Incentives that can be utilized in the Chemical Industry

Incentives that can be utilized in the Chemical Industry

The chemical sector is of great importance due to its contact with other sectors and its contact with many areas of life. For this reason, the need for innovation, product diversity and investment in the sector continues. In line with this need, our investment incentive legislation also includes special regulations concerning the sector. This study summarizes the important incentives provided within the scope of the Decree No. 2012/3305 on State Aids in Investments.

I. STATUS OF THE CHEMICALS SECTOR UNDER THE DECREE NO. 2012/3305 ON STATE AID IN INVESTMENTS

I. STATUS OF THE CHEMICAL SECTOR UNDER THE DECREE NO. 2012/3305 ON STATE AID IN INVESTMENTS

– Priority investments

– Strategic Investments

– Regional Incentives

– General Incentive

The conditions under which the chemical sector can benefit from these incentives are summarized below:

A- Priority Investments and Chemicals Sector

Priority investments are listed in Article 17 of the Decree No. 2012/3305 on State Aids in Investments.

Among the priority investments, “test center investments for products classified as medium-high and high-tech industries according to the Organization for Economic Cooperation and Development (OECD) technology intensity definition” in subparagraph (c) of the first paragraph of the article stands out.

These technological investment subjects are listed in Annex 6 of the Decree. “Manufacture of Chemical Substances and Products” is also among these investment subjects.

In addition, Article 17/1-y of the Decree states that “investments with a minimum amount of 500 million TL to be realized in the investment subjects listed in Annex-6” are also among the priority investment subjects.

In this respect, test center investments in the manufacture of chemical substances and products and investments of at least TRY 500 million in the manufacture of chemical substances and products can be considered as priority investments.

These two investments in the chemical sector will be eligible for 5th region incentives. If the investments are made in the 6th region, the incentives of this region will be utilized.

B- Strategic Investments and Chemical Industry

Article 8 of the Decree sets out the criteria for strategic investments as follows:

a) The minimum fixed investment amount is above fifty million Turkish Liras (including the portion of non-natural gas based energy investments to be realized exclusively to meet the energy needs of these investments, to be proportioned to the installed capacity of the facility).

b) The total domestic production capacity of the product subject to investment is less than imports.

c) Within the framework of the principles to be determined by the Ministry, the added value to be provided by the investment subject to the certificate shall be at least forty percent.

d) The total amount of imports realized in the last year in relation to the product subject to investment is over fifty million US Dollars.

The above-mentioned criteria for investments to be made in the chemical sector are very unlikely to be met due to the high imports of chemical products in Turkey and the potential of the sector for high value-added production. Investors are advised to conduct research in this regard prior to their investments and evaluate whether the investment subject can be included in strategic investments. While conducting this research, it should be taken into account that all of the listed criteria must be met together. Another important point here is that these conditions will not be sought for petrochemical investments.

It is possible to benefit from advantageous support elements for strategic investments compared to regional incentives. In addition to VAT exemption and customs duty exemption, other support elements can be briefly listed as follows:

– Building-construction expenditures to be made within the scope of strategic investments with a fixed investment amount of over five hundred million Turkish Liras may be eligible for VAT refund. In this context, in accordance with the amendment made by Law No. 7394 in the provisional Article 37 of the VAT Law, building-construction expenditures can also be exempt from VAT, even for investments with lower amounts. This support element is also valid for other investments in the manufacturing industry and is not specific to the chemical sector.

– It is possible to benefit from interest and profit share support for loans used within the scope of strategic investments more advantageously than regional incentives.

– The duration of the insurance premium employer’s share support is 10 years in the 6th region and 7 years in all other regions. However, the amount of support in regions 1-5 cannot exceed 15% of the fixed investment amount.

– For strategic investments to be made in all regions, the investment contribution rate is applied at 50%.

– In the event that the strategic investment is realized in the 6th region, the portion of the insurance premium corresponding to the minimum wage will be covered by the Treasury for 10 years.

– The above-mentioned support elements can be provided at higher rates and amounts for strategic investments made under the Technology-Oriented Industrial Move Program.

C- Regional Incentives and the Chemical Industry

The chemical sector is characterized by regional incentives, the most common category of incentives. Before addressing these specific issues, the table below shows the provinces and regions in terms of regional incentives:

As can be seen, Turkey is divided into 6 regions in terms of regional incentives. Support elements can be utilized according to the region in which the province where the investment is made is located.

