Filenews 16 August 2022 - by Pambos Charalambous
The government is looking for the right balance for a tax reform, which will modernize the existing tax framework, with the aim of strengthening the competitiveness of Cyprus and serving the citizens. Insider records the positions of economic operators, who continue the dialogue with the Ministry of Finance.
In the final turn, the effort to develop a new, modern, tax framework in Cyprus enters, with the Ministry of Finance opening the window of intensifying consultations with stakeholders. The dialogue of the Ministry of Finance with all stakeholders of the economy, for the submission of suggestions on the measures that can be adopted, begun in February, with the government wanting to proceed with a fiscally neutral tax reform, which will include an increase in the corporate tax rate to 15%, which makes it difficult for the Ministry of Finance to consult with the economic operators. The ministry's planning, which in essence began in 2019, concerns the completion of the consultation, so that the proposals are put before the Council of Ministers for approval and in the Parliament for adoption and the legislations will enter into force in early 2023.
Insider records the positions and views of the Employers & Industrialists Federation (OEB), the Institute of Certified Public Accountants of Cyprus (ICPAC) and the Pancyprian Bar Association (GPP) on the upcoming tax reform.
Institute of Certified Public Accountants of Cyprus
"The Minister of Finance not only in his speech to the Parliament during the presentation of the budget for 2022, but also in many other subsequent forums, rightly in our opinion, recognizes the need for tax reform. Unfortunately, however, it appears that the intention is for some changes in tax rates and the abolition or reduction of some taxes, with the aim of neutrality in the finances of the state and not for a proper and thought-out tax reform. As ICPAC we have long been proposing to promote significant changes in our tax system, both for Cypriot taxpayers and for foreign investors. Realizing that the existing system gave everything it had to give and seeing the rapid changes in the wider economic and social environment, we submitted specific proposals for its evolution, as we call it, Tax Transformation", commented the President of ICPAC, Pieris Markou.
As he explained, ICPAC's proposals indicate the need to design a modern tax framework that is able to serve both the immediate and future needs of the country, on the basis of the strategic planning for the development of the economy by 2035, the need to simplify the tax system and the abolition of anachronistic provisions of tax legislation and the more efficient and effective operation of the Tax Department through state-of-the-art computer systems, friendly to both the officers and the taxpayer.
"In other words, we seek a comprehensive tax reform that takes into account the new economic data and tax requirements, but at the same time, promotes the development of new incentives to attract investors with an effective tax framework so that Cyprus continues to be an attractive investment destination. At the same time, we should take into account international developments concerning, primarily, direct taxation and the determination of the subject matter of taxation of multinational companies and the level of effective tax they pay, the promotion of green growth, the fight against aggressive tax planning, tax transparency and harmonisation, as well as technology and digital taxation", noted Mr Markou.
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 ensure the interests of our country and our competitive advantage, the President of ICPAC told us, stressing, at the same time, that the simple increase of the corporate tax from 12.5% to 15% with some tax reliefs is not a tax reform.
For ICPAC, as he said, Tax Transformation means a horizontal and comprehensive exercise that comes through a specialized study that includes all the potential parameters, utilizing the necessary experience and know-how from specialized consultants.
Federation of Employers and Industrialists
"Our current tax system was established in 2002 for the purpose of harmonization with the Acquis Communautaire when Cyprus accelerated the process for accession to the European Union. Despite the fact that since then this framework has been improved and has served its purposes to a significant extent, nevertheless, based on the current data, it becomes insufficient to successfully manage the challenges that Cyprus faces as an international business and investment destination. The need for a proper and studied reform of the tax framework has long been identified by OEB with the immediate priority of its modernization and simplification. The ultimate goal is to become more effective and at the same time attractive to businesses from Cyprus and abroad in order to respond to the new data of the time", pointed out on his part the Director of Business Development and Economy of OEB, Antonis Fragkoudis.
In the last two years at least and on the occasion of the G7 agreement for the adoption of a minimum corporate tax rate of 15%, the reform of the tax system and the corporate tax rate has been the subject of meetings with the participation of all the actors of the economy, including OEB for reflection and submission of suggestions to the Government, said Mr. Frangoudis, however, as he added, the period of time we are going through focusing on the developments in relation to the invasion of Ukraine, the EU sanctions on Russia which are constantly changing and whose duration and effect is still unknown and the sharp increase in inflation, any change in the country's tax data will intensify uncertainty, for business and will worsen the attractiveness of the country for foreign investors.
By extension, OEB's view is that at this juncture, the suggestion for a change in rates is premature. It is also necessary for OEB to make a global approach and rational planning of the whole effort concerning reform and not piecemeal changes in specific points. On the subject, OEB suggested that the State proceeds rapidly with the assignment of the whole project called tax reform, to a reputable house so that it can receive proper and thorough study. It goes without saying, of course, that the need for continued cooperation between the State and all the productive bodies of the economy on the subject is a sine qua non," noted Mr. Frangoudis.
