Filenews 25 June 2024 - by Angelos Angelodimou
The process of preparing the study on which the long-awaited tax reform will be based is in full swing. As it is known, the Ministry of Finance has commissioned the Centre for Economic Research of the University of Cyprus to prepare the study, which is currently in the process of examining the positions of the social institutions with which it had contacts.
Based on the data so far, the JIT study is expected to take a more concrete form in late summer or September, while in its final stage it is expected to reach early 2025. However, green taxation (mainly on fuels) is expected to be introduced beforehand, while compensatory measures will be announced by the Ministry of Finance.
MINISTRY OF FINANCE
We asked the Ministry of Finance to list the main objectives of the tax reform, when it is expected to be completed and in what contexts it will finally move. In a written statement to Insider, the Ministry of Finance states:
Key objectives
The main objectives of the tax reform are to increase employment and competitiveness of the Cypriot economy, within the framework of international and European standards, to promote innovation and the green transition with evolutionary perspectives, as well as to distribute the tax burden fairly, maintaining the sustainability of public finances, through a simplified tax system that reduces the administrative burden and burden on taxpayers.
An important pillar of this project will be the modernization of the legislative framework, in order to contribute positively to the overall effort for the implementation and utilization of technology, as befits a modern State and a modern tax service.
Completion of the project
The beginning of the effort for holistic tax reform has begun with the assignment to the Centre for Economic Research of the University of Cyprus of the preparation of a comprehensive study on the evolution of the tax system through Research Cooperation. The entire work is expected to be completed by the end of the first half of 2025, with the submission to the House of Representatives of the new proposed modern legislative framework.
Where will the Reform ultimately go?
At this stage, some of the key stages of tax reform have been completed, such as the existing tax system, the good practices of other states. Basic tax principles have been examined, recording the pros and cons of each principle and policy, in order to draw qualitative conclusions. Finally, tax systems of countries that have carried out similar tax reform and good practices in other countries in recent years have been examined.
This analysis will culminate, with the necessary public consultation taking place, in recommendations, so that the necessary political decisions can be taken.
University of Cyprus VIU
Having completed a cycle of more than 30 bilateral meetings with social stakeholders, the Centre for Economic Research of the University of Cyprus is proceeding with the process of completing the study on tax reform.
Speaking to Insider, economist and special scientist of the NOC, George Syrihas, said that "at the moment the Center is processing the written positions submitted by the institutions and after they are studied, our positions and our own findings will be recorded and we will come back for a new consultation," he noted.
As Mr. Syrihas said, a study on existing taxation systems is currently underway and the first assessments are being made in relation to possible changes that could be made to our tax system. At the same time, efforts are underway to cost the measures, both in terms of revenues and in relation to compensatory measures.
All this is expected to take a more concrete form in late summer or September. That is, the estimated changes we will propose and their cost, Syrihas said. Then, he added, we will come back for a new round of consultations with social actors, in order to reach more specific positions.
According to calculations so far, early 2025 the study will be in its final stage. Previously, i.e. towards the end of this year, both green taxation and compensatory measures are expected to be announced by the Ministry of Finance.
Specifically, as Mr. Syrihas said, the compensatory payments are expected to be announced in September, perhaps earlier, while green taxation is calculated towards the end of the year.
TEC
In a written statement to Insider, SEK General Secretary Andreas Matsas warns that the green of tax reform is dangerously in danger of turning red. In particular, when SEK highlighted the need and made recommendations for the promotion of comprehensive and green tax reform in order to ensure a smooth transition to green growth, SEK saw the risks, which unfortunately are confirmed today.
The delay in the promotion of the reform and compensatory measures by the previous Government, in conjunction with the wrong planning of the current one, lead to a green tax raid, which is estimated to bring revenues to the state, in the three-year period 2025-2027 amounting to € 397 million. without a clear picture of compensatory measures for workers, society and entrepreneurship.
The inclusion of green growth in the Recovery and Resilience Plan is a sound strategic choice, the faithful implementation of which, however, now sets even tighter timelines for the process of comprehensive and green tax reform.
The International Monetary Fund, in its May 2024 Country Report - Cyprus, also clearly indicated the delay in the implementation of ambitious targets for mitigating the problem linked to climate change and the green transition.
Unfortunately, this delay leads to the demonization of green growth and prescribes an incomplete course of etherobamonism. Even now, the SEK is sounding the alarm to promote a comprehensive and green tax reform, through which labour costs will be reduced and pollution will be taxed, so as to achieve environmental protection policy, climate change management and the promotion of the circular economy, taking into account the composition of the family.
The lack of a comprehensive political framework and dialogue, activating the Consultative Economic Committee, so as to enable the transformation to be linked to other policies and reforms that involve and affect the participating ministries (Labor and Energy), creates even more gaps and problems.
Clearly, comprehensive tax reform should be fiscally neutral, but with particular emphasis on the social dimension. The new tax policy should include the smooth implementation of the Recovery and Resilience Plan, highlighting the EU's strategic objective to link environmental, social and governance (ESG) parameters in order to ensure a smooth transition to a climate-neutral economy.
SEK clarifies, recalls and warns that social dialogue is an integral part of the process of designing and implementing the comprehensive and green tax reform. The process followed and the delay observed threatens the transformation of green into a red dead-end course, with clear negative consequences for economic growth, the labour market, society as a whole and the path of achieving social cohesion.
