• BUSINESS
• OCTOBER 5, 2009

Turkish Premier Defends Media Tax Battle

A $3.2 Billion Fine Threatens Standing of the Dogan Group

By MARC CHAMPION

ISTANBUL — Turkey’s Prime Minister Recep Tayyip Erdogan defended his government’s crippling $3.2 billion demand in fines and penalties against the country’s largest media business, comparing the case with the U.S. pursuit of gangster Al Capone on tax-evasion charges in the 1930s.
Mr. Erdogan, interviewed Sunday at the elegant waterside offices that serve as the government’s home when in Istanbul, also said his country had resolved its dispute with the International Monetary Fund over the fund’s demand he should make Turkey’s tax authority independent. He said he would like to see a new IMF program for Turkey agreed “soon.”
Marek Belka, director of the IMF’s Europe department, declined to comment. Turkey is hosting the annual meeting of the IMF and the World Bank in Istanbul this week.

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Mr. Erdogan also challenged the intense focus on checking Iran’s nuclear-fuel program, saying it wasn’t the biggest problem in the Middle East. And he said he was certain Turkey and Armenia would sign an agreement to reopen their closed border and establish diplomatic relations on Oct. 10, provided Armenia doesn’t alter the text.
The tax case against Dogan Yayin Holding AS — which owns roughly half the television and newspaper market in Turkey — has drawn concern at home and abroad. Days after a $2.5 billion fine was announced last month, the European Commission in Brussels expressed “serious concerns” over the implications for press freedom in Turkey and said it would include the incident in its report later this month on progress in Turkey’s talks to join the European Union. The Organization for Security and Cooperation in Europe also has expressed concern.
“The issue here is of a routine tax examination,” Mr. Erdogan said. “In the U.S., too, there are people who have had problems with evading taxes. Al Capone comes to mind. He was very rich but then he spent the rest of his life in jail. … Nobody raised a voice when those events happened.”
“There are no legal grounds for these tax [demands], they are baseless,” said a senior executive at the Dogan group, who asked not to be named. He said the Dogan group had been singled for attention out after the media group published stories alleging corruption in fundraising for the ruling party. He said 30 tax inspectors had been at the group’s offices for a year since, combing through its books.
By the end of this week, Turkey’s finance ministry is due to decide on whether to insist on its decision that Dogan group provide $3.2 billion in collateral, the full amount of the fine plus interest and penalties to date, while the group appeals the fine in court.
The senior Dogan executive said the company would file for a court injunction if the finance ministry stuck to its demand. If it were implemented, “We would be inoperative; we’d be out of the picture,” the executive added.
Mr. Erdogan said the Dogan group can challenge the fine in court and has already settled one tax-evasion case out of court, related to its petroleum business Petrol Ofisi. Asked if it was acceptable for the government to demand collateral that would collapse the company before the case reaches court, Mr. Erdogan said the court might issue an injunction, or the group could settle first.
He bristled at the comparison some critics have drawn between his government’s pursuit of Dogan group and the Russian government’s bankrupting of oil company Yukos with back-tax charges, under then-President Vladimir Putin.
“I find it to be very ugly, very improper. I think those words have been expressed by some people from the Dogan group, like the daughters of [chairman Aydin] Dogan,” Mr. Erdogan said. He described the charges as “disrespectful” to both himself and Mr. Putin as elected leaders.
Mr. Erdogan said the case against the Dogan group was part of a broad government policy aimed at cleaning up Turkey’s large underground economy and bringing it onto the books. That is the same reason for which he said he had resisted the IMF’s request to depoliticize the tax authorities. “We need to work hand in hand,” with the tax service in that effort, he said.
Earlier this year, Dogan group was hit with a $500 million fine in connection with the sale of a minority stake in its television unit to Axel Springer AG, of Germany. A $2.5 billion fine came Sept. 8, this time for unpaid taxes sales of shares within the group.
The Dogan executive said the transactions were aimed at unwinding cross ownership within the group, to make units more attractive to outside buyers, and weren’t tax liable.
Late last month, the finance ministry told the group it had 15 days to provide collateral for the fine, plus penalties and interest, amounting to $3.2 billion in total. That deadline expires Friday, the Dogan executive said. The group is now in talks to sell its stake in Petrol Ofisi to its partner, Austria’s OMV AG, to help cover the fines.
The Dogan group gets little sympathy in Turkey, said Soli Özel, a prominent columnist with Habertürk, an independent daily. That’s because the group used its media and connections to further its business interests in the past. Still, “this is ultimately about shutting up all sources of opposition, and you cannot have a democracy like that,” said Mr. Özel.
“We have never been against freedom of the press,” said Mr. Erdogan.
The prime minister’s Justice and Development, or AK, party came to power in 2001, challenging the secular elite — including Mr. Dogan — that had long run Turkey. Though the AK party triggered concerns among some with its Islamist roots, in government it has pursued economic and other reforms that opened the way to membership talks with the EU and created the kind of macroeconomic stability long lacking in Turkey.
Despite a sharp drop in growth in the first quarter, Turkey appears to have weathered the financial crisis relatively well. Whereas IMF programs negotiated for some other countries in emerging Europe are about “preventing collapse, that’s not the case in Turkey,” said Mr. Belka. A facility would instead aim to boost growth by freeing credit for use in the private sector.
Write to Marc Champion at marc.champion@wsj.com