SUMMARY In the market-economy, in which it's application area is growing wider, first in developed countries and then in developing ones the specialization and globalization of financial markets bring the development of financial means and techniques. On one hand the need of a long term fund which increases parallel to the economical growth and on the other side tree saving owners interest on the investment of financial products rather than making a reel one has made the financial markets an important organ of the economies. The importance of the financial markets are due to the fact that these financial products should have the gualities of reliance and profit that makes them demandable. These products which are a kind of providing source to the corporates and also means of investments in finance sector are in close relation whit each other in terms of the formation of the source and distribution, and also the have an important promoter for both micro and macro terms with the effect of the practicing financial and economical politics. In order to increase the workability of the capital and money markets and the regulations that will constitute the foundation of rapidly increasing financial products have gained more importance. Both in the issues and transaction on financial products and also with the reduction of problems while facing whit results to the minimum that the addition of small savings to economy in a profitable way which spread through a large add the development of the markets will due to this. 276The importance of the financial markets increase gradually only due to the economical development but also to the development of social gualifications saving defusion of possession reproducing goods with the intermediary of financial products spreads the wealth and income distribution to large communities. In Turkey especially after 1980's, modernism in capital and money markets has been tried to be made parallel to the changes in the world and with the acceptance of capital market code article 2499 in 1981 (mostly changed with the code number 3794 in 1992), then market have gained a special regulations As it's known there's the need of encouragement for the offering of saving owners extra funds to the market and the ones who need these funds to ensure from the market. Obviously, the most effective of these encouragemets are the ones that are realized by tax policy from this point of view in the recent years important changes in tax laws especially in GVK (income tax code) and KVK (Corporation income tax code) has been started so that the tax exemption and exceptions are enlarged according to financial corporations. (Like investment fund and association) and the profit that's obtained from the financial products. The goal and the, base subject of this work that we that we present is directed to the effects of regulations and taxation of financial products over financial markets which are transaction in financial system. With this aim we firstly tried to present the theoretical approaches in a systematical way. The work is reserved wide both theoretically and applicationaily and the worlds and Turkey's applications are handled separately. Our work is formed of three main parts except the result part and seven under sections. In the first part, first section with the identification of financial 277markets and functions international financial markets, financial innovations the regulation of financial system is dealed and money rational expectations and efficient market are theoretically searched. Also in the first part, second section it's explained upon the effects of taxation of financial product and general taxation theories on financial markets. In the second part it's explained with financial markets and financial products according to regulations and application we see in this part. In the first section there's the world and in the second section there's the application and regulation of Turkey. In the third part the financial products and the taxation of market participants are searched and in the first section the system and the principles in the world in the second section the system and principles in Turkey and the third section the tax agreements of which Turkey is supporter and it's application over financial products are searched considering to prevent international double- taxation agreements. An overview of the financial system: Financial markets (bond and stock markets) and financial intermediaries(bank, insurance companies, pension funds) have the basic function of getting by moving funds from those who have a surplus of funds to those who have shortage of funds. The financial system of the United States and other developed nations performs a number of functions that are essential for a modern private enterprise economy. Two of the most important of these functions are providing the means by which(1)payments for transactions are accomplished and (2) savings are accumulated and channeled in to investments uses. Paying for goods and services, saving, lending, borrowing, and investing are all activities are carried 278out in the framework of instruments, institutions, and markets that constitute the financial system. The major function of the financial system is to efficiently gather and allocate funds in the economy by bringing borrowers and lenders together. Borrowers and lenders can be households, business firms, government, and foreigners. We have seen how the financial system channels funds from lenders to borrowers and look at the difficulties and other problems in this relations. The theory of rational expectations and efficient capital markets: Throughout our discussion of the subject many facets of financial markets, you may have noticed that subject of expectations keeps cropping up again and again. The theory of rational expectations attempts to explain how economic agents from their expectations. It is at the center oi many recent debates about how monetary policy and fiscal policy should be conducted. On the other hand, when this theory is applied to financial markets, where it is called the theory of efficient capital markets (efficient markets theory), it has important implications about what factors determine