Finally, as stated by OEB, any tax reform should necessarily take into account the commitments of our country both to the Recovery and Resilience Plan and the Long-Term Strategy for the Sustainable Development of the Cyprus Economy entitled "Vision 2035", which was prepared by the Economy and Competitiveness Council.
"OEB will continue to carefully monitor developments around the international tax and regulatory environment as it is shaping up. Through constructive dialogue we will be able to contribute as a representative of the business world to the evolution of our tax system so as to achieve the best result and ensure the sustainability and competitiveness of the country", the Director of Business Development and Economy of OEB told us in conclusion.
Cyprus Bar Association
"The tax reform is imperative so that our tax framework is modernized and in line with today's data, taking into account the huge changes that have occurred, especially in the last five years, through the recommendations of the OECD (BEPS Project) and the EU DIRECTIVES ATAD 1.2, etc.). The numerous amendments made to the tax law in recent years as a result of these international changes have made it complex and dysfunctional. Basically, since 1941, when the law on Income Tax was introduced, all we are doing is "patsias", is the position expressed by the President of the Pancyprian Bar Association, Christos Clerides. According to him, the unprecedented global tax changes impose a holistic reform and not some individual modifications such as the increase in the tax rate with some compensatory measures and another or two other changes announced by the government. "In order for a proper reform to take place, we must follow the successful model followed by developed countries where they appoint an independent firm (usually a non-profit organization such as a university centre) that has practical experience in reforms of tax systems of other states. This house to study the existing law and taking into account the global tax changes and the economic model we want to implement to prepare a draft that will be put to public consultation before it is submitted to the Parliament for approval. On the other hand, let us not forget that our law comes from England. English hypotheses are used to better interpret it. There is a common law framework. If something radically new changes and becomes, then it will take a long time for there to be stability and security", Mr. Clerides told us.
TAX RATE
Regarding whether the increase of the Tax Rate to 15% in legal entities is desirable, Mr. Clerides explained that the government seeks to comply with the commitments arising from the Recovery and Resilience Plan (RDP) of the Republic. "But in the SDS there is as far as I know no commitment to increase the tax rate," he noted. Regarding international developments and specifically the increase of the minimum tax rate to 15% promoted by the OECD and the EU, it is worth mentioning that the global tax rate will be imposed only on multinational groups of companies (multinationals MNEs) with a global consolidated net turnover exceeding €750 million, he added. "Therefore, the first question that arises is why to proceed with a total increase in the tax rate and why not limit this increase (of the tax rate to 15%) only to these MNEs (as Ireland and other countries have announced). It should be emphasized that the OECD is talking about an effective 15% minimum tax therefore and if Cyprus increases its tax rate but continues to give exemptions to incomes, it will still not achieve the target", he added.
With regard to the argument that the increase in corporate tax will help to improve the image of Cyprus, Mr. Clerides put forward the view that, firstly, there have been no studies on how much the 12.5% tax affects Cyprus' reputation and whether the 15% tax will help it and secondly, we know that countries such as Luxembourg have high tax rates, but because they have reliefs then the effective tax that someone pays is very low. "If this is what Cyprus wants to do, namely to have a high tax rate with reliefs, the image of Cyprus will not improve since in the final analysis it is the effective tax that matters", he pointed out.
SUGGESTION
The recommendation of the Pancyprian Bar Association, as quoted to us by Mr. Clerides, states the following: Firstly, "any increase in the rate alone we consider that it is not appropriate without primarily making an appropriate thorough study. The government recommends that the defence contribution will be reduced at the same time so as not to affect households. Yes, but this is also how foreign customers are affected. So it's not a simple matter."
Secondly, "the tax rate must also be in line with international developments, with what other countries are doing, but also with the model that we want to promote as an economic centre for the coming years".
Thirdly, "raising the tax rate to 15% can also affect the headquartering that the government has been promoting for a few years now. Therefore, the government should proceed with an impact assessment to see the impact of the imposition of the global tax rate at 15% in Cyprus. That is, how many companies (either parent companies or decision-makers) there are in Cyprus that are affected by the imposition of the global tax rate and whether Cyprus can be attractive in case of a change or not of a change in the tax rate". Fourth, "the increase in corporate tax may be contrary to the trends followed in other countries. In recent years, many countries have been gradually reducing the corporate tax every year due to the competition that exists between countries to attract investment. This corporate tax reduction will continue. For example, Austria and France have announced that the corporate income tax rate will be reduced from 2024."
From Insider August magazine
