TAX FRAUD CHARGE AGAINST DOGAN MEDIA SEEN AS

UNCLAS ANKARA 000298 SENSITIVE SIPDIS TREASURY FOR FRANCISCO PARODI, JOANNA VELTRI AND JASON WEISS EUR/SE AND EUR/PPD FOR STEFANIE ALTMAN-WINANS E.O. 12958: N/A TAGS: KPAO ECON TU SUBJECT: TAX FRAUD CHARGE AGAINST DOGAN MEDIA SEEN AS EFFORT TO SILENCE OPPOSITION PRESS REF: A. 08 ANKARA 1723 ¶B. 08 ANKARA 1643 ¶1. (SBU) Summary: The GOT Revenue Administration charged Dogan Media with criminal tax fraud on November 18 and imposed a TL 860 million ($505 million) fine. Dogan and the opposition CHP party claim the charges are intended to silence Turkey's largest media company, which has lately been critical of the ruling AKP. The criminal charge follows an acrimonious and public argument in September between Prime Minister Erdogan and Dogan Group Chairman Aydin Dogan over Dogan press reports on the Deniz Feneri scandal (reftels). A long court battle is likely. Dogan Media views the size and criminal nature of the charges as an existential threat, but also as the inevitable result of their critical reporting on AKP. If this case succeeds in changing the tone of Dogan Media's coverage of the AKP, it may explain why the GOT has long opposed Revenue Administration independence in IMF negotiations. End summary. ¶2. (U) The Finance Ministry,s Revenue Administration (equivalent to the IRS) charged the Dogan Media company with tax fraud on February 18 and imposed a TL 860 million (USD $505 million) tax penalty. The tax fraud charge mainly relates to the timing of the sale of 25% of the company to a German media company. Dogan registered the sale in 2007, but the Revenue Administration ruled the sale actually took place between 2004 and 2006 and taxes should have been paid at that time. Dogan Media owns top-selling dailies Hurriyet and Milliyet and national broadcasters CNN Turk and Kanal D. The penalty and charge seriously depressed the share price of Dogan Media and its parent, Dogan Holding, which fell 21.5% and 18.5% respectively on February 18. ¶3. (U) The tax charge quickly became a political issue, with Dogan Media's chief executive labelling the tax penalty "a fine against the freedom of the press," with a similar condemnation coming from Deniz Baykal, leader of the opposition CHP. On the campaign trail, PM Erdogan denied that the Revenue Administration,s decision was political or aimed at silencing the Group,s journalists. ¶4. (SBU) Both the size of the fine and the criminal charge were very unusual. The fine is substantially larger than Dogan Media's current TL 315 million ($185 million) market capitalization. In 2007, a record TL 1 billion civil tax fine against Dogan Holding subsidiary Petrol Ofisi (Turkish Petroleum company) was negotiated between the firm and the tax authorities down to 28% of the original fine. However, the Revenue Administration's decision to pursue this as a criminal case not only increased the fine to three times the alleged unpaid tax but also rules out the possibility of arbitration. The criminal charge also enables prosecutors to bring criminal charges against the company's board members, including its Chairman, Aydin Dogan, the most powerful person in the Turkish media business. His conglomerate, Dogan Holdings, operates in 12 countries with 20,000 employees, controls seven Turkish newspapers, a wire service, three network TV stations, and a range of specialty digital channels, radio stations, internet sites, a publishing house and numerous magazines, as well as gasoline, electricity, tourism and other interests. ¶5. (U) The charge comes after an acrimonious debate in September between Prime Minister Erdogan and Dogan Holding owner and Board Chairman Aydin Dogan, in which the two publicly traded personal attacks for more than two weeks. The battle related to Dogan Media reporting on a German court,s conviction of three men for transferring money from the Deniz Feneri charity to non-charitable causes allegedly connected to the AKP (ref B). Erdogan characterized the coverage of the case in the Dogan Media as "media terror" and called on his supporters to boycott Dogan newspapers. Dogan replied by accusing Erdogan of seeking to silence independent media groups. Erdogan again called for a boycott on Dogan papers in January of this year when he felt remarks he had made about the Gaza conflict were misreported. &Let's boycott the media that covers false stories,8 he said. ¶6. (SBU) In a January 23 meeting with the Ambassador, Hurriyet Editor-inChief Ertugrul Ozkok complained that GOT financial inspectors had been poring over the company's financial records for over six months. Huriyet Daily News Editor-in-Chief David Judson and Hurriyet's Ombudsman and Corporate Communications Director Temucin Tuzecan told us this week that while Dogan Holdings had expected some sort of fine, the outcome is worse than they had expected both in the nature of the charge and the sheer