securities prices how these price move over time. The example makes the following important point about rational expectations; even thought a rational expectation equals the optimal forecast using all available information, a prediction based on it may not always be perfectly accurate. As a result, to explain our subject, we have to know this;, `While the theors of rational expectations was being developed by monetary economists, financial economists were developing efficient markets theors in 279financial markets`, we will discuss this as follows; when economists say that the securities is efficient, they are not talking about whether the filling is-up-to date or whether desktops are tidy. They mean that information is widely and cheaply available to investors and that all relevant and ascertainable information is already reflected in security prices. The efficient market hypothesis is frequently misinterpreted One common error is to think it implies perfect forecasting ability. In fact implies only that prices reflect all available information. Market efficiency has been defined three levels by Harry Robert's. The first called this a least, second level of efficiency called this a semistrong and finally a strong from of efficiency. The strong-from contends that stock prices fully reflect all information from public and private sources. International financial markets: One of the most notable features ot the past few decades has been the accelerating internationalization of the financial system. As a result, in recent years financial markets have recorded dramatic growth in volume, range and complexity as they have become increasingly international. Generally, international financial markets include short-term financing and Ipng-term financing. Short-term financing in Euromarkets involves `eurocurrency` and long-term financing in capital markets involves `eurobond`. In many ways, the long-term market parallels the short-term market. Both markets have informational problems, as well as credit, interest-rate and liquidity risks. Eurocurrency (eurodollars) represent the creation of global claims, since.. ?.. ?.... / both their parties do not have to reside in the same country, Eurobonds are 280denominated in one country's currency and sold in countries having currencies different from those of the issuer. Functions and types of financial products: Recall that one major function of financial markets is creating financial capital to substitute for real capital. Financial claims allow investors more flexibility than do directly owned physical assets, since they denominate wealth, facilitate the transfer of wealth, distribute and diversity risk, and separate risk. Financial products vary in terms of the income they promise and the ownership rights they bestow upon their holders. There are two types of major claims in financial system. Debt claims are simply loans; they usually offer norights of ownership to holders. Equity claims typically have two attributes of ownership, the right participate in profits and the right to have some degree of input in decision making for the business. The major types of financial claims according to fixed versus variable income and debt versus equity are as follows loans, notes, and bond, common stock, preferred stock and equity instruments. Financial innovation: The starting point to any systematic analysis of financial innovation must be the financial innovation must be the financial system and its basic function, for two reasons. First, financial innovation is an integral part of the working of a financial system and is the process whereby the basic functions are performed in different ways. Second the functions of a financial system must be the initial focus because the ultimate criterion when judging financial innovation is the innovation is the extent to which it increased the efficiency of financial intermediation in particular and the ^functions of theT financial system in general. 281On this basis classifies financial innovations as follows; -risk-transferring innovations (price and credit), -liquidity-enhancing innovations, -credit-generating innovations, -equity-generating innovations, Regulation of the financial system: The financial system is among the heavily regulated sectors of economy. The government regulates financial markets for three main reasons, to increase the information available to investors, to ensure the soundness of the financial system, and to improve control of monetary policy. There are many regulators agencies of the U.S. financial system, some of them as follows; -Securities and exchange commission, -Commodities Futures Trading Commission, -Federal Deposit Insurance Corporation, -Federal Reserve system. On the other hand, financial system is regulated by `Capital Markets Commission` in Turkey. Financial regulation in japan, Canada, and the nations of western Europe is similar the US.The provision of information is improved by requiring Corporations issuing securities to report details about assets and liabilities earnings, and sales of stock and by prohibiting insider trading. 282Tax theory and effective on financial system of taxation in financial products: Tax theory is define, burden of tax and who actually makes the tax payment to the government. The incidence of taxation is seen to fall on the person legally responsible for meeting the tax bill. The welfare costs or excess burden of taxation can be identified by reference to indifference curve analysis. The individual is assumed to bö faced with a fixed budget which permits the choice of any combination of two goods. The slope of the budget, will reflect the relative prices of two goods that depends on taxation or not. Before taxation the individual will chouse that combination of the two goods and in this way attain the highest level of welfare possible. Tax capitalization is a topic that is not only of importance in itself, but also provides a convenient link between concept of incidence and concept of allocation. In addition the concept once more warns against simply the face value analysis of taxation. We have seen that the twin objectives of economic growth and reduction of inequity can be secured best by reliance on