by Revenues Administration, yet not published, it is stated that periodical
returns shall be subject to withholding tax under provisional article 67/1 of ITL.
Therefore, periodical returns derived from investment fund participation
certificates shall also be subject to withholding tax under provisional article 67/1
of ITL.
On the other hand, types of income that can be obtained from investment
companies come into question in two ways as dividend income and trading
income.
In this context, investment fund participation share incomes and trading
incomes from investment company share are subject to withholding tax within
the provisional article 67/1 of ITL11.
11 Share dividends of investment companies shall be taxed in accordance with the gen-
eral provisions of the ITL and CITL (as they are not in the scope of Article 67 of the
Income Tax Law).
After the amendment in Law12 No. 6009, however, the rate of withholding tax
for fully and limited taxpayer companies’ incomes (also incomes of investment
funds share and trading incomes of investment companies share) under the speci-
fied paragraph is determined as 0%.
The withholding rate for full and limited taxpayer real persons’ incomes of
investment funds shares and trading incomes of investment companies share is
determined as %1013.
The income derived from the disposal of the participation certificates of
investment funds with at least 51% of their portfolio permanently consisting of
shares traded on the BIST for more than one year is excluded from withholding
tax (ITL Prov.67/1).
In the section no.1.1.2. of General Communiqué of ITL Serial No. 258, it is
stated that in order for income derived from the disposal of investment fund
participation certificates to be excluded from withholding tax, during the 1 year
period between the purchase and sale date of investment fund participation
certificate, according to the fund by-law at least 51% of the fund participation
certificate’s portfolio in question must permanently consist of shares traded on
the Istanbul Stock Exchange.
There is no regulation in the tax legislation regarding the content of the
concept of permanency in the statement of “at least 51% of its portfolio per-
manently” included in aforementioned regulation. The stated rate is not the
anticipated rate in Capital Market Legislation. Therefore, it is not clear that the
51% requirement will be sought every day. This issue needs to be clarified by
legal regulation.
Additionally, in the tax ruling no. 5515, dated 27.03.2017 of Revenues
Administration; in the event that there is no statement in the fund by-law that
at least 51% of its portfolio shall be composed of shares traded in BIST, it is con-
cluded in the view that the actual provision of the condition in question will not
lead to withholding tax exclusion of these incomes and this statement shall be
included in the fund by-law.
On the other hand, in accordance with CMD14 No. 2012/3141;
– Incomes of participation share of share intensive funds and
– Incomes from the disposal of real estate and venture capital investment company shares
12 OG no. 27659, dated 01.08.2010.

13 Per provisional article 67 of ITL, the types of funds within the withholding tax are not
subject to declaration.
14 OG no. 28296, dated 18.05.2012.
88 Filiz Keskin
obtained by entirely and limited taxpayer real persons are subject to %0

withholding tax.
It is seen that a similar statement stipulating the “permanency” criterion is
included in the definition of the share intensive funds in the Capital Market
Legislation.
In Article 6/(2) of the Communiqué on Principles of Investment Funds, funds
at least 80% of fund net asset value of which is permanently invested in issuer’s
shares traded in BIAS, except for shares of securities investment companies, and
units of which are issued under an umbrella fund as defined in subclause (2) of
subparagraph (a) of the first paragraph of this Article are considered as “Share
Intensive Funds”.
In the same article, it is stated that “… Cash collaterals of futures contracts
based on issuer’s shares and issuer’s share indices included in portfolios of share
intensive funds, and premiums of option contracts based on issuer’s share, and cov-
ered warrants based on issuer’s shares traded in exchange are taken into account in
calculation of 80%. Without prejudice to provisions of fifth paragraph of Article 24
of this Communiqué, in cases where a fund fails to meet the required conditions on
daily basis for classification as a share intensive fund, for the relevant days, founder
and portfolio custodian shall be jointly liable also for performance of all obligations
of the fund, investors and/or institutions trading investment fund units.”
If the limits specified in the information documents and this Communiqué
are breached due to rights of option on newly issued shares or reasons beyond
control of portfolio manager such as dividend distribution or price movements
in value of portfolio assets, then it is required to re-establish compliance with the
said limits within no later than 30 days. If it is impossible to re-establish compli-
ance with the said limits within said period of time or it is determined that the
re-establishment of compliance with the said limits shall lead to major losses,
then this period may be extended by the Board. The Board may request liquida-
tion or transformation of the funds which fail to apply to the Board by the end of
this period of time or the funds which are not deemed appropriate by the Board
for granting a time extension.
Therefore, in case of remaining below the limit of 80% due to the rights of
purchasing new shares or paying dividends and price movements of value of
assets in the portfolio of share intensive funds that are beyond executive control,
it is considered that tax exception may continue to be implemented in case of
compliance with these limits within 30 days.
The Turkish Council decided on State in a dispute over similar issues in the past
years. In accordance with the legislation in force on the date of the case, because
securities in portfolio of “the funds which shall be subject to %0 withholding tax
and whose at least 25% of the portfolio value invested permanently into shares of
companies established in Turkey including State Economic Enterprises included in
the scope of privatization according to the legislation” may decrease in value as a
result of stock market fluctuations, it is stated that increasing the fund to its old
rate requires a certain period of time, this period is determined as 10 working
days in the Capital Market Legislation, and there is no regulation in the way
that the 25% rate determined in the relevant articles of the income tax law and
corporate income tax law is valid for each day of the year. Therefore, it is con-
cluded that it is sufficient for the share rate in the portfolio to be above 25% on a
monthly average basis15.
On the other hand, in the opinion of the Revenue Administration No. 186
dated 14/08/2012; incomes of investors that purchased investment fund partici-
pation certificates prior to the amendment of the bylaw and disposed of the related
participation certificates after the funds have been transformed into “share inten-
sive funds” upon CMB approval, since investment funds were shared intensive
funds on the date of the income shall be subject to %0 withholding tax according
to article 1 of the Council of Ministers Decision No: 2012/3141.
3.3 Law on Taxes on Expenditure (BITT)

In article 30 of the Law on Taxes on Expenditure No. 6802, taxpayers of BITT are
considered as banks, bankers and insurance companies; in paragraph 2 of article
28, it is stated that;
“The money that bankers received in cash or not in their own favor regardless of their
titles due to their transaction and services (including the money received as commissions,
fees, service over their benefit and income obtained from the money collected by those
whose job is to collect money to charge deposit interest or to take advantage under other
names and those who pledge to purchase and sell securities on account of themselves or
others; and to act as mediator on sales and purchases or to pay off debts against the secu-
rities they purchase and sell) are subject to bank and insurance transactions tax (BITT).”
In paragraph 3, it is stipulated that those who carry out any of the transactions
and services mentioned in paragraph 2 as the main field of business shall be con-
sidered as bankers in the implementation of this Law. Regulations on the rate of
BITT are made in Article 33 of the Law.
In tax rulings issued to date by Revenues Administration (for example;
tax rulings no.23486 dated 05.06.1997, and no. 074581 dated 27.09.2006, and
15 The decision of the 4th Chamber of the Council of State dated 12.12.2000, numbered
E. 2000/898 K. 2000/5234.
90 Filiz Keskin
no.150376 dated 31.05.2017), in the event that the investment funds and com-
panies perform any of the transactions (such as buying and selling shares and
acting as a mediator on purchase and sales) specified in paragraph 2 of article
28 of Law no.6802, they shall be considered as bankers and all kind of money
received in favor of them as a result of these transactions shall be subject to BITT.
However, under subparagraph 29/t of Law on Taxes on Expenditure; the
money obtained by
– Pension investment funds,
– Securities investment funds,
– Securities investment companies,
– Venture capital investment funds and
– Venture capital investment companies
due to their transactions in money and capital markets shall be exempted
from BITT.
On the other hand, transactions of investment funds and companies which
are outside of the scope of paragraph 2 of article 28 of Law No.6802 are subject
to VAT16.
Since the main field of business of real estate investment funds and companies
is not trading securities or capital market instruments, these institutions are not
subject to BITT17.
3.4 Stamp Tax Law (STL)

The regulations related to stamp tax are included in the Stamp Tax Law no. 488.
Whereas papers subject to stamp tax are counted in Table (1) attendant to the
Law together with relative and lump sum stamp taxes, documents exempted
from stamp tax are counted in Table II.
The term “paper” which is a subject of stamp tax, refers to documents which
are issued by means of being written and signed, and marked with a sign to
replace the signature or which can be submitted to prove or indicate any matter
and documents created as electronic data in magnetic medium by means of
using electronic signature (STL art. 1).
In accordance with article 3 of the Law, taxpayers of stamp tax are those who
sign the papers.
16 In article 17/4-e of VATL, the transactions within the scope of banking and insurance
transactions tax are exempted from VAT.
17 Real estate investment funds and companies are VAT taxpayers.
In section “IV-Commercial and Civil Affairs Paper” of Table II attendant

to STL;
“16. Papers issued concerning joint-stock companies, partnerships limited by shares and
limited liability companies, and investment funds, share transfers, capital increases, and
extensions of time.”
“21. Trading contracts of real estate investment companies and real estate investment
funds exclusively for real estate portfolios and preliminary contract for real estate sales.”
“50. Contracts issued in relation to venture capital investments exclusively of venture cap-
ital investment companies and venture capital investment funds, and other papers issued
regarding these contracts” are exempt from stamp tax.
Additionally, in section “V- Corporate Papers” of Table II attendant to STL;

“21. Stamp tax of papers that are issued in all kinds of the transaction of insurance and
retirement companies and pension investment fund companies, and these companies or
funds should pay that” are exempt from stamp tax.
In the tax rulings regarding regulations of exception for real estate investment
companies issued by Revenues Administration (tax ruling no.104570 dated
01.08.2016 and tax ruling no.580 dated 17.04.2016 of Revenues Administration),
it is stated that;
– preliminary contracts for sale and sales contracts related to the immovables in the
portfolio of the Real Estate Investment Company (REIC) can be exempted from the
stamp tax,
– stamp tax exception can be applied only for the part of the REIC share in preliminary
contracts for real estate sales issued by sellers as joint venture including investment
companies,
– the revenue sharing contracts to be questioned regarding real estate (in the portfolio
of REIC) sales shall not benefit from the stamp tax exception.
On the other hand, in the tax ruling no. 55872 dated 22.05.2015 of Revenues
Administration, it is concluded that the “total stamp tax of the “KYD Indicies
Agreement” aiming to have Indicies of …. Association to which Retirement
company is party used in return of a specific price should be paid by the company
that is a party to the agreement”.
Therefore, solely the papers including pension investment funds of stamp tax
taxpayers shall be excluded from stamp tax and in the event that the paper has
another taxpayer, that taxpayer shall be obligated to pay total tax.
4 Conclusion
When Turkish Tax Legislation is analyzed, in article 5 of CITL, income derived
from venture capital investment funds and companies, and gains obtained from
92 Filiz Keskin
portfolio management of some investment funds and companies based in Turkey

and corporate incomes of some of the others are exempt from CIT. In terms of
foreign investment funds, tax advantages are also provided in the event that cer-
tain conditions in article 5/A of CITL exist. Moreover, in article 15/3 of CITL,
the withholding rate for investment funds and companies’ gains exempted from
CIT is determined as 0%.
In Provisional Article 67 of ITL, tax advantages (such as exclusion from with-
holding tax, nondeclarative right, and 0% tax rate) are provided to corporate
incomes of investment funds and companies and some incomes and revenues
within the article some of their income and to investors of these institutions.
By articles 89 of ITL and 10 of CITL, the amount allocated as venture capital
funds in article 325/A of TPL can be deducted at certain rates.
In Article 29/t of the Law on Taxes on Expenditure, the money obtained
as a result of the transactions made in money and capital markets by pension
investment funds, security investment funds and companies, and venture capital
investment funds and companies are exempt from BITT.
Exceptions regarding the papers related to various collective investment
institutions are regulated in subparagraphs of 16,21 and 50 of Table II and sub-
paragraph 21 of Table V attendant to Stamp Tax Law.
In cases where the provisions providing tax advantages for CII are not suffi-
ciently clear (such as, the portfolio structure of funds to be exempted from tax and
the nature of the papers to be exempted), as the tax administration seems to have a
narrow interpretation of their scope, the legislator needs to explicitly write these
provisions.
In withholding tax exemption, %0 tax rate or withholding tax exclusion
applications, the statement “permanently” mentioned in the related regulations
indicating that:
– To apply the exception to investment funds and companies based on gold and pre-
cious metal, at least %51 of their portfolio must permanently,
– To apply withholding exemption to incomes derived from the disposal of participation
certificates held more than a year, at least %51 of their portfolio must permanently,
– To apply %0 withholding rate to incomes from participation share of share intensive
funds, at least %80 of their portfolio must permanently,
consist of the assets mentioned above, and values should be clarified whether
these rates are required every day or not.
Also in subparagraph IV-50 of Table (II) attendant to STL, there are some
hesitations in the application about the scope of the statement “Contracts issued
in relation to venture capital investments exclusively of venture capital investment
companies and venture capital investment funds, and other papers issued regarding
these contracts” in the provision of exception for Venture Capital Funds and
Companies.
Since it is seen in the application that there are provisions regarding revenue
sharing in preliminary contracts for real estate sales and sales contracts regarding
the portfolios of real estate investment funds and companies, the fact that the stamp
tax exception within the scope of paragraph IV-21 of table (2) attendant to STL
covers the revenue sharing transactions arranged together with the preliminary
contracts for real estate sales and sales contracts is seen as an case to be evaluated.
On the other hand, in accordance with Provisional Article of 67/5 of ITL, pen-
sion and exchange-traded funds and securities funds and companies’ incomes
stated in paragraph 1,2,3 and 4 of the Law shall be subject to %0 withholding tax,
but deposit and repo revenues of real estate and venture capital investment funds
are subject to withholding tax. In this case, there is no difference between the
investor opening a direct deposit account or buying a repurchase agreement and
obtaining a real estate investment fund participation certificate in terms of the
tax cost of deposit and repo accounts. Therefore, a regulation, which stipulates a
withholding tax exclusion for the assets and the transaction in the portfolios of
these funds, is thought to be advisable. Barring securities investment companies,
a similar recommendation can also be made in terms of investors of investment
companies.
Again, especially in terms of real estate investment funds and companies, it is
essential to make regulations for exceptions on VAT, title deeds, and real estate
tax and thereby reduce the high tax and charging costs.
References
Aydın, E. (2000). “Gelir Ve Kurumlar Vergisi Uygulamaları Açısından Yatırım
Ortaklıkları ve Yatırım Fonları”, Vergi Dünyası Dergisi, Sayı 224, 84–99.
Berzek, A.N. (1995). Yatırım Ortaklıkları, Vergi Sorunları Dergisi, Sayı 80.
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Ankara.
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Kuruluşları ve Özellikle Değişken Sermayeli Yatırım Ortaklığı”, İstanbul
Üniversitesi Hukuk Fakültesi Mecmuası, Cilt 71, Sayı 2.
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Countries, John K. Thompson and Sang-Mok Choi, OECD Publishing, Paris,
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Araçlarından Elde Edilen Gelirlerin Vergilendirilmesi, Beta Yayınları, Istanbul.
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Second Edition, John Wiley & Sons Ltd., England.
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Hukukunda Uygulanma İmkanları, Fakülteler Matbaası, Istanbul.
www.spk.gov.tr
www.gib.gov.tr
http://europa.eu
Filiz Giray
The Impacts of Digitalization of Tax

Administration on the Complexity of Tax
System: OECD Countries Example
Abstract: The traditional tax system may not support a new business model. The improve-
ment of information and communication technology has changed the business model. The
new business models are based on digital technologies and transactions. The traditional
tax administration and system fail to tax on profits of digital companies. The digital tax
paradigm will inevitably necessitate a change in countries’ tax systems. Today, the digita-
lization of business has played an essential role in the increased tax evasion and loss. Tax
administrations have to go to digitization to adapt to these changing business structures.
The digital tax administration can create an opportunity to raise tax-income without raising
the tax burden. Also, the digitalization of tax administration affects the complexity of the
tax system, which is a significant problem for many countries. The complicated tax system
causes issues such as loss of tax revenues, injustice. The aim of this study investigates the
impacts of the digitalization of tax administration on the complexity of the tax system with
the indicators of some OECD countries.
Keywords: Digitalization, Digitalization of Tax, Epistemic Tax Policy, Electronic
Fiscal Device
JEL Codes: H20, H26, H83, K34
1 Introduction
The modern world is experiencing a digital age. The process of digitalization
has been spread since the late 1990s. The data can be a more valuable asset than
gold or oil in the current world. The digitalization is not only internet usage,
but also it changes persons’ think the way (Naughton, 2010). The development
of technology has disrupted the classical business model and created a new
business type. These businesses are called platform business model or platform
firms (Stallkamp and Schotter, 2019). The features of new business models can
be listed as follows: (1) It is not necessary to create a company physically because
of the digital products sold by these companies. This case invalidates classical
national taxation based on local assessment. (2) The majority of these companies
are multinational corporations to monopolize due to having a potential multi-
side platform, network, and scale economy effects and restrictions of use.
96 Filiz Giray
Although digital sectors still account for less than 10% of most economies
based on the added value, income, and employment they created, this sector
has been developing rapidly (IMF, 2018:1). For example, e-commerce in the
Netherlands has increased as a share of total company revenue from 3.4% in
1999 to 14.1% in 2009. Similarly, between 2004 and 2011, this share increased
from 2.7% to 18.5% in Norway and from 2.8% to 11% in Poland (OECD,
2015:56).
The administration of tax, which was designed by business models before
the revaluation of technology is far from insufficient needs. The development of
e-commerce has made it difficult to reach taxable income. The OECD’s Shadow
Economy Report for 2017 indicates that new technology and development in the
digital economy will lead to informal economic activities (OECD, 2017). The dig-
ital economy creates opportunities for tax base erosion and profit shifting (Dover,
2016:47). New technology challenged both direct taxes and indirect taxes. The
final product can be produced at the premises of the purchaser even if the design
is made elsewhere, and the value created is determined (Hadzhieva, 2019:91). The
tax system should follow these changes to reach the goals of tax authorities such as
low tax evasion, tax erosion, more efficiently tax c ollection. These changes should
include two parallel directions as the digitization of tax administration and tax
policy changes. However, the digitalization of tax a dministration has not yet been
fully realized in all countries. The effectiveness of the tax administration’s digiti-
zation depends on many factors. One of them is the epistemic tax policy. The per-
formance of the digitalization of tax depends on epistemic tax policy, providing
whether used tools in taxation have the test of reality (Campbell and Hanschitz,
2018:1). In the future, artificial intelligence will be used in the taxation area.
Although digitalism has increased due to the aggressive tax planning of
multinational corporations by moving their earnings to low-tax countries in
particular (Hadzhieva, 2019:10), it is believed that digitalization in tax will be
beneficial. Digitalization in tax administration will positively affect investments
as a macroeconomic variable. Taxes are an important determinant of individuals’
entrepreneurial decisions. This is the most popular assumption, explained by
Hundsdoerfer and Sichtmann’s irrational decide-making behavior (Hundsdoerfer
and Sichtmann, 2008:19). Therefore digital tax system would positively affect
entrepreneurial decisions. Digital taxation is an opportunity for countries that
want to bring technology into their tax systems and to add more value to their
businesses while it is a necessity for the new digital world (EY, 2017:26). In this
study, it is expanded that the digitalization of the tax administration could also
affect the complexity of the tax system, which is an important problem for many
countries. Firstly, the digitization of the tax administration will be explained in
The Impacts of Digitalization of Tax Administration 97
this study. Then, the digital transformation of tax administration will be given
with OECD country’s implementations. In the following chapter, it is assessed
practices of digitalization in tax administration from the view of the complexity
of the tax system. The findings will be evaluated in the conclusion.
2 The Digitalization of Tax Administration

Although there is no generally agreed definition of the digital economy, the defi-
nition made by the International Monetary Fund (IMF) is the most comprehen-
sive. The IMF has defined the digital economy in two ways: broad and narrow.
The digital economy is defined as a narrowly online platform and liability activ-
ities on this platform. In broadly meaning, the digital economy can be defined
as all activities that are using digitized data such as the internet into production
processes and products, new forms of household and government consumption,
and fixed-capital formation. But there is no compromise on the definitions yet
(IMF, 2018). For this reason, Fortanier and Matei (2017) have been determined
by three groups of digital transactions, rather than defining them.
Fortanier and Matei (2017) determined three criteria for distinguishing dig-
ital transactions (Fig. 1): How the transaction includes the process of digitally
ordered, enabled and delivered of trade, what the subject is goods, services and
data, and who represents a corporation, household (customer) and government.
Tax administrations can be seen as an essential component of e-government
strategies (Marcus, Baron, 2018: 27). Digitalization in tax administration occurs
with electronic fiscal devices. The use of electronic financial devices refers to a
wide variety of technology instruments for the tax administration to help control
business’ operations.
In the modern global economy, the taxation of the profits of a business is
more complicated and complex. There is not a link between where the value to
be taxed and where taxes are paid. In other words, the source of income obtained
can be uncertain (Fabregas, 2018:3). E-commerce can offer goods and services
to many potential buyers by websites. Such a trade would raise various tax and
government-level tax issues (Nellen, 2012:3).
Digital taxation provides some benefits to both taxpayers and tax
administration.
In terms of the taxpayer:
– Digitalization in taxation will not only enable individuals and companies to
declare more easily and cheaper taxes, but will also allow unreported income
to remain.
98 Filiz Giray
Nature Product Actors

(‘how’) (‘what’) (‘who’)
Goods Corporations
Digitally
ordered
and/or Households
Services
Platform
enabled
Government
and/or
Digitally Non-profit
delivered Information/ institutions serving
data households
Fig. 1: The Dimensions of Digital Transactions. Source: Fortanier and Matei (2017): 10.
– Digital methods are less expensive than classical methods. For example,
documenting certain transactions require written documents for taxpayers.
The electronic record can substitute for the written record (Nellen, 2012:7).
– Digitalization reduces the risk, which protects to company’s reputation
(EY, 2017:18).
– Individuals may not need expensive tax consultants (Campbell and Hanschitz,
2019:9).
From the view of tax administration:
– Digitalization may reduce tax evasion and tax evasion utilizing tools to collect
tax information more efficiently and capture deficiencies (ICAEW, 2019:6).
– It also reduces the time of data collection.
– The digitalization of tax is more functional than the conventional tax pro-
cess, especially in determining taxation’s data collection and tax liabilities.
Innovative solutions can make the functions of tax administrations much more
effective. Because it can provide more secure and full data and control of tax.
The tax administration will be able to have structured and unstructured infor-
mation about taxpayers from several various sources (Vuković, 2018; Volvach
and Solovyev, 2018). The data can be able to give a picture of all networks of
taxpayers who consist of stakeholders, consumers, and suppliers. This process
can take place in a short time (about 45 minutes) (Gascon, 2018:15).
– The use of electronic fiscal devices ensures better audit results with the same
number or even fewer auditors (Casey and Castro, 2015:24).
– Thanks to the online system, the exchange of financial data between the tax
administration and companies will increase transparency in taxation, taxes
will be collected more efficiently, and more tax fairness will be possible
(Campbell and Hanschitz, 2019:2).
– By analyzing the Data, the risk and the behavior, needs, and issues of the
taxpayers’ behavior will be seen more clearly.
– The human can behave differently. However, the operations in electronic
devices are the same for everyone. This situation eliminates complaints that
equal treatment is not taken.
The tax administration’s gains on the result of these counted benefits will be
(Strømme, 2018:50–51):
– Increase in Efficiency.
– Increase Compliance.
– Provide Better Service.
– Equal Treatment.
All of the features require pressure on governments for digitalization.
Digitalization is not easy for administration. It needs to be integrated into the
business strategy. Holte emphasized digitization today as the lock for the tax
administration to achieve the mission expected of him (Holte, 2018:9–10).
Small - and medium-sized companies provide huge advantages from digi-
talization. Electronic applications would give opportunities to small - and
medium-sized companies to reduce administration tasks in the calculation of
their taxes. Notably, the online tax system means a less bureaucratic transaction
for a self-employed person (Campbell and Hanschitz, 2019:2).
The digitalization of the tax process is observed in five areas. On other words,
the digitalization of the tax administration takes place in five steps:
– E-filing: Filling the tax return with the standard electronic form.
– E-accounting: Recording data in an electronic format by electronic invoices
– E-matching: Cross-referencing with accounting, bank, and source data.
– E-auditing: Electronic audit assessments.
– E-assessment: Assessments by use of Blockchain technologies, etc.
Most countries’ tax authorities began using e-filing tax returns to adopt dig-
ital technologies. E-accounting followed it. The most radical change is e-match.
E-match involves matching with data to other sources such as banks in real-time.
100 Filiz Giray
Also, e-match analyzes across the taxpayers and jurisdiction to see hypothetical
cases (EY, 2017:5). E-assessment is a significant step, too. Obtaining the data is
not enough. The tax authority needs to analyze and assess them for purposes.
Hwangbo (2004) called them e-tax technologies. It is stated that these tech-
nologies serve the implementation of a reliable, effective, transparent, and secure
tax system. However, there are very few countries that implement these five steps
(Hadzhieva, 2019:87). In many countries, still electronic tax statements, tax
payments, and the integrated tax administration data system are optional (Casey
and Castro, 2015:11).
In order to solve problems in the process of digitalization, it is not only nec-
essary to bring new taxes, but also digital conversion is required in the tax
administration.
The highest degree of digitalization is that tax administration use the sub-
mitted data to assess tax without tax forms (tax without tax forms (EY, 2017:5)
If electronic invoicing is arrayed to meet the needs of all companies, it can
decease administrative costs for business. Electronic invoicing should be man-
datory for all enterprises in over the World. Another advantage of the electronic
invoice is that it can improve the business process.
The performance of the digitalization of tax administration depends on
some factors. Technologies, people, managing tax risks, financial resources, and
communication as five elements are required to digitalize tax administration
(Vuković, 2018).
In digitalization, technology is an essential element. If information tech-
nology experts only make the design of the digitalization of tax administration
without taking account of tax authority and taxpayers, it leads to some mistakes
(Vuković, 2018).
However, human factors should not be ignored. Tax administration helps
to taxpayers about their tax transactions. With digitization, the number of
stakeholders in taxation has increased to three: taxpayer, tax administration,
and software. Software vendors are a new stakeholder in taxation. Software
vendors take place in the market as supporters of taxpayers. Taxpayers want
security software when submitting their information in data format (ICAEW,
2019:5).
The issues of digitalization of taxation include data security, reliance on data,
lack of nexus, taxable income determined, and expansion of e-commerce and
new business model (Hadzhieva, 2019:13). Data security is one of most critical
of tax digitalization applications (Campbell and Hanschitz, 2018:7).
Additionally, the epistemic tax policy is needed to test the validity of tools and
data used in taxation (Campbell and Hanschitz, 2019:2).
Also, the digitalization of a country’s tax administration is not enough. It is

necessary to use different digital systems and similar models with other coun-
tries in the process of globalization (EY, 2017:5).
3 The Implementation of Digital Transformation of

