CITIBANK CLIENTS GET SLAPPED WITH $1.5 BILLION

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008255

SIPDIS


SENSITIVE


STATE FOR E, EB, AND EUR/SE
TREASURY FOR OASIA - MILLS AND GUNARATNE
USDOC FOR 4212/ITA/MAC/OEURA/CDP/DDEFALCO
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: DECL: 09/02/2006
TAGS: EINV EFIN TU
SUBJECT: CITIBANK CLIENTS GET SLAPPED WITH $1.5 BILLION
TURKISH CLAIM FOR BACK TAXES: POTENTIAL GIANT INVESTMENT
DISPUTE


Classified by the Ambassador for reason 1.5 (b).



1. (C) SUMMARY: Citibank's foreign investor clients in
Turkey were recently disallowed long-standing preferential
tax treatment on T-bill income. These investors' T-bill
income from 1997 to present was reassessed at a 44 percent
tax rate, rather than the preferential 11 percent tax rate,
resulting in a whopping tax claim of $1.5 billion submitted
to Citibank as these investors' custodian in Turkey.
Citibank is quietly working with GOT bureaucrats now, but is
concerned that this issue not surface in the local media.
The Ambassador told Citibank execs in Ankara that we will
coordinate a high-level approach, starting with the new
Finance Minister, as soon as the new GOT is in place. END
SUMMARY.



2. (C) Citigroup's London-based Director of Global
Securities for Europe, Japan and MidEast Jim Donovan, and
Citibank GM for Turkey Mark Robinson briefed the Ambassador
on a serious new issue with the Government of Turkey. Last
month a Turkish tax inspector disallowed - only for Citibank
and its clients - the long-standing preferential tax
treatment of T-bill income of non-Turkish residents. The
result is a claim for back taxes, with penalties and
interest, of $1.5 billion. The tax inspectorate requested
that Citibank deposit $500 million in collateral in advance
of resolving this claim. Donovan told the Ambassador that
the collateral deposit has been dropped, but the tax
assessment is outstanding, and Citibank is treating it very
seriously.

3. (C) Citibank, JP Morgan/Chase and several Turkish banks
(including Garanti Bankasi) have foreign clients who invest
in the local T-bill market, through custodial accounts kept
in the banks. In Turkish legal parlance, the bank is the
"permanent representative" for these investments.
Investments by corporations formed outside of Turkey, which
are have no Turkish residence, and which bring funds into
Turkey have long benefited from preferential tax treatment.
This treatment is spelled out in a Capital Markets Board
circular. It states that foreign investment in the local
T-bill market is taxed at the rate of 11 percent (versus the
44 percent rate at which Turkish residents are taxed on
T-bill income). If 25 percent or more of the foreign
investment is put in the Turkish equities market, then the
tax rate on income from the whole investment is zero.



4. (C) According to the Citibank execs, the Finance
Ministry's tax inspector recently disallowed the preferential
tax treatment for Citibank and its clients, and applied the
44 percent tax rate retroactively for the period 1997-2000.
Per Citibank, this is the action of one tax inspector, and
this kind of assessment has not been applied to other banks
with foreign investor clients.



5. (C) Citibank execs Donovan and Robinson met November 14
with the Finance Ministry's DG for revenue Mete Sahin,
Treasury U/S Faik Oztrak and others in Ankara. They told the
Ambassador that these bureaucrats were supportive of
Citibank's position - that this retroactive change in tax
treatment is unfair to foreign investors, and Citibank will
not agree to submit this claim to a settlement commission.
But the bureaucrats also noted the need to get the incoming
government's approval before making any decisions on this
case. Citibank will wait for the new GOT to be formed before
raising this issue with the new Finance Ministry.



6. (C) At present, Citibank is not asking the USG to
intervene with the GOT, per Donovan and Robinson. They have
hired local accountants Price Waterhouse and Ernest and
Young, and local attorneys, to begin talking with AK Party
figures. They will stay in touch with us, and coordinate
approaches at the ministerial level, very soon after the new
GOT is formed. Citibank is concerned that, if this issue
leaks into the local press, then the chances of quietly
resolving the claim are much less. The Ambassador agreed
with this approach, and expressed his willingness to raise
this with the new GOT once it is formed.



7. (C) Comment: Citibank has been in Turkey for 25 years.
While maintaining a small commercial banking presence, it has
trained a whole generation of Turkish banking executives
(including BRSA Chairman Akcakoca, former State Bank Board
Chairman Akisik, Kocbank CEO Karacaham and others).
Furthermore, its investor clients (including Goldman Sachs,
Merrill Lynch) have at times been major players in the local
T-bill market. Press criticism of "foreign banks" surfaces
from time to time and calls them a bunch of speculators.
This outrageous tax assessment raises new risks to all
foreign portfolio investors. We will work with Citibank to
nip it in the bud with the AK government.
PEARSON