Filenews 16 November 2023 - by Eleftheria Paizanou
The tax reform in Cyprus will not only focus on green taxation (although it will start in spring 2024), but will be broad and will touch the legal framework of corporate tax, income tax, capital gains tax, stamp duty, adopt other forms of taxation and at the same time contribute to the simplification of the tax system.
The aim will be, among other things, to shift the tax burden from labour to other taxes and to curb tax evasion and the shadow economy.
According to data submitted to Parliament by the Ministry of Finance, it will be a tax policy mix that takes into account efficiency, redistributive effects, tax compliance and administrative costs.
Start with fuels
The new tax regime will be based, according to the Ministry of Finance, on the triptych green and digital transitions, included in the National Recovery Plan and on tax trends in the European Union and internationally.
The new tax regime is expected to have a positive impact on strengthening the economy, employment and competitiveness, while ensuring the sustainability of public finances and a fairer distribution of national income, taking into account the framework of Cyprus' long-term growth strategy.
It is expected to start in the first quarter of 2024, with the imposition of the carbon tax, known as the green tax (initially on fuel) and the parallel implementation of compensatory measures to relieve those affected. The rate of additional taxation per type of fuel has not yet been determined, nor the type and content of the offsets. Green reform is among the prerequisites of the Recovery Fund.
What the study will look at
According to the data sent to Parliament by the Ministry of Finance, the reforms that will be examined during the University of Cyprus study on tax reform focus on the following issues:
– Promote investment and tax policies that reduce business risk and encourage funding or investment in research. According to the competent ministry, this includes the simplification of the tax system and the reduction of tax costs, which will encourage innovation, investment and competitiveness.
– Shifting part of the tax burden from labour to other forms of taxation, such as consumption, green taxation and real estate, in order to encourage employment. As stated in the data submitted to Parliament, the tax burden of labour in the EU is relatively higher compared to other developed countries.
– Green taxation, which will contribute to the achievement of environmental objectives and milestones by taxing polluting activities and encouraging green practices. According to the ministry, green taxation is inversely progressive in nature, affecting low-income strata, which is why countries are also providing compensatory measures. This is also expected in Cyprus.
– Curbing the shadow economy and curbing tax evasion. In Cyprus, according to the ministry, the shadow economy is at high levels as a percentage of GDP, so any tax reform should aim to limit it.
The Ministry of Finance points out to MPs that "while it is important to consider tax changes in isolation, a full assessment of the changes, in terms of efficiency and social fairness, which are also influenced by economic factors that extend beyond the tax regime, is possible if done comprehensively".
The study will cost one million euro
The occasion for the presentation of the information data to the Parliament on the tax reform was the request of the Ministry of Finance for the release of an envelope of €142,800, to cover part of the cost for the study conducted by the experts on the reform. The agreement between the Ministry of Finance and the University of Cyprus for the conduct of the study will be for two years, with the prospect of an extension for six months and the total cost will amount to €1.02 million. In addition, VAT will be charged on specific deliverables.
The study on tax transformation is already underway, by the Centre for Economic Research of the University of Cyprus, following instructions from the Ministry of Finance. As we write above, the first part of the study will concern the imposition of green taxation on fuels and will include proposals for compensatory measures to be given to those affected.