progressive consumption taxes; but we have also that equity calls for this approach to be combined with the taxation of capital income under a progressive income tax. Given the potential conflict of the latter with investment incentives, it is surprising that much attention has been given to various devices by which detrimental investment effect can be minimized. Overview of the corporate equity and debt securities markets: Corporations issue securities of essentially three types; equity (in the form of common stock or preferred stock), debt (in the form of notes and bonds), and hybrid instruments, for example, securities with option characteristics(warrants, ' convertible bonds, and convertible preferred stock)and securities with 283characteristics of futures or forward contracts ( bonds where interest is indexed to the price of a commodity). Stocks, both common and preferred, evidence ownership of a corporation. The terms of issuance and rights attendant to ownership are prescribed by state corporate law, the corporation's charter and by-laws, stock exchange rules if the stock is listed on an exchange, and NASDAQ rules, if the stock is publicly traded but not listed. Corporate bonds, debentures, notes, and commercial paper are all forms of corporate debt. The terms of the debt (e.g.,interest rate or discount, principal repayment schedule including sinking fund provisions, and whether the debt is secured or unsecured) are specified in the corporation's charter, by-laws, or director's resolutions. The terms `bonds,` `debentures,` `notes,` and `commercial paper` are not precisely defined and are often used interchangeably. Debt securities can be issued in registered or bearer form. If they are in bearer form, they will typically be coupon instruments, that is, they will have detachable coupons that must be presented to the corporation or its agent before interest payments will be made. States and its agencies issue marketable, that is, freely negotiable, and nonmarketable securities (collectively `government securities`). Marketable government securities trade primarily over-the-counter and are of two types. The first comprises those securities issued directly by the United States, that is, Treasury bills, notes, and bonds. Government securities are issued to finance the operations of the United States and its agencies. Marketable govern.nient securities form the largest component of the United States financial markets,, Market participants trade (in outright purchases, sales, and financing transactions) 284hundreds of billions of dollars of such securities every business day. Secondary trading in government securities is for speculative and investment reasons, to facilitate short-term borrowings by institutions, and because of FRB open-market operations intended to influence interest rates and the growth of the money supply. On the other hand, state and local governments and their agencies typically issue debt securities in the form of notes, short-term obligations sold in anticipation of obtaining tax revenues other funds, or bonds that are long-term obligations issued to finance capital projects or governmental programs (collectively referred to as `municipal securities` or `munis`). In general, municipal securities either general obligation or revenue securities. Most municipal securities are interest bearing, although they can also be issued in discount form. In general, publicly offered municipal securities are rated for creditworthiness by Moody's Investor's Service and/or Standard & Poor's Corporation. A major attraction of municipal securities is that interest income is generally excluded from gross income for federal tax purposes and may be exempt from state taxation. The interest income on certain municipal securities is, however, subject to the alternative minimum tax in the hands of certain holders, usually corporations or individuals holding extensive portfolios of such securities. Municipal securities are subject to the antifraud provisions of the Securities Act, but they are exempt from the registration requirements of that statute. Under the Exchange Act, however, the Municipal Securities Rulemaking Board (`MSRB`), which is the self-regulatory organization for municipal securities brokers and dealer, has the authority to issue rules of practice that impose financial disclosure requirements for municipal securities. 285The `securitization` of otherwise illiquid financial assets is now commonplace. A wide variety of assets serves as the collateral that is pooled to create securitized assets. Securitization first began in the real estate mortgage markets, and securitizing mortgages on single-family, multifamily, and commercial properties has been an overwhelming success. To securities assets, the assets are packaged into `pools`, and securities backed in one way or another by the assets in the pools are sold to third parties. A variety enterprises can take advantage of the securitization process. Securitization frequently involves the sale or pooling of assets by a lender or an affiliate of the lender. In general, sales of individual loans to investors are not practical because the potential purchasers are unwilling to conduct a full credit analysis of each of the individual borrowers. These problems are minimized if groups of assets are pooled and interests in the pools are sold to purchasers. Types of asset-backed securities have exploded in recent years. At the date of this writing, securitized assets can be classified into seven broad groups; collateralized debt securities, participation certificates, pass-through certificates pay-through bonds, equity interests in entities issuing pay-through bonds, pass- through debt certificates, and interests in REMICs. Options on securities and commodities are very old trading vehicles. Trading in options on stock began in the United States in the late eighteenth century, but it was not until 1973, with the registration of the CBOE as a securities exchange and the introduction of standardized options, that options began to attract large numbers of public participants. A class of options consists of all call contracts on the same underlying interest. A series of options is; all contracts of the same class having the same expiration date and exercise price. *. 