Filenews 25 September 2021
Almost two decades have passed since the last tax reform introduced in our country. During this time, there is no doubt that a lot has changed in our lives, let alone the international business environment that has changed dramatically. Our economy today needs a profound reform that responds to the challenges of the times. Association of Accountants, OEB and CCCI, submit their views to insider.
By Stelios Tsiarttas
Undoubtedly, 2002, the year in which the tax system that runs nowadays was introduced, cannot be compared with the times we live in today. And if it is difficult for you to understand the gap of the times, I would like to remind you that in the last reform, Glafkos Clerides was President of the Republic of Cyprus, the island was outside the EU and we used the pound for transactions. The gates of the digital age have been wide open for years, with technology, digitalization and e-commerce revolutionizing our lives. Moreover, the penetration by multinational companies, green growth, the fight against aggressive tax planning, as well as the decision of the G7 to adopt a global minimum tax rate, have presented us with major challenges, which urgently require the design of a new integrated tax framework. The Ministry of Finance will soon begin an intensive dialogue with all the involved productive bodies, employers' and trade unions, with the aim of developing a modern tax framework, which will be consistent with the new economic model promoted through the National Recovery and Resilience Plan.
Insider asked relevant stakeholders to give their views on tax reform and presents them to you in detail:
President The Institute of Certified Public Accountants of Cyprus, Pieri Markou: The current system is insufficient
Why is it necessary to evolve our country's tax system?
Our current tax system was established in 2002 for the purpose of harmonization with the European acquis at the time of Cyprus' accession to the European Union. For almost 20 years we continue to operate within the framework of the existing tax system which, despite having been improved and enriched from time to time, conveys several weaknesses that make it insufficient to successfully manage the challenges that Cyprus faces and is expected to face, as an international business and investment destination.
As ICPAC, we have long proposed to promote significant changes in our tax system, both for Cypriot taxpayers and for foreign investors. We are pursuing a comprehensive tax reform that takes into account the new economic data and tax requirements, so that Cyprus continues to be an attractive investment destination. Alongside the development of new incentives to attract investors, an effective tax framework is imperative.
In our view, the tax framework must be made more modern, more functional and more taxpayer-friendly. To abolish unnecessary taxes, to reduce laws, to expand the use of technology, to cut red tape and to re-approach the issue of tax evasion.
How crucial is the implementation of the latest e-government technologies and tools?
The evolution of our tax environment also requires, as I have already mentioned, functional and administrative regulations, in particular through the application of modern technologies and e-government tools. Despite the rapid technological developments of recent years, which have a particular impact on the operating models of businesses, the tax system both in Cyprus and internationally has not managed to keep up with them. Both the Cypriot taxpayer and the foreign investor now expect to be able to manage his tax matters with minimal bureaucracy, as well as simple but effective procedures. At the same time, the State should use the data and data that exist for each taxpayer in various departments and services, so that the procedures are as efficient and minimally time-consuming.
How will international developments affect the evolution of our country's tax system, bearing in mind the taxation of multinational companies, digital taxation and green growth?
International developments concern, primarily, direct taxation and the definition of the subject matter of taxation of multinational companies, the promotion of green growth, the fight against aggressive tax planning, tax transparency and harmonisation, as well as technology and digital taxation. Indicative are the decisions of the G7 and G20, the OECD, the European Commission, as well as countries such as the US, Germany, the UK and France that prefer these changes.
These developments lead to serious reflection regarding our own tax environment, since they create challenges in our existing system, intensify tax competition and make digitalization necessary to safeguard our country's interests and our competitive advantage.
In what areas do you think there is a need for reforms?
We believe that the fiscal and other reforms that we should undertake should form part of the overall vision for the future, which should be determined with the contribution of all economic operators. The new strategic long-term economic model that is being worked out by the Economic and Competitiveness Council is an essential step in the right direction since, among other things, it will contribute to the definition of our economic vision for at least the next 15 years.
We also believe that both the resources of the Recovery and Resilience Fund and the T.AL.E.I.A. Programme of the new programming period 2021-2027, can contribute decisively to the realization of the necessary reforms and to ensuring the resilience, competitiveness and growth of the Cyprus economy.
We strongly maintain the view that for a project such as that of tax development, it is necessary to call in Cyprus specialized experts. At the same time, it is necessary for the State to cooperate with all the competent productive bodies of the economy.
General Manager of OEB, Michalis Antoniou: We want a simple tax system
Why is it necessary to reform the tax system in the country? Is the Recovery and Resilience Plan putting pressure in this direction?
The last tax reform took place some 20 years ago and although various improvements have been made to the tax regime from time to time, you will realise that since then the international business environment has changed dramatically. The penetration of technology, digitalization, e-commerce, multinational companies, green growth, the fight against aggressive tax planning as well as the recent decision of the G7 to adopt a global minimum tax rate, make imperative the need to design a new integrated tax framework to serve our country as a modern international business and investment destination. The Recovery and Resilience Plan has precisely this mission to contribute to the implementation of the necessary reforms and to ensure the resilience, competitiveness and growth of the Cypriot economy.
What are OEB's recommendations regarding the reform of the tax system?
OEB has submitted autonomously and jointly with other important bodies such as ICPAC, to the Minister of Finance and the President of the Republic, in-depth proposals for tax reform. Briefly, we should mention that the tax system must be simple, reduce the tax burden on businesses and individuals, reduce or abolish various counterproductive and anti-development contributions and burdens, encourage technological upgrading and the green transition of the real economy.
What are the benefits of the new tax model?