Tax Administration in Some OECD Countries
OECD developed the first “Base Erosion and Profit Shifting Action Plan
(BEPS)” in 2015. Later, these plans were revised. BEPS Action Plans require to
drive transparency on the part of taxpayers. OECD countries have signed some
agreements over the years. For example, in 2016, only 84 of 111 OECD coun-
tries signed the Multilateral Competent Authority Agreement for Automatic
Exchange of Information (EY, 2017:14). There are different views among 117
OECD members against BEBs measures. However, BEPS is a crucial instru-
ment that draws attention to the issue of digital tax as an international tax issue
(Hadzhieva, 2019:26).
Tax administrations go digital. Although there is no consensus among OECD
countries, the EU appears to have stepped up faster compared to OECD coun-
tries towards digital taxation. Governments in EU countries are under pres-
sure from digital companies to create unfair tax pay. In the EU, the main aims
of the digitalization of tax administration are to balance the tax obligations of
member countries and to reduce the bureaucratic of the tax burden (Campbell
and Hanschitz, 2019:5).
Globally, 11 EU and some other OECD countries took unilateral measures. In
direct taxes (Hadzhieva, 2019:39–40):
- France’s New GAFA (Google Apple, Facebook, Amazon) and YouTube Taxes
In 2018, a 2% tax was levied on advertising revenues by the resident, and non-
resident platforms broadcast online videos such as YouTube, Netflix in France.
This tax is called “Netflix tax”, which includes video given “for free” by web sites
such as YouTube. However, some problems have been seen in the application of
this tax. Because the persons to be taxed are not in France (Baron, 2018:5). The
other charge, called GAFA, is levied on the income of the activities of global
companies in Europe. This tax has been applied since 1 January 2019.
– Italy’s Web Tax
Italy has implemented a 3% web tax on internet services used by Italian resi-
dent and non-resident companies. This tax will be paid by the buyer of intangible
goods, such as online advertising and sponsored links, but not to online retail.
102 Filiz Giray
– Austria’s Online Advertisement Tax

In Australia, the digitalization of tax administration was begun by the dig-
ital transformation office within the government in 2013. Online advertising tax
enacted in Austria in 2018.
– Slovakia’s Intermediation Tax
A tax on intermediation income from the website was introduced in Slovakia.
– Belgium’s Fairness Tax
Belgium has brought fairness tax at the rate of 5.5% over the distributed
profits. This tax is different from corporate and income taxes.
– Hungary’s Advertisement Tax
Hungary introduced advertising tax in 2014 to tax advertising revenue for
companies. However, the tax was revised in 2015 and 2016 because the European
Commission does not comply with EU rules. Hungary amended it by reorgan-
izing it in 2017 to harmonize the laws of the EU. In this respect, the threshold
of the progressive tax rate to 7,5% was raised for advertising sales revenue of
companies which have over Hungary forint 100 million advertising sales rev-
enue. Although this tax is not directly for the digital sector, digital markets will
be significantly affected.
– UK’s Diverted Profits Tax
The diverted profit tax aims to establish a link between the place where
income originates and the business that provides income. This tax qualifies an
upfront tax at 25%.
Also, in 2018, it is proposed a withholding tax for the IP royalty payable by
companies not established in the UK. This tax focuses on taxing the digital
economy, since aiming at creating a nexus between consumer and user base
rather than physical presence.
– Australia’s Multinational Anti-Avoidance Law
Australia introduced the multinational anti-avoidance law, which is similar
to the structure of the UK’s Diverted Profits Tax. The taxpayer is a company that
does not settle in Australia.
– New Zealand’s Digital Services Tax
Although New Zealand was reluctant to levy digital services tax, it has brought
it as anti-tax avoidance measures with the effects of other countries.
– India’s New Nexus and Equalization Levy

In India, in 2018, a new income tax was legalized by the rate of 40% for foreign
companies providing digital goods and services.
– Turkey’s Withholding Tax on E-payments
In Turkey in 2016, the monthly mandatory reporting obligation for transactions
involving digital sales of service providers and advertising activities was enacted.
Turkey has started to Apply 18% VAT for digital services offered by foreign com-
panies abroad since January 2018.
Some countries (the UK, US, China, Saudi Arabia, Kuwait, Israel, Taiwan,
Turkey, Australia, and Japan) have introduced value-added tax as indirect taxes
to capture the taxes of services provided via the internet (Hadzhieva, 2019:89).
However, some criticism against unilateral measures has been put forward.
These taxes carry some risks like negative impacts on investment, innovation,
economic growth, the incidence of taxation on consumers (Hadzhieva, 2019:11).
In addition, the unilateral measures can lead to the fragility of the single
market (Fabregas, 2018:3). The unilateral actions should not be accepted in the
international arena.
In some countries, such as Italy and India, the equalization levy distorts the
principle of ability to pay in taxation, because this may require tax payment from
damaged businesses (Hadzhieva, 2019:43). Nexus-based Approaches include
many issues.
Latter, the European Commission proposed new legal rules for taxation of the
activities of digital companies in 2018. The European Commission’s first proposal
was the comprehensive solution, which includes changing the taxable nexus to
account for the absence of physical presence. This proposal requires a long term.
For this reason, an interim tax for certain income derived from digital 5,5% activ-
ities is proposed. Thus, the European Commission proposed “Digital Services
Tax” (DST) called an interim solution that harmonizes the European Union.
This tax is an indirect tax. Therefore, this tax will help certain European Union
countries avoid unilateral taxes on digital activities. The DST includes revenues
from i) Selling online advertising space, (ii) Digital intermediary actions, and
(iii) The sale of data. The tax rate is 3% of gross revenue as a proxy of value cre-
ated. The DST is a temporary implementation until the comprehensive solution
(Fabregas, 2018:3).
Lee and Hwangbo (1999) suggested a tax called the Consumer-Delivered
Sales Tax for use in the electronic commerce order to prevent tax evasion and
economic distortion. This tax is based on the direct payment of the consumer
104 Filiz Giray
without the intervention of the supplier. It is claimed that this tax is the best
solution to a cyber-consumption taxation system to reach OEC’s seven criteria
(Equitable, simple, confidence, effective, fairly, and adapting) (OECD, 1997) for
the development of global electronic commerce. But the tax couldn’t solve the
problem worldwide. Similarly, Hwangbo (2004) suggested a consumption tax
system called the Global Electronic Tax Invoice System for cyber-taxation. Jin
(2003), in his work, examines the effects of non-taxation of electronic commerce
on state and local tax revenues. While electronic commerce is overgrowing, it is
noted that the reflection of this on tax revenues is small.
4 The Assessment of Implementation of Digitalization in

Tax Administration: The Complexity of the Tax System
Tax is essential for both person and government. Tax is the most direct eco-
nomic activity of connecting between citizens and the state (Sharman, 2012:18).
Tax policy or tax principles should be changed to solve the problems of e-com-
merce related to taxation. For this, it is necessary first to determine the differ-
ence between tax policy and tax principles. Tanzi and Zee described tax policy
in 2000 study for the IMF as designing a tax system to finance public spending
most effectively and equally. The design of the tax includes its subject, rate, base,
management, and compliance rules of the tax. Tax principles are tools that en-
able the creation of appropriate tax policies in a tax system. It is important to set
principles of good tax policy. The problem is that applying current tax princi-
ples to e-commerce damages the tax policy of countries. While it is the work of
some institutions (The American Institute of Certified Public Accountants and
the National Conference of State Legislatures) to identify tax principles that can
address this issue, the OECD’s study is the most general (Nellen, 2012:9).
OCED’s five tax principles are as follows (OECD, 1998):
– Neutrality: The tax system should be neutral in both commerce and e-commerce.
– Efficiency: Administrative and compliance costs must be minimal.
– Certainty and simplicity: Tax rules should be at ease, confidence, and simplicity.
– Effectiveness and fairness: Taxes should be taken in amounts and fairly, which
would not create tax losses.
– Flexibility: The tax system must be flexible to keep pace with economic and
technological changes.
The simplicity in the tax system is one of the tax principles required for suc-
cessful tax policy for countries. Tax complexity is an area that leads to a reaction
against tax. The right tax statement is quite difficult in a complex tax system
(Andreoni et al., 1998:852). The complexity of the tax system in many countries
requires taxpayers to rely more on the tax administration and/or seek help from
consultants in meeting their tax obligation (Casey and Castro, 2015:10).
Countries have a more complex tax system that spends more time, waste, and
effort on tax compliance, which leads to tax losses. One assessment of the appli-
cation of the digitalization of tax administration is the degree of complexity in
the tax system.
Tax administration has several critical opportunities for digital conversion.
These are centralization, data, and automation. Centralization will facilitate tax
compliance, improve quality, greater transparency, and lower cost. Advanced
data provides to see gaps in available data. Automation creates the development
of tax processing, planning, and reporting. For this reason, tax administrations
around the world are rapidly developing digitalization in the tax system.
According to “The Financial Complexity-Index 2018 which was found by
the “Netherlands-headquartered TMF group for 94 jurisdictions worldwide
(Europe, the Middle East and Africa (EMEA) (50), the Americas (25) and
Asia Pacific (APAC) (19)). They used the survey to measure four complexity
parameters: Compliance (Company representative, cross border transaction,
data storage), Tax (Tax registration, type of taxes and compliance requirement),
Reporting (Reporting process), and Bookkeeping (Accounting regulations,
authorities, and technology). Global complexity rates for 2018 are as follows
by reporting 57% (2017: 55%), tax 49% (2017: 48%) and bookkeeping 46%
(2017: 51%) (The Financial Complexity-Index 2018, 2018:5).
The top sixty-one countries in the index ranking showed in Tab. 1. Turkey
ranged the most complex in 94 countries for accounting and tax compliance
in 2017. In the same year, the Cayman Islands took place as the least complex.
According to the Financial Complexity-Index 2017, most complex jurisdiction
area focuses on Europe, the Middle East, and Africa.
The main reasons for the increasing complexity in Turkey are as follows: Firstly,
Turkey’s tax code is changed frequently. This case prevents both not easy fol-
low-up and increases complexity. Secondly, an attempt to harmonize Turkish tax
legislation was insufficient. Similarly, although taxes have been deceased in Italy,
the fact that many specific requirements have risen the complexity of account
and tax.
In 2018, the index ranking was changed (Tab. 1). China became the most
complex in the world for accounting and tax compliance. Also, the Cayman
Islands are the least complex.
Brazil is among countries that have the most complex for accounting and tax.
An essential reason for Brazil is digital transactions. Especially, e-social (social
106 Filiz Giray
Tab. 1: Top 10 Most Complex Jurisdictions for Accounting and Tax Compliance
(2017–2018). Source: The Financial Complexity-Index, 2017, 2018.
Global Ranking Jurisdiction Global Ranking Jurisdiction

(2017) (2018)
1 Turkey 1 China
2 Brazil 2 Brazil
3 Italy 3 Turkey
4 Greece 4 Italy
5 Vietnam 5 Argentina
6 Colombia 6 France
7 China 7 Bolivia
8 Belgium 8 Colombia
9 Argentina 9 Mexico
10 India Russia 10 Russia
11 France 11 Vietnam
12 Bolivia 12 Croatia
13 Albania 13 India
14 Kazakhstan 14 Albania
15 Mexico 15 Belarus
16 Belarus 16 Philippines
17 Israel 17 Romania
18 Spain 18 Venezuela
19 Pakistan 19 Ukraine
20 Croatia 20 Belgium
21 Austria 21 Germany
22 Ecuador 22 Greece
23 Honduras 23 Slovakia
24 Luxembourg 24 Israel
25 Philippines 25 Guatemala
26 Uruguay 26 Kazakhstan
27 Thailand 27 Luxembourg
28 El Salvador 28 Ecuador
29 Guatemala 29 Uruguay
30 Venezuela 30 Portugal
31 Angola 31 Thailand
32 Malta 32 El Salvador
33 Chile 33 Paraguay
34 Paraguay 34 Spain
35 Latvia 35 Chile
Tab. 1: (continued)
Global Ranking Jurisdiction Global Ranking Jurisdiction

(2017) (2018)
36 Indonesia 36 South
37 Azerbaıjan 37 Panama
38 Egypt 38 Peru
39 Portugal 39 Slovenia
40 Malta 40 Bosnia
41 Dominican Republic 41 Dominican Republic
42 Finland 42 Egypt
43 Montenegro 43 Honduras
44 Panama 44 Lithuania
45 Jamaica 45 Moldova
46 Mauritius 46 Indonesıa
47 Poland 47 Serbia
48 Taiwan 48 Hungary
49 Canada 49 Latvia
50 South Korea 50 Nicaragua
51 Nicaragua 51 Poland
52 Peru 52 Cyprus
53 Russia 53 Jamaica
54 Romania 54 Algeria
55 The Netherlands 55 Australia
56 Costa Rica 56 Cambodıa
57 Lebanon 57 Lebanon
58 Ireland 58 Estonia
59 Malaysia 59 Austria
60 Czech Republic 60 Sweden
61 Estonia 61 Czech Republic
security and labor obligations) require increase data shared with authorities for
companies, which causes some problems and complexity. Besides, another reason
is that taxes on income transfers to foreign banks in Brazil have been increased.
According to the 2018 Financial Complexity Index, Turkey ranked third.
Some regulations provide simplification. For example, e-voice in export oper-
ations accelerates the customs process by reducing the administration burden
on taxes and customs offices. Also, e-notification provided to companies by tax
authorities has increased communication and effectiveness between parties.
108 Filiz Giray
Tab. 2: Complexity Issues as Globally and Regional (2017, %). Source: The Financial
Complexity-Index 2017: 26.
Complexity GLOBAL 94 EMEA 50 AMERICAS 24 APAC 20

Risk of non-compliance 19 14 25 24
with local regulation
Tax compliance 17 13 21 20
Future impact of technology 17 18 18 14
BEPS and transfer pricing 16 20 14 12
Accounting complexity 11 9 7 16
Cyber security/data privacy 13 16 11 9
Other 7 10 4 5
However, from Europe, the Middle East, and Africa, Turkey was still the most
complex country in 2018.
The factors affecting the complexity of accounting and tax compliance of
TMF group are listed as follows: Risk of non-compliance with local regulation, Tax
compliance (possibility of tax audits), Future impact of technology, Base Erosion
and Profit Shifting (BEPS) and transfer pricing, Cyber security/data privacy. Tab. 2
indicates the weight of the factors by region with a global comparison rate.
Globally, the first three factors impacting complexity were ranked ‘risk of
non-compliance with local regulation’, ‘tax compliance’, and ‘the ‘future impact
of technology’. This situation varies by region. The technology is an important
factor in all areas except APAC. The digitization of the tax system will have a
positive effect on three areas.
For example, Estonia is a country that records significant distance in digi-
talization. Estonia has advanced digital tax administration. In Estonia, 29% of
companies are online, 99% of bank transactions, and 99% of tax returns are filed
online (Campbell and Hanschitz, 2019:4). Also, Estonia is among the lowest in
OECD countries from the point of the cost of collecting taxes due to deliver the
saving through digitalization (Laid, 2018:8). Parallel to this, Estonia, in the 2018
Financial Complexity Index, ranked 58. With this score, Estonia is the country
with the least complex tax system.
5 Conclusion
The change in information and communication techniques has changed the
business forms and structures. E-commerce can offer goods and services to
many potential buyers by websites. Such a trade would raise various tax and
government-level tax issues. Digitalization is fundamentally changing the way

businesses and governments interact. Digitalization is fundamentally changing
the way businesses and governments interact. Digital tools provide significant
opportunities through faster, easy, and low cost for businesses and consumers.
The digital sector has been developing rapidly over the World. However, the
growth of this sector brings with it several problems. Taxation is one of the areas
where these problems occur. The digital economy creates opportunities for tax
base erosion and profit shifting.
Traditional tax administration has been unable to tax changing business
gains. At the same time, the current tax principles which are used in a country
occurred for tax administration without the internet. As a result of this situation,
tax authorities face to loses tax revenues. As a solution, some authors have pro-
posed separate taxes for e-commerce. The EU takes faster steps due to pressures
in digital taxation than OECD. The EU has taken unilateral measures. In the
unilateral actions, some taxes brought by member countries in solving the tax
evasion and tax loss problems brought by digitalization have not been resolved.
These measures have been even criticized in several respects. For example, these
types of taxes negatively affect investment, innovation, economic growth, the
incidence of taxation on consumers, and lead to the fragility of the single market.
Whereas, digitalization creates an opportunity to tax authorities in collecting
the right tax at the right time. The tax administration should be transferred to
digitalization.
A good tax system depends mainly on tax principles. One of the tax princi-
ples set out by the OECD for both traditional, and e-commerce is the simplicity
of the tax system. This study searches the impacts of the digitalization of tax
administration on the complexity of the tax system with the indicators of some
OECD countries. Theoretically, by implementing digital services, the tax admin-
istration will lose Complexity. According to “The Financial Complexity-Index
for 94 jurisdictions worldwide, Turkey ranged the most complex in 2017. China
became the most complex in the world for accounting and tax compliance in
2018. The factors affecting the complexity of accounting and tax compliance of
TMF group are listed as follows: Risk of non-compliance with local regulation, Tax
compliance (possibility of tax audits), Future impact of technology, Base Erosion
and Profit Shifting (BEPS) and transfer pricing, Cyber security/data privacy.
According to the survey, technology is seen as an essential factor for all regions
except the Asia Pacific. This result shows that the digitization of tax administra-
tion provides a positive effect.
The stages of digitalization of the tax administration include e-filing,
e-accounting, e-matching, e-auditing, and e-assessment. Very few countries
110 Filiz Giray
have completed these stages. Countries with complex tax system problems, such
as Turkey, have to use new technologies in tax administration and adapt to the
new economy and business conditions. In addition, the digitalization of tax
administration should be parallel among countries.
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Pelin Varol İyidoğan, Eda Balıkçıoğlu, and H. Hakan Yılmaz
Empirical Findings on Macro Determinants of

Pharmaceutical Spending in Selected OECD
Countries
Abstract: Pharmaceutical expenditure as a major determinant of health care spending

arises as an attractive area of research in terms of public policy. Policymakers inevitably
face the control of pharmaceutical expenditure, which corresponds to more than a %16
of health expenditure on average to optimize health policy. In this context, besides the
historical pattern of pharmaceutical expenditure, the investigation of macro determinants
of pharmaceuticals has come into prominence in the health care literature. Within this
scope, we aim to examine the effect of aging, chronic diseases, health care expenditures and
social spending on pharmaceutical spending for 22 OECD countries by employing General
Method of Moments (GMM) procedure of Arellano and Bond (1991) which utilizes the
difference of dependent variable to eliminate the individual fixed effects. In our paper,
we conclude that the rise in the elderly population leads to an increase in pharmaceutical
spending, which is consistent with our expectations.On the other hand, we find no signif-
icant effect of male cancer incidence and the negative impact of adjusted health spending
on pharmaceutical spending. However, the results point out that a rise in female cancer
incidence rises drug expenditures. More clearly, pharmaceutical expenditure is exposed
to gender sensitivity in terms of cancer. Furthermore, we find that social spending has a
positive effect on pharmaceutical spending.
Keywords: pharmaceutical spending, dynamic panel, health, the general method of
moments (GMM)
JEL Codes: C33, I18
1 Introduction
Pharmaceutical expenditure has a significant share of overall health care spending
across OECD countries, which corresponds to more than a %16 of health expen-
diture on average. Besides the retail pharmaceutical spending, when hospital use
is also taken into account, on average, 20 percent of budget canalizes to phar-
maceutical demand. Moreover, similar to other health care functions, the cost
of pharmaceuticals is predominantly covered by government financing or com-
pulsory insurance schemes, which about % 56 of total health is spending in the
OECD average (Graph 1). In this regard, pharmaceutical spending contributes
114 Pelin Varol İyidoğanet al.
% Government and compulsory schemes Voluntary health insurance Out-of-pocket Other

100
16 13 17
25 27 24
7 29 31 31 33 29 33
34 38
80 41 41 42 39 44 40 44
12 48 47 48 49 45 51 51
1
1 58 65 66
1
26
60 4 5 1
1 4 34 31
6
40 84 80
75 72 71 71
69 68 67 65
62 59 59
58 57 55 55 55
52 52 51 51 51 50 48
20 44
38 36 36 35 34
Graph 1: Expenditure on Retail Pharmaceuticals by Type of Financing (2017).

Source: OECD (2017).
notably to determine public health spending dynamics, which is a significant

component of fiscal balance (OECD 2017).
As pointed out by OECD (2017), during the last decades, pharmaceutical
spending has upsurged sharply as a consequence of the growth in the con-
sumption of recently developed drugs. This case has led to a rise in the share
of health spending from %7 in the 1980s to more than %9 in the early 2000s.
However, since the mid-2000s, this pattern of pharmaceutical spending has
generally slowed compared with other subsectors of health care expenditure,
such as in the hospital and outpatient sectors. The global financial and eco-
nomic crisis, which induced fiscal policy implementations based on reductions
in government expenditure and the introduction of cost-containment poli-
cies, coinciding with patent losses of several top-selling drugs led to a decline
in pharmaceutical spending. While the extent of the slowdown varies widely
across OECD countries, nearly all have seen a reduction in pharmaceutical
spending growth since the onset of the crisis, and several European countries
have noticed more dramatic reductions. On the other hand, recently, the con-
sumption of pharmaceuticals has increased substantially concerning rising in
the elderly population, the growing prevalence of chronic diseases, and changes
in clinical practices (Belloni et al., 2016). In 2017, as presented in Graph 2,
pharmaceutical expenditures have reached to almost %30 for several OECD
countries.
Findings on Macro Determinants of Pharmaceutical Spending 115
Pharmaceuticals
35,00
30,00
25,00
20,00
15,00
10,00
5,00
0,00
Graph 2: OECD Pharmaceutical Expenditures – 2017 (%of Total Health Spending).

