Doing Business in Turkey - payroll taxes

(Justin) One of the best overviews I've seen on doing business in Turkey is guide written by Price Waterhouse Coopers entitled "Doing Business in Turkey in a Nutshell." While published in 2008, it is still very relevant and gives you a sense of the ever-changing tax codes and regulatory environment. As Turkey moves closer in line with OECD and EU standards, business will become easier. But for 2011 the World Bank ranks Turkey as only #71 in ease of doing business (behind Belarus and Kyrgyzstan) and #61 in starting a business. It doesn't fit the image of what you'd expect with the #16 size economy in the world and one of the currently fastest-growing.

One difficulty business owners face is a high payroll tax for Social Security. In the U.S. the employer pays 6.2% of a person's salary up $110,100. In Turkey, the statutory rate for Social Security and unemployment totals to about 18.8% of gross salary. (Employers I've talked to quote a percentage well beyond 50% for this, it's one thing I'm trying to figure out.) Additionally, businesses are required to provide several weeks of severance pay to employees who have worked longer than a month. Employees who have been terminated have a right to get paid a certain number of hours a day while they seek new employment (you can read the labor law here). This makes it more costly for businesses to fire employees, makes it cost-prohibitive to hire replacements, and makes a business hesitant to hire a person in the first place.

To reduce the tax burden, businesses will under-report the salaries they are paying workers and then pay the workers the difference off-the-books. This creates a dilemma for business owners who want to do everything above-board and on-the-books.  I'm told that even the smallest businesses here have to hire someone to keep track of their taxes. 

One business we've been talking to here has been suffering that burden. To be above-board meant to be unprofitable and unable to hire the necessary workers to run the business. The government allows deferral of payroll taxes but with something like a 5% penalty per month.

The labor and tax laws are something we're learning more about as we talk to businesses here and seek possible employment or to start a business of our own. Every country has its challenges and hurdles to business; the cost of legal labor might be Turkey's biggest.