286Repurchase agreements (`repos`) and reverse repurchase agreements (`reverse repos` or `reverses`) are very similar to secured loans. In a repo, the borrower sells securities and agrees to repurchase equivalent securities from the other party (i.e., the lender) at a future date. The securities are either repurchased at the same price, with charges representing an agreed upon interest rate added to the principal at the maturity of the contract, or at a (predetermined) price higher than the sale price calculated to provide for an appropriate interest payment, or repo rate. A reverse repo is simply a repo looked at from the lender's side; for example, a dealer lending money and receiving securities has entered into a re-verse repo. There is currently no central marketplace for repo and reverse repo transactions; those transactions are generally arranged over-the-counter by telephone. While repos typically involve United States Treasury and agency securities, any asset that the supplier of funds is willing to accept may serve as the basis for the repo. Repose and reverse repos can be over-night, for a longer specified period (term repos), or open. Open repos generally can be terminated by either side on one business day's notice. Taxation of financial products in general: This section discusses various types of corporate stock and debt securities interest and tax considerations for these interests. Neither the Code nor the regulations provide a useful definition of `stock.` Stock has generally been defined, however, as an equity interest in a corporation, either common or preferred, voting or nonvoting. Stock is frequently classified as common stock for tax purposes if it is an equity interest with an unrestricted right to participate in the growth of a corporation. Common stock represents ownership of a corporation. `In general, the common stock bears the risk of full loss and enjoys the benefit of future appreciation. 287Repurchase agreements (`repos`) and reverse repurchase agreements (`reverse repos` or `reverses`) are very similar to secured loans. In a repo, the borrower sells securities and agrees to repurchase equivalent securities from the other party (i.e., the lender) at a future date. The securities are either repurchased at the same price, with charges representing an agreed upon interest rate added to the principal at the maturity of the contract, or at a (predetermined) price higher than the sale price calculated to provide for an appropriate interest payment, or repo rate. A reverse repo is simply a repo looked at from the lender's side; for example, a dealer lending money and receiving securities has entered into a re-verse repo. There is currently no central marketplace for repo and reverse repo transactions; those transactions are generally arranged over-the-counter by telephone. While repos typically involve United States Treasury and agency securities, any asset that the supplier of funds is willing to accept may serve as the basis for the repo. Repose and reverse repos can be over-night, for a longer specified period (term repos), or open. Open repos generally can be terminated by either side on one business day's notice. Taxation of financial products in general: This section discusses various types of corporate stock and debt securities interest and tax considerations for these interests. Neither the Code nor the regulations provide a useful definition of `stock.` Stock has generally been defined, however, as an equity interest in a corporation, either common or preferred, voting or nonvoting. Stock is frequently classified as common stock for tax purposes if it is an equity interest with an unrestricted right to participate in the growth of a corporation. Common stock represents ownership of a corporation. `In general, the common stock bears the risk of full loss and enjoys the benefit of future appreciation. 287Distinctions between preferred stock and debt are also relevant in determining whether a merger or corporate acquisition qualifies as tax free reorganization under. To qualify for tax free treatment the shareholders of the corporation to be acquired must, to some extent, continue to have an interest in the enterprise after the merger. The two major tax questions with respect to preferred stock redemption's are whether mandatory redemption provisions reclassify stock as dept. and whether a periodic redemption is subject to the rules of I.R.C.. Convertible stock is typical ly(although not always) preferred stock that is convertible into common stock of the issuing corporation. The taxation of convertible stock is not governed by any single Code provision. Rather, one must look to various Code provisions, Treasury regulation often conflicting judicial decisions, and IRS pronouncements to ascertain the appropriate tax treatment of convertible stock. Simply stated, conversion is the exchange of one security for another. In general, the act of converting one type of stock into another type of stock in the same corporation is tax free to both the issuer and the owner of the stock. Stock con-versions have generally been viewed as tax-free even though there is no explicit Code section authorizing such treatment. The rationale treating the conversion of preferred stock into common stock of the same corporation as tax-free is that the conversion qualifies as a Type e reorganization (i e recapitalization) under. Although the Code does not define `recapitalization` the term has been used to describe a reshuffling of a capital structure within the framework of an existing corporation. When convertible preferred stock sells at substantial premium to the market price of the comrnpn stock into which it is convertible, a purchase of the preferred stock may arguably 288represent an investment in the issuing corporation's common stock. As result, a subsequent conversion might be regarded under I.R.C. 1036, as a tax-free exchange of common for common. Generally debt securities maybe divide in to four types. We discusses the special tax that apply to tax-exempt taxable securities in follows sections; `original issue discount`, `market discount bond`, `purchase premiums` and `zero coupon securities` In general, interest expense on debt securities is deductible for tax purposes(subject to the on investment interest and personal interest) and includable in the income of the holders of the debt securities. Dividends paid on corporate stock are not deductible by the issuer, although certain corporate shareholders are eligible for the intercorporate dividends received deduction. As a result, many corporations have favored the issuance of debt over stock issuance's to raise additional funds. Original Issue Discount (OID): is the difference between the issue price of a dept. security and it's stated redemption price at maturity. The OID method used to adjust the issue price depends on the date the security is issued and whether is a corporate government, short-term or tax-exempt security. The taxpayer's basis in a security is increased by the amount of OID included in his income. If there was an intention (at the time of issuance) to call the debt security before maturity, gain on the sale or redemption of debt securities is treated as interest to the extent of the OID, minus that portion of the OID previously included in income. Redemption's pursuant to a mandatory sinking fund may evidence an intent to call debt securities before maturity. A mandatory sinking fund can also accelerate the inclusion of OID under the rules that apply to debt securities with serial maturity provisions as well. Gain realized 289on the exchange of OID debt securities issued with an intention to call the securities before maturity is not taxed as ordinary income if the gain is not other wise recognized because of a nonrecognition Code provision such as I.R.C. The issuer can deduct interest payments when paid on the deferred portion although the issuer can never deduct interest paid on the nondeductible portion. A corporate holder of an applicable high yield discount obligation can qualify for the intercorporate dividends received deduction. In general, I.R.C. 163(e)(5)(B)(i) provides that solely for purposes of I.R.C. 243, 245, 246, and 246A, `the dividend equivalent portion of any amount incredible in gross income of a corporation under I.R.C. 1272(a) in respect of an applicable high yield discount obligation shall be treated as a dividend received by such corporation from the corporation issuing such obligation. `The` dividend equivalent portion `is` the portion of the amount so incredible. This means that a corporate holder reports as interest income all OID calculated under I.R.C. 1272 and it might also be entitled to the intercorporate dividends received deduction under I.R.C. 163(e)(5)(B). A purchase premium is the amount that a purchaser pays to acquire a debt security in excess of its face value. A purchaser may be willing to buy a debt security at a premium if the security's interest rate or yield to maturity exceeds current market interest. Bond premiums paid on taxable debt securities are deductible A taxpayer can elect, on taxable bonds only, to deduct the amount of the amortizable premium for the taxable year in computing taxable income. If taxpayer does not elect to amortize premiums, he reports a loss on redemption. Such a loss is either capital or ordinary, depending on whether the debt security is a capital or 290ordinary asset in his hands. For a discussion of the tax treatment of bond premiums paid on tax-exempt securities. Zero coupon securities are debt securities payable without interest at a fixed maturity date. Owners of taxable zeros report income on interest earned on a yearly basis. The United States Treasury issues STRIPS, and some brokerage firms and federal government agencies also issue taxable zeros. In addition, there are certificate of deposit zeros that are insured by the FDIC and corporate zeros. Finally, there is a market for zero coupon convertible bonds. Treasury securities include both marketable securities (i.e., Treasury bills, notes, and bonds)and nonmarketable securities (e.g., savings bonds).With some exceptions discussed in this section, Treasury securities are generally treated for federal income tax purposes in the same way as other debt securities. Treasury securities, however, are exempt from all taxes imposed by state and local governments, except for estate or inheritance taxes, franchise taxes, and other nonproperty taxes imposed on corporations. Interest income earned on Treasury securities issued. Pass-through certificates, typically ownership interests in trusts-represent undivided ownership interests in each asset making up the pool. This characterization can be significant for mutual savings banks, cooperative banks, domestic building and loan associations, and other savings institutions as defined in I.R.C. A pass-through certificate owner, as the beneficial owner of each underlying asset, should technically calculate income or loss on each asset separately. As a practical matter, however, allocation to each asset Is; usually not necessary because the tax results are usually the same ir the assets are viewed separately or in the aggregate. 291A certificate owner's gain or loss on the sale of a passthrough certificate is based on the difference between the certificate's tax basis and the net proceeds on the sale. In-vestors and traders obtain capital gain or loss, reduced by any gain attributable to interest or discount income, which is taxable at ordinary income rates. Dealers, hedgers, and certain financial institutions obtain ordinary income. The taxation of pass-through certificates purchased at their principal amounts is relatively straightforward. The only interest elements is the stated interest amount. Principal payments are a tax-free return of capital. Pay-through bonds are the debt obligations of corporate and owner truest issuers, which means that an owner of a pay-through bond simply owns a debt security subject to all of the tax rules that generally apply to debt securities. In brief summary, a pay-through bond owner does not own an interest in the underlying assets used to collateralize the loan. Pay-through bond owners are taxed on the payments they receive from the entity that issues the pay-through bonds (for cash method taxpayers) or as they accrue (for accrual