Source: OECD Health Statistics (2017).
To sum up the framework of OECD (2017), the main drivers of pharma-

ceutical expenditures can be assumed to be an aging population, growth per-
formance of the economy, indicators of chronic diseases, and fiscal policy
instruments. In our model, we estimate a model embodying those macro
determinants to examine the dynamics of pharmaceutical expenditures across
OECD countries by utilizing panel estimation techniques. In the following
years, the development of health technology, finding new diseases, especially
driven by the aging and health pricing policy, will be useful in pharmaceutical
expenditures.
Our paper is organized as follows. In the next section, we give a brief overview
of the literature regarding pharmaceutical expenditure. We explain the data and
model as follows. Finally, we present empirical findings and conclude.
2 Literature
While research on health expenditures has a wide and expanding literature, it
can be observed that there is limited recent empirical evidence on the key drivers
of pharmaceutical expenditure. We present an overview of those previous studies
in Tab. 1 below.
Although the findings differentiate concerning sample and methodology,
some common determinants explaining pharmaceutical expenditure come into
prominences such as GDP, the structure of the population, and health system
Tab. 1: Review of Literature. Source: Composed by the Authors.
Study Sample Methodology Result

Roy and 48 US States Panel data The impact of access to primary
Madhavan (1998–2002) methodology care, the severity of the disease,
(2012) unemployment and education level
on pharmaceutical expenditures of
government in the coverage of State
Medicaid Programmes
Huh et al. (2008) US (2000) Cross-section Drug coverage as a determinant of
probit analysis drug expenditure
Lauridsen et al. Spain (50 SUR analysis -The effect of GDP, health system
(2008) provinces) characteristics such as the number
of hospital beds, medical doctors,
pharmacists, the young and elderly
population
-Heterogeneous results with regard
to time and provinces
Shaikh and 136 developed Panel data -The strong positive impact of GDP
Gandjour (2019) and developing methodology on pharmaceutical expenditure in
countries low spending countries economies
(1995–2006) with large economic freedom
Jung and Kwon 22 OECD Panel data -The effect of level of protection for
(2018) countries methodology property rights on pharmaceutical
(1970–2009) expenditure rather than GDP and
elderly population
Blazquez- Spain Cyclical -The positive relationship between
Fernandez et al. (1995–2012) sensitivity pharmaceutical spending and
(2016) analysis economic development
Çınaroğlu (2017) European -Canonical -Reverse the relationship between
countries correlation pharmaceutical expenditures and
including analysis health outcomes
Turkey (2015)
characteristics. We contribute to the literature by a broader point of perspec-

tive, which includes variables indicating the incidence rates of major chronic dis-
ease (cancer). Moreover, we use a dynamic approach to estimate pharmaceutical
spending, which excludes the endogeneity problem.
3 Data, Model and Estimation Results

We estimate the model for pharmaceutical spending by employing unbalanced
panel data for selected 22 OECD countries concerning data availability over the
Tab. 2: The Description of Data
Variable Description Source

Dependent variable
pharmaceutical spending Pharmaceutical spending (%of health OECD Health
(pharma) spending) Statistics (2017)
Explanatory variables
GDP per capita growth GDP per capita (USD 2010 constant OECD National
(gr) prices) Accounts
adjusted health spending The difference between total health OECD Health
(adj_health) spending and pharmaceutical Statistics (2018)
spending (%of GDP)
male cancer incidence rate A cancer incidence rate is the number Ferlay et al. (2018)
(male_cancer) of new cancers in a population during
female cancer incidence a year, expressed as the number of
rate (female_cancer) cancers per 100,000 people at risk.
Incidence rate = (New cancers/
Population) × 100,000
World age-standardized An age-standardized rate is a summary Ferlay et al. (2018)
rate measure of the rate that a population
would have if it had a standard age
structure. The most frequently used
standard population is the World
Standard Population.
elder population (age) The share of 65 and older population OECD Labour
(%of the total population) Force Statistics
social spending Social spending (%of GDP) OECD Social
(soc_spend) Expenditure
(Aggregate data)
Notes: i) We obtain the elderly population of the UK from the Office for National Statistics (ONS).
ii) The authors calculate GDP per capita growth by using the GDP per head series in the OECD
database.
period 2000–2014. The description and the source of the data used in our model
are summarized in Tab. 2.
As for the methodology, we employ dynamic panel data analysis, which
eliminates both the problem of the unobservable factors correlated with the
dependent variable and regressors and the endogeneity that suppress the con-
sistency and biasness property of the estimators. We perform the Generalized
Method of Moments (GMM) methodology of Arellano and Bond (1991) which
is based on the estimation of,
∆yit = β 0 ∆yit−1 + β1 ∆xit + ∆εit (1)

where yit indicate the dependent variable, that is, pharmaceutical spending.
Furthermore, xit it shows the explanatory variables presented in Tab. 2. The
model utilizes the difference of the dependent variable (∆yit−1 ) to remove the
individual fixed effects. Finally, as a part of the Arellano and Bond (1991) meth-
odology, we evaluate the consistency of GMM estimators by employing specifica-
tion tests. In this regard, we both apply the Arellano-Bond test of autocorrelation
in the first differenced errors at order 2 to analyze the serial correlation of the
series, and Sargan test to examine the suitability of the instruments.
We present the empirical results in Tab. 3 below.
According to the results from the GMM procedure, we conclude that the rise in
the elderly population leads to an increase in pharmaceutical spending, which is
consistent with our expectations. Contrarily, we find no significant effect of male
cancer incidence and the negative impact of adjusted health spending on phar-
maceutical spending. On the other hand, the results show that a rise in female
cancer incidence puts upward pressure on drug expenditures. Moreover, we
explore that social spending has a positive impact on pharmaceutical spending.
Finally, we find the significance of the instrument, which is the 1st difference
of the dependent variable. According to the specification procedure, Sargan test
results indicate that we accept the null hypothesis, which implies the validity
of over identifying restrictions. Likewise, we detect no autocorrelation problem
concerning AR (2) test results.
Tab. 3: GMM Results
Dependent Coefficient Standard Error

Variable: pharma
pharma (-1) -0.012* 0.001
age 2.817* 0.228
male_cancer 0.197 0.135
female_cancer 0.915* 0.299
soc_spend 4.394* 0.237
adj_health -1.602** 0.061
gr 0.078 0.292
AR(2) test (p value): 0.1332
Sargan test (p value): 0.2318
Notes: i) Authors’ estimation. ii) *, ** and *** indicate the significance at %1, %5 and %10 levels,
respectively.
4 Conclusion
One of the main issues discussed with the structural change in health expenditures
is the increase in pharmaceutical expenditures. Working on the determinants of
pharmaceutical spending from a macro perspective is so vital for the establish-
ment of public policies to be implemented in the following period.
The fact that the cancer incidence (female), which is an excellent example
in terms of chronic diseases, is related to drug expenditures, has revealed the
necessity of evaluating the policies related to chronic diseases. In addition, dif-
ferentiation in public social programs of countries in our study was related to
differentiation in pharmaceutical expenditures. This shows us that policies and
programs related to pharmaceuticals within health policies are related to policies
and programs for social programs.
One of the indicators used in terms of the effectiveness of health expenditures
is the share of pharmaceutical expenditures. Increased efficiency in pharmaceu-
tical policies would also contribute to increasing efficiency in public health pol-
icies and programs.
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Example of Internal Tax Bleeding: “Tax

Expenditures”
Abstract: The issue of tax expenditures has been well known and adopted by developed
countries for nearly half a century. This concept is perceived as a contradiction in that it
includes the price collected as “tax ile and the price spent as” expenditure. It also reminds
us of any administrative and legal expenses related to the collection of the tax, but it is not
used in this sense. The concept of tax expenditure has the same meaning in theory. It is used
as a concept that reduces the tax burden of taxpayers for various purposes and expresses
regulations such as exemptions and exemptions in public. But, although it is the same defi-
nition in some respects, it does not have a structure suitable for international comparisons
since it imposes different meanings in terms of scope. This study aims to describe the the-
oretical framework and reasons for assets of tax expenditures, and discussing its size and
results in Turkey to attract the attention of business and politics.
Keywords: Tax Exemptions, Tax Incentives, Tax Expenditures, Tax Erosion, Tax Justice
JEL Codes: H 20, H 25, H 32
1 Theoretical Framework on Tax Expenditures

These special arrangements commonly referred to as tax incentives or tax subsi-
dies, referred to as “tax expenditures”, imply the application of provisions different
from the regular tax system to a particular industry, activity, or group of persons.
It is known that tax expenditures have various processes and mechanisms in
terms of tax techniques and practices.
States give incentives for specific activities by granting subsidies or reducing
taxes for desired practices. States also make an expenditure when they allow
individuals and legal entities to deduct, and even return to carry out certain
activities. In other words, instead of making some public expenditures, the state
aims to realize public investments with specific tax incentives.
The definition of tax expenditures varies according to the country in which
it is enacted. For example, Austria defines tax expenditure as the loss of tax rev-
enue, except general tax norms, to grant privileges to the activities of some nat-
ural and legal persons.
Tax expenditure in the Netherlands is defined as the loss of tax revenues
arising from the legal situation and which is not compatible with the basic tax
122 Nevzat Saygılıoğlu
system. As another example, tax expenditure in Finland is defined as separation

from the basic taxation structure to support specific objectives (Kulu, 2000: 3).
Therefore, a tax expenditure is defined as loss of income from provisions that
allow for a specific exemption, exemption, or deduction. But, the exemptions
and exemptions arising from the tax technique such as value-added tax refunds,
minimum subsistence allowance in continuous exportation in standard tax sys-
tems are not accepted as a tax expenditure.
Tax expenditures are based on economic, fiscal, and even political reasons,
especially social reasons. Tax expenditures arise as a permanent or temporary,
complete or partial reduction of the burden of tax liability depending on the
person or subject.
The principle of legality of taxes has been explained under the title of “duty
to pay taxes” in Article 73 of the Turkish Constitution. In this article, the exec-
utive body is given broad authority, provided that the upper and lower limits of
exemptions, exceptions, reductions, and rates are included in the relevant tax law.
The frequent use of taxation authority in terms of scope and intensity has become
a subject of serious debate both in theory and in political and practical terms.
To the increase of tax expenditures in Turkey and also began to emerge and con-
figure tax amnesties too often, they have significant and negative consequences of
the resort. First of all, this situation causes a loss of tax revenues to a great extent
and amount. It also creates a severe tax injustice for tax-compliant and honest
liabilities. More importantly, it encourages those who do not pay taxes and tend
to evade. Thus, Turkey is becoming too institutional structures responsible for a
large group of tax havens and tax return also almost obliged hell for small groups.
The theoretical framework for tax expenditures is detailed in the following
section.
1.1 Conceptually Tax Expenditures

Stanley S. Surrey first expressed the concept of tax expenditure. Beyond some
direct practices of the state, indirectly applied discounts, such as investment loans,
special discounts, discounts on certain types of consumption, or rate cuts on
specific activities, are called tax expenditures (Surrey and McDaniel, 1979: 228).
The concept of tax expenditure is an approach whereby the tax system and the
budget system are used together, suggesting that public expenditures are made
not only through the state budget but also through the tax system (Ferhatoğlu,
2015: 91). In the definition created by the IMF, the tax revenues that income
administrations give up for social, financial, and economic reasons are called tax
expenditure (IMF, 2011: 99).
Example of Internal Tax Bleeding: “Tax Expenditures” 123
Tax expenditures lead to loss of income for the state, while taxpayers are
seen as a decrease in tax liability. Tax expenditures are generally defined as
tax revenues that the government has given up. However, tax expenditures are
not included in the scope of public spending while creating a budget (Buhur,
2019: 69). The most important reason for the waiver of tax collection through
tax expenditures is the transfer of funds from the public economy to the private
economy through these expenditures. (Özlem ve Gürçam, 2015: 140). Although
there is a consensus on the definition and concept of tax expenditure, there are
different practices regarding the inclusion of exemptions, exceptions, and tax
reductions in the scope of tax expenditure (Sabuncu, 2011: 10).
All kinds of exemptions, exceptions, deductions, refund credits, and
postponements that include privileged provisions other than the gen-
eral tax technique, which continuously or temporarily, conditionally or
unconditionally reduce the tax burden, are accepted as a tax expenditure.
Particularly in the personal income tax and corporate tax systems, due to the
different structures of the countries, numerous tax expenditure applications
have been included for specific individuals or organizations in the activities
and industries. Therefore, although the primary objectives and approaches are
the same, there have been differences in the definition, scope, and applications
of tax expenditures by c ountries. Despite different definitions or procedures,
the typical characteristics of tax expenditures are as follows. In this context,
tax expenditures;
– Directed to a particular sector, activity or group of liabilities,
– In terms of purpose, it should be defined as the aim that can be achieved by
public expenditures,
– The scope should be wide enough to determine a tax structure,
– Abolition must be administratively possible,
– Another tax regulation should not eliminate the effect of tax expenditure.
1.2 Tax Expenditures as Deviation from Normative Tax Approach

The normative tax approach did not take into account the concept of tax
expenditures when seeking the answer to the question of how to distribute
the tax burden. At this point, the definition of a normative tax approach by
governments emerged.
Considering that the general aim of the phenomenon of tax expenditures is to
provide social optimum, the economic dimension of tax expenditures emerges.
In this context, according to the fact that tax expenditures deviate from the
standard tax system, first of all, the normative tax order in a country should be
defined. However, in practice, difficulties are encountered in determining the

normative tax structure and, thus, tax expenditures.
2 Reasons of Assets of Tax Expenditures

There are economic and social reasons for turning to tax expenditures. The
common goals of tax expenditures are the accurate measurement of income, the
distribution of financial aid, the change of tax burden, and the promotion of
desired social behavior.
The state implements tax expenditures to facilitate taxpayers’ achievement of
their economic, political, social, and administrative purposes. Tax expenditures
cause erosion of tax base (tax erosion), decrease in tax revenues, and decrease
in tax flexibility. Tax expenditures increase the privilege of taxpayers in various
income groups and increase their disposable income (Öztürk, 2011: 11).
Therefore, tax expenditures are used to increase investments, to direct
investments to specific sectors and areas, to support exports, to promote savings,
or to implement the principle of the social state, especially for the protection of
weak, disabled, and older people.
Common objectives of tax expenditures; accurate measurement of income,
distribution of financial assistance, changing tax burden, and encouraging desired
social behavior. Tax expenditures; to increase investments, to direct investments
to specific sectors and areas, to support exports, to encourage savings. Also, the
social state comes to the agenda for social purposes, especially for the protection
of the weak, the disabled, and the elderly, to fulfill the requirements. Therefore,
the reasons for the existence of tax expenditures; economic, social, and even
political.
3 Calculation Methods of Tax Expenditures

Tax expenditures; It is possible to calculate with three different methods as the
following abandoned income method, earned income method, and equivalent
expenditure method.
Abandoned income method: The measurement of losses in tax revenues due
to tax privileges.
Earned income method: Estimates the tax revenue that can be obtained when
the tax privileges are removed.
Equivalent expenditure method: Estimating the amount of direct public
expenditures to be made to achieve the same level of benefit instead of tax
expenditure.
Located above the method of calculation of tax expenditures “waived income

method”, it is the method most practiced in the world, including Turkey. The
earned income method is used only in Japan.
4 Benefits and Problems of Tax Expenditures

Tax expenditures are a financial tool used to produce social policies. Although,
by definition, it is an abandoned income and thus seen as a loss, such expendi-
ture affects available income (Tekin and Akdağ, 2013: 277). Monitoring of tax
expenditures in central government budget law and is included in legal control
provides an advantage in terms of seeing the system as a whole and transparency
(Kara, 2019: 93).
In this context, the benefits of tax expenditures can be stated as follows.
– The cost of tax incentives is bearable as long as the increase in investment is
higher than the tax loss increase.
– Tax incentives lead to new investments over time, and the tax increases pro-
vided by these new investments may compensate for the loss of taxes incurred
in the short term.
– The participation of the private sector in the economic and social programs
undertaken by the government is encouraged.
– Provides the opportunity for the private sector to make decisions rather than
government decisions
When tax expenditure is made instead of public expenditure, this expenditure is
not explicitly included in the budget as an expense.
– The need for strict state supervision is reduced.
Tax expenditures, which are an element of public expenditures, affect macro
budget elements such as resource allocation and productivity, in partic-
ular, budget balance such as regular public expenditures. Because public
expenditures, which are a component of the tax structure, make the budget
balance more difficult by reducing the tax revenues in the first place. Since tax
expenditures are financed from the tax base, they also affect the financial allo-
cation and reduce efficiency and efficiency in public resource allocation (Saraç,
2010: 276).
On the other hand, the drawbacks of tax expenditures are also revealed.
A financial burden for the state means complexity and bureaucracy for the tax
system (Uçanok, 2019: 113). These drawbacks can be summarized as follows:
– Some tax expenditures are insufficient to override the basic economic forces
or to balance them with local or foreign tax provisions (Inactivity).
– Many tax expenditures correspond to a wide range of interest groups rather

than actual needs. (Inefficiency)
– The tendency to change the tax burden of taxpayers both horizontally and
vertically (Inequality).
– It is an obstacle for taxpayers among the poorest groups of society to benefit
from tax expenditures.
– The tax revenue base leads to contraction.
5 World Application Examples of Tax Expenditures

Although the concept of tax expenditures is used in the same sense in all coun-
tries, it differs in terms of its definition, scope, and application forms.
A tax expenditure is a concept that emerged in the world in the 1960s, and
Germany prepared the first tax expenditure report in 1959. After Germany, the
USA began to publish tax expenditure reports in 1968, Spain 1979, England 1979,
France 1980, Canada 1997, and the Netherlands 1997. Today, the tax expenditure
report is published in almost all OECD countries. Australia, Austria, Belgium,
France, Germany, Portugal, Spain, Turkey, and the tax expenditure report in
OECD countries such as the US and/or estimated amounts for the preparation
of the list is a legal requirement. In most of these countries, tax expenditure
reports are closely linked to the budget process (General Directorate of Revenue
Regulations, Ministry of Treasury and Finance, 2018: 1).
It is seen that countries are not in the unity of practice in terms of measuring
tax expenditures. For example, in the US and UK tax expenditures, an abandoned
income method is applied. But in countries such as Italy, different evaluation cri-
teria such as cost and objective measures are used. Meanwhile, in countries such
as Italy, Austria, Australia, Germany, the Netherlands, and Spain, accelerated or
high-rate depreciation is considered tax expenditure.
There are some essential criteria for tax expenditures in the European Union.
In this context, according to the decisions of the Court of Justice, member
states are prohibited from providing state aid as a rule. However, over time, the
implementation of some regional and sectoral state aids has started. Performed
through tax; The prohibition does not cover Depreciation, valuation methods,
loss transfer, research and development, environment, education, employment
support, development of underdeveloped regions, and privileges for sensitive
and priority sectors such as agriculture, fisheries, and shipbuilding.
The guidance published in 2010 for OECD countries, of which EU countries
are members, is used. Moreover, in the IMF Fiscal Transparency Guide and
published by the IMF, the inclusion of the central government tax expenditures
as a report in the budget documents was defined as the basic requirement of

fiscal transparency. Most OECD countries regularly publish annual reports
on tax expenditures, but OECD countries’ practices vary widely in scope and
method.
6 Tax Expenditures in Turkey

Explained in detail below is the view of tax expenditures in Turkey.
6.1 Legal Regulation
Article 2 of the Turkish Constitution introduces the state as a social law state, and
Article 73 underlines the fair and balanced distribution of the tax burden as the
social purpose of the fiscal policy.
Therefore, tax exemptions, deductions, and exemptions, tax refunds, or loans
are applied within the framework of the financial functions of the tax, especially
in the context of economic and social functions, and this definition is defined
as a tax expenditure. In addition to the social role of the tax, especially since the
economic function has become more prominent today, tax regulations for eco-
nomics purposes emerge as another form of tax expenditure.
In this context, tax expenditures are held in Article 18 of the Act No. 5018 in
Turkey, is defined as the financial transparency principle that should be included
in the central government budget each year (Batırel, 2013: 20). With the regula-
tion mentioned above, the tax amounts that are waived due to tax exemptions,
exemptions, and deductions are included in the tables added to the central gov-
ernment budget law. Thus, although there is no public expenditure, the legal
framework of the tax expenditures, such as public expenditure, is put forward.
6.2 Fiscal Dimension: Tax Expenditures in Budget Laws

The provisions of Act No. 5018 on Public Financial Management and Control
concerning tax expenditures entered into force on 1 January 2005. Thus the 2006
central government budget law, which should come into force before the comple-
tion of the 2005 calendar year, includes lists and figures for tax expenditures for
the first time. Turkey has started to calculate the tax expenditure after 5018 Public
Financial Management and Control Law entered into force. In this respect, the
definition and numerical dimensions of tax expenditures are included in Table B
annexed to the Central Government Budget Law of each year. The evaluation of
the numerical quantities related to tax expenditures in the Central Government
Budget Law is given in detail below.
Tab. 1: Tax Expenditures and Gross Domestic Product (2006–2019) (Million TL)
Source: The author prepared it according to the statistics of the Turkish Statistical
Institute, The Ministry of Treasury and Finance, and annual central government budget
figures
Year Tax Expenditures GDP Share of Tax

(Million TL) (Million TL) Expenditures in
GDP (%)
2006 8.592 789.228 1.08
2007 9.479 880.461 1.07
2008 12.444 994.783 1.25
2009 14.684 999.192 1.46
2010 14.363 1.160.014 1.24
2011 17.566 1.394.477 1.26
2012 17.918 1.569.672 1.14
2013 22.417 1.809.703 1.24
2014 23.888 2.044.466 1.17
2015 26.112 2.338.647 1.12
2016 29.963 2.608.526 1.15
2017 102.216 3.106.537 3.30
2018 132.142 3.700.989 3.57
2019 (Program) 178.696 4.450.278 4.01
6.2.1
Tax Expenditures and Gross Domestic Product
Tax expenditures in Turkey and Gross Domestic Product (GDP) and the interac-
tion between the relationships is given in the table below.
When the above table is examined, in the fourteen years between 2006
and 2019, GDP increased by 5,6 times in current prices, whereas tax
expenditures increased by 20,8 times in the same period. While the share of
tax expenditures in GDP was 1,08% in 2006, this share was 4,01% in 2019.
On the other hand, tax expenditures increased by only 3,5 times in the last
11 years from 2006 to 2016, when tax expenditures began to be monitored,
but 1,7 times in the last three years between 2016–2019. Accordingly, the
increase in tax expenditures, especially in the last few years, was much higher
than the GDP.
6.2.2
Tax Expenditures and Public Expenditures
Relations and interaction between public spending and tax expenditures in
Turkey are given in the table below.
Tab. 2: Tax Expenditures and Public Expenditures (2006–2019) (Million TL) Source: The
author prepared it according to the statistics of the Turkish Statistical Institute, The Ministry
of Treasury and Finance, and annual central government budget figures
Year Tax Expenditures Public Expenditures Share of Tax

(Million TL) (Million TL) Expenditures in Public
Expenditures (%)
2006 8.592 178.126 4.82
2007 9.479 204.068 4.64
2008 12.444 227.031 5.48
2009 14.684 268.219 5.47
2010 14.363 294.359 4.88
2011 17.566 314.607 5.58
2012 17.918 361.887 4.95
2013 22.417 408.225 5.49
2014 23.888 448.752 5.32
2015 26.112 506.305 5.16
2016 29.963 584.071 5.13
2017 102.216 678.279 15.07
2018 132.142 830.450 15.91
2019 (Program) 178.696 960.975 18.60
When the above table is examined, in the fourteen years between 2006 and
2019, public expenditures increased by 5,4 times in current prices, whereas tax
expenditures increased by 20,8 times in the same period. While the share of tax
expenditures according to public expenditures was 4,82% in 2006, the share
of tax expenditures according to public expenditures was 18,60% in 2019. In
this context, the increase in tax expenditures was much faster than the public
expenditures and was 3,9 times higher.
6.2.3
Tax Expenditures and Tax Revenues
The relationship between tax expenditures and tax revenues in Turkey and inter-
action is given in the table below.
When the above table is examined, in the fourteen years between 2006
and 2019, tax revenues increased by 5,5 times with current prices, whereas
tax expenditures increased by 20,8 times in the same period. While the share
of tax expenditures in 2006 was 6,25% in total tax revenues, the share of tax
expenditures in 2019 was 23,62%. In this context, the increase in tax expenditures
was 3,8 times higher than the tax revenues.
Tab. 3: Tax Expenditures and Tax Revenues (2006–2019) (Million TL). Source: The Author
Prepared It According to the Statistics of the Turkish Statistical Institute, The Ministry of
Treasury and Finance, and Annual Central Government Budget Figures.
Year Tax Expenditures Tax Revenues Share of Tax Expenditures

(Million TL) (Million TL) in Tax Revenues (%)
2006 8.592 137.480 6.25
2007 9.479 152.835 6.20
2008 12.444 168.109 7.40
2009 14.684 172.440 8.51
2010 14.363 210.560 6.82
2011 17.566 253.809 6.92
2012 17.918 278.781 6.42
2013 22.417 326.169 6.87
2014 23.888 352.514 6.77
2015 26.112 407.818 6.40
2016 29.963 459.002 6.53
2017 102.216 536.617 19.05
2018 132.142 621.311 21.27
2019(Program) 178.696 756.494 23.62
6.3 Numerical Development of Legislation on Tax Expenditures

The numerical development of legal regulations relating to expenditure taxes
between the years of 2006–2019 in Turkey is located in the following table.
When the above table is examined, in the fourteen years between 2006 and
2019, a total of 3,031 legal arrangements were made on tax expenditures. While
the number of legal regulations on tax expenditures was 72 in 2006, this number
was 606 in 2019. In 2016, the number of rules related to tax expenditures was
132, which was 641 in 2017 with an extraordinary numerical increase. The
increase continued in 2018 and reached 673.
The distribution of the tax laws and the number of legal regulations relating
to expenditure taxes between the years of 2006–2019 in Turkey is located in the
table below.
When the above table is examined, Among the 72 legal regulations related to
tax expenditures in 2006, 29 were associated with Income Tax Law, and four were
related to other tax laws except for Corporate Tax, Value Added Tax, and Special
Consumption Tax Laws. In 2016, the same numerical distribution was made
concerning the Income Tax Law, 59 of which were related to the Income Tax Law,
and 15 of the tax laws other than the Corporate Tax, Value Added Tax, and Special
Tab. 4: Numerical Development of Legislation on Tax Expenditures (2006–2019).

