Turkey’s diesel tax buffer evaporates amid booming oil prices and refinery margins

Price hikes on diesel in Turkey are now being directly reflected in sales prices as the special consumption tax (OTV) on diesel prices was set at zero as of March 20, according to a statement from the country’s revenue administration (GIB).

The OTV on 85-octane gasoline, meanwhile, stood at Turkish lira (TRY) 6.1808 ($0.02258).

On March 23, a latest diesel price hike, amounting to TRY 6.6, based on the formula applied to calculate sale prices, will follow.

Tax relief mechanism

Back on March 2, the government revived a tax relief mechanism (known as “echelle mobile”) to smoothen the impact of oil price gains.

Fuel prices in Turkey are automatically updated based on a formula. Based on the tax relief mechanism, 75% of a required price hike is deducted from the OTV and the remaining 25% is reflected in the sales price.

Prior to March 2, the OTV on the diesel price stood at TRY 13.90 per litre versus TRY 14.82 on the gasoline price.

Diesel up 57%, gasoline 37%

Prior to the dawn of the Iran war, or “Gulf War III”, on February 28, fuel price increases in Turkey were hovering in the 20%s on an annual basis. As of March 20, the annual rise in the gasoline price reached 37% versus 57% in the diesel price.

A stabilisation has yet to be observed in oil prices and refinery margins.

Tweet by @e507: Why do diesel prices rise faster than gasoline prices? Gasoline margins rise at a slower pace since Europe and Turkey are net gasoline exporters.

Not forgetting VAT

In calculating fuel prices, the price obtained from multiplying the Genoa/Lavera refinery price of gasoline and diesel with the USD/TRY rate is converted to litres. The OTV and share of energy watchdog EPDK are then added.

The fuel distribution price is calculated by adding the distributor margin to the ex-refinery price including tax. Then, the dealer margin is added. The sales price is calculated by adding 20% in VAT (some critics say Turkey’s OTV system amounts to double-taxing, or taxing the tax, since VAT is calculated on the fixed OTV).

Table: Calculation of fuel prices in Turkey.

The VAT remains sat on the diesel price. The government has never introduced a tax relief mechanism via the VAT componenet.

As of March 21, TRY 62 worth of the 95-octane sales price included TRY 17 worth of VAT, while the TRY 71 diesel price included TRY 12 in VAT.

If the tax relief mechanism was not present, the diesel price would be TRY 16.68 (TRY 13.90 OTV plus 20% VAT) higher at TRY 87.78 and the annual price increase would be 94%.

The gasoline price would, meanwhile, be TRY 10.37 (((14.82-6.1808)*1.20)) higher to stand at TRY 72.37, with the annual rise 60%.

Table: Tax burden on fuel prices in Turkey as of March 21.