Details on regional supports are provided below:

i) Minimum Investment Amounts

In order to benefit from regional incentives, minimum investment amounts for each region must be taken into account. The minimum investment amounts or capacities by sectors and regions are given in Annex 2A of the Decree. Accordingly, in order to benefit from regional incentives in the manufacture of chemical substances and products, minimum investments must be made in the following amounts by region:

In order to benefit from regional incentives, in addition to the minimum investment amount requirement, the province where the investment will be made must be among the provinces that can benefit from regional incentives for this sector according to the list in Annex 2B of the Decree. According to the list in the aforementioned annex, regional incentives cannot be utilized for the manufacture of chemical substances and products in Istanbul.

Although this is the general regulation for Istanbul, in the third paragraph of Article 18 titled “Investments to Benefit from Sub-Regional Support” of the Decree, it is specifically stipulated that the regional supports in the 1st region will be applied to investments of minimum five million TL in organized industrial zones or industrial zones and investments of minimum ten million TL outside of organized industrial zones or industrial zones, which will be realized in subjects classified as medium-high technology industry according to the OECD technology density definition, except for complete new investments in Istanbul Province.

Accordingly, an investment in the chemical sector to be made in Istanbul Province, excluding complete new investments, will be able to benefit from the 1st region supports by meeting the minimum investment amounts of 5 million if it is made in OIZs and EBs and 10 million if it is made outside these regions.

iii) An Attractive Opportunity for the Chemicals Sector: 4th Region Incentives

The sector has another advantage since it is classified as a medium-high technology industry according to the OECD technology intensity definition. According to Article 18/3 of the Decree, it is possible to benefit from the incentives of the 4th region if the investments to be made for the production of chemical substances and products are made in regions 1 to 3. Therefore, no matter in which of the provinces of the 1st-4th regions (except Istanbul) an investment to be made in the chemical sector will be made, the support elements of the 4th region will be applied. If the investment is made in the 5th or 6th regions, it is natural that the support elements of these regions will be utilized.

D- General Incentives and the Chemical Industry

An investment in the chemical sector that is not supported under the above incentive categories can be supported under general incentives. It is possible to benefit from VAT exemption and customs duty exemption for machinery and equipment to be purchased under general incentives.

II. A SAMPLE APPLICATION REGARDING THE SUPPORT ELEMENTS THAT CAN BE UTILIZED IN INVESTMENTS TO BE MADE IN ONE OF THE 1ST-4TH REGIONS BUT OUTSIDE OF ISTANBUL PROVINCE WITHIN THE SCOPE OF REGIONAL INCENTIVES

There are many provinces other than Istanbul where enterprises can make new investments and benefit from high incentive opportunities. However, provinces with high incentive opportunities may not be preferred due to reasons such as transportation, infrastructure and organization.

As stated above, the chemicals and chemical products manufacturing sector is included in the medium-high technology industry class according to the OECD technology intensity definition and listed in Annex 6 of the Decision. Accordingly, investments to be made in the sector in one of the provinces of the first four regions, excluding Istanbul, will be able to benefit from the support elements of the 4th region (sub-regional incentives are excluded from the evaluation).

For investments to be made in one of these provinces, the minimum investment amount of the region where the investment will be made should be taken into consideration. The minimum investment amounts in these regions are given in the table below:

– VAT Exemption:Pursuant to the Value Added Tax Law No. 3065, import and domestic deliveries of machinery and equipment to be made to investors holding an incentive certificate within the scope of the incentive certificate, and sales and leases of software and intangible rights within the scope of the certificate may be exempt from VAT. Accordingly, if an incentive certificate is obtained, machinery and equipment can be procured without paying VAT.

– Customs duty exemption:Import of investment goods machinery and equipment within the scope of the incentive certificate is exempt from the customs duty to be paid in accordance with the Import Regime Decree in force. In this context, this exemption is not applied for the import of machinery and equipment included in Annex 8 of the Decree. It should be noted that if the machinery and equipment to be imported is included in this list, the customs duty exemption will not be applied.

– Tax Reduction: Even if investments are made in regions I-III, incentives of the 4th region will be utilized. The tax deduction rate for investments in this region is 30%. According to Article 8 of the Decree, for the investment expenditures to be realized between 1/1/2017 and 31/12/2022, the investment contribution rates to be applied in tax deduction support within the scope of regional and strategic incentive practices for the investment expenditures to be realized between 1/1/2017 and 31/12/2022 are applied by adding 15 points to the investment contribution rate valid in each region, corporate tax or income tax deduction at the rate of 100% in all regions, and the ratio of the investment contribution amount to be applied to the investor’s earnings from other activities during the investment period is 100%, without any action on the incentive certificate.