Source: The Author Prepares the Annual Central Government Budget.
Year Number of Regulations

2006 72
2007 79
2008 87
2009 89
2010 100
2011 99
2012 99
2013 106
2014 121
2015 127
2016 132
2017 641
2018 673
2019 606
Total 3.031
Consumption Tax Laws. In 2017, although the number of regulations related to the
Income Tax Law was 57 in the total number of 641 regulations, the number of rules
related to other tax laws other than Corporate Tax, Value Added Tax, and Special
Consumption Tax Laws increased by 113 times to 641. It is seen that occurred.
7 Result
As explained before, “Tax expenditure” is defined as loss of income from
provisions that allow for a special exemption, exemption, or deduction. But; The
exemptions and exemptions arising from the tax technique such as value-added
tax refunds, minimum subsistence allowance in continuous exportation in stan-
dard tax systems are not accepted as a tax expenditure — tax expenditures; eco-
nomic, fiscal and political reasons.
The phenomenon of tax expenditures, which has been in practice for almost
half a century, is used in nearly all countries of the world in the same sense; in
terms of scope and application.
Tax expenditures; It has implications and implications for tax justice and
income for public finance, business, and taxpayers. In terms of public finance,
there are effects and consequences for the decrease in tax revenues and,
132
Tab. 5: Number Distribution of Tax Expenditures Regarding Tax Laws (2006–2019). Source: The Author Prepares the Annual Central
Government Budget.
Law 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total
Income Tax 29 29 46 45 47 47 48 50 58 58 59 57 58 61 692
Law
Corporate 20 25 19 19 24 24 24 26 26 28 28 33 34 34 364
Tax Law
Value Added 13 13 10 10 11 11 11 14 16 17 19 35 36 41 257
Tax Law
Special 6 8 8 9 10 10 10 10 11 11 11 18 19 18 159
Consumption
Tax Law
Other Laws 4 4 4 6 8 7 6 6 10 13 15 498 526 452 1559
Total 72 79 87 89 100 99 99 106 121 127 132 641 673 606 3031
consequently, the deterioration of the budget balance, the elimination of ef-

fective distribution of public resources, and the decline of fiscal discipline. In
terms of business, while some sectors or firms are unduly supported in the form
of inefficient use of abandoned public resources. In terms of taxpayers, social
supports does not reach to low-income subsidies, economic supports does not
replace them, and thus the tax justice deteriorates.
In order to provide a useful tax expenditure model, the tax administration
should first define the normative tax structure and prepare the tax expenditure
budget accordingly. In addition, it should analyze the tax expenditure amounts
in the budget prepared and measure their impact on cost and tax revenues and
include the analysis of the state budget.
Tax exemptions, exceptions, and reductions included in the Turkish Tax
System should be assessed by comparing the economic or social benefits, and
the limits of tax expenditures should be determined in such a way that they do
not exceed the objective (Öz, 2002: 29).
The state’s application of tax expenditures for economic, social, and cultural
purposes does not comply with the principle of equality and justice. But it does
not contradict the principle of openness as it is determined when, how, and
how much tax will be paid in contemporary practice. On the other hand, tax
expenditures are separated from the principle of impartiality because they pre-
vent the effects of taxes on investment and consumption decisions and affect
economic attitude and resource use. It complies with the principles of transpar-
ency and ease of payment.
When tax expenditures are evaluated together with the principle of justice, it
is seen that taxpayers may create tax privileges for some taxpayers contrary to
the general principle. For this reason, it is vital to correctly determine which tax-
payer group is given advantage with the revenue given up when tax expenditures
are imposed (Gül, 2018: 82).
The number of adjustments related to tax expenditures in Turkey is too much.
This issue has been put forward in the relevant sections in numerical dimensions.
Instead of the main tax laws such as income, institutions, value-added, private
consumption, the tax exemptions and exemptions introduced by other laws and
tax laws are very striking in terms of number and variety.
Especially since 2016, tax expenditure amounts have increased considerably
in Turkey. There is no sustainable side to tax exemptions and exceptions that are
lack of tax justice, ineffective, non-objective, and very complex.
Therefore, the number of tax expenditures in the form of exemptions,
exceptions, and reductions in the Turkish Tax System should be reduced
considerably.
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Cihan Yüksel
The Size of the Public Sector and the Armey

Curve: The Case of Turkey
Abstract: The relationship between economic growth and public spending as a percent
of GDP (government size) is a quite widespread issue in the literature. One of the impor-
tant explanations of these debates is the Armey curve. The Armey curve is defined as
a geometric expression that public spending below an optimal threshold level has an
expanding effect, but that public spending above the threshold level affects economic
growth adversely. The parabolic structure of the Armey curve is essential for estimating
the optimal government size. This study aims to test the Armey curve using the ARDL
bounds testing approach of time-series techniques between the years 1981–2018 in the
Turkish economy. According to the coefficient values obtained in our study, the optimal
level of public expenditure that maximizes economic growth is 16% of GDP. Between the
years of 1981–2018 in Turkey, the actual rate varies from 12.1% to 33.5%, and the average
rate is 20%. Accordingly, while the level of public expenditure between 1981 and 1992
remained below the optimal level, the level of public expenditure between 1993 and 2018
remained above the optimal level.
Keywords: Public Expenditures, Economic Growth, Armey Curve, Turkey
JEL Codes: E62, H11, H50, O40
1 Introduction
Economic growth is one of the objectives of fiscal policy. Just like in other
purposes of fiscal policy, public expenditures stand out from the tools used in the
provision of economic growth. This is because a fiscal economist must know at
which level and within which components he or she must use public expenditures
to reach the target for economic growth. The composition of public expenditures
is important here. Expenditures that directly affect economic growth utilizing
implementing the total demand are generally real expenditures. The multiplier
effect that these expenditures will create in the economy is expected to influence
economic growth positively.
The share of public expenditures within the Gross Domestic Product (GDP)
also expresses the size of the government in an economy. However, when the size
of the government comes into question, the differences between the paradigms
grow deeper. What kind of effect was in the short term along with the expansive
effects of the public expenditures in the long term should be discussed.
138 Cihan Yüksel
Those who say that there is a positive relationship between public expenditures
and economic growth claim that the expansion of the public sector provides
the function of private property insurance. Based on this, public expenditures
encourage private investments that will lead to economic growth and also allow
for the production of public goods that will improve the investment environment.
Those who assert that there is a negative relationship between public
expenditures and economic growth claim that the expansion of the size of the
government (public spending) has diminishing returns effect and that the over-
size of the government has a crowding-out impact on private investments. Based
on this, public expenditures can transform into inefficient expenditures that
lead to deterioration in resource allocation along with corruption. At the same
time, the government will need higher taxes as public expenditures widen, but
increasing taxes will slowly lead to negative effects on the economy.
The Armey curve became one of the critical contributions brought to the
debated relationship of the size of the government with economic growth. The
geometric explanation that public expenditures have a widespread influence
when beneath the optimal threshold level but negative impact over economic
growth above the threshold level is expressed as the Armey curve (Armey, 1995).
But the relationship between government size and economic growth can differ
between economies and between periods, even in the same economy. The exam-
ination of this relationship based on the temporal and spatial distinctions still
preserves its importance in the literature.
The purpose of our study regarding this importance was the testing of the
Armey curve between the years 1981–2018 in the Turkish economy. Our study
used the ARDL approach, a time-series technique, and aimed to create an Armey
curve for Turkey and to determine the level of public expenditure that maximizes
economic growth in Turkey. For this reason, primarily public expenditures and
the economic growth relationship in our study were examined theoretically in
the framework of the discussions on the Armey curve, and the empirical lit-
erature that tries to respond to these discussions was subsequently compiled.
Finally, we tried to determine the Armey curve and the optimal government size
for the Turkish economy.
2 Armey Curve and Optimal Public Sector Size

2.1 Theoretical Literature
The relationship between the size of the public sector and economic growth is
a much-discussed topic certainly before it was explained with a curve. Solow
(1956) and Swan (1956) don’t see public expenditures as a determinant for
The Size of the Public Sector and the Armey Curve 139
economic growth in the neoclassic growth models, which explained output level
with labor and capital as a production function and which accepted technology
as an exogenous variable. Barro (1990) revealed that there was a relationship
between public expenditures and economic growth in the explained endogenous
growth model. However, this relationship was positive to a certain amount, while
economic growth is negatively affected at levels of high public expenditure.
The first person who studied this relationship with the help of a graphic in
a nonlinear extent was Armey (1995). Although there are studies that call this
curve the BARS curve, based on the acronym of Barro (1989), Armey (1995),
Rahn and Fox (1996), and Scully (1994), the frequent use in the literature is for
Armey curve.
Armey referred to Arthur Laffer, who explained the quadratic relationship
between tax rates and total tax revenue and tried to explain with similar logic
the relationship between government size and general welfare. According to
Armey, the government is certainly necessary to ensure peace, prevent anarchy,
and provide public services. This dimension of the government is similar to the
constitutional description, such as guaranteeing the protection of freedom and
increasing general welfare. However, if the government starts to grow after some
point, it starts to erode the general welfare and liberty (Armey, 1995: 91–92). The
Armey curve intercedes at this point.
The horizontal axis in Fig. 1 expresses the growth of the government and
the decline of liberty. The vertical axis shows the general welfare of society. It
is seen in the graphic; there is an upper boundary on the topic of being able to
make something better in the economy. Economic progress takes place with the
increase of this upper boundary over time. The capability of increasing this is
tied to an optimal mixture of elements such as government, savings, and invest-
ment. There is no prosperity at the level in which the government is zero because
there is chaos, no domestic or international security, no system of justice, and no
contract law. There is no prosperity at the level in which the government is 100%
because there is no reason to work if the government owns everything. As is seen
from the graphic, the government serves the people and increases the prosperity
up to a certain point. However, after this point, the government begins to reduce
productivity and, concerning this, reduce prosperity. The “X” point in the figure
shows an optimal mixture that includes the activities of the public and the pri-
vate sector. And the attainable prosperity comes to the highest level at this point
(Armey, 1995: 92–93).
It is understood from here that the Armey curve is a parabolic curve that
demonstrates that government activities have the effect of increasing welfare up
to a certain point but that the growth of the government beyond this certain level
140 Cihan Yüksel
X Attainable prosperity
The general welfare
0% 100%
The growth of government and decline of liberty
Fig. 1: Original Armey Curve. Source: Armey, 1995: 92.
reduces welfare. However, contrary to what is frequently used in the literature,

Armey (1995) expressed the vertical axis in the original graph with the general
welfare of society. The concept of welfare here has many determinant criteria.
Vedder and Gallaway (1998) related this societal welfare to economic growth,
and the Armey curve was expressed afterward in the literature with economic
growth. As is known in addition to this, the size of the government is generally
measured with the share of public expenditures within GDP. For this reason, the
axes of the Armey curve today are expressed as economic growth and shares of
public expenditures within GDP (government size), differently than the original
version. The graphic below shows the version of the Armey curve used today.
In Fig. 2 as the size of the public sector, shown in the horizontal axis, increases
from zero (from complete anarchy), the rate of economic growth, shown in the
vertical axis, grows from the start. The curve has a concave form because of
diminishing marginal return. In other words, a proportional increase in public
expenditures is slower than a proportional increase in economic growth. Along
with growing positive externalities, an additional percentage increase in the
contributions of the government to economic activities still creates further eco-
nomic productivity (meaning, a positive slope in the curve). At one point, how-
ever, the marginal benefit obtained from growing public expenditures is zero.
When the contrary effect of the growth of the government concludes with a
Real gross domestic product
Public spending as a percent of GDP
Fig. 2: Armey Curve. Source: Vedder ve Gallaway, 1998: 2.
decrease in the increase of output, the growth-increasing properties of the gov-

ernment begin to decrease (Alimi, 2014: 7).
The absence of the government will lead to a state of anarchy and a low level
of output per capita because the lack of legal government rules and the failure
to protect property rights presents an extraordinarily little incentive for savings
and to make investments. Similarly, the output per capita will be low in situ-
ations when the government makes all input and output decisions. However,
when the mixture of public-sector and private-sector decisions becomes rel-
evant, the output is expected to be more significant. Based on this, output-
increasing features are dominant when the government is exceedingly small.
In addition to this, the functions of the government that increase growth sub-
side after a point and the greater expansion of the government does not lead to
the expansion of outputs (Vedder and Gallaway, 1998: 1–2). In other words, as
public expenditures increase, government-financed additional projects gradu-
ally become less productive, and the taxes and debts that increase about this
bring further burdens. At this point, the marginal benefit obtained from growing
government expenditures is zero (Pevcin, 2004: 4).
The Armey curve does not mean that the government is entirely evil. It
emphasizes that an excess of something accepted as a good thing may be
harmful. For this reason, they assert that the government must be measured in
the economy (Vedder and Gallaway, 1998: 2).
142 Cihan Yüksel
Facchini and Melki (2011) say that the positive effects of public expenditures
can be explained with the benefits obtained from the correction of market
failures, and their negative effects can be explained with the costs that the nature
of the state failures create. For this reason, they express that the Armey curve
is the combination of two different curves that show the shortcomings of the
market and state.
According to Schaltegger and Torgler (2006), although there is a large empir-
ical literature that has researched the relationship between government size and
economic growth, the empirical evidence obtained is still insufficient. This is
because the concept of a small or large government is not hypothetically a deter-
minant on its own. While a negative relationship is only valid for rich coun-
tries with an expansive public sector, the growth in the size of the government
in underdeveloped countries can lead to more secure property rights and the
implementation of agreements. Analyses were conducted for this reason, con-
sidering the levels of development of the countries.
Many factors like countries’ levels of development, levels of productivity,
transaction costs, rates of corruption, bureaucratic unwieldiness, strength of
rent-seeking operations, length of lags occurring in the observance results and
the implementation of policies, and power of fiscal policy to penetrate conjunc-
ture may be determinant in the effect of public expenditures on economic growth.
2.2 Empirical Literature
Numerous studies test the Armey curve for countries and periods. The objective
of seeking answers to the question of what kind of relationship there is between
economic growth and the size of the public sector constitutes the foundation of
these studies.
Guseh (1997) concluded in an analysis for 59 middle-income, underdevel-
oped countries for the 1960–1985 period, and Fölster and Henrekson (1999) also
completed a study they performed for 23 OECD countries for the 1970–1995
period that there was a negative relationship between public expenditure and
economic growth. However, Ram (1986), in an analysis for four different groups
of countries and the periods of 1960–1970 and 1970–1980, and Kormendi and
Meguire (1986), for the 1931–1983 period, concluded that there was a positive
relationship between public expenditures and economic growth.
Vedder and Gallaway (1998) testes the Armey curve for the U.S. economy for
the period of 1947–1997 with the least-squares regression analysis and calcu-
lated the optimal size of the government as 17.45%. The Armey curve was tested
further in five countries in the continuation of the study. Based on this, it was
calculated that the optimal size of a government for Canada in the 1926–1988
period was 21.37%, for Denmark in the 1854–1988 period was 26.14%, for Italy
in the 1862–1988 period was 22.23%, for Sweden in the 1881–1988 period was
19.43%, and for the United Kingdom in the 1830–1988 period was 20.97%.
Pevcin (2004) tested the Armey curve in a panel data analysis that covered 12
industrialized Western European countries for the 1950–1996 period and deter-
mined that the optimal size of the public sector ranged between 36.56–42.12%.
The author found this rate to be high and tested the Armey curve with the time
series method separately using country data in the continuation of the study. The
author concluded that the optimal public sector size for eight countries whose
results were statistically significant was between 37.09–45.96%. When referring
to the year 1996, it was seen that only the size of the public sector in Ireland, from
among these countries, was below the calculated optimal levels.
Chen and Lee (2005) concluded that there was a nonlinear Armey curve for
the period of 1979–2003 in Taiwan. Based on this, the threshold regime for the
total public expenditures was 22.83%, while the threshold regime for the public
investment expenditures was 7.30%, and the threshold regime for public con-
sumption expenditures was found to be 14.96%.
Schaltegger and Torgler (2006) tried to test the effect of the size of a sub-
federal government for a rich country on economic growth using panel data
for 26 Swiss cantons for the period of 1981–2001. The general finding was that
there was a strong negative relationship between the size of a government and
economic growth.
Davies (2009) added a different dimension to the literature on the optimal
size of the government and correlated the effect of government consumption
expenditures on social welfare. Thus, using the United Nations’ Development
Programme’s Human Development Index as an outcome variable, Davies shifted
the criterion for optimal government size from productivity to social welfare.
By conducting a panel data analysis for 154 countries for the 1975–2002 period,
Davies concluded that the optimal size based on the humanitarian-development
standards of the government was significantly greater than the optimal size.
Matuşcu and Miloş (2009) found the optimal public sector size to be 27.46%
and 30.42% in the analysis they conducted in 12 old EU member states and 15
EU member states in the 1999–2008 period.
Samimi, Nademi, and Zbeiri (2010) tested a two-sector production model
by measuring the threshold government size in eight Muslim countries for the
1980–2007 period. Based on this, a nonlinear relationship was found between
the size of the government and economic growth. A significant, positive correla-
tion between the two variables when the government is small and a meaningful
144 Cihan Yüksel
negative relationship when the government was large (except for Jordan and
Turkey) were determined.
Abounoori and Nademi (2010) used a two-sector production function to test
the Armey curve for Iran with a threshold regression model. According to a
study that found a nonlinear relationship between economic growth and public
expenditures for the 1959–2005 period, the threshold value for total public
spending was 34.7%, while public consumption expenditures were 23.6%, and
public investment expenditures were 8%.
Facchini and Melki (2011) studied a long period of 1871–2008 in France and
attained strong findings that the Armey curve had a relationship with the time
series. According to this, the optimal government size in France for this period
was at a rate of 30% of GDP.
Fallahi and Montazeri Shoorkchali (2012) tested the existence of the Armey
curve using a smooth transition model for the 1961–2008 period in Greece. As
a result of their analysis, they concluded that there was a nonlinear relation-
ship between economic growth and public expenditures but that this relation-
ship was positive. According to the study, which found that the threshold was
13.26% in Greece for this period, the existence of the Armey curve could not
be verified.
Herath (2012) asserted that the Armey curve can be valid not only for devel-
oped nations but also for underdeveloped countries and tested the Armey curve
for the Sri Lankan economy. The researcher performed an analysis using the
least-squares method for the 1959–2009 period and found the level of public
expenditures, which corresponds to the peak of the threshold of the Armey
curve, to be about 27% of GDP.
Alimi (2014) tested the Armey curve in the Nigerian economy between 1970
and 2012 and acquired different optimal public sector sizes under different
assumptions. Based on this, the optimal size of the public sector is 19.8% when
there is a GDP-dependent variable, including the component of the government,
while it is 12.58% when there is a GDP-dependent variable in which the govern-
ment component is not included.
Ahmad and Othman (2014) concluded that the Armey curve was valid using
the ARDL bounds test approach for the 1970–2012 period in Malaysia and
determined that the optimal level of public expenditure was 16.32%. This rate is
above the level of public expenditures that occurred in the year 2012.
Hok, Jariyapan, Buddhawongsa, and Tansuchat (2014) tested the Armey curve
with the help of a panel data analysis in the 1995–2011 period for eight Asian
countries (Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore,
Thailand, and Vietnam) and concluded that the optimal rate was 28.5%.
Turan (2014) tested the validity of the Armey curve for different periods in
Turkey and found significant results. Based on this, the optimal public expenditures
ranged between 8.8–9.1% in the 1950–2012 period and between 15.4–17% in the
1970–2012 period. Considering non-interest public expenditures, the researcher
found the optimal level to be 14.4% for the 1980–2012 period. The discovered
values were below the realized values.
De Mendonça and Cacicedo (2015) tested the Armey curve with monthly data
in the period of 2000–2013 in the Brazilian economy and found the optimal gov-
ernment size to range based on the established models, between 20.88–23.05%.
Pamuk and Dündar (2016) calculated the optimal public sector size to be
23.5% of GDP using the Scully time series method for the Turkish economy in
the 1950–2006 period.
Varol İyidoğan and Turan (2017) tested the Armey curve with the threshold
regression model for the period of 1998:1-2015:1 in Turkey, found strong
findings that there was nonlinear relationship, and calculated the threshold
values as 16.5% for the total public expenditures, 12.6% for the public consump-
tion expenditures, and 3.9% for the public investment expenditures.
Tabaghua (2017) found the optimal government size in the Georgian
economy in 2002–2014 to be at a rate of 21% and determined that the public
expenditures were beneath the optimal level before 2006 and above the optimal
level after 2006.
Bozma, Başar, and Eren (2019) tested the Armey curve with the ARDL
cointegration model in G7 countries by dealing with different periods between
the years of 1981–2014. Based on this, it was determined that the Armey curve
in the United States, France, and Canada are valid and are not valid in other
countries. Optimal public consumption expenditures were calculated as 12.46%
in the United States, 23.57% in France, and 18.93% in Canada.
3 The Armey Curve and Optimal Public Sector Size in Turkey

The share of public expenditures within GDP in Turkey in the period of 1981–
2018 ranges between 12.1% and 33.5%. This rate, which shows the size of the
government, changes either based on fiscal policies implemented against con-
juncture or based on the change in the understanding of the state. The economic
growth rates are, on average, 3.9% in this period.
As is seen from Fig. 3, public expenditures and economic growth rate move in
the same direction in this period, except for years of crisis.
The fundamental purpose of our study was to create an Armey curve that
shows the relationship between economic growth and public expenditures based
146 Cihan Yüksel
40%
35%
30%
25%
20%
15%
10%
5%
0%
–5%
–10%
–15%
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
Public expenditures/GDP Economic growth rate
Fig. 3: The Size of Government and Economic Growth Rates in Turkey (1981–2018).
Data Source: Ministry of Treasury and Finance, Republic of Turkey (2019).
on Turkish economic data from the period of 1981–2018 and to calculate the ratio
of public expenditure level to GDP that maximizes economic growth in Turkey.
3.1 Model and Data Set

Our study aims to calculate the size of optimal public expenditures by testing the
Armey curve in Turkey. The analysis in which the time series techniques were
used took place based on the following model.
Yt = β0 + β1 Gt + β2 Gt 2 + εt (1)
In the model, Yt expresses the rate of economic growth, Gt expresses the per-
centage of total public expenditures for GDP, and εt expresses the error term.
The data set used in the model was obtained from the Republic of Turkey
Ministry of Treasury and Finance and comprised data belonging to the period
of 1981–2018. The dependent variable, Yt , were deflated data of nominal GDP
based on the CPI (1987=100) procured from the Turkish Statistical Institute and
were obtained with the logarithmic difference. All public expenditure values
were prepared by dealing with consolidated budget data from 1981 to 2005 and
central government budget data for the period of 2006–2018.
By creating a quadratic equation, the presence of the Armey curve was accepted.
The purpose here is to determine the optimal level of public expenditure for Turkey
regarding the preliminary acceptance in which the Armey curve exists. For this to
Tab. 1: ADF Unit Root Test Results
Variables ADF-Test Statistic MacKinnon Critical Lag Length (k)

Value (5%)
Y -5.446*** -2.943 0
G -1.533 -2.943 1
G2 -1.890 -2.943 1
ΔG -5.109*** -2.943 0
ΔG2 -4.635*** -2.943 0
Notes: Δ expresses the first-degree difference processor. Results were obtained based on the Akaike
Information Criterion in the unit root test. Maximum lag lengths were taken as 4. Only the model
with constant was used. *** expresses the level of statistical significance at the level of 1%.
occur, the first independent variable coefficient is expected to be positive, and the
second independent variable coefficient is expected to be negative.
3.2 Method and Findings

The stationary of the variables was tested in the analysis through a unit root
test, and the long-term coefficients were obtained afterward by testing the
cointegration relationship with the ARDL bounds test approach.
3.2.1
Unit Root Analysis
The Augmented Dickey-Fuller (ADF) (1981) unit root test was used to research
the unit root properties of the variables discussed in our study. As is known, if the
ADF test statistic is smaller than the specified critical value, the null hypothesis
in which the series is not stationary is rejected.
As is understood from Tab. 1, the Y series is stationary at level, while the
other series include the unit root at the level. But when the difference is taken,
these become stationary at a scale of 1% significance. Because of the differences
in the degree of integration in the series, the ARDL bounds test approach that
considers this situation was used.
3.2.2
Bounds Test (ARDL) Approach
The ARDL (Autoregressive Distributed Lag) bound test approach was used to
research whether there was a long-term cointegration relationship between the
variables in our study. The use of the ARDL approach means to test whether
the lags of the variables are statistically significant by estimating a dynamic lim-
ited VAR model. Our study estimated equation number (1) to determine the
148 Cihan Yüksel
Tab. 2: (2) Numbered Equation Bound Test Results
Dependent Variable Lag Length (k) F-statistic Critical Values

(Lower Bound - Upper
Bound)
FY (Y | G, G2 ) 2 14.377 3.10 - 3.87
Notes: The critical values were given based on a significance level of 5%. The maximum lag length
was taken as 4, and the lag length was specified based on the Akaike Information Criterion.
long-term relationship with the ARDL unrestricted error correction model

(UECM), which is expressed in equation number (2).
p

ΔYt = β0 + β1 Yt−1 + β2 Gt−1 + β3 Gt−1 2 + λ1i ΔYt−1 (
i=1
p p (2)

2
+ λ2i ΔGt−1 + λ3i ΔGt−1 + εt
i=0 i=0
By estimating equation number (2) with the least-squares method, the null
hypothesis was tested in which the coefficients of the lagged variables are equal
to zero (there is no cointegration relationship between the variables), and the
alternative hypothesis was tested in which the coefficients of the lagged variables
are not equal to zero (there is a cointegration relationship between the variables).
Accordingly, if the F-statistic value exceeds the upper critical value, it can be said
that there is cointegration between variables.
As is understood from Tab. 2, the F-statistic is found above the upper critical
value at a significance level of 5%. In this situation, the null hypothesis, which
expresses that there is no cointegration relationship between the variables,
is rejected. In other words, there is a long-term relationship between public
expenditures and economic growth in the period of 1981–2018.
After finding a long-term relationship between the variables, the ARDL
long-term model was estimated. Based on this, ARDL long-term estimation for
equation number (1) is obtained with equation number (3).
p r k

∆Yt = β0 + β1 ∆Yt−i + β2 ∆Gt−i + β3 ∆Gt−i 2 + εt
i=1 i=0 i=0 (3)
As a result of the estimation of equation number (3) with the least-squares
method, the long-term coefficient estimations belonging to the ARDL (3,4,2)
model whose lengths of lag are specified based on the Akaike Information
Criterion are shown in Tab. 3.
Tab. 3: ARDL (3,4,2) Model Long-Term Coefficient Estimations
Variable Coefficient Standard Error t-statistic Prob.

C 0.010 0.025 0.398 0.694
G 0.513 0.252 2.035 0.053*
G2 -1.606 0.605 -2.653 0.014**
Note: * and ** express the level of statistical significance at the level of 10% and 5%,
respectively.
As is seen in Tab. 3, the variable of public expenditures is positive and signifi-

cant at a level of 10% while the variable of the square of the public expenditures is
negative and significant at a scale of 5% in the long-term. This situation is a result
that is expected theoretically, and that supports the Armey curve.
Finally, the error correction coefficient (η) and the short-term dynamic
parameters were estimated. This situation is shown with equation number (4).
p r k

∆Yt = β0 + β1 ∆Yt−i + β2 ∆Gt−i + β3 ∆Gt−i 2 + ηecmt−1 + εt
i=1 i=0 i=0
(4)
Here, the ecmt−1 variable (error-correction term) expresses the one-period lagged
value of a series of error terms found in equation number (3). The error-correction
coefficient (η) shows the short-term imbalance that might be corrected in the
long term and is expected to has a negative sign and be statistically significant.
As is seen from Tab. 4, the error-correction coefficient was found to be
negative-signed and statistically significant at a level of 1%. The F-statistic
was found to be statistically significant at a scale of 1%. According to the
Jarque-Bera test, the error terms are distributed normally. According to the
Breusch-Pagan-Godfrey heteroscedasticity test, there is no heteroscedasticity
problem. There is no autocorrelation problem based on the Breusch-Godfrey
autocorrelation test.
It is possible to calculate the optimal public expenditure level from the long-
term coefficients that we obtained based on the ARDL approach. Based on î this, as
ó
a result of equalizing the derivative of the equation number (1) to zero dGdY
=0,
î ó
the level of optimal public expenditure can be found with formula − 2β β1
2
. Thus,
the level of public expenditures corresponding to the peak of the Armey curve
will have been found. According to the coefficient values that we obtained in
150 Cihan Yüksel
Tab. 4: ARDL Model Error Correction Coefficient Estimations
Variable Coefficient Standard Error t-statistic Prob.