method taxpayers), not on the payments the entity is entitled to receive on the pooled assets it owns. The tax rules that apply to owners of debt securities turn on whether the securities are purchased at their principal amount, purchased at premium, or purchased at a discount. As a result, it is necessary to separately consider the tax treatment of pay-through bonds purchased in these ways to determine the appropriate tax treatment for an owner of a pay-through bond. The remainder of this section highlights these issues. Taxation of financial products in Turkey: In general, the provisions related to the taxation of financial instruments and to the tax exception or exemptions 292A certificate owner's gain or loss on tne saie of a passtnrougn certificate <s based on tne difference between tne certificate's tax oasis and the net oroceeds on the saie. in-vestors and traders obtain capital gam a: ;c-ss reaucec o/ an/ gain attributable to interest or discount income, wnicn is taxaoie at ordinary income rates. Dealers, hedgers. and certain financial institutions ootain ordinary income. The taxation oi pass-through certificates purchased at tneir principal amounts is relatively straightforward. The only interest elements is tne statea interest amount. Principal payments are a tax-free return of caoita!. Pay-through bonds are tne aeot obligations of coroorate anc owner trues; issuers wmch means tnat an owner of a uav-n'i'ougn uonc: ><i^di/ owns a ae:r. secuntv subject re ail of tne tax ruıes tna: generaiK aoon. :c debt securities, ir one*' summar-, a oav-tnrougn oonc owner coes no: own an interest in tne underlying assets used to collateralize tne toan. Pav-;nrougn oonc owners a~e taxed on tne oavments tne/ receiye trorr tne en:it/ tna; issues tne oav-tnrougr oonas (for cash metnoc taxoavers or as t,ne/ accrue ic accrua- memos taxoayers...not on tne oavments tne entit/ is entitiec tc receive or tne oooiec assets it owns. Tne tax ruies tna; appiv to owners of oeot securities turn on wnetne*- tne securities are purcnased at their principal amount, ourchased at premium, or purchased at a discount. As a result, it is necessary to seoarateiv consider the tax treatment of pay-througn bonds purchased in tnese wavs to determine tne appropriate tax treatment for an owner of a pay-througn bond. Tne remainder of this section nignlignts tnese issues. Taxation of financial products in Turkey: ir genera;, tne provision's related' to tne taxation of financial instruments anc tc tne tax exceouon ;or exemouons 792concerned are put into proactive through Income Tax Code and Corporate Tax Code the circulars relative to these laws other regulations. Our tax system foresees two elements in the taxation of the securities concerned. These can be classified as follows; -taxation at source, -taxation while the income is earned, In the taxation at source, when the income is received, it is taxed by a certain percentage by the tax responsible. y The remaining balance is paid to those who are entitled. In this case, the withholding rates indicated in article 94 of the Income Tax Law are applied. In the taxation while the income is earned, in case the said income is earned by a commercial enterprise or institution, it is, together with the other earnings, declared as a whoie with an income tax return oracorporate tax return. Essentially, the difference between the Income Tax Code and Corporate Tax Code arrangements lies in the way of taxation. From the point of view of taxation, the tax payer according to the Income Tax Code is real person whereas in the Corporate Tax Code it is legal entity. Securities are defined in article 3 Capital Market Code as instruments providing partnership and creditorship, representing a certain amount, vitiated as investment instrument, providing periodical earning, consisting of equal amount and serially issued. The tax law structure has been tried to analyze and interpute in light of this provision with emphasis on its nature and income structure. /?? 293The provisions of Article 75 of the Income Tax Code Law constitute the basis in the taxation of income received from securities. In the above article dividends, rents and similar revenues which are obtained though the ownership of cash capital or assets which are represented in term of monetary units have been defined as capital incomes. The following revenues have been accepted as capital incomes irrespective of their sources; a- The dividends of all kinds of shares. b- The earnings arising from equity participation's. c- The dividends paid to the Chairman and Board members of the companies. d- The part of the corporate profit calculated by deducting the corporate tax from the gross corporate profile before the of exception and exemptions. e- The interest of all types of bonds and treasury bond as well as the incomes secured from the securities issued by Mass Building Administration and Public Participation Administration. f- Interest on all kinds' of receivable. g- Interest on deposits. h- The proceeds obtained from the sale of unmatured coupons of shares and bonds. i- The payments received in cash and in kind in return for the turnover of the unaccrued profit shares 294i- Discount proceeds received in return for the all kinds of bonds discounted. The provisions relating to the taxation of securities of Corporate tax are indicated in article 7 and 8 of Corporate income Tax Code concerning exemptions. The tax burden on the funds qualified as an institution is indicated in the provisions concerning exemptions. Corporate earnings the are exempted from corporate tax including institutions with limited liability are mentioned in article 8 of corporate income tax code. According to Income Tax Code Article 75(2),the income received from all kinds of bonds interest and treasury bonds interest a long with the securities issued by public corporations are considered as capital income Tax withholding from the capital income is foreseen in Article 94 of the above mentioned law and in Article 24 of Corporate income Tax Code. Interest income on these securities and earnings obtained from the sale there of are subject to different taxation principles and procedures according to their status and their tax responsibilities. International Double Taxation Practices: The fundamental element in international double taxation is the aim of preventing double taxation which may give rise to negative developments on economic and legal basis by determining the methods and principles of the taxation of income formed as a served of international goods, capital and service flow. The international double taxation has been defined by the Organization for s Economic Co-orperation and Development-OECD and the United Nations-UN by ' doing research in area concerned. 