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Akbank is behind the biggest non-sovereign deal by a Turkish bank outside Turkey with its sale of a $1 billion five-year bond.

The deal, at 3.5% over US treasuries, is in spite of new financial regulations which make bonds issued directly by Turkish companies subject to a 10% withholding tax.

On July 23 2010 a new law, Replacement law for Temporary Article 67 (number 6009), was enacted which resolves the issue between local and foreign private issuers by making all issuances zero rated. This law was passed after the Akbank sale.

The bond sale highlights the discrepancies between Turkish and foreign private bond issuers. Previously, at the point of sale, Turkish corporate private bonds were subject to a 10% withholding tax.

This was not the same for foreign issued private bonds so Turkish companies were at a disadvantage.

In spite of the new law, tax advisers are still uncertain about whether private bonds should merit a zero rate.

"It's whether Akbank Turkey or, for example, HSBC UK, regardless of residency, could benefit from the zero rate available on government debt issues," said Ali ªanver of Pekin & Pekin. "Even after the new law this lack of clarity still exists. However, Law No. 6009 grants the Council of Ministers the right to promulgate the rates for each specific type of security. Accordingly, the view is that the general rate of 10% on interest, like on the current Akbank bond issue, will prevail until, and if, the Council of Ministers issues a zero, or other, rate".

While foreign issuers and private issuers are now treated equally there is still a difference between government bonds, which have a zero rate, and private bonds, subject to a 10% withholding tax.

"The Revenue [Authority] is certainly inclined to keep the 0% on treasury bills so they are more competitive to investors," ªanver said. He added that his work would be increased through lobbying the government to reduce the 10% rate.

There are also discrepancies between the corporate tax law and the definitions of domestic issuance by the Ministry of Finance.

"I see a contradiction between the tax law and the capital market law," said Umurcan Gago of PricewaterhouseCoopers. "Under the capital market law if a Turkish company issues bonds it has to register such bonds to the Capital Market Board of Turkey (CMB), irrespective of whether the sale is made in Turkey or abroad, through local or foreign intermediaries. Therefore, in my view, technical capital market terms which are not specifically defined in the tax laws should be interpreted in line with their regular meanings and thus based on the current law the withholding tax rate should be 0% where the investor is non-resident irrespective of the place of sale."

The previous law said income from securities and other capital market instruments through intermediary financial institutions and banks was subject to 10% withholding tax for temporary residents and 0% for Turkish residents. The new law, passed by parliament but not signed by the president yet, says fully resident corporations, and investment funds and partnerships, which are similar to ones existing in the Turkish legislation, now attract a zero rate.

"Temporary residents and full residents are not deriving income through Akbank according to the Income Tax Law. They are purchasing the bonds that are issued by Akbank itself and obtaining interest income over these bonds," said Izel Coskun of Marzars Denge. "Related to that, interest obtained over the bonds that are issued by Akbank are not within the scope of income tax law. In that case, article 30 of the corporation tax law comes into effect. We came to the conclusion that, according to article No 30 of the corporation tax law, Akbank should pay 10% withholding tax over the interest payments. If the interest were paid to Turkish residents, 10% withholding would again be applicable. In terms of withholding tax application, fully or temporary residents are likewise." Akbank has said they will gross-up the bonds paying the tax on coupons so investors do not have to.

"There should not be a problem for tax accountancy. But it will definitely increase the cost of funding this vehicle," said Abdulkadir Kahraman of KPMG. "On the other hand, the rate of 10% may be reduced by the Counsel of Ministers in order to reduce the cost of funding because, at the end [of the day] it will be the increased cost of funding that will be reflected in the price of goods and services and discourage investment."

The last Turkish bank to sell bonds was Bank Pozitif which raised $150 million from a five-year bond in October 2009.

"This [Akbank's] issuance may pave the way for new issuance from Turkey's financial institutions. Akbank would like to benefit from the maturity," Kahraman said. "When you compare this to a syndicated loan, even if the cost is less in syndicate, maturity matters. In the past, banks in Turkey used to have syndicated loans but bond issuance can be another popular discovery."

Withholding tax rates on interest and gains on Turkish securities Rates as of today and until the Draft Law is passed

Source: Pekin & Pekin June 9 2010

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