ΔY(-1) 1.076 0.231 4.669 0.000***
ΔY(-2) 0.331 0.131 2.521 0.019**
ΔG 0.121 0.990 0.122 0.904
ΔG(-1) -4.591 0.942 -4.873 0.000***
ΔG(-2) -1.218 0.291 -4.186 0.000***
ΔG(-3) -0.887 0.278 -3.192 0.004***
ΔG2 -4.501 1.955 -2.303 0.031**
ΔG2(-1) 7.449 1.913 3.894 0.000***
ecmt−1 -2.619 0.325 -8.063 0.000***
ecmt−1 = Y − (0.513 ∗ G − 1.606 ∗ G2 + 0.010)
R2 0.830 Adjusted R2 0.748
AIC -4.113 F-statistic 10.182
[0.000]
DW-statistic 2.078 χ2BG 2.042
[0.155]
Jarque-Bera 2.069 χ2BPG 10.540
[0.355] [0.482]
Notes: *, **, and *** express the level of statistical significance at the level of 10%, 5%, and 1%,
respectively. AIC: the Akaike Information Criterion, DW-statistic: the Durbin-Watson statistic,
χ2BG the Breusch-Godfrey LM serial correlation test, and χ2BPG: the Breusch-Pagan-Godfrey
heteroscedasticity test.
our study, the (optimal) level of public expenditures that maximizes economic
growth constitutes 16% of GDP. This rate varies between 12.1% - 33.5% for
the years 1981–2018 in Turkey, and its average value is 20%. Based on this, the
level of public expenditure that occurred between 1981 and 1992 was under the
optimal level, while the level of public expenditure that occurred between 1993
and 2018 was above the optimal level.
According to the findings we obtained in our study, the Armey curve
belonging to the period of 1981–2018 in Turkey was shown in Fig. 4. By placing
the values of the coefficients in the model we estimated and the value of public
expenditures that grow with certain intervals into the equation, we can geo-
metrically demonstrate the relationship between public expenditure and eco-
nomic growth. Indeed, as is to be understood from Fig. 4, the optimal public
expenditure level for the relevant period in Turkey (the level of public expendi-
ture that demonstrates the peak point for the Armey curve) is 16%, and the red
6,00%
5,00%
Economic growth
4,00%
3,00%
2,00%
1,00%
0,00%
10,7%
12,5%
14,2%
16,0%
17,8%
19,6%
21,4%
23,1%
24,9%
26,7%
28,5%
30,2%
32,0%
0,0%
1,8%
3,6%
5,3%
7,1%
8,9%
Government size
Fig. 4: The Armey Curve in Turkey
line shows it. The green line is the level of public expenditures that occurred in
Turkey in 2018 (22.2%) and is to the right of the red line. In this situation, it is
possible to say that the level of public expenditure in the year 2018 was above
optimal.
4 Conclusion
The Armey curve tries to explain the hypothesis that the rate of public
expenditures to GDP, or in other words the size of the government, will con-
tribute positively to economic growth up to a certain level but will negatively
affect economic growth after this certain level, and it is an important topic that
is discussed in the fiscal economics literature. Based on studies that provide dif-
ferent results in different periods, different countries, and various economic
structures, it is not possible to express an optimal size of government that is de
facto. Therefore, the Armey curve in the Turkish economy was tested for the
1981–2018 period in our study, and we attempted to determine the level of gov-
ernment that maximized economic growth.
It was seen in the model for which the bound test (ARDL) approach, a time
series technique, was used based on yearly data from these periods that the Armey
curve provided statistically significant results and met theoretical expectations.
Based on this, the rate of public expenditure to GDP that maximizes economic
growth was calculated as 16%. While there is information that the levels of public
expenditure that occurred in the Turkish economy in the 1981–2018 period were
152 Cihan Yüksel
in a range of 12.1 - 33.5% and the average value obtained was 20%, we can say
that the actual level mostly remained above the optimal level. Reviewing based
on year, we can say that the level of public expenditure that occurred between
1981 and 1992 was below the optimal level and between 1993 and 2018 was
above the optimal level.
Our study only aimed to test the Armey curve with the presupposition that
accepted economic growth as a dependent variable. But economic growth is only
one of the objectives of fiscal policy. Therefore, public expenditures are also ex-
pected to serve purposes like price stability, development, and equity in income
distribution. For this reason, the determinant of optimal government size is not
only economic growth. It is a fact that the size of the government that maximizes
each objective of the fiscal policy may be different and that each type of public
expenditure contributes to different objectives at different levels. For this reason,
determining an optimal level of public expenditure (or types of public expendi-
ture), that will maximize the overall set of fiscal policy objectives will advance
the literature toward a wider discussion.
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Nedim Mercan and Özay Özpençe
Okun’s Law: Turkey Case1
Abstract: The concepts of unemployment and economic growth, which have an important
position in macroeconomic issues, are dynamic and are issues that are always on the agenda
in every economic point. In addition to economic growth and increasing production, there
is a desire to create jobs and reduce unemployment. Today, however, unemployment is
not decreasing despite economic growth. There is a difference between the literature and
today’s economic situation. Long-term and more sustainable economic growth is needed
rather than short-term to reduce unemployment or increase employment. Therefore,
unemployment is seen to be a broader, more complex, and more critical issue in terms of
its policies and effects.While economic growth can be achieved through structural poli-
cies such as investments, and demand-increasing real wage growth, unemployment is not
a problem that can only be solved by structural policies that increase economic growth.
This is because there is a socio-cultural dimension as well as the economic dimension of
the unemployment problem.Economic growth and unemployment are always up-to-date
in all economies. Especially after the Second World War, the importance of this relation-
ship increased. This study, which later entered the literature as the Okun’s Law, examined
data on the U.S. economy between 1948 and 1960. The study concluded that there was
a negative correlation between economic growth and unemployment. In other words,
an increase in real GDP reduces unemployment. In this study, the relationship between
economic growth and unemployment for the Turkish economy is investigated. As a result
of the analysis, which was based on annual data from 1980 to 2016, an increase of 1% in
economic growth reduces unemployment by 0.11%. In other words, this is the result of the
validity of the Law of The Okun in Turkey. However, the inability of growth to adequately
reduce unemployment is the basis for unemployment problems. In this context, the growth
policies determined by governments will contribute to minimizing this problem by encour-
aging employment.
Keywords: Economic Growth, Unemployment, ARDL, Regression Test
JEL Codes: F43, E24, R15, C22
1 This study bases on the unpublished master thesis with the title “The Analysis on
Turkey in Framework of The Okun’s Law of The Relationship Between Economic
Growth and Unemployment” of Mr. Nedim Mercan and consultancy with Assoc. Prof.
Ozay Ozpence at Pamukkale University Social Sciences Institute on 19/07/2017.
156 Mercan and Özpençe
1 Introduction
The first to examine the relationship between growth and unemployment was
the American economist Arthur M. Okun in 1962. According to this approach,
which is entered into the literature as the Okun Law, the existence of a negative
relationship between the real growth rate and the unemployment rate is empha-
sized (Ceylan & Şahin, 2010: 158). Accordingly, it was determined that the
unemployment rate was low in the years when the real growth rate was high, and
the unemployment rate increased in the years when the actual growth rate was
flat or negative (Mıhçı & Atılgan, 2010: 48, Ahmad vd., 2011: 293). Theoretically,
as long as growth contributes to employment growth, it is possible to benefit
from the positive effects of growth by providing better income to individuals.
In countries with high economic growth rates, the employment rate is expected
to be high. However, due to the complex and multifaceted nature of unemploy-
ment, it is observed that this expectation does not occur at the desired level.
(Takım, 2010: 3). Okun Law is one of the most common methods describing
the relationship between unemployment and economic growth (Göçer, 2015: 2).
The empirical analyses of the validity of the law of the Okun to date focus on
the assumption that the relationship, in general, is symmetry. Symmetry rela-
tionship, in the expansion and contraction phases that may occur during periods
of cyclical fluctuation, it has been accepted that the effect of real output on unem-
ployment is similar. However, today’s studies indicate that the impact in real
production on unemployment may be different during periods of contraction
and expansion. It has an effect that increases unemployment during contrac-
tion periods and reduces unemployment during periods of expansion (Ceylan
& Sahin, 2010: 158). This study aims to investigate the relationship between eco-
nomic growth and unemployment within the framework of the Okun Law and
to examine whether the Okun Law is valid in Turkey.
2 Growth and Unemployment in the Turkish Economy

The problems experienced before 1980 and the lateness of the measures to solve
these problems have led to a deepening of the problems. Facing high inflation, dif-
ficulties in finding financing, inadequacies in oil and energy, difficulties in finding
imported inputs are the main economic problems before 1980. The decisions of
January 24, 1980, which included export incentives to address export shortages
arising from their shortcomings in imports, played a crucial role in solving the
problems. The reduction of investments due to insufficient savings, high foreign
debt and foreign currency bottleneck problem has also been effective in taking
these decisions (Parasız, 2003: 281 – 283; Kılıçbay, 1984: 176 – 177).
Okun’s Law: Turkey Case 157
Tab. 1: Economic Growth and Unemployment Rates in Turkey (1980–2016). Source: IMF
(International Monetary Fund) (http://www.imf.org, 22.01.2017)
Years Growth Unemploy- Years Growth Unemploy- Years Growth Unemploy-

ment ment ment
1980 -0,77 7.20 1993 8,04 8.93 2006 6,89 9.03
1981 4,36 7.20 1994 -5,45 8.55 2007 4,66 9.18
1982 3,42 7.60 1995 7,19 7.62 2008 0,65 10.02
1983 4,75 7.51 1996 7,00 6.62 2009 -4,82 13.05
1984 6,82 7.40 1997 7,52 6.81 2010 9,15 11.12
1985 4,25 6.94 1998 3,09 6.37 2011 8,77 9.09
1986 6,94 7.71 1999 -3,36 7.15 2012 2,12 8.43
1987 10,02 8.13 2000 6,77 5.99 2013 4,19 9.04
1988 2,12 8.70 2001 -5,69 7.80 2014 2,91 9.91
1989 0,25 8.57 2002 6,16 9.76 2015 3,84 10.27
1990 9,25 7.99 2003 5,26 9.92 2016 3,80 10.79
1991 0,92 8.19 2004 9,36 9.68
1992 5,98 8.48 2005 8,40 9.48
Looking at the relationship in Turkey before 1980, although it appears to have

a relationship between growth rates and unemployment and employment, the
relationship decreased after 1980. This is because production is carried out for
the foreign market rather than the domestic market with the policies followed.
This has led to a cost increase in the labor market, and it is considered positive to
produce more with less labor to reduce costs (Akkaya & Gürbüz 2012 5). In this
period, GDP conditions were observed to be insufficient in terms of job creation
(Mıhçı & Atılgan 2010: 38–39).
In Turkey, the unemployment rate in the 1990s was generally observed to
exceed international standards (Tab. 1). Compared to other countries, Turkey is
not only in the group of countries with low employment rates but also among the
countries with the highest unemployment rates. The most important reason for
this is that the rate of population growth generally increases more than employ-
ment. It was also observed that GDP growths during this period remained inca-
pable of creating jobs (Mıhçı & Atılgan, 2010: 38 – 39).
Structural reforms from 2002 have allowed the period between 2002 and 2007
to achieve a high and sustained growth momentum. However, the global crisis,
which began to be felt in 2008 and continued in 2009, has negatively affected
the economy, growth rates have decreased considerably, and the economy has
shrunk by about 5%. The crisis is not only financially sourced, but it also affects
the real sector. During this period, unemployment rates continued to increase
and reached about 14% in 2009 (Acar, 2013: 17).
In Turkey, the economy, which began to recover during the 2009 crisis,
achieved high growth in 2010, but has lost this momentum since 2011 and
has continued to fall below 5%, which is considered a potential growth rate. In
2014, it was stated that the growth rate would be below 4% when the Medium
Term Program was announced. There was no improvement in unemployment
rates during this period and remained in the 9–10% band (Köse, 2016: 62 – 64).
3 Literature Review
Many surpluses are examining the relationship between economic growth and
unemployment. Some of the essential studies related to Okun’s Law, which are
dealt with both globally and nationally, are given in Tab. 2.
Tab. 2: Literature Review. Source: Authors’ elaboration
No Author Name/Year/Reviewed Results Obtained

Country(s)/Years and Model
1 Okun Arthur M. (1962)/USA/ In this study, which entered the literature as
1947 - 1960 Okun’s law, it was stated that there was an
inverse relationship between unemployment
and economic growth.
2 Harris & Silverstone (2000) As a result of the analysis, the existence of
New Zealand/1978 – 1999/ a long-term relationship between real GDP
Co-integration Analysis and unemployment was denied. However,
real GDP is the cause of unemployment. In
addition, the model stated that real GDP is weak
external, and the short-term Okun coefficient is
estimated at -0.103.
3 Silvapulle vs. (2004)/USA/1947 The Okun’s Law, which is being calculated
1Q – 1999 4Q/Time Series using USA post-war data, states that results
Analysis and Regression Analysis support the asymmetric relationship between
unemployment and output were obtained.
4 Sinclair (2007)/USA/1948 1Q – The coefficient of the Okun was found
2005 4Q/Kalman Filtering Model to be negative for both output and
and OLS unemployment. It has been stated that there
is a negative relationship between output and
unemployment. It also concluded that a 1%
decrease in the temporary unemployment rate
would result in a 1.4% increase in GDP.
Tab. 2: (continued)
5 Moazzami & Dadgostar (2009)/13 The analysis will show a 1% decrease in the
OECD Countries/ 1988 1Q – unemployment rate, growth between 2.6% and
2007 4Q/ Regression Model 4.7% in the countries examined. Employment in
Canada, Finland, Norway and the United States
is more sensitive to economic growth.
6 Ball vs. (2013)/USA/1948 – In most of the countries examined in the
2011/20 OECD Countries/1980 – analysis, it was determined that the Okun
2011/Regression Analysis/OLS law had a strong and stable relationship. The
relationship between unemployment and output
varies between countries. Furthermore, it was
stated that there was no significant change
in the analysis during periods of the great
recession
7 Huang & Yeh (2013)/53 Countries As a result of the analysis, it was stated that the
(21 OECD Countries and 32 Non- long-term coefficients between unemployment
OECD)/1980 – 2005/1976 – 2006/ and output are identical between countries. It is
Panel ARDL/ Pooled Mean Group also stated that the Okun’s Law applies among
Model/ Co-integration Analysis the countries examined.
8 Khaliq vs. (2014)/9 Arab At the end of the analysis, unemployment
Countries/1994 – 2010/Pooled has negatively affected economic growth. In
EGLS (Cross – Section SUR) addition, it has been stated that the 1% increase
Model/Unit Root Test in economic growth will reduce unemployment
rates by 0.16%. The analysis, which also referred
to the population, stated that a growth rate
of 1% at the rate of population growth would
increase unemployment by 0.37%.
9 Palombi vs. (2015)/United As a result of the analysis, it was found that
Kingdom/1985 – 2011/Spatial Okun’s Law was valid, and the negative
Panel Approach relationship between output and unemployment
was reported to be strong.
10 Ayhan (2008)/Turkey/1970 – In the analysis, a long-term positive relationship
2006/Co-integration Analysis/ was found between unemployment and
Granger Causality Analysis growth. Also, as a result of the analysis, a
one-way causality relationship from GDP to
unemployment is determined.
11 Uysal & Alptekin (2009)/ According to the results obtained in receiving
Turkey/1980 – 2007/VAR in Turkey, it is stated that there is a Granger
Analysis causality relationship from unemployment to
growth.
(continued on next page)
Tab. 2: (continued)

12 Ceylan & Şahin (2010)/ As a result of the analysis, it was stated that
Turkey/1950 – 2007/ the Okun’s law is valid for a long time in the
Co-integration Analysis/ TAR Turkish economy. There was also an asymmetric
and M-TAR relationship between unemployment and
growth.
13 Tarı & Abasız (2010)/ In the analysis, the fluctuations in the
Turkey/1968 – 2008/Two Regime contraction periods of the economy affect the
Threshold Co-integration unemployment more than the fluctuations
Analysis/ Threshold Error in the expansion periods of the economy.
Correction Model Furthermore, the Okun coefficient was -0.48 in
the long run.
14 Muratoğlu (2011)/Turkey/2000 – As a result of the analysis, there was no long-
2011/Engle-Grangerer term relationship between employment and
Co-integration Analysis/ Granger GDP, but a short-term relationship.
Causality Test
15 Altuntepe & Güner (2013)/ In the study, two results were obtained. First, the
Turkey/1988 – 2011/OLS growth in the services sector leads to increased
employment. Secondly, there is a negative
relationship between employment growth and
economic growth in the services sector.
16 Göçer (2015)/Turkey/2001 2Q – As a result of the regression analysis, it is
2015 1Q/Granger Causality Test/ stated that growth hurts unemployment. In
Regression Analysis this respect, the conclusion that the Okun’s
Law applies to the Turkish economy has been
put forward. Granger causality test stated
that growth affects unemployment, while
unemployment does not affect growth.
17 Bulut (2016)/Turkey/2005 – 2015 As a result of the analysis, it was determined
(Quarterly Data)/ Structural that there are asymmetric relations between
Fractured Unit Root Test/ growth and unemployment in Turkey.
Asymmetric Causality Test Moreover, while an acceleration in the growth
rate does not reduce the unemployment rate,
a slowdown in growth is negatively affecting
unemployment.
4 Data Set, Model, and Empirical Findings

In this study, which examined the relationship between economic growth and
unemployment, the validity of Okun law for Turkey was tested. It was analyzed
using the annual data of the period between 1980 and 2016 with the ARDL
Co-integration model. As a result of the analysis, it was seen that there was a
correlation between economic growth and unemployment in the long term.
However, Regression analysis was performed after the ARDL Co-integration
test to produce a more concrete result as a coefficient. The time series for real
GDP and unemployment rate variables in the data set were taken from the
International Monetary Fund (IMF) electronic database. The reason for the data
being made since 1980 is the liberalization policies that began in Turkey at that
time and then the desensitization of unemployment towards growth and the lack
of desired results in employment.
Tab. 3: Descriptive statistics of Economic Growth and Unemployment Data.

Source: Authors’ elaboration
Statistics/Variables GDP Unemployment(U)

Mean 4.5677 8.5509
Median 5.6080 8.4860
Maximum 11.1130 13.0530
Minimum -5.9620 5.9970
Standard Deviation 4.3552 1.4720
Skewness -0.9486 0.7163
Kurtosis 3.2174 3.7463
Jarque Bera 5.6229 4.0232
When Tab. 3 is examined, descriptive statistics of variables are shown. The

Skewness coefficient shows a skew distribution to the right in the growth data,
while the unemployment data shows a skew distribution to the left. When
we look at the Kurtosis coefficient, it is seen that the variables show a basic
distribution.
Tab. 4: ADF and PP Unit Root Test Results. Source: Authors’ elaboration
GDP Unemployment(U)
Critical Value Test Values Critical Value Test Values
ADF %1 -3.6267 -6.4813* %1 -3.6267 -1.8595
%5 -2.9458 %5 -2.9458
PP %1 -3.6267 -6.7198* %1 -3.6267 -1.7213
%5 -2.9458 %5 -2.9458
ΔGDP ΔUnemployment(U)
ADF %1 -3.6329 -10.1949* %1 -3.6329 -5.0630*
%5 -2.9484 %5 -2.9484
PP %1 -3.6329 -21.1336* %1 -3.6329 -8.3488*
%5 -2.9484 %5 -2.9484
*: * It represents a level of significance at 5%
Looking at the results of the ADF and PP unit root test values in Tab. 4, it is
seen that the economic growth level is stable, and the unemployment variable is
stable at the first level.
20
15
10
–5
–10
–15
–20
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Cusum 5% significance
Fig. 1: CUSUM Test. Source: Authors’ elaboration.

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
–0.2
–0.4
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Cusum of squares 5% significance
Fig. 2: CUSUMQ Test. Source: Authors’ elaboration
Figure 1 and Figure 2 examine the stability of the series. In CUSUM tests, the
graph should be within the specified limits. The fact that the graph is within the
boundaries means that there is no structural break. In the analysis, it is seen that
the graph is within the determined limits. In other words, it is concluded that
there is no structural break.
Tab. 5: Diagnostic Tests ARDL (1, 1) Model. Source: Authors’ elaboration
Diagnostic Tests Statistics

F - statistics 4.2682 (0.0121)
Breusch – Godfrey LM 0.0267 (0.9736)
Arch LM 0.1246 (0.7263)
Ramsey Reset 2.8957 (0.0988)
Jarquera Bera 4.1058 (0.1283)
According to the results of the diagnostic tests in Tab. 5, 5% at the level of

significance, the relationship between economic growth and unemployment
is significant, and there is no autocorrelation and heteroscedasticity problem
in the model. Furthermore, it is observed that there is no model setting error
in the parameters to be used in the analysis and that the model has a normal
distribution.
Tab. 6: Bounds Test. Source: Authors’ elaboration.
K F statistics Critical Value at 1% Critical Value at 5% Critical Value at 10%

Significance Level Significance Level Significance Level
Lower Upper Lower Upper Lower Upper
Bound Bound Bound Bound Bound Bound
1 28.0454 6.84 7.84 4.94 5.73 4.04 4.78
In the analysis, it is observed that the F statistical value is higher than all
values, with a significance of 1%, 5%, and 10% compared to the critical value. If
the F statistical value is smaller than the upper bound values of essential values, it
means that there is no co-integration relationship between economic growth and
unemployment. However, since the F statistical value is higher than the upper
bound values of all critical values, it is determined that there is a co-integration
relationship between economic growth and unemployment.
Tab. 7: Error Correction Model. Source: Authors’ elaboration.
Variables Coefficient T statistics Prob

ΔU -2.1352 -3.0665 0.0044
ECM -1.0878 -7.4218 0.0000
The ECM coefficient in Tab. 7 indicates how much of the short-term shocks
will be eliminated in the long term. As expected, the ECM coefficient should be
negative. The value of the error correction coefficient indicates that the shocks
that occur have disappeared in less than one year.
According to the findings obtained in the ARDL method, it is concluded
that the variables are co-integrated in the short and long term. On the other
hand, long-term coefficients cannot be interpreted statistically. In this context,
Regression analysis was performed to reveal the effects of variables on each
other more concretely. Two models were created within the scope of Regression
analysis. In the first model, unemployment is the dependent variable, while in
the second model, economic growth is chosen as the dependent variable (Tab.
8). Data and results for models are shown below:
Model 1: ΔU = 0.646798537143 - 0.115973233152*GDP
(-3.5016) 1
(0.0013)
Model 2: GDP = 4.94447041473 - 2.28545768787*ΔU
(-3.5016) 2
(0.0013)
Tab. 8: Diagnostic Test Results. Source: Authors’ elaboration.
Model 1 Model 2
F-stat. Prob F-stat. Prob
Model Data 12.2617 0.0013 12.2617 0.0013
Breusch – Godfrey Serial Correlation LM Test 1.0090 0.3759 0.1162 0.8906
Heteroskedasticity Test: White Test 1.1210 0.2972 0.0019 0.9650
Ramsey Reset Test 0.0105 0.9188 0.3475 0.5595
The aim of this study is to investigate the validity of the Okun’s law with annual
data for the Turkish economy between 1980 and 2016. In this study, it was appro-
priate to use the ARDL co-integration method because the time series was stable
at different levels. As a result of the study, the relationship between economic
growth and unemployment emerged as co-integrated. In other words, economic
growth and unemployment are acting together in the long term. This result
states that a change in economic growth will lead to a change in unemployment.
However, the coefficient of this change could not be found because the long-term
coefficient could not be interpreted statistically. Therefore, Regression analysis
after ARDL co-integration analysis was deemed appropriate. The reason for the
Regression analysis is to see the statistically more tangible results of the relation-
ship between economic growth and unemployment. In this context, a 1% growth
in economic growth by Regression analysis reduces the unemployment rate by
0.11%. Later, the impact of unemployment on economic growth was analyzed.
According to this analysis, a 1% increase in unemployment reduces economic
growth by 2.28%. From this point of view, the negative impact of unemployment
on economic growth is more significant than the effects of economic growth on
unemployment. According to the analyses, it is concluded that the Okun’s Law is
partially valid in Turkey.
5 Result and Evaluations

According to the analysis, although Turkey is a developing country, the growth
ratios are not affected sufficiently by unemployment. In this case, it is seen that
a solution to the problem of unemployment cannot be produced only by eco-
nomic growth. Policymakers should resort to different policies when addressing
the issue of unemployment. Because the economic growth in Turkey is seen to
be more capital-intensive growth. It is known that such growth does not con-
tribute much to unemployment. It is possible to see this during periods when
high growth does not reduce unemployment to the desired level. In this respect,
it is essential that Turkey increases its importance to the unemployment problem
and produces more permanent solutions, not palliative.
It is essential to increase employment to solve the problem of unemployment.
Employment created in this way will gradually reduce unemployment. Vocational
training courses to be given by local governments can also be useful in reducing
unemployment. However, opening courses to specialize in various professions of
local governments and operating effectively here is another important step to be
taken. Although this practice is carried out activities within the İş-Kur today, the
participation rate is not at the desired level because it is not announced much.
Studies show that many people are not aware of these courses.
Another important step towards reducing the unemployment rate is to
remove the overburden on the minimum wage. The tax burden on the minimum
wage is a high cost for the employer. By reducing this cost, the employer can stop
layoffs and take in more workers. Recruitment in this way can lead to significant
reductions in unemployment rates in the long run.
Improvements in education could also yield positive results in unemploy-
ment. For example, the cooperation of vocational high schools with the indus-
tries allows them to be more qualified and learn the job better. Implementation
of this in universities are relevant policies that must be implemented to give
more positive results in order to reduce youth unemployment.
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Aslıhan Özel Özer, Buğra Özer, and Sercan Akın
An Evaluation of Subsidies Granted to the