295According to this, international double taxation is the taxation by two (or more) states the tax liable in the same taxation period in relation with the same tax subject with the same taxes. The concept of double taxation can both national and nature. On the other hand, double taxation can also appear in two dimensions namely economic and double taxation. The international economic double taxation can be explained with an example. One of the conditions for the reel person and institutions in the status of full taxpayer to receive their tax receivable is the taxation of these payments considered to be dividend in the country concerned. The tax receivable is part of the corporate tax paid from the corporate earnings which constitute the source of the dividend and it aims at preventing the economic double taxation partially. In case, some part of the corporate tax paid in the other country can be counted in annual income declaration to be given in the country concerned, there will be a real reduction in the tax burden. The idea of concluding agreements aiming as preventing double taxation on income can arise in case when there is an intensive flow of capital, service, technology or such a potential international. Fundamentally, such agreements are arranged in order to avoid the obstades to industrial investment and commercial transactions realized through capital, technology and service flows by double taxing the same income between two countries. As a result; the financial system increasingly gained importance following the developments in this area since the 1970 s. In this context, the way in which the financial markets, product and structures of institutions have evolved and the 296factors which might enable the continuation of this development, have seen on the agenda. In general, the financial system comprises the financial markets where the transactions of the financial instruments of both private and public sector institutions take place. The economic evaluations and regulations done in this area have shown that the financial products should be dealt with separately. It can also be said. That the financial product markets should be subject to separate specific arrangement to operate on national and international levels. As is know, there is an ongoing globalisation process in world financial markets. The globalisation trend in the financial markets can be related to three following factors: the liberalization of big financial markets and their restructuring; the developments in the communication and computer technology; the institutionalization of financial markets. The most important part of these developments occurs in the equity and bond markets. The tendency of globalisation noticed in the bond markets resulted in the formation of two different markets, namely national and international. As our studies show, the markets which have a biggest share in the equity and bond markets are the markets of USA and Japan, followed by United Kingdom and Germany. Consequently, the regulations, methods and principles related topractice in the USA constituted an example in a way for other countries. On the other hand, the variety of new financial instruments is increasing everyday due to the big and continuous change in the financial markets. The newly developed financial instruments are used as the derivatives of the existing ones are generally traded for risk transfer. These instruments mentioned as futures markets can be in the forms of option, future, forward and swap. When these 297transactions are analyzed it is seen that these instruments are traded over equity indexed, debt commitments in order to hedge against the changes in the equity prices, interest rates and exchange rates. As far as the financial markets in Turkey are concerned, it appears that efforts have been made since the mid 1980s to catch up the development dynamics in the international financial system on one hand and to put into practice the products which have seen developed on the other. The continuation of this positive development and structuring naturally requires the harmonization of the legal framework related to the financial markets to the international standards. Studies continue to complete the legal framework in this regard but it is not adequate yet. The financial markets and the financial products in Turkey have become operational in terms of legal structure and institution, with the Capital Market Code. The regulations on the issue and transactions of the existing and new financial products are made by the Capital Market Board. In case the legal framework prepared in this subject is detailed and realized in time, it is an important factor the development of the market. On the other hand, taxation which is considered to be another important factor in this regard must be taken into account. In this context, the extension of tax exception and exemption by making the necessary arrangements in tax legislation and the establishment of a reasonable taxation system would facilitate the efforts in this subjects. 