Accordingly, the investment contribution rate will be 45% (30+15%) for an investment of 4 Million TL. For an investment of this amount, the portion of the investment to be covered by the state by avoiding corporate tax will be 4.000.000×45%= 1.800.000.-TL. This amount can be indexed every year at the revaluation rate after the completion of the investment in case of insufficient earnings. At the same time, it is possible to start benefiting from the discounted corporate tax application during the investment period.

– Insurance Premium Employer Share Support: Investments supported within the scope of regional incentive practices, provided that they do not exceed the employment registered in the incentive certificate with a completion visa;

a) In the case of complete new investments, provided by the investment realized within the scope of the incentive certificate,

b) For other types of investments, following the completion of the investment, the portion corresponding to the minimum wage of the employer’s share of the insurance premium to be paid for the employment added with the investment realized within the scope of the incentive certificate to the average number of workers reported in the monthly premium and service certificate submitted to the Social Security Institution in the last six months prior to the date of commencement of the investment (for investments with seasonal characteristics, the seasonal employment averages of the previous year are taken into consideration) is covered from the Ministry’s budget.

Accordingly, the employer’s share of the insurance premium corresponding to the minimum wage of the personnel to be employed for the investment will be covered by the State for 6 years. Another restriction here is that the employer’s share support amount cannot exceed 25% of the fixed investment, which is valid for the 4th region. Accordingly, in case of an investment of 4.000.000.-TL, the insurance premium support will not exceed 4.000.000×25% = 1.000.000.-TL in total.

However, if requested at the application stage regarding the issuance of the incentive certificate, the ratio of this support to the fixed investment amount is increased by half of the investment contribution rate, provided that the tax deduction is not utilized. Since the investment contribution rate will be 45%, half of this rate is 22.5%. When this rate is added to 25%, the ratio of the support to the fixed investment becomes 42.5%. Accordingly, in case of an investment of 4.000.000.-TL, the insurance premium support will not exceed 4.000.000*42,5% = 1.700.000.-TL in total. In this case, tax deduction incentive cannot be utilized.

This situation should be carefully analyzed at the application stage according to the size of the investment since tax deductions will be waived.

– Investment Location Allocation: For strategic investments for which an incentive certificate has been issued by the Ministry and for investments that will benefit from regional supports, an investment location may be allocated according to the procedures and principles determined by the Ministry of Environment and Urbanization within the framework of the additional article 3 of the Law No. 4706 dated 29/6/2001.

– Interest or Dividend Support: If requested, the interest or dividend to be paid for the interest or dividend to be paid for the portion up to seventy percent of the fixed investment amount registered in the incentive certificate of investment loans with a maturity of at least one year to be used from banks for investments that will benefit from supports within the scope of regional incentive practices and strategic investments;

For investments to be made in the 4th region, four points for Turkish Lira loans and one point for foreign currency loans and foreign currency indexed loans may be covered from budget resources, provided that they are paid for a maximum of the first five years, if deemed appropriate by the Ministry. For investments subject to incentive certificates that include interest or dividend support, interest or dividend support may be foreseen under the same conditions, provided that an amortization plan including interest or dividend payments is made for the investments to be realized through financial leasing method.

The amount of interest or profit share support to be covered within this scope cannot exceed 1.200.000 TL for the 4th region.

Accordingly, the maximum loan amount that can benefit from interest support for an investment of 4.000.000 TL is 4.000.000*70%=2.800.000 TL. The interest corresponding to 4 percentage points of the interest or profit share corresponding to the loan of this amount can be covered from the budget, provided that it is paid for a maximum of 5 years. It should be taken into account that the total amount of interest that can be utilized cannot exceed 1.200.000 TL in case the investment and loan amount grows.

III. MATTERS TO NOTE

In order to benefit from incentives for investments to be made in the chemical sector, the minimum fixed investment amount to be made by region should be taken into consideration.

In Istanbul, the sector cannot benefit from regional incentives. However, if the investment is made in OIZs and EBs, it will be able to benefit from the 1st Region incentives by meeting the minimum investment amounts of 5 million and 10 million if the investment is made outside these regions.

Since the sector is among the medium-high technology investment subjects that can benefit from the 4th region supports, it is possible to benefit from the advantageous support elements mentioned above. However, the manufacture of chemical and plant-based products used in pharmaceuticals/pharmacy and medicine is not in this scope.