Private Educational Institutions within the
Framework of Turkish Tax System1
Abstract: One of the essential concerns that governments have to deal with has been the
theme of economic growth and development. In order to be able to sustain the objectives
mentioned above, states and governments instrumentalize fiscal policies in which subsidies
occupy a substantial place. The primary rationale behind these fiscal policies, including
grants, has been the allocation of resources to those fields with better and more efficient
prospects within the general good of the economy. Despite convergences seen in terms of
types and implementation of subsidies, the basic objective is to accomplish higher rates of
economic growth and investment.Through the Decision of the Council of Ministers of the
Turkish Republic dated June 19th, 2012, investments to be handled for primary, secondary,
and high school educational institutions were evaluated within the framework of the fifth
region with the labeling of priority investment. Along with the closure of private-mentoring
facilities, the related facilities investors were foreseen to utilize the subsidies to convert
these facilities to schools, thereby minimizing the costs of investments coupled with rises
in investments. The effort of the study, given the given scope and framework, is to eluci-
date and to analyze arrangements and recent developments concerning grants of space and
location for investments and exceptions regarding the insurance and tax exceptions and
exemption within a general framework of aforementioned subsidy program in Turkey for
educational institutions.
Keywords: Incentives, Education, Tax Exemption
JEL Codes: H71, H52, H26, I22
1 Introduction
Governments’ grants and subsidies provide the private sector and related actors
in the name of economic development and growth. As the concerned grants may
vary from location to another, these grant schemes may differ based on a sectoral
basis as well.
1 This study has been abridged and developed from the MA project titled “ A General
Evaluation in the Field of Subsidies in Education Sector and The Subsidies in Turkish
taxation system” by Sercan Akın supervised Assistant Professor Aslıhan Özel
Özer PhD.
170 Özer and Özer
Education as a field has a quintessential role to play from contributing to the

making of the qualified labor force as a component of the making of human
capital. While the public sector is predominantly involved in the private sector,
the private sector is also actively indulged in the related field. The subsidies
and grants program oriented at the private sector actors in the education field
strengthen the private sector partner, thereby contributing to a more effective
and quality provision of services along with the realization of higher rates of eco-
nomic growth and development. A review of implementations and applications
in the education fief characterized with positive externalities in particular with
emphasis on regulations directing at reinforcement of private investments and
analysis of the aforementioned schemes shall contribute to the development of
the private sector in education.
This work has the objective to present a literature review on the implementa-
tion of the private education sector within a context of Turkish taxation system
along with elaboration on different aspects of the scheme
The effort shall be to provide information on the fundamental regulations
regarding the subsidies granted to the private sector in Turkey while putting
elaborations in the education fields with emphasis on private partners’
interactions and their future investments.
2 Concepts in Regards to Subsidies and

Education System and Evaluations
The concept “subsidies” refer to “material and/or non-material assistance and
encouragements with the aim of a faster and a more abundant provision of cer-
tain economic activities compared to other provision frameworks” (İncekara,
1995: 9).
Subsides do not only develop the provision of economic activities but also
contribute to coping with regional economic in inequalities, henceforth contrib-
uting to the national economic development on an economic basis. Given the
default perspective, subsidies may be defined to be “a summation of supports
given by governments with the objective of creation of new employment oppor-
tunities in certain sectors and on specific regions and increasing the life quality”
(Karabıçak, 2013: 265).
The final objective of the related schemes has been to back economic
growth. There exists a direct relation between subsidies and economic growth.
By means of economic growth, governments seek to achieve a higher rate of
employment, create a broader basis of taxation, and to increase the welfare level
(Eser, 2011: 12).
Subsidies Granted to the Private Educational Institutions 171
The primary characteristics of subsides are respectively: a) They are granted

by governments, b) they may also be given to state enterprises as well as the pri-
vate counterparts, c) they impose a cost on government leading to decreases in
public funds through cash grants, low interest credits and grants and causing
the level of public revenues to roll back due to the granting of state revenues
whose source is the taxation, d) the subsidies may be a benefit for the private
counterparts while they may be attributed as receding public revenues and funds,
e) subsidies are used in accordance with the content, region, sector, magnitude
and timing factors, f) subsidies and grants may be direct or indirect, g) they may
be hidden or open (Duran, 2003:6). This being asserted, among the different
subsidies classification, tax-based subsidies have been the most popular one with
examples of implementation in many international examples (Giray, 2008:95).
The term subsidies may be able to be explained in terms of their objectives.
The term may be defined as ad economic-aimed, producer-based subsidies,
transfer payments, premiums, credit with favorable conditions (Küçüktürkman,
2007: 61). Succinctly speaking, to be able to realize economic growth and to
increase employment sources, to maintain economic stability, all measures taken
by governments in economic, social, legal, and financial terms may be summa-
rized as subsidies (Tuncer, 2008: 191).
Subsidies in the form of in-kind, cash, and tax-related have served for dif-
ferent purposes throughout history with various usages. Many governments
have aimed to encourage investments using subsidies, tax-rebate, and direct
guarantees programs (Thomas, 2007: 1). By the second mid 980s, subsidies have
tremendously increased along with the fact that both developing and developed
countries have taken advantage of the related schemes (OECD, 2002: 169).
The fact that markets do not operate automatically, thus leading to market
failures, is also valid for many countries where income distribution is less than
just. When market dynamics left alone in countries where the necessary eco-
nomic allocation of production, consumption, and redistribution mechanism
are left to the mercy of price mechanism and market conditions, the redistribu-
tion schemes are expected to be just either. Governments attempt to carry out a
more just economic redistribution through fiscal policies by influencing social
befit of public expenditures and distribution of tax burden (Aksoy, 2011:45–1).
Several criteria are taken under consideration whist classifying the subsidies
being respectively (Duran 2011:19):
1. Objective-Based Subsidies: they may be in the form of influencing of
increasing investment and production, supporting exports, gaining inter-
national competitiveness, decreasing regional disparities, attracting
172 Özer and Özer
foreign direct investment, increasing Research and Development Activities,

reinforcing Small and Medium-sized Enterprises, finishing the unfinished
investments.
2. Content-Based Subsidies: General –Aimed and Particular-Based Subsidies
are to be mentioned. While the initial one refers to the implementation iden-
tical level of subsidies being applied to all sector with the very same rates
including tax exemptions and value-added-tax exemptions, the latter one
refers to the exemptions granted to the particular regional and firm based
privileges with the concrete example of exemptions given to the investment
on the research and development activities based on certain conditions.
3. Objective-Based subsidies correspond to those subsidies that based on invest-
ment and enterprise based along with pre-investment subsidies.
4. Instrument-Based Subsidies are those kinds that refer to subsidies in kind, in
cash taxation one and state guarantees.
5. Resource-Based subsidies are those aimed at profit/revenue-based, cap-
ital investment based, labor-based, value-added bases and import and
export-based ones.
Most contemporary public expenditures are realized through taxation. Tax
systems provide necessary investment for public expenditures. Taxes play
quintessential roles in the redistribution of income and the contribution to
increases in savings and capital accumulation strategies’. While trading off the
tax-based income, the objective has been to realize economic and fiscal policies
(Bıyık, 2001:4)
Tax based subsidies with different implementation at different international
settings have contributed to increases in savings via increasing disposable
income through reductions income rates, and these savings have been diverted
to the savings via tax-based subsidies and added up to the expansion of sav-
ings volume. Indeed the impact of these schemes had been positive upon to the
increases of investments thereby with high growth and development rates in the
less developed and the developing countries (Siverekli, 2003: 105)
The aims of taxation based subsidies may be juxtaposed as follows a) Increasing
savings and investments b) diverting investments to specific fields and regions c)
alleviating the negative impact of taxation on economic decisions d) maintaining
economic stability and decreasing the economic impact of inflationist pressures
e) supporting employment e) maintaining a just economic redistribution f)sus-
taining justice in the making of tax burdens f) contributing to a higher level of
international competitiveness rate for foreign currency rates (Giray, Koban and
Gerçek, 1998:10).
The forms of taxation based subsidies may be in the form of reduction in

tax rate, investment bonuses, investment credits, tax holiday, tax postponement,
accelerated depreciation, exceptions and exemptions, reduced import and tax
applications, VAT support, loss cuts, preferential treatment for long term capital
gains, definite discount rules, reduced withholding tax, employment-based cuts,
tax credits, reduction in property taxes.
2.1 Education as a Concept and Educational Expenditures

Many definitions and explanations have been put forth by different scholars
throughout history to locate the term education. While Plato place emphasizes
the education’s quintessential role in the making of Excellency for the mind
and body, Cicero stresses the process of how education leads to the making of
humans. One of the related definitions regarding the term is to create a pro-
cess of change in human behavior along with the desired direction with a given
objective (Ertürk, 1982: 2).
The enlightenment Age witnesses the usage of the term derived: from the
Latin word “educere” for the cultivation of animals and plants. The term has
come to be applied for humans due to the cognitive traits inherent in the con-
cept. While the intelligentsia has come to be identified with the term, the term
has come to denote a mature level of moral, physical and character development.
Accordingly, education as a concept has a connotation of intellectual physical
and moral excellence and its very full formation (Tozlu, 1997:93).
Along with these usages, term education has come to mean to different
things as well. Depending upon the field in which the term is used, the term
has differentiated itself. The term has different relative connotations with
related limitations and ambiguities. While the daily usage of education has
encompassed a wide array of fields with flexible and broad openings, the
term possesses a totality and a core of itself where these broad definitions are
derived. Henceforth, one should trace the term to its kernel and root (Yılmaz,
2000:19).
Knowledge, knowledge production, and education come to occupy an essen-
tial place in modern societies. Education is inextricably linked to knowledge and
knowledge production processes using providing terrain for such production,
the upbringing of generations for the related schemes, the spread of knowledge
via different channels (Cerit, 1997: 64).
The term education in Turkey has come to mean different sets of meanings
corresponding to terms maarif, tedrisat, and terbiye as corresponding to
Ottoman Turkish (Başaran, 1984:14). The term education as under the term
174 Özer and Özer
eğitim is inclusive of the aforementioned terms gaining manners, nurturing, fos-

tering, science, discipline.
2.1.1
Types of Education
By the legislation No:1739 having come to affect in the Official Newspaper of
Turkey No: 14574 dated June 24th, 1973, education came to be defined in two
basic categories formal education and standard education, both being comple-
mentary and cooperative. The former one is inclusive of primary, secondary, high
school, and higher education as processes while the latter type comes to include
the kind of education for the people that could not have access to educational
opportunities. Those that dropped out of formal education and schooling oppor-
tunities, for the people that would like to take advantage while being involved in
the legal, educational process and for those groups that would like contribute to
their occupational competencies.
2.1.2
Investment Expenditures
Educational services have positive social, economic, and political positive exter-
nalities in society. Along with the increase of these positive externalities, the
quality of education has come to be associated with the related term. The edu-
cational services add up to increases in productivity, political stability, social
and cultural development, and efforts of industrialization efforts to yield (Şener,
2001: 356–357). Due to these characteristics, education is classified as semi-
public goods, and the marginal benefits of these services are lower than the mar-
ginal social benefits. Provided that these services are solely left to the market,
there will be an under-production phenomenon that requires a bailout by the
government through the general budget (Madanoğlu, 1992: 59).
In addition to the direct funding of education, there are other types of
financing, such as partial and indirect funding programs.
In direct financing, the beneficiaries are asked to pay for the courses that students
attend to finance certain items in services. The indirect financing, in the meanwhile,
refers to the introduction of private partners with granted certain initiatives in the
educational sector while the government carries out the public provision of these
services (Devrim, Tosuner, 1987: 86–87). The voucher called system is the transfer
of a voucher to the beneficiary, which gives a chance for the students to make use
of private educational services (Stiglitz, trans.: Batırel 1988: 463–464). On the other
hand, educational expenditures facilitate the redistribution of income, the realiza-
tion of the economic growth, sustaining economic growth which all sum up to the
making of investment expenditures (Mutlu, 1997: 249–250).
3 Subsidies in the Turkish Education System

The economic development of a country is interwoven with the personal and
social development of a country. By means of attitudes and behaviors gained in
the socialization processes via the educational channels, economic growth may
be facilitated by such methods (Kaya, 1984: 10). The provision of educational
services may be realized by both the public and the private sector. While the pri-
vate sector may face different challenges in the provision of these services, the
public sector may provide remedies to overcome the related problems utilizing
subsidies schemes. According to the decision of the Council of Misters dated
June 19th, 2012, Number 350, the private sector has come to be supported with
different subsidies and exceptions, which the study shall address in the following
sections.
3.1 Revenue Exception for the Private Education and Teaching

The exception to special education and training is regulated in Income Taxation
Law No: 193 Article No:20 and Corporation Taxation Law No: 5520 Article
No: 5/1-ı as amended by Corporation Taxation Law Number 5528. This excep-
tion have been defined as follows “revenues gained from preschool, private
primary school and private secondary school corporations, pending upon the
consent of the related ministries, shall be subject five-term-exemption within the
framework of regulation and rules to be determined by the Ministry of Finance
and exemptions shall commence in the aftermath of the very date of educa-
tional services’ beginning and the exemptions to be valid for the subsequent five
intervals of taxation” (GTL Art. 20; VATL Art.5/1-ı; GTGL 254) (5228 provi-
sional Law Article. 1).
3.2 Exception for Research and Development Activities

By means of this exception, all players in the process of research and devel-
opment processes were to be supported. From the perspective of scien-
tific expenditures approach, the ration of research and development of
expenditures to GDP and the number of researchers to the total population
rates have been significant indicators for economic development (Kızılot,
2000:398)
According to the Corporation Taxation Law No: 5521 Article No:1 Clause
No: 1 Paragraph, those corporations under the condition of not being an exclu-
sively defined research and development corporations along with other activities
carried out shall have the chance of expenditures of research and development
activities realized for the objective of creation of new technologies within the
176 Özer and Özer
R&D departments within the company exclusively by a 40% amount (byte

Legislation Number February 2nd, 2008 Article Number 5 the rate was deter-
mined by 100%) from the revenue earnings under the item of R&D deductions.
Yet this provision was annulled from the legislation Number 6728 Article
Number 58 dated July 15th, 2016.
3.3 Value Added Tax in Educational Service

In the Value Added Tax (VAT) Law, the subject of VAT has been defined in the
very first article of the related legislation as those activities:
• Services contracts realized within the framework of commercial, industrial
and agricultural services
• Import of goods and services of any kind.
• Contracts and services arising from other activities
The casual factor about the formation of VAT comes to emerge in different ac-
cording to its types. In terms of interactions subject to be taxation, the causal
events leading to the formation of VAT have been juxtaposed in the VAT Law
(Article 10). As a rule, the main causal event in the structure of private edu-
cational services is the completion of the service. The education in the pri-
vate educational sector is carried out over a while, namely the school year.
Henceforth, the primary causal factor for the formation of VAT is realized at
the end of each schooling year (Yılmazcan, 1997:82). Meanwhile, the private
education sector subject to the Law No: 625 has also been given the right for
tax exception for the free educational and teaching services delivered bona fide
with the condition that they do not exceed over 10% of their capacity (KDVK
Art.17/2-b).
3.4 VAT Rates in Private Education Sector

Several definitions have been forth for educational corporations that are regulated
by Law No: 5580 Private Education Corporation Laws Article No: 2. By means
of different amendments, Amendment No: 26742 dated December 30th 2007, by
means of list Number II mentioned in the decision of the Council of Ministers”
universities and higher education facilities” and e ducation and teaching services
given by the private education corporations mentioned in the Law 5580 Private
Education Corporations, Law Number 2282 Social and Children Services Law
and governmental decree Number 576 for the Private Education Corporations
and transportation and transfer services given for the students as indicates
by the “Bylaw for School Transpiration Services and the accommodation and
dormitory services m
entioned in the “Private School Accommodation Bylaw”,
the VAT rate has been determined as 8%.
3.5 Investment Subsidies for Investments to be Realized

by Private Educational Corporations
2012/3305 Decision of the Council of Ministers with the date of June 6th,
2012 No: 28328 stipulates while regulating the “Government Assistance in
Investments” that those investments realized by kindergarten, preschool,
primary, secondary, high school schoolings shall be deemed as education
investments. (Supplementary Table 2/a). Irrespective of the provinces where
these investments would be carried out, the investments would take advantage
of the 5th Zone, and they shall be subject to 6th zone investments should they
carry out the concerning investments in the 6th Zone”.
In those provinces where the investors would be investing educational
investments, within the framework of regional subsidies implementations,
investors shall also be granted land and/or provide the location themselves the
necessary area, whereby components of subsidies were juxtaposed in the fourth
article third paragraph of the legal regulation.
These are:
• Tariff exemption
• VAT Exemption
• Tax Rebates
• Share of Employer Support for Insurance Premiums
• Location Grants
• Interest Support
• Income Tax Support (For the 6th Zone Premiums)
• Insurance Premium Support (For the 6th Zone Premiums)
In order for these components to be used for the first and second regions, min-
imum investment levels of 1 million Turkish lira are required. The minimum
investment amount for the third, fourth, fifth and sixth regions should be
500.000 Turkish Liras.
3.5.1
Tariff Exception
Most of the equipment required in the Investment Subsidy License can be pur-
chased domestically while they can be supplied from abroad. Most imported
machinery and equipment lists that can be seen in the license mentioned will
be provided without any tariff levied according to the provision stated in the
178 Özer and Özer
decision stipulating all machinery and shall not be subject to any tariff whatso-
ever clause.
3.5.2
VAT Exemption
The Turkish private education sector is specified and defined within the II article
of the Legislation Number 5580 Private Education Enterprises. According to
the stated legislation, preschool, primary school, secondary private education
institutions, private courses distance education enterprises, in-house training
units student study centers, private education, and rehabilitation centers are
included within the stated law (Ozansoy, 2008: 105). According to the VAT Law
in Turkey dated October 10th, 1984, Number 305 states that those investors with
subsidies license to purchase machinery and equipment shall also be granted VAT
exemption during the purchases of this item. On the other hand, all transfers of
machinery and equipment within the content of subsidies license content shall
also be subject to the exemption while the exemption is also valid for the subsets
of equipment and machinery listed in the license
Fixed investment limits over 500 million TL shall also be considered as a stra-
tegic investment with exemptions granted for expenditures of construction for
the infrastructure (Nr. 28328, 2012/3305 Dcs. Nr., Art. 10).
3.5.3
Tax Rebate
Along with the VAT Law in Turkey dated October 10th, 1984, Number 305
Article 32/A stipulates for the content of regional subsidies implementations, rev-
enue, and corporation taxes shall be subject to 70% deduction until the amount
reaches to the foreseen subsidies contribution rate. According to the subsidies
documents required by the subsidies decision until the very date December 31st,
2014 (inclusive of this very exact date) and provided that investment process has
commenced the subsidies support will vary from 80 percent to 40 percent (Nr.
28328, 2012/3305 Dcs. Nr., Art. 15).
3.5.4
Insurance Premium Employers’ Share Support
In the regional support programs, upon the completion approval realized subsi-
dies license under the condition that required employment is not exceeded
• For the completely new investments realized with investment subsidies
licenses
• In the other types of investment in the aftermath of completion of investment,
or in the period six months before the end of the investment (for the seasonal
investment the very recent year’s averages are taken under consideration) for
the premiums and service documents passed to the Social Security Institution
depending on the average number of workers
Premiums support shall also be granted in favor of employers based on the
minimum wage levels from the budgetary allocations granted to the Ministry.
The concerning support program shall be given for the projects that have
started since December 31st, 2012, for years and five years for those that have
started after January 1st, 2015. The benefitted insurance premium support
levels shall not surpass 25% of the investment (Nr. 28328, 2012/3305 Dcs.
Nr., Art.12).
3.5.5
Investment Location Support
In the related decision document dated June 29th, 2001, Number 4706 supple-
mentary third article corporations may be supported with investment land and
location grants for those investment project licenses (Nr. 28328, 2012/3305 Dcs.
Nr., Art.16).
3.5.6
Interest Support
In the case of demands for investments realized through regional support
programs and strategic aids along with the content of R&D and environmental
projects, the credits to be utilized from banks with one-year period interests shall
be supported with 70 percent of fixed investment rates for the interests incurred.
For the Turkish lira based interests within the 5th Zone Investment region up
till 5 points shall be bailed by the government while for foreign currency found
credit 2 points shall be supported within the same region. Yet the support limits
will not exceed over TL700000 for the interest support. For the 6th Zone of
Investments, the Turkish lira based support will be around 7 percent while the
foreign currency based credit support shall not be over 2 points with limits not
to exceed over TL 900.000 (Nr. 28328, 2012/3305 Dcs. Nr., Art.11).
3.5.7
Income Tax Support (For Investments in the 6th Zone)
For the 6th Zone of Investments as indicated in the Investment Subsidies
Decision, for the extra employment provided that the amount shall not exceed
over the recorded employment level income tax for the workers calculated over
the minimum wage amounts shall be not to taxation over the declaration to be
given in the aftermath of 10 years of completion of the investment Project fully
or partially (Nr. 28328, 2012/3305 Dcs. Nr., art. 14).
180 Özer and Özer
3.5.8
Insurance Premium Support (For Investments in the 6th Zone)
For the 6th Zone of Investments as indicated in the Investment Subsidies
Decision, for the extra employment provided that the amount shall not exceed
over the recorded employment level insurance premiums paid to the Social
Security Institution shall be funded by the Ministry in the aftermath of 10 years
of completion of the investment Project fully or partially. (Nr. 28328, 2012/3305
Dcs. Nr., Art.13).
4 Concluding Remarks
Education is a sector that plays a quintessential role in the lives of individ-
uals with its semi-public good characteristics. The private sector plays within
the game in the appendix to the public sector’s involvement. The increase
in competitiveness and quality increases in education have come to be two
championing claims of the private face of the education sector. In the mid of
these processes, tax systems are multitasking schemes. One of these tasks is to
increase public finance for public expenditures and contribute to the enhance-
ment of societal benefit. Yet a commodification of the education system shall
be hazardous to the equality of opportunity. In the name of supports given to
the private sector, the government should be regulating the subsidies given
the impact of social and economic equilibrium to the fifth zone of invest-
ment within the regional support programs under the title of “Government
Subsidies in Investments” June 9th 2012, 23138 Number3305, with an elab-
oration of VAT exemptions, tariff reductions and exemptions, tax rebates
ınsurance premium supports, employers support, interest supports along
with Zone & implementations. The effort has also dealt with matters including
earnings exemption research and development exemptions and other VAT
exemptions.
It is without any doubt that the education sectors need to be supported for
quality increases in content and quality. It will be of utmost importance that
related support and subsidies programs be regulated and monitored closely,
which constitutes a subject for a new study.
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Özgür Biyan and Güneş Yılmaz
Artificial Intelligence: If It’s Taxed, But How?
“Artificial intelligence will be either the best or the worst

thing ever to happen to humanity.”
Stephen Hawking
Abstract: In today’s world of rapid digitalization, the widespread use of artificial intel-
ligence has reached such a level that it will have some consequences in terms of public
finance. The change in employment policies due to the external factors resulting from the
prevalent use of artificial intelligence, and therefore the possibility that budget revenues
might be affected, has led to the discussions about the taxation of artificial intelligence.
This study discusses the issues of how artificial intelligence can be taxed in accordance
with the discussions going on about the same. The main point derived implies that it does
not seem plausible that artificial intelligence could become a taxpayer as per the applicable
legal system in force.
Keywords: Artificial Intelligence, Robot tax, Digitalization, Taxation
JEL Codes: D62, H23, K34
1 Introduction
Non-stop growth of technology beginning with the invention of the steam engine
continues tremendously owing to Industry 4.0 today, with direct effects on human
living. Widespread use of the internet, fast-paced of robotization, and development
of artificial intelligence have risen some question marks in the minds as to where the
social and economic life would head. Internet of things (continuously connected
to the net), smart cities, smart buildings, autonomous (self-driving) cars and, ulti-
mately projects involving the participation of Al robot in the workforce; have been
included in the agenda of the governments as the topics to be discussed regarding
the future policies. All these developments, which we tried to outline briefly, have
also been reflected in the field of public finance. Inevitable radical changes in the
ways of work and business manners soon have led to the fact that employment,
economic, and fiscal policies should be reconsidered. This study deals with such
a massive increase in technology from the perspective of the “externality” theory
as part of public finance. Although the term “technological development” sounds
excellent, the discussions began whether it has created positive or negative exter-
nality, considering the results it created or it might result in in the future.
184 Biyan and Yılmaz
On the other hand, legal science has also had to accommodate itself to tech-
nological developments. Likewise, the changes in business models and working
methods required the adoption of harmonized arrangements in terms of private
and public law. The fact that whether artificial intelligence, related to our study
and analyzed in great detail, can be given personhood and then be assigned a
responsibility has been the main topic of most branches of law. Also, the tax law
is dealt with as part of these discussions and thus has to produce solutions.
The conclusions derived at the end of these discussions would lead to the
clarification of the technological developments in the face of taxation regimes.
Therefore, according to the questions concerning the discussions focusing on
the core of this study, it will be necessary to make assessments as to whether
the artificial intelligence should be taxed and based on the arguments made and
seek solutions. Before we go ahead and address the discussions and our opinions
about the taxation aspect of the study, the concept of artificial intelligence will
be outlined, and the predicted results will be expressed, after which the research
will address the suggestions on how to impose a tax, referring to the opinions in
the doctrine.
2 Artificial Intelligence and Characteristics

2.1 Artificial Intelligence Conceptually
The emergence of the concept “artificial intelligence”, formed with the combina-
tion of the individual terms artificial and intelligence, dates back to the 1940s.
It was in the 1940s that McCulloch and Pitts attempted to express the concept
of “intelligence” mathematically for the first time. In 1948, William Gray Walter
built two small robots called “Elmer” and “Elsie” and enabled them to respond to
obstacles they hit (Huang Z, 2018: 1818). In 1950, Alan Turing carried out some
studies on computerized machines and intelligence. He indicated that communi-
cation could be established between man and machine, thanks to his experiment
known as “Turing Test”. In the Turing experiment, he enabled a man to talk with
both a man and a machine simultaneously; and he proposed that the computer
passed the test when he noticed that the man could not distinguish between the
device and another person. So, it was how the first steps were taken towards the
evolution of artificial intelligence (AIR, 2018: 2). At the Dartmouth workshop in
1956, the term “artificial intelligence” was proposed, claiming that it was a disci-
pline (DDAIT, 2018: 1818).
First used by McCarthy in 1955, Artificial intelligence can be defined as
“a machine capable of solving problems that individuals can solve with natural
intelligence”. But, the part which underlies the concept of artificial intelligence
Artificial Intelligence: If It’s Taxed, But How? 185
with a broad insight, and is concerned with our study, is that the machines have
learning skills. In other words, a machine with artificial intelligence corrects
the errors or mistakes made by trial and error; namely, it can learn. Statistical
models, created with inspiration from the neural networks in the human brain,
comprise the artificial neural networks. These neural networks enable deep
learning method can be implemented (Yüksel, 2018: 588–589). Artificial intel-
ligence is a system that performs normal human intelligence functions such as
perception, learning, development, creativity, communication, decision-making,
conclusion, etc. (Zorluel, 2009: 308). Artificial intelligence is considered one of
the leading events in the 4th stage of industrialization (Industry 4.0) (Marwala,
2018: 2). In another saying, the “Fourth Industrial Revolution” is begun with a
new technological wave that had profound economic effects within the scope of
closely-related features, such as robot dexterity, machine learning, processing
power, and sensor capabilities (Ooi & Goh, 2019: 2).
2.2 Characteristics of Artificial Intelligence