size of it. Judson believes that this is an "existential" case of PM Erdogan's revenge - not just for Deniz Feneri, but for what he perceives as Dogan's lack of support during the AKP closure case and the Ergenekon investigation. As such, while this plays into ballot politics, Dogan does not believe the Prime Minister will retreat after the March municipal elections, and has told Turkish and foreign media he intends to fight the assessment. Tuzecan was surprisingly self-critical, saying he has told Dogan's senior leadership that the Group's critical approach to reporting on the AKP - done in its own self-interest - made this clash inevitable. In his opinion, this episode shows the limit of Dogan's power and the consequences of the failure of the Group's media to be completely objective. ¶7. (SBU) The charge also follows a reported statement by Treasury Minister Mehmet Simsek to London investment bankers in September, where Simsek was quoted as advising them to sell all their Dogan Holding shares because there &would not be any Dogan Holding8 within a year. (Note: we have only second-hand accounts of this alleged remark, reportedly made during an off-the-record meeting that Simsek had with his former investment banking colleagues in London. End note.) ¶8. (SBU) However, Akif Beki, who was the Prime Minister's spokesman and chief advisor until December and is now a columnist at the Dogan Media newspaper Radikal, told PDOff that he does not believe the Prime Minister is behind these charges, noting Islamist-oriented Kanal 7 was hit with a $5 million tax fine in 2003. Rather, he believes this was a decision by the tax inspectors acting on their own judgment, although he conceded they may have been encouraged by the Prime Minister's anti-opposition media rhetoric. ¶9. (SBU) According to Dogan Media, over 93% of the fine is related to the 2006 sale of shares to Axel Springer for euros 375 million. The sales transaction procedures began in November 2006 and ended on Jan. 2, 2007, when Alex Springer deposited the sale price and Dogan Media transferred the shares. Dogan Media paid TL 30 million in tax on this sale in April 2007. Even though the money was deposited into Dogan Holding accounts in 2007, and the share transfer was executed on the same date, the Revenue Administration ruled that the sale took place in prior years and ordered Dogan Media to pay 133 million TL in unpaid taxes from 2004-06 and 693 million TL in late charges and fines. According to Sukru Kizilot, a respected tax expert and Hurriyet columnist, under the Turkish Commercial Code, the sale of shares of joint stock corporations is completed when the sale is recorded in the ledgers and the shares are delivered. ¶10. (SBU) The charge is likely to lead to a protracted legal battle (Judson estimated it would take 2-7 years to work its way through the judicial process). Dogan management is appealing to the tax court, which is likely to refer it to the High Administrative Court (Danistay). To initiate its appeal, Dogan Media had to pay a TL 948 million cash bond on February 23. This likely will force the parent Dogan Holding Group to financially support Dogan Media and could limit the Group's expansion plans, including a bid in a 50-50 joint venture with Italy's Lottomatica on the privatization of Turkey's national lottery as well as plans to expand in the energy sector. This comes at a time of declining ad revenues and subsequent layoffs and downsizing at Dogan's TV channels, including a recent consolidation of the news operations of CNN-Turk and Kanal D. ¶11. (SBU) Atilla Yesilada, a prominent economic and political analyst from Global Source based in Istanbul, told Econoffs that he personally knows most of the accountants of the Dogan Group, whom he said are all former certified auditors and &very careful people.8 Yesilada said there could be tax avoidance in this case, but not criminal evasion. Yesilada also said the political conflict between the Dogan Group and the AKP was obvious, and that such a high tax fine in this situation could only be imposed in a &banana republic.8 ¶12. (SBU) Comment: Foreign investors have long cited legal and regulatory uncertainty as one of their major concerns about investing in Turkey. Turkish tax regulations are highly complex, leaving a lot of room for interpretation by tax investigators, and for political interference. If this case succeeds in changing the tone of Dogan media's coverage of the AKP, it may explain why the GOT has deemed Revenue Administration independence to be politically unacceptable in negotiations with the IMF. Reform and full autonomy for the tax administration agency has been an unresolved issue between the IMF and the GOT since 2001, and was recently cited as one of the outstanding issues in negotiations on a new Stand-By Agreement. End Comment. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey Silliman