298In this study, the analysis has been based on three pillars with the method selected. First, the financial system has been analyzed from the financial functions and the finance theory perspectives. In theoretical terms, the financial markets have been evaluated with the efficient hypothesis depending on rational expectations. It has been shown that the efficient market hypothesis explained on a quite reasonable degree the development in the financial markets consisting of conscious and organized participants. The efficient markets hypothesis is considered as an approach to define the market where there is a high number of buyers and sellers; where the information obtained about the financial products in the market (this information can comprise the private information with regard to the institution which issues the products, but also general financial, economic, legal and political information) is reflected on the prices as a result of an interaction; where prices change with the new information concerning financial products. Within the context of the analyses in terms of taxation theory, it appears that the taxation in financial products has a very important impact on the financial markets. One aspect would be the high degree of tax burden on financial product holders and the negative impact on the market in case this burden can not be reflected. However, it's been understood that it has a positive impact on increasing the operation ability of the market. On the other hand, taxes affect the investment preferences and resource distribution and can be contrary from time to have to the financial and social aims which are pursued. The efficient distribution of resources can only be possible with the benefit analysis. 299It can be said that the tax policies to be applied in parallel to the yield to be obtained has an important effect in orienting markets. The regulations concerning financial products constitute the second part of the study. With this approach, it is understood that the fact that the legal arrangements have a confidence increasing nature played an important role in increasing the operation ability or the market. It is considered that the organs which will control both the companies whose securities are treaded in the financial markets and the institutions functioning as the capital market institution, are not effective enough. This arises from the fact that the legal infrastructure which will cover the financial system has not been established yet. In general, the arrangements made by the provisions oi the Capital Market Code and the circulars issued by the Capital Market Board determine the financial products traded in the market and as legal content refer to the Turkish Commercial Code. However, as this general approach does not clearly indicate the rights and obligations concerning financial products holder, it can create some legal problems in case of probable disputes. For instance, provisions concerning preferred stocks are not mentioned Ir, the Turkish Commercial Code. As for as debt notes are concerned, it is indicated that they are only securities. Therefore, the holders of such instruments do not have any priorities to claim, on their receivable. While evaluating their saving, the severs prefer the investments with highest return. Consequently, they invest in products subject to tax exement or low tax, because of it's final nature the tax incidence is not possible. It is obvious in this analysis that the tax on financial assets will effect demand considerably... 300In recent specifically in developing countries, the tax burden on financial instruments has be~en removed or alleviated in order to increase demand in financial products and to contribute to the development of capital markets. From the study of the financial statements of the companies it has been gathered that the major part of the profits has been formed of interest and other income from the non-operational activities. This however creates a contradiction in that where as the trade on securities and receiving income through buying and selling securities is promoted the savings can not be channeled to investments and there by economic growth can not be encouraged. Another important subject accentuated in our study is the fact that the regulations to be made according to the type of taxation should have parallel provisions. In our study, the of incomes received from financial products are analyzed from two different angles namely institutions and real persons. Whereas the income from a financial interment is not subject to tax in cesa of real person, threesome income received by an corporation is subject to taxation. The taxation or tax-exempt of the profits received will have an increasing or decreasing on real profit. The income distribution and equitable taxation are the factors to be taken into account by calculating the macro variables while realizing the above menhaden point whit the taxation policies which will be applied. In addition, it is considered that the losses which might arrive the tax burden are stopped due to the fact that the provisions of the agreements aiming at preventing double taxation to which Turkey is part, which are related to the interest, dividend income and earnings from increase of the value concerning financial product provide periodical advantages. We can say, the importance. of financial markets has increased in the world and Turkey in relation to the economic developments. The fact that the existing financial institutions and X. YÜKSEÜ?RETİİ £ ` - -/stOM îkn- 301financial products spread within the financial system affects the financial markets From different angles. *`: * It appears that the inadequate nature of the legal infrastructure in Turkey as regards the financial products has a negative effect on the financial markets. Our study lays down the conclusion that there is a need for fundamental regulations confining of financial markets and to increase the operation ability of the market. It is also that the financial products are supported both in the world and Turkey by taxation policy. It can be said that taxation the tax exception and exemptions aiming at developing financial markets are applied differently according to the income receivers. It is understood that the financial products offered by the state and its agencies and the financial products offered by companies are subject to low tax or exception. In case of income receivers, tax exception and exemption are provided to real persons in order to evaluate the rather small savings and to encourage participation in the market. It has been laid down in this study that the tax exceptions low taxation's and adequate regulations effect the financial markets by increasing the demand for financial product and their issuances, that in the opposite situation there is a negative impact. 302