Artificial intelligence, which is used to express the techniques that render the
machines “smart”, make use of automation by developing or reproducing the
human intellect to improve the analyzing and decision-making capabilities of
machines and enable them to perform research and implementation. It catalyzes
structural transformation in various industries, offering the managers unprece-
dented opportunities and tools to facilitate the complexity of decision-making.
Besides, it allows otherwise complicated and time-consuming tasks to be com-
pleted more effectively and efficiently (DDAIT, 2018: 1818–1819).
The concept of artificial intelligence is a concept that refers to information sys-
tems inspired by biological systems and is accepted as an umbrella term involving
several technologies such as deep learning, machine vision, natural language pro-
cessing (“NLP”), and machine reasoning (AIR, 2018: 1). Artificial intelligence is
divided into two. The first one is a reliable artificial intelligence (deep learning).
This intelligence is implemented by imitating the human brain. A technology
that can think like a human is aimed. The second one is weak artificial intel-
ligence (machine learning). This intelligence is, though, the one that performs
predetermined movements based on rules (Yüksel, 2018: 591; Zorluel, 2009: 308).
Artificial intelligence is a kind of computer program. It is a program that
uses the situations affecting the sensory organs, such as an image, sound, touch,
hears, smell, or taste, as an input through the sensors. The inputs are processed
and evaluated algorithmically and transformed into a movement or a thought
in the long run. Meantime, the samples are matched; the research is conducted,
the reasoning is made, and thus the learning activity is performed (Yüksel,
2018: 592). Large amounts of data are processed quickly and accurately using the
transactions carried out via algorithms within the scope of artificial intelligence.
Humans have been replaced by artificial intelligence programs owing to the nat-
ural speed, reliability, and scalability of algorithms (Ooi & Goh, 2019: 3).
2.3 Difference between Artificial Intelligence and Robot

Artificial intelligence does not mean a robot. While artificial intelligence is a
software, a robot is an object, and some machine made up of mechanical parts.
Not all robots have artificial intelligence. There is not even such a rule claiming
that artificial intelligence exists in robots only (Yüksel, 2018: 593). The robots
are the mechanisms capable of managing themselves, moving independently,
and performing specific tasks assigned to them (Zorluel, 2009: 309). Robots can
walk, perform their jobs, and have artificial intelligence to make better decisions.
Even though the automation systems (Industry 2.0) are thought together with
artificial intelligence, they are entirely different from artificial intelligence, too.
For example, when traffic lights were introduced, they replaced the traffic police.
What’s more, also the term “robot” was used for traffic lights in South Africa.
However, that does not necessarily mean that traffic lights can be regarded as
artificial intelligence (Marwala, 2018: 2). The Google search engine is a kind of
artificial intelligence, but it is not considered a robot. As you search through the
Google search engine, Google first detects the subject being explored. Once it
detects the topic, it carries on the process of reasoning thanks to its algorithms,
by using the information it learned previously and presents the most relevant
websites to the user in a hierarchical manner. In this way, Google fulfills the per-
ception, learning, reasoning, and deduction processes of intelligence. However,
that does not necessarily mean that it can be considered a robot (Zorluel,
2009: 309).
So, based on the reasons mentioned above, the report on “European Civil
Law Rules in Robotics”, which was issued by the European Parliament Policy
Department for Citizens’ Rights and Constitutional Affairs, stated that a
smart autonomous robot was required to possess the following characteristics
(ECLRR, 2016: 8):
(a) Ability to move to utilize the sensors and/or by analyzing and using the
peripheral data;
(b) Self-learning;
(c) Use of physical support;
(d) Able to keep up with the environment owing to its movements and behaviors.
2.4 Possible Effects of Artificial Intelligence on the Future

In parallel with the rapid developments in artificial intelligence, it began to be
used in more and more fields. It is highly likely that artificial intelligence will be
used more widely in the future. Moreover, discussions began on where certain
professional groups today would end up. While the technological developments
in the 1980s and 1990s enabled the employees to speed up and carry out their
works comfortably, recent developments began to replace the employees by
machines or robots. Technological progress has increased so much so that
there was nearly no need to employ qualified personnel, apart from the limited
number of trained staff in charge of monitoring the automation system. Less and
fewer qualified staff was used, and also a decrease was observed in the name of
the entire team employed. Furthermore, the level of wages further reduced as
more unqualified employees were recruited (Korinek, 2019: 2–3).
The market size of artificial intelligence globally is approximately $6 billion,
according to the gross value added estimates as of 2016. This figure is expected
to rise to $60 billion, with a 10-fold increase by 2025 (AIR, 2018: 3). Today, arti-
ficial intelligence has begun to be used widely in transport, education, employ-
ment, defense and security, health, virtual reality and virtual assistant, internet of
wearables and objects, commercial intelligence, and robotization. Also, artificial
intelligence lends substantial support to painting, story writing, and scripting,
composing, computer programming, filmmaking, recipe making (AIR,
2018: 5–12). According to the 2017 Statistical Report on Internet Development
in China, 2.542 artificial intelligence companies worldwide have come into oper-
ation. 1.078 of these companies are based in U.S.S, and 592 are in China (Huang
Z, 2018: 1819). Therefore, it will be fair to say that artificial intelligence will be
seen in many more areas in the near future.
Therefore, with all these developments, it is clear that the legal status of artifi-
cial intelligence is used instead of humans.
Because it is important to determine the status of artificial intelligence (or
not) in life and especially in-laws. The assessment of the state of artificial intel-
ligence in legal, financial, social, and even political life should be discussed
internationally.
3 Taxation Size: To Be or Not to Be…

In order to put an answer to the question “can artificial intelligence be taxed?”,
it is necessary to set forth its essence in terms of fiscal and legal sciences dealing
with tax as a profession. In this context, it will be appropriate to determine the
status of artificial intelligence against the externality theory in terms of public
finance and to determine its essence and status in terms of the law, so that its
taxation aspect can be adequately addressed.
3.1 Artificial Intelligence in Terms of Externality Theory

The reflection of technological developments manifested itself under two
headings. Firstly one is the increase in the amount of production. As a result
of technological progress, the amount of output in the economy has increased,
and especially the businesses that had innovation policies have benefited signif-
icantly from this deal. Secondly, technological development has led to the fact
that the share of income received from the economy was distributed again. These
new developments also referred to as the sharing economy, have influenced the
way the funds are exchanged between the persons (Korinek & Stiglitz, 2017: 6).
Technological improvements have significantly contributed to the increase of
efficiency, reduction in the cost of operational transactions, and facilitation of
data transfer to/from machines (Kavoya, 2018: 52). Nevertheless, technological
revolutions are also regarded as the cause of the mass replacement of human
labor, which has been restored by technological advances (Ooi & Goh, 2019: 4).
Public finance has faced two fundamental problems in the face of these tech-
nological developments. First, the market mechanism has lost its production
efficiency upon the inclusion of information technologies. The firms producing
financial information have started to steer the economy by creating a monopoly
effect on the one hand and started to change the useful point of demand with high
prices by guiding the consumers in this direction, on the other. At this point, it is
recommended that the public sector establish a fund for the creation of informa-
tion technologies and allow individuals to access them at affordable prices. The
second main problem affecting public finance is the intensive use of these public
funds by the private sector. As an example, when Steve Jobs designed iPhone,
U.S. Defense, Advanced Research Projects Agency, had already been estab-
lished. This agency could not have outsourced (even if it wanted) the goods with
a design, which could not yet be imagined by visionaries like Steve Jobs. And
that began to restrict the areas where effective results could be achieved with the
public investments made in the sources of information (Korinek, 2019: 6).
According to some approaches, the development of artificial intelligence and
Al robots made it possible to use artificial intelligence in areas where humans
cannot obtain efficiency or involve the robots or mechanisms with artificial intel-
ligence in dangerous works. This is described as a positive externality. Whereas
those with other approaches suggest that artificial intelligence, which is capable
of developing their skills and mimicking intelligent behavior, can increase
unemployment, as it will replace humans. Those that have the second approach
argue that Al robots must be taxed or a tax must be imposed on the robot (AIR,
2018: 26). The idea that artificial intelligence will affect employment negatively
forms the basis of the need for taxation. Although it was known that technolog-
ical revolutions in the previous years also contributed to unemployment, a cur-
rent wave of automation caused in parallel with Industry 4.0 is likely to be more
destructive than the previous ones for several reasons. Previous technological
innovations did not eliminate the need for human labor in operation and con-
trol technology. The autonomous nature of the existing technologies removes the
need for human intervention, thus threatening the place of social work to a great
extent. In addition, unlike previous technological innovations that are limited
in terms of applicability, the autonomous technology is a general-purpose tech-
nology that has a broader set of various capabilities, including physical action,
information processing, etc. So, inevitably, it has the potential to have a devas-
tating impact on a broader range of sectors. Due to the speed of development in
automation technology, it is stated that there is hardly time for the governments
to respond to automation. Otherwise, the consequences can be severe unless
quick actions are taken (Ooi & Goh, 2019: 5).
While the Bank of America’s Merrill Lynch argues that artificial intelli-
gence will save $9 trillion in employment costs by 2025, a report by the World
Economic Forum estimates that 5.1 million people will lose their jobs due to
artificial intelligence automation by 2020. Deloitte, a consulting firm, claimed
that thirty-five percent of people employed in the UK were at risk of layoff due
to improvements to be made in automation systems over the next ten to twenty
years (Abbott & Bogenschneider, 2018: 153). Therefore, it is stated that as auto-
mation and artificial intelligence prevail, productivity will increase, and new
businesses will emerge. Still, on the other hand, unemployment and inequality
will inevitably be experienced (Abbott & Bogenschneider, 2018: 154). Hence, job
losses, increasing inequality, and a decrease in tax revenues are seen to be inevi-
table (Mazur, 2018: 6–17).
On the other hand, it may not be possible for an artificial intelligence automa-
tion system to create an equal effect in all sectors. It will be difficult for most of
the businesses within the same industry or occupational class to switch to new
businesses if they are highly sensitive to automation. Put it differently; a radical
restructuring of the company or business policy will be needed, even though it
is not required at the moment. It is necessary to take policy measures to reduce
the impact of automation on specific sectors or occupational classes. In some
industries, technological developments can make it plausible yet and financially
demanding for companies to automate their entire line of business entirely.
A significant problem will arise if the workers doing these jobs do not need to
have the skills to allow them to perform alternative performance typically. For
instance, the effect of self-driving trucks on truck drivers makes a good example.
If self-driving vehicles replace truck drivers who do not have a different job alter-
native, then there will be a long-term probability of structural unemployment.
Therefore, it is stated that the need for intervention, particularly in such sectors,
is necessary (Ooi & Goh, 2019: 5).
As a result of all these discussions, it is understood that the fact of artificial
intelligence brings about either positive or negative externalities, as the case
may be.
In such a case, it is necessary to clarify the taxation or promotion of machines,
robots, or articles using artificial intelligence. It is also clear that a policy should
be developed based on the findings of the analysis of sectors and their impact
on employment. The general opinion is that artificial intelligence hurts work
(Ooi & Goh, 2018: 5, Bottone, 2017: 12, Englisch, 2018: 7–8). Therefore, with
the increase in artificial intelligence and the gadgets having artificial intelligence,
which will affect employment negatively and replace humans, it seems to be
inevitable to impose a tax or similar financial obligations. Of course, it is con-
troversial on what or whom it will be imposed and how it should be applied. As
elaborated in the following sections of the study, it has to be clarified whether it
will be imposed on income or via a Pigovian tax application.
On the other hand, the decrease in the employment of real people is of par-
ticular concern to the public budgets in macro terms. Namely, if artificial intel-
ligence starts to work instead of real people, it will lead to a decline in public
revenues, as it will not be possible to realize the tax obligations collected based
on social security payments and wages. That is because the employment of “real
person” is what makes them be paid. However, artificial intelligence needs nei-
ther social security nor income. This result reveals that public finance will be
affected, more or less, as the artificial intelligence is used widely. Therefore, even
just for this reason, it can be said that a taxation study should be done regarding
artificial intelligence.
3.2 Artificial Intelligence in Terms of Law

3.2.1
Should Artificial Intelligence Be Personified?
The hottest debate in legal terms is whether artificial intelligence needs to be
given legal personhood is given. In the legal system, personhood is divided into
two: real and legitimate. For individuals not having legal personhood, solutions
are produced by making special regulations in the laws. Artificial intelligence is
neither an actual nor an authorized person. So, first of all, the answer to the ques-
tion, “Should personhood be given” has to be/has been sought.
The basic approach concerning the debates regarding the concept of person-
hood and legal status in terms of artificial intelligence, which survived today, is
that artificial intelligence is an “item/tool” and should be accepted in the own-
ership of its producer. However, in view of the fact that artificial intelligence is
increasingly a more significant part of human life and acquiring more and more
humanlike features, the idea to accept them as tools or items only is increasingly
being abandoned. The most striking proposal regarding the legal status of arti-
ficial intelligence is the one suggesting that “Electronic Personhood” should be
granted to artificial intelligence (Leroux & Labruto & Boscarato, 2012: 61). And,
that stems from the concept of legal personhood; and development of electronic
personhood is discussed within the frame of the fact that artificial intelligence,
which is capable of making autonomous decisions and communicating with
people, should be registered in a special register. Thus it is intended that it could
have some acquired and individual rights and obligations; the responsibilities of
related parties (users, vendors, manufacturers, etc.) can be determined. In this
way, electronic personhood, similar to the legal personhood, should be devel-
oped (Zorluel, 2009: 344).
Legal personhood is always related to individual autonomy. The question
“can an artificially intelligent asset be given legal personhood?” is a matter of
whether such an asset set will possess any legal rights and obligations. The es-
sence of the legal personhood is based on the fact that whether such an asset has
the right to ownership and the capacity to file an action or engage in a lawsuit
(AIR, 2018: 13). What is taxed within the scope of the proposal of electronic
personhood was not the robot itself but rather the companies that use it (Mazur,
2018: 18).
According to an argument put forward as to whether or not the legal entity
(personhood) given to the companies in the doctrine can also be given to the
artificial intelligence; it is possible to establish the legal construct, which was
created for the companies regarded as an essential example of fake person, for
artificial intelligence, as well. On the other hand, it is also accepted that there is
not an absolute similarity between companies and artificial intelligence. That is
because, while the companies are considered autonomous institutions construc-
tionally and their stakeholders decide on their activities, artificial intelligence
does not have any stakeholders and makes decisions directly by themselves
(AIR, 2018: 13).
From the viewpoint of the capacity to have the right and ability to act in
Turkish law, many discussions come to surface. In another saying, if personhood
is recognized, then some questions have to be answered. For example, when

making agreements, it will be difficult, at least for today, to find the answers
to the questions such as, whether they will be a party to the agreement, get the
approval of the other party and whether the intentions of Al robots are measur-
able (Akbilek, 2017: 227). Because, to be a “person” requires some consequences
(Gözler, 2014: 179). The most moderate view, among others, put forward in the
doctrine today, is the one suggesting that the operator of Al robot should be held
responsible (Chopra & White, 2004: 3).
Considering some of the examples relating to the subject in the world, the
studies conducted by South Korea and Estonia emphasize the idea of giving
personhood to the robots. In 2012, South Korea introduced a legal regulation
in 2012, restricting that humans must always control the robots and ruled out
the possibility of giving separate legal personhood. On the other hand, Estonia
discussed whether special regulations should be made for the robots within the
scope of the Civil Law, and some proposals were made on responsibility. The
most remarkable suggestion was one offering that the robots should be allowed
to acquire legal personhood in a way to include also the authority to represent
their owner. Aside from the ongoing discussions, according to an agreement we
advocate, it is not possible to agree with the idea that robots can act since they are
not autonomous enough to perform their actions and operations by their own
will, i.e., without any external intervention (Akbilek, 2017: 231–232). However,
the subject will be put under discussion again in the future, if we have such Al
robots that can make decisions and act on their own and do not need human
intervention whatsoever.
Since the assets in question are not “real persons”, it causes a dilemma as
to whether it would be possible to assess them with the attributes of a “legal
person”. Real persons ultimately guide legal persons, and the responsibilities
can be shared with the real persons. However, there is no human interven-
tion in artificial intelligence. On the other hand, artificial intelligence does
not have a body, soul, nationality, feelings, consciousness, interests, and curi-
osity, nor a free will as real people do. It should be noted, however, that Saudi
Arabian granted citizenship to the artificial intelligence, named Sophia, which
was produced by a Hong Kong firm Hanson Robotic (AIR, 2018: 13–14). And,
that is a clear indication that it does not mean artificial intelligence will not
have what it doesn’t today, over time. It seems plausible in the forthcoming
years that it will be possible to impose tax by giving a statue of personhood
subject to the law, rather than to an artificial intelligence programmer or user
(AIR, 2018: 25).
3.2.2
Artificial Intelligence in Terms of Responsibility and Punishment
The concept of “responsibility” is the main reason for the discussions about
whether artificial intelligence should be given personhood. In particular, this
subject of responsibility was further highlighted as a result of the accident that
claimed the life of a 49-year-old person in Arizona, U.S.A., during the test drive
of autonomous vehicles, which was carried out by UBER. So, the discussions
began as to whom should be held responsible since there was no legal regulation
as to whether Uber Technologies Inc. should be held accountable or whether the
artificial intelligence operating the autonomous car would be held responsible
alone (AIR, 2018:14). Therefore, artificial intelligence is not naturally respon-
sible at the moment. However, it might be confusing whether it will be consid-
ered reliable as the potential operations increase over time. Moreover, given the
fact that the decisions could also be appealed, in other words, the fact that it can
implement its own decisions raises the issue of whether or not a legal responsi-
bility can be assigned.
The fact that each Al robot has different autonomy levels creates problems
in producing solutions regarding the law of responsibility and makes matters
even worse. Do the acts, actions, or functions performed by robots result from
the design and programming, or do they improve and evolve depending on the
features they own? If a person guides the actions of anAl robot or has a part in
its activities, then we can talk about some aspects such as a fault or intention in
terms of liability law. However, it is argued that some regulations should be made
under a different approach, for Al robots, which are capable of moving autono-
mously (Akbilek, 2017: 219–220).
Yet another point reached in these arguments is the question of whether arti-
ficial intelligence can be punished or not. It must have a bank account and pay
from its account in case it is served with an administrative fine. But, artificial
intelligence does not have a bank account (for the moment at least). Nor will it
be eligible to open a bank account. Therefore, it will not be possible to punish it
either legally or effectively. According to some recommendations on this topic
(AIR, 2018: 24);
(a) If an act of artificial intelligence requires death penalty, deleting the artificial
intelligence can be an option;
(b) If the law of artificial intelligence requires a prison sentence, it may be tem-
porarily put out of service;
(c) If the action of artificial intelligence requires a public service, it can be allo-
cated to that particular the public service;
(d) If the act of artificial intelligence requires an administrative fine, the user or
creator of that artificial intelligence may be served with a fine. However, this
is controversial in terms of the personality principle of penalties.
Criminal and financial responsibility is closely related to giving personhood
to artificial intelligence. In general, criminal liability belongs to natural per-
sons, while financial responsibility belongs to natural or legal persons (Gözler,
2014: 223). If artificial intelligence is to be given personhood and responsibility
is to be assigned accordingly. Its results must be taken into consideration because
artificial intelligence can be served neither with imprisonment nor a monetary
fine. Hence, if a criminal or financial action is to be considered for an act of
artificial intelligence, it should be the person who is the creator/operator of the
artificial intelligence that must be held responsible. Breaking off the relationship
between artificial intelligence and its creator/operator may lead to an uncon-
trollable point where it will be impossible to find the wrongdoer (offender) and
impose a sanction. Although it can be argued that artificial intelligence can take
an autonomous decision, and thus it must be punished, the fact that no action
can be taken against it, either criminally or effectively, can lead the argument to
a meaningless point. What is more, in our opinion, suggestions such as taking
actions to delete and/or remove artificial intelligence (AIR, 2018: 24) does not
make any sense.
3.2.3
The Fate of Copyrighted Work Produced by Artificial Intelligence
It is also argued in legal terms how it will be dealt in case a copyrighted work is
produced by artificial intelligence produce. If artificial intelligence provides any
task which requires copyright, such as painting, story, and scriptwriting, com-
posing, computer programming, and filmmaking, artificial intelligence, which
is not a real person, does face the same problem of granting personhood. Even
though the real person takes the first step in creating the copyrighted work, it
is still unclear how to determine the actual owner of such copyrighted work as
artificial intelligence is involved in and affects the process of creation. The same
applies to all transactions that create intangible rights. Does the copyright belong
to artificial intelligence or the real person who creates it? (AIR, 2018: 17).
In one of its decisions, the U.S. Copyright Office decided that works pro-
duced without the contribution of any creative people could not be regarded
as works. English law recognizes the author as the person who makes the
necessary adjustments for the creation of the work. In this case, computer-
generated literary, dramatic, musical, or artistic works are not considered
works. As in the U.S. legal system, the fact that the products of artificial
intelligence are not accepted within the scope of copyright, subjected to direct
public use, is seen as an obstacle preventing the progress of the works from
being carried out in this field (Zorluel, 2009: 325–326). On the other hand, the
products that can be considered an action, according to Law on Intellectual
and Artistic Works in Turkish Law, can only be produced by humans. In other
words, the owner of the works created by artificial intelligence may not be
artificial intelligence. However, it is stated in the doctrine that this situation
is not sustainable.
3.3 Discussions on Taxation Regime

As mentioned in the previous chapters of the study, how to tax the artificial
intelligence in terms of finance theory and legal science, and what methods to
use in taxation per the existing rules, if artificial intelligence is to be taxed was
discussed. The subject will be considered under this heading by also including
our opinions based on these discussions.
3.3.1
In Terms of Income Tax
3.3.1.1 Principle of Financial Power and Identification of
Taxpayer: Artificial Intelligence? Or Its Creator/Operator?
The majority of the discussions on the taxation of artificial intelligence are by
and large on whether or not artificial intelligence can be identified as a taxpayer.
This issue has been addressed both in terms of giving personhood to artificial
intelligence and whether it should be vested with financial power. According to
positive law, a person must be a real person to be an income taxpayer. Besides,
considering the principle of financial power as per the constitutional provisions,
it must also have a taxable income.
Real persons, who obtain the elements making up the income, submit tax
returns according to their particular circumstances and qualifications, -or even if
they do not-, they are (often) taxed through withholding. The taxes to be paid are
assessed by taking the specific situations of real people, such as disability, mar-
ital status, number of children, education and health expenditures, donations,
and charities. It is unclear yet whether artificial intelligence will make such
expenditures as real people do. In other words, artificial intelligence does not
make donations and give charities, nor does it spend on health and education.
And, that raises the question of whether a certain fee can be set and accepted as
a levy for the expenses that are not made. What is more important above all is
how to impose a tax following the principle of fiscal ability. In other saying, do
robots have a fiscal ability?
Since artificial intelligence is not a real person, it cannot be a taxpayer for

income at present. However, if artificial intelligence were to be given person-
hood and this personhood can be included in the taxpayer group in terms of
income tax, and it can be taxed naturally as soon as it acquires one of the income
elements. In this case, it rises to different questions. For example, if artificial
intelligence is to be taxed, it cannot be determined how much of the income
will belong to artificial intelligence and how much to the creator/operator. Also,
whether the user/creator creates the added value or it will be attributed entirely
to artificial intelligence. For today, the general approach is to tax the income
earned by creators/operators (AIR, 2018: 25). Since the real persons declare their
salary as per the income tax based on assessment upon declaration, it is also
important how to subject the robots to this regime in this scope. One of the
arguments outlined in this context is to grant Al robot a “special status”. It is pro-
posed to grant new legal personhood as per the tax law and shape up the system
accordingly. In this context, the robot can be regarded as a separate person.
A system called “electronic payment power” can be created. The primary basis
of those who claim that robots should be taxed in this way is that robots replace
humans. Robots’ income is considered as a fee and can be withheld. Besides, if
an Al robot is regarded as a separate taxpayer, it will be highly likely to cause
double economic taxation in case the income of the robot and its owner is taxed
separately. In this case, a result, as in the profit shares, will eventuate (Englisch,
2018: 4–6).
In our opinion, it might be undesirable to establish liability in terms of tax
law unless it has a criminal and financial responsibility, whether or not artifi-
cial intelligence is given personhood. Primarily, it is probable that artificial intel-
ligence can commit tax misdemeanor and revenue offense as it might mimic
human behaviors or display similar acts. In this case, it may not make any
sense to imprison artificial intelligence or impose a fine for loss of tax/fraud
(irregularity). Although it is considered for a moment that a liability similar
to the criminal liability of a legal entity may be given in France or Belgium, it
is more appropriate to designate the creator/operator as its legal representa-
tive. Otherwise, tax authorities may have to bear the consequences of crimes or
offenses committed by artificial intelligence. If its creator/operator is specified as
the legal representative, there will be a real person to address in case of misde-
meanor and crime. As a result, instead of establishing liability for artificial intel-
ligence, it will be a good practice to accept its creator/operator as the taxpayer
and attribute the income earned to the real person. In this way, the criticism of
double taxation will be eliminated.
3.3.1.2 Assessment of Income and Base: What Type of Earnings?