OEB expects that with the implementation of the new tax framework, significant multiple benefits will arise that will contribute to the strengthening of the business ecosystem, the increase of investment interest and the improvement of the competitiveness of our country. The new framework will upgrade Cyprus as a modern centre for providing services and attracting productive sustainable investments in a wide investment menu. It is also expected to upgrade the international credibility of Cyprus and improve its image abroad, enhance tax compliance and ensure the absolutely necessary component of tax stability and predictability.
General Secretary of the CCCI, Marios Tsiakkis: The needs and challenges have changed
Why is it necessary to reform the tax system in the country? Is the Recovery and Resilience Plan putting pressure in this direction?
Reform of the tax system is necessary for many important reasons. In principle, the existing tax framework, which has been in force since 2002 when the previous tax reform took place, has exhausted its possibilities of offering. Today, the data of both the economy and taxpayers have changed greatly. Let's not forget that we experienced an intense economic crisis in 2013 and now we are experiencing the effects of the unprecedented pandemic. The picture, therefore, today is very different, as new needs have emerged and are asking for solutions while new challenges are ahead of us that cannot be addressed with the distortions, malfunctions and bureaucracy that characterize the existing tax system. Today, with the technology revolution and the digital transformation of the state, many of the weaknesses of the existing system can be overcome.
Therefore, for the CCCI, but also for other economic operators in the country, the reform of the tax system is a sine qua non if we want our country to have a modern, flexible and functional tax system that serves the current goals of development and transformation of Cyprus into a regional business centre. This effort is certainly favoured by the implementation of the Recovery and Resilience Plan, which contains many measures for modernization and reform of our economy.
What are the recommendations of the CCCI concerning the reform of the tax system?
The CCCI has many detailed suggestions for reforming the Cyprus tax model which certainly cannot be analyzed in a short interview. However, these suggestions include, among others, the following:
- GESY contributions should be deducted without any restriction from total income as deductible expenses.
- The GESY contribution should be paid only for dividends paid to shareholders and not on the basis of the deemed distribution.
- The deduction in contributions (Social Insurance Fund, life insurance premiums, Provident Funds, etc.) should be limited to 1/5 of the total income and not only from salaried services.
- Reintroduce the highest tax rate from 35% to 30%, as was the case until 2010.
- Reduction of defence contribution on interest on deposits to 15%.
- Extension of the provision for reduced taxation of executives of international companies.
- Abolition or at least a significant reduction of the contribution to the Social Cohesion Fund.
- Reduction of the employer's contribution to the Surplus Personnel Fund.
- Repeal of the Stamp Duty Law.
- Abolition of the fee of €350 paid by companies to the Registrar of Companies each year.
- Inclusion of incomes that are now subject to capital gains tax in income tax.
- Abolition of the measure of "protective" taxes and completion of the examination of tax cases within a shorter period of time
- Restore the pre-retention of defence to dividends to 15%.
- Reinstatement of the measure to deduct profits subject to a special defence contribution on dividends in cases of reinvestment of profits
- Reinstatement of the measure for granting accelerated depreciation for investments in immovable property used in the company as well as for the purchase of machinery and equipment
- Remove many regulations to simplify the process of taxing companies and individuals.
- Granting of reliefs and/or exemptions for investments in defined research and innovation projects.
What are the benefits of the new tax model?
If the changes proposed by the CCCI are adopted, then our tax model will better respond to the current (and future) conditions of the economy. At the same time, the benefits that will arise for businesses, the economy, but also the revenues from the profits of businesses (due to the increase of their competitiveness) will be very significant. It should also be noted that these changes can be implemented quickly and without any particular difficulties, while the total cost to the state will be at very reasonable levels, without burdening public finances.
General Secretary of SEK, Andreas Matsas: Key to growth the reduction of taxes
What reforms do you consider necessary to be incorporated into the new tax system for the benefit of workers and the economy?
Given the fact that the previous comprehensive tax reform took place in 2002 within the framework of the then necessary adaptation of Cyprus with the European Acquis, it is imperative to start a structured social dialogue with the aim, always within the framework of the economic capabilities of the country, of planning and implementing a general tax reform towards a fairer distribution of national income. At the same time, taking into account the finding of the study of the Ministry of Finance of 2015 that, "the reduction of taxes is the key to growth, SEK considers that a new dynamic of balanced development should be created, through which social justice will be promoted on the basis of the social market economy.
Among other things, the SEK recommends:
- The adoption of green taxation policies, which are fiscally neutral, transmitting revenues to the state, creating new jobs and contributing to the reduction of labour costs
- The reduction of taxation on fuel, taking into account that 2/3 of the price concerns consumption taxes and VAT. In addition, the possibility of imposing a ceiling should be considered, given the fact that on the one hand, there is no particularly competitive environment in the energy sector and on the other hand, the alternative options for transport and public transport are limited.
- The gradual reduction or even the redesign of the amount of the VAT burden.
- The reduction of the tax burden on deposit / savings returns, amounting to 30%.
- The aim to combat tax evasion, on the basis of public shaming (name and shame).
The SEK, which has proposed and strategically promotes the green tax reform, considers that neutrality in green fiscal policy is an important prerequisite in the design of a comprehensive approach that will create positive effects from carbon taxation and neutralize the short-term negative side effects that may arise in low-income households and energy-intensive industries; as in vulnerable businesses.
Energy transition policies and environmental fiscal reforms are necessary, both from an environmental and a social point of view. Undeniably, eco-tax reforms can contribute to job creation and the financing of the pension system during demographic transitions.
In conclusion, it is noted that the role of social dialogue is an integral part of the process of shaping the green tax reform, with the scope of collective bargaining extending to the impact of the green transition, on employment and wages, as well as on skills needs and on health and safety at work. Through this process, a balanced reform policy can be achieved, for the benefit of both the economy and businesses, as well as the workers, the wider society and, of course, the environment.