One of the essential aspects under discussion in this context is how to determine
the income earned/to be received by artificial intelligence and what the type of
income will be. How will the income earned by an Al robot be determined?
The studies on taxation of artificial intelligence suggested the idea that the
income earned through artificial intelligence should be considered as the contin-
uation of the business of its creator/operator. Put it differently; also, the income
generated by artificial intelligence, which is created/used by a business earning
commercial income, should be considered commercial earning. In such a case,
taxation shall be made based on the business under the applicable provisions
(AIR, 2018: 25). Within the scope of this possibility, all incomes earned by arti-
ficial intelligence will be regarded as the commercial receiving of the business.
According to another view, if the robots of artificial intelligence are classified,
the income should also be determined accordingly. When artificial intelligence
or Al robot is classified according to the intended use as “industrial artificial
intelligence/robot” or “serving artificial intelligence/robot”, the income earned in
such a scenario can also be accepted as “commercial earnings” or “wage/self-em-
ployment earnings”. For example, a service robot is a robot that does useful work
for people or tools/equipment, except for industrial automation. On the other
hand, a personal service robot or a service robot for personal use is a service
robot used for non-commercial purposes or purposes other than commercial
use. Domestic servant robots, automatic wheelchairs, own mobility assistance
robots, and pet exercise robots are the examples, to name but a few. A profes-
sional service robot, or a service robot for professional use, is a service robot
used for a commercial task, which is usually operated by a duly trained oper-
ator. Examples include cleaning robots for public places, the delivery robot in
offices or hospitals, fire fighting robots, rehabilitation robots, and surgical robots
in hospitals. In this context, an operator is a person assigned to start, oversee,
and stop the intended operation of a robot or a robot system (Bottone, 2017: 4).
According to another proposal, if a robot is to be taxed, then the rate of
income tax should be based on the possible wage it could have earned had it
been a real worker. According to this proposal called “robot income tax, the “eco-
nomic advantage” obtained by the employer through the use of robots instead of
workers can be considered as the criterion (Guerreiro & Rebelo & Teles, 2017: 4).
In that case, the robot’s ability to pay can be regulated by law as the technology
evolves.
As can be seen in the arguments above, it is unclear how to assess the type
of income if artificial intelligence is to be held liable for tax purposes. As we
mentioned in the previous section, that confirms the fact that rather than
establishing liability for artificial intelligence, the creator/operator has to be
determined as the taxpayer, considering the current technological and legal
circumstances. If the creator/operator is accepted as a taxpayer, we think that
it will be appropriate to consider it a commercial earning. As the use/operation
of artificial intelligence requires capital, organization, and less labor, this type of
gain will be appropriate. Of course, different alternatives can be considered in
case an income is earned by leaving it at the disposition of others. For example,
with the regulations to be made under Article #70 of Income Tax Law, it will be
possible to accept it as real property income, considering that Al robot is rented
to another person.
On the other hand, if a liability is established for artificial intelligence, the
issue will become more complicated. It is uncertain to determine what kind
of income the artificial intelligence earns as the actual taxpayer. But still, if a
profit is to be attributed under current circumstances, it can be possible to ac-
cept it as “commercial earning” or “wage” and to make special regulations in
the law.
3.3.1.3 Should Artificial Intelligence Be Considered a Workplace?

One of the points under discussion about taxing artificial intelligence and Al
robots is seen as a problem under international tax law. Because it is evident
that it needs to be clarified where it will be based or considered to be, in terms
of “location”. For example, it should be made clear who will be using the taxation
authority in cases where the creator/operator resides in country X, but artificial
intelligence or Al robot operates in territory Y (Englisch, 2018: 12–13).
The workplace, which forms the basis of taxation as a place (location), is
defined as the point of affiliation, which allows commercial earnings to be affili-
ated to the taxation authority of the source country where they are earned (Yaltı
Soydan, 1995: 131). The subject of “workplace”, which is one of the affiliation
rules in the exercise of taxation authority, is the most important basis through
which the tax administrations can impose a tax on corporate income taxpayers
and commercial income taxpayers. Those who have a business within the polit-
ical boundaries of a country shall be subject to the taxation regime of that partic-
ular country. The first aspect considered in the implementation of the principle
of residence, which is the basic principle in taxation, is whether the person/
corporation has a workplace (Biyan & Yılmaz, 2018: 17).
Artificial intelligence can deliver services either online or at a fixed location,
as applicable. Therefore, it would be more appropriate to assess a case by case
basis. For instance, since an artificial intelligence offering online services will be
indifferent to a website, it should be evaluated as the businesses operating via a

website, in which case the taxation problems will manifest themselves against
the artificial intelligence (Biyan & Yılmaz, 2018: 34–36). On the other hand, arti-
ficial intelligence affiliated to a fixed location, e.g., an Al robot can be taxed as
a fully obligated or limited taxpayer in the country of residence according to
the principle of residence or source. Consequently, assigning a status to artificial
intelligence in terms of a workplace is one of the main problems caused by the
digital economy. Rather than producing national-wide solutions, it would be a
good practice to include, address, or refer the matter in tax treaties, to get more
proper and practical results.
3.3.1.4 Discussions on Copyright
The point of whether artificial intelligence can be a copyright owner also appears
in its taxation, as well. Even though artificial intelligence is considered to have
the ability to mimic intelligent behavior and process it on its own, it is ultimately
made up of computer algorithms and software. And, if that is accepted as the
“right to use” for artificial intelligence programmers, then the income earned by
artificial intelligence needs considering as copyright. On the other hand, when
a profit is obtained by assigning the copyright, it is argued that it can also be
accepted as a technical service fee (AIR, 2018: 25–26).
In Turkish law, FSEK does not allow the persons, other than real ones, to be
a copyright owner; therefore artificial intelligence can’t be copyright owner in
Turkey today, as per the positive law. On the other hand, although it may be con-
sidered that the artificial intelligence should be given copyright, it seems more
appropriate to accept the owner/operator as the copyright owner if a copyrighted
work is produced by artificial intelligence. Since it is not clear how all will use
the rights that copyright will bring to its owner and how it will get the earnings
it will acquire owing to such reasons. Because of the creator/operator of artificial
intelligence benefits from earnings. If it is the artificial intelligence that produces
such work, then it is the creator/operator who is a real person that creates artifi-
cial intelligence. Then again, if the criminal and financial responsibility lies with
the creator/operator, in that case, also the creator/operator should be considered
a copyright owner. And, the income earned will be taxed as self-employment
income.
3.3.1.5 In Terms of VAT

It will be inevitable to use the robots as serving gadgets as they were employed
instead of real persons. Robots provide several services, such as legal or finan-
cial advice, medical assistance or cleaning services, etc. In this case, we come up
with the question of whether or not calculate the VAT, which is based on goods
delivery and execution of service (Englisch, 2018: 17–8).
According to an opinion, value-added tax for activities carried out by robots
may be subject to VAT by considering them “service”, as in the case of self-em-
ployed traders. However, it is stated that it may not be easy to figure out whether
the fee charged by an AI robot is accurate (Oberson, 2017: 256–257). If a robot is
used to produce goods or services, they are probably taxed both as intermediate
goods and final goods, so it is stated that there is no need to recalculate VAT
to avoid the risk of double taxation. However, if the robots are legally consid-
ered a “person” with legal and financial capacity, it will be required to levy VAT
on the service related to their activities. All proposed solutions are highly con-
troversial in terms of globalization and, consequently, easier circulation/mobi-
lization of capital, the emergence of tax competition between jurisdictions, etc.
Therefore, since physical capital tax implies higher costs for national companies
and impairs their global competitiveness, it can be stated that the design of a
robot tax requires a comprehensive analysis by taking the arguments, especially
regarding international taxation at OECD and UN (Bottone, 2017: 17).
Since it is evident that the delivery of goods and the execution of the serv-
ices are included in the subject of VAT, it is clear that the sale of a service or
products carried out by artificial intelligence should be subject to VAT in the
case of commercial, agricultural or professional activity as well as imports. The
VAT will be calculated during the sale of goods or services, which is carried out
by an artificial intelligence operated by its creator/operator, and the taxpayer will
be the creator/operator. However, if liability is assigned to artificial intelligence,
there might be some problems in the performance of the formal obligations of
artificial intelligence, even if the VAT calculation of artificial intelligence is pro-
grammable. For example, lodging tax returns, in which case its creator/operator
fulfills the formal liabilities. In our opinion, it will not pose a problem whether
or not artificial intelligence collects VAT or whether the payment is received in
full amount since the fees will be calculated both by computer programs and
processed through the banks or financial systems. But, some problems can be
experienced in case cash transactions are accepted in such situations.
3.3.1.6 In Terms of Environmental Tax (Pigovian)

The widespread use of artificial intelligence and its possibility to affect employ-
ment negatively highlights two issues, in particular. First, there is the possibility
of a decrease in income tax, which has a significant share in tax revenues in
almost several countries. As robots replace human beings, the taxes imposed on
them will likely lead to a reduction in tax revenues. The second is to face the fact
that robots will be employed and thus to train those persons, mainly working
in such businesses or jobs that do not require any skills and talents. As a result,
the need for public resources will increase (Bottone, 2017: 2). The European
Parliament stated that it would be more appropriate to use the income that is
generated, to re-train the unemployed workers if it would be necessary to impose
a tax on a robot’s work or define a wage for it. Therefore, it was pointed out
that sectors, which are at the most risk due to the employment of robots, should
be identified (Bottone, 2017: 12). In case an Al robot or automation system is
used, it is proposed to apply a high tax rate or impose automation tax or sim-
ilar tax for businesses with automation. On the other hand, it is also necessary
to use tax relief or incentives to companies employing real persons (Abbott &
Bogenschneider, 2018: 168–173).
The social costs caused by automation create a negative externality as workers
or communities cover them. The causal relationship between the transition of
the firms to automation and the resulting negativity creates a prima facie situ-
ation, in order for the government to intervene by deterring or punishing such
automation actions that generate an externality. Such an intervention may return
to the party to alleviate such externality as a Pigovian financial obligation. In
this case, such tax would impose an automation tax, which will apply to all tech-
nologies forming the current wave of technological innovations, on the com-
panies that automate their systems or equipment involved in the production
processes (Ooi & Goh, 2019: 6). This tax, which is proposed in the doctrine as
a robot tax, is an automation tax and aims to impose a tax on businesses that
prefer to operate automation systems by switching to mechanization, instead of
employing people. In this context, it serves as a sort of balance (Mazur, 2018: 18).
The base of the automation tax can be measured by the total monetary cov-
erage of any decrease in the number of layoffs or employee wages. In addition,
this can be easily measured according to financial data, payroll, or other company
records. The size of the tax base measured by the layoffs attributed to automa-
tion will be proportional to the externality of dismissal based on automation. At
this point, however, it is not clear how to assess other possible situations, such as
reduced operating conditions or productivity improvements not related to auto-
mation, when determining the tax base. It also seems necessary to take into ac-
count the analyses on whether the time between automation and layoffs is short
enough and whether the automated tasks are similar enough to those performed
by those who are discharged (Ooi & Goh, 2019: 11).
South Korea is the first country in the world to levy a robot tax. The country in
question started to impose robot tax (AIR, 2018: 26) as of August 2017. However,
this is not sufficiently considered regarded as a robot tax. This tax in question,
which is widely considered as an application that restricts the incentives for the
transition to the automation system, is an obligation which is imposed on the
corporate taxpayers investing in automated machines and paid in an amount set
between 3% and 7% of the investment made. Then, South Korea decreased these
rates by two points (Abbott & Bogenschneider, 2018: 149).
One of the concrete proposals made in the doctrine is the application of
reverse depreciation. It is argued that if the investment made by the taxpayers
who invest in automation affects to eliminate employment, the depreciation rate
of the investment made will be kept low, not allowing a great majority of the
capital expenditures to be deducted from the taxable income. On the contrary, if
such investment made is supporting the employment, then in such a case, sup-
port can be given, and incentives can be provided by keeping the depreciation
rate high (Ooi & Goh, 2019: 18–19).
4 Conclusion
The focal point of discussions on taxation of artificial intelligence emphasis on
the negative impact it may have on employment due to the negative externality
that it creates and on the issue whether or not it should be taxed due to possible
losses of revenue in the budget. Although there are opinions that artificial intel-
ligence should be given legal personhood and accepted as a taxpayer -as we have
tried to elaborate in the study- it is not a proper approach to provide artificial
personhood and assign liability to artificial intelligence, at least for now.
In our opinion, whether or not an entity with artificial intelligence is given
personhood under the existing technological and legal conditions, it may be
inconvenient to establish liability in terms of tax law unless it has criminal and
financial responsibility. It is, of course, probable that artificial intelligence can
commit tax misdemeanor as it might mimic human behaviors or display similar
acts. In this case, it may not make any sense to imprison artificial intelligence
or impose a fine for loss of tax/fraud (irregularity). Although it may be consid-
ered, for a moment, that financial responsibility may be assigned, it would still be
more appropriate to appoint its creator/operator as its legal representative under
the current circumstances. Moreover, it is unclear, in the current system, how to
determine the type of income if liability is to be assigned to artificial intelligence.
It would be appropriate to establish the creator/operator as the taxpayer and ac-
cept the income earned as commercial earning, rather than creating a liability for
artificial intelligence. Likewise, in case a copyrighted work is produced by arti-
ficial intelligence, yet again it will be more appropriate to attribute such income
to its creator/operator.
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List of Figures
Fig. 1: Turkey Tax Revenues, 2006M01 – 2018M12. Source: General

Directorate of Budget and Fiscal Control and General
Directorate of Budget and Fiscal Control. * the t – Statistic Value
of the Augmented Dickey-Fuller Test, Indicating Nonstationarity
of the Series at Level 0.05 �� 17
Fig. 1: Tax Literacy Framework. Source: (Bomman & Wasserman
2018: 7) �� 60
Fig. 2: Financial Information, Behaviors and Attitudes. Source: (OECD,
2017:8) �� 62
Fig. 3: Financial Literacy Level by Education Level. Source: (Lusardi &
Mitchell, 2014: 19) �� 63
Fig. 1: The Dimensions of Digital Transactions. Source: Fortanier and
Matei (2017): 10 �� 98
Graph 1: Expenditure on Retail Pharmaceuticals by Type of Financing
(2017). Source: OECD (2017) �� 114
Graph 2: OECD Pharmaceutical Expenditures – 2017 (%of Total Health
Spending). Source: OECD Health Statistics (2017) �� 115
Fig. 1: Original Armey Curve. Source: Armey, 1995: 92 ................................. 140
Fig. 2: Armey Curve. Source: Vedder ve Gallaway, 1998: 2 ............................. 141
Fig. 3: The Size of Government and Economic Growth Rates in Turkey
(1981–2018). Data Source: Ministry of Treasury and Finance,
Republic of Turkey (2019) �� 146
Fig. 4: The Armey Curve in Turkey .................................................................... 151
Fig. 1: CUSUM Test. Author’s elaboration ......................................................... 162
Fig. 2: CUSUMQ Test ........................................................................................... 163
List of Tables
Tab 1: Percentage Distribution of Tax Revenues in Turkey ............................. 14

Tab. 2: The results of the ARIMA(0,1,2)(0,1,1)12 mode .................................... 20
Tab. 3: The results of the BATS (0.377, {0,0}, 1, {12}) Mode ............................ 21
Tab. 4: Point Forecasts of the Methods for the Testing Data
(2016M01–2018M12 ................................................................................ 22
Tab. 5: Measures Accuracy of the Methods for Testing Set
(2016M01–2018M12 ................................................................................ 23
Tab. 1: Comparison of the use of proceeds for 2016 and 2017.
Reference: Green Bonds: Review of 2017, s. 11. https://www.
environmentalfinance.com/assets/files/Green%20Bonds%20
Review%20of%202017.pdf (16.02.2019) ............................................... 41
Tab. 2: Comparison of Issuer Types (2016–2017). Reference: Green
Bonds: Review of 2017, s. 11. https://www.environmentalfinance.
com/assets/files/Green%20Bonds%20Review%20of%202017.pdf
(16.02.2019) ............................................................................................... 41
Tab. 3: Examples of Tax Incentives Related to Green Bonds.
Reference: Climate Bonds Initiative & IISD-International
Institute for Sustainable Development 2016: 14; the Author
Added France, China, and Turkey .......................................................... 51
Tab. 1: Actors and Determinants in the Formation of Tax Climate.
Source: (Alm et al., 2012: 136) ................................................................ 58
Tab. 2: Cognitive-Affective-Psychomotor Scope of Tax Literacy.
Source: (Yılar & Akdağ, 2017000: 366) .................................................. 59
Tab. 3: Taxjazz Project Processes. Source: http://search.ebscohost.com/
login.aspx?direct=true&db=a9h&AN=48076039&lang=tr&site=
ehost-live, The Tax Literacy Project, www.taxjazz.com
(01.04.2109) ............................................................................................... 64
Tab. 4: Some Studies Related to Tax Perceptions and Their Target
Population in Turkey. Source: Own Elaboration Based on the
Studies Above ............................................................................................ 67
Tab. 5: Tax Topics and Activities in Social Studies Education in Turkey.
Source: (Yılar & Akdağ, 2017: 375) ........................................................ 68
Tab. 1: Top 10 Most Complex Jurisdictions for Accounting and Tax
Compliance (2017–2018). Source: The Financial Complexity-
Index, 2017, 2018 ...................................................................................... 106
Tab. 2: Complexity Issues as Globally and Regional (2017, %).
Source: The Financial Complexity-Index 2017: 26 .............................. 108
208 List of Tables
Tab. 1: Review of Literature. Source: Composed by the Authors ................... 116

Tab. 2: The Description of Dat ............................................................................. 117
Tab. 3: GMM Result .............................................................................................. 118
Tab. 1: Tax Expenditures and Gross Domestic Product (2006–2019)
(Million TL) ............................................................................................... 128
Tab. 2: Tax Expenditures and Public Expenditures (2006–2019)
(Million T) ................................................................................................. 129
Tab. 3: Tax Expenditures and Tax Revenues (2006–2019) (Million TL).
Source: The Author Prepared It According to the Statistics of
the Turkish Statistical Institute, the Ministry of Treasury and
Finance, and Annual Central Government Budget Figures ............... 130
Tab. 4: Numerical Development of Legislation on Tax Expenditures
(2006–2019). Source: The Author Prepares the Annual Central
Government Budget ................................................................................. 131
Tab. 5: Number Distribution of Tax Expenditures Regarding Tax Laws
(2006–2019). Source: The Author Prepares the Annual Central
Government Budget ................................................................................. 132
Tab. 1: ADF Unit Root Test Result ...................................................................... 147
Tab. 2: (2) Numbered Equation Bound Test Result .......................................... 148
Tab. 3: ARDL (3,4,2) Model Long-Term Coefficient Estimation .................... 149
Tab. 4: ARDL Model Error Correction Coefficient Estimation ...................... 150
Tab. 1: Economic Growth and Unemployment Rates in Turkey
(1980–2016). Source: IMF (International Monetary Fund)
(http://www.imf.org, 22.01.2017) ........................................................... 157
Tab. 2: Literature Review ...................................................................................... 158
Tab. 3: Descriptive Statistics of Economic Growth and Unemployment
Data ............................................................................................................ 161
Tab. 4: ADF and PP Unit Root Test Result ........................................................ 162
Tab. 5: Diagnostic Tests ARDL (1, 1) Mode ...................................................... 163
Tab. 6: Bounds Test ............................................................................................... 164
Tab. 7: Error Correction Mode. Author’s elaboration ...................................... 164
Tab. 8: Diagnostic Test Result. Author’s elaboration ........................................ 165
Adnan Gerçek/Metin Taş (eds.)
This book examines the main issues discussed in the field of public finance today.
These issues are perhaps identified among policy areas that will come to the
agenda of many governments over the next decade. Topics covered in the book
are as follows; revenue forecasting models, the taxation of sharing economy, tax
incentives provided to green bonds in financing of energy efficiency, the impor-
tance of tax literacy in tax compliance, the concept of collective investment
institutions, digitalization of tax administration and complexity of tax system,
macro determinants of pharmaceutical spending, tax expenditures as internal
tax bleedıng, the size of the public sector and the Armey Curve, Okun’s Law,
subsidies granted to the private educational institutions, and taxation of artificial
intelligence. The book consists of twelve chapters on “controversial issues in the
public finance” mentioned above. The authors of the chapters also offer some
policy recommendations regarding their work.
The Editors
Adnan Gerçek is Professor of Fiscal Law at Bursa Uludağ University, Faculty of

Economics and Administrative Sciences, Department of Public Finance, Bursa,
Turkey. He has a PhD. from Uludağ University Social Science Institute. He is
member of the Turkish Tax Council. His research focuses on tax administra-
tion, tax collection procedure, taxpayers’ rights, tax responsibility, discretionary
power of tax administration, tax literacy, and the e-taxation system.
Metin Taş is Professor of Fiscal Law at İstanbul Gedik University, Faculty of
Economics Administrative and Social Sciences, Department of Political Science
and Public Administration, İstanbul, Turkey. He has a PhD. from Uludağ
University Social Science Institute. He is the chair of the Department of Political
Science and Public Administration. He is also a certified public accountant. His
research centers on tax criminal law, tax jurisdiction, Turkish tax system, and
tax practices.

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Critical Debates in Public Finance

Adnan Gerçek and Metin Taş (eds.)

Critical Debates in Public Finance

Library of Congress Cataloging-in-Publication Data

Printed by CPI books GmbH, Leck

ISBN 978-3-631-81074-3 (Print)

© Peter Lang GmbH

context, the growth policies determined by governments will contribute to min-

List of Contributors .................................................................................................. 11

Hamza Erdoğdu and Recep Yorulmaz

Ayşe Yiğit Şakar

Güneş Çetin Gerger, Feride Bakar Türegün, and Adnan Gerçek

Pelin Varol İyidoğan, Eda Balıkçıoğlu, and H. Hakan Yılmaz

Nedim Mercan and Özay Özpençe

Aslıhan Özel Özer, Buğra Özer, and Sercan Akın

Özgür Biyan and Güneş Yılmaz

List of Figures .......................................................................................................... 205

List of Tables ........................................................................................................... 207

Sercan Akın Adnan Gerçek

Buğra Özer H. Hakan Yılmaz

Comparison of Tax Revenue Forecasting

Tab. 1: Percentage Distribution of Tax Revenues in Turkey

amount of taxes is comprised of expenditures in Turkey. Finally, taxes on wealth

in the literature. Furthermore, Section III describes the methodologies of the

Tax Turkey Tax Revenues (thousand tl), 2006M01-2018M12

Fig. 1: Turkey Tax Revenues, 2006M01 – 2018M12. Source: General Directorate of

3 Data and Methodology

Lt = Lt−1 + Bt−1 + αDt , (1B)

Bt = Bt−1 + βDt , (1C)

Lt = Lt−1 + φBt−1 + αDt , (2C)

Bt = (1 − φ)B + φBt−1 + βDt , (2D)

4 Analysis and Empirical Results

Tab. 2: The Results of the ARIMA(0,1,2)(0,1,1)12 Model

Lagged Length Coefficients Standard Error

Tab. 3: The Results of the BATS (0.377, {0,0}, 1, {12}) Model

5 Conclusion and Discussion

Forecast Horizon ACTUAL Forecasting Methods

Tab. 5: Measures Accuracy of the Methods for Testing Set (2016M01–2018M12)

Methods ME RMSE MAE MPE MAPE MASE Theil’s U

Hambor, J. C., Norman, M. R., & Russell, R. R. (1974). A Tax Revenue

Examination of Tax Administration by

2 The Concept of Sharing Economy

3 Parties of Sharing Economy

4 Evaluation of the Value Created by the

– service and labour (TaskRabbit, Shareyourmeal, Elance),

4.2 Determination of Taxes and Taxpayers on the Sharing Economy

5 The Role of Cooperation with Platforms in the Taxation

can begin by sharing information about transactions carried out by service

6 The Value Created by the Sharing Economy in

6.2 The Taxes Which Are Sharing Economy Subject to in Turkey

Kara M.S. (2018), “Elektronik Ortamda Sunulan Hizmetlerde KDV (3 No’lu

Tax Incentives Provided to Green Bonds

2 Methods of Financing Energy Efficiency in Turkey

• Support provided for energy efficiency projects by the industrial enterprises

In addition, loans are provided by international development agencies and

3 Green Bonds in Financing Energy Efficiency

Tab. 2: Comparison of Issuer Types (2016–2017). Reference: Green Bonds: Review of

3.2 The Green Bond Principles

• Renewable energy (including generation, transmission, equipment, and

3.3 Types of Green Bonds

3.4 Tax Incentives Provided for Green Bonds

The Report proposes eight key recommendations, several cross-cutting

Depreciation Scheme as examples for incentives (EU Technical Expert Group on

• In accordance with Decision no.2010/926 of Council of Ministers, 10% with-

3 Data and Methodology

4 Analysis and Empirical Results

5 Conclusion and Discussion

2 The Concept of Sharing Economy

3 Parties of Sharing Economy

4 Evaluation of the Value Created by the

4.2 Determination of Taxes and Taxpayers on the Sharing Economy

5 The Role of Cooperation with Platforms in the Taxation

6 The Value Created by the Sharing Economy in

6.2 The Taxes Which Are Sharing Economy Subject to in Turkey

2 Methods of Financing Energy Efficiency in Turkey

3 Green Bonds in Financing Energy Efficiency

3.2 The Green Bond Principles

3.3 Types of Green Bonds

3.4 Tax Incentives Provided for Green Bonds

2 Factors Affecting Tax Compliance and Tax Literacy

2.2 Importance and Scope of Tax Literacy

2.3 Regulations Regarding Tax Literacy in OECD Countries

2.4 US Tax Literacy Project Implementation

2.5 Austrian Tax Literacy Project

2.6 Tax Literacy Project in the UK

2.7 Australian Tax Literacy Survey

3 Tax Literacy in Turkey

4 Recommendations for Turkey to Improve Tax Literacy

2 Concept of Collective Investment Institutions (CII)

3 Tax Advantages Specific to the Collective

3.1 Corporate Income Tax Law (CITL)

3.2 Income Tax Law (ITL)

3.2.2.1 Tax Advantages Specific to Collective Investment Institutions

3.2.2.2 Tax Advantages Specific to Investors

3.3 Law on Taxes on Expenditure (BITT)

3.4 Stamp Tax Law (STL)

2 The Digitalization of Tax Administration

3 The Implementation of Digital Transformation of

4 The Assessment of Implementation of Digitalization in