PEO
PEO presented a comprehensive proposal to the Center for Economic Research in relation to the Integrated Tax Transformation (OFM), recording in a memorandum its positions and views. After noting that the OFM is being promoted 22 years after the last tax reform, he points out that PEO considers it necessary for the OFM to focus on the creation of a socially fair tax system. To this end, the reform should focus on six pillars:
1. Progressive taxation of incomes with a large tax escalation as incomes increase and with a corresponding increased taxation of business profits.
2. Reduction of the share of the horizontal indirect tax burden in the total tax burden such as consumption taxation and VAT.
3. Introduction/extension of taxation of wealth and large real estate.
4. Combating tax evasion and avoidance and recovering tax debts to the state.
5. Design tax incentives with a holistic approach.
6. Link tax reform to social policy to support vulnerable and low-income households.
PEO then sets out some of its individual positions and proposals. In the category Direct taxation measures, PEO proposes, among other things, the increase of tax-free personal income, since, as it says, 16 years have passed since the last revision.
Then there are suggestions in relation to the reduction of the indirect tax burden, where the proposal to reduce the general VAT rate stands out. Following are recommendations on wealth / property taxation, combating tax evasion and tax avoidance and recovery of tax debts to the state.
In addition, there are suggestions for designing tax incentives with a holistic approach and linking tax reform with social policy. Finally, there is no shortage of PEO's positions on so-called green taxes. PEO argues, among other things, that the government's choice to accelerate the imposition of green taxes outside the framework of the OFM is misguided and counterproductive. The government, he notes, was not convinced that it exhausted every available possibility to secure the necessary extension so that the implementation of the measures could take place at a more consumer-friendly time or at least to assist with the OFM.
PASYDY
PASYDY, after pointing out that it has submitted since 16/03/2022, in a joint document with the other state organizations POED, OELMEK, OLTEK and CAA to the Ministry of Finance, its positions and views on tax reform, stresses that the last amendment to income tax for individuals was made on 1.1.2008.
Since then, 16 years have passed and not only has there been no relief, but, on the contrary, an additional burden has been imposed on taxpayers with the memorandum measure of introducing an additional tax category at a rate of 35% of incomes over €60,000 as of 1.1.2011, PASYDY reports.
PASYDY believes that the time has come for the middle class to receive the support it deserves and deserves, so that the above issue can be addressed immediately and tax breaks will be given to taxpayers who are called upon to bear unbearable burdens while tax evasion, undeclared work and the shadow economy continue to flourish.
Below is a relevant table, with the existing tax scales as well as the new ones proposed by PASYDY:
* The 35% tax category should be abolished as it was unilaterally introduced as a memorandum measure in 2011.
PASYDY also recommends that from now on the automatic revision of the scales, based on inflation, be instituted every four years.
ADDITIONAL MEASURES BY PASYDY
In addition to the adjustment of tax brackets/rates, relevant additional measures that need to be regulated, according to PASYDY, are the following:
- The fight against tax evasion, income declaration and the "black" economy. Indicatively, the number of self-employed persons declaring income taxed at a rate of 30% or more is only in three digits.
- The restoration of the defensive levy rate on credit interest to 10% in force in 2011, from 30% in recent years. To this end, a Bill was prepared by the Ministry of Finance to reduce the percentage to only 17%, which was approved by Parliament in November 2023.
- The automatic review, based on inflation every four years, of the income criteria for the payment of social benefits, such as child benefit and student grant, a position that we have submitted on 29/02/2024 to the Head of the Welfare Benefits Administration Service in the context of the public consultation regarding the amendment of the Child Benefit Benefit Law.
- The exemption from Income Tax of any Additional Payments that patients are required to make within the framework of the GHS.
Alternatively to the above suggestions, we wish to propose to examine the scenario of adopting a new taxation model that was mentioned before the elections, which will calculate income tax on the basis of total mixed family income, taking into account the composition of the family (number of dependent children, single parent, etc.), he concludes.
CCCI
The issue of tax reform and the modernization of taxation is a constant priority for the CCCI, the Chamber notes in a memorandum. The new tax strategy must include the following elements:
Simplifying the tax system: Cutting red tape and simplifying tax procedures will make the system more understandable and flexible.
Fairer taxation: Tax policies must be fair and not overburden either businesses or individuals.
Incentives for the development of new sectors: Special tax incentives can encourage the development of new sectors of economic activity, such as research, technology, innovation and sustainable development. We also propose to provide tax incentives with emphasis on the green economy and provide tax credits/discounts for investments in the circular economy and reduce Scope 1, 2 and 3 emissions.
Reducing the tax burden: The strategy should aim to reduce the tax burden in order to enhance the competitiveness of the economy.
Maintaining a competitive tax rate: The effective tax rate must remain competitive compared to other countries in order to maintain the country's attractiveness for investment and doing business.
In its recommendations for measures related to Personal Taxation, the CCCI proposes, inter alia:
• Reduction of the defense levy on interest on deposits to 10%.
• Adjust upwards the tax-free amount to take into account the increase in the cost of living as it has developed over the last 20 years. Along with the above, it is proposed to revise the range of existing tax brackets for individuals (€0 – €19.500: 0%, €19.501 – €28.000: 20%, €28.001 – €36.300: 25%, €36.301 – €60.000: 30%, €60.001+: 35%).
Among the proposals for measures related to the Taxation of Legal Entities (Corporate Tax / Defense Contribution for Companies): the CCCI's proposal for:
• Complete abolition of the provision for a Deemed Dividend Distribution, for the purposes of the special defence contribution (calculated and actual) to dividends of Cypriot Companies, as it creates an excessive burden on companies that considered that there was no possibility of paying a dividend, either due to reinvestment or due to the use of profits for payment of debt obligations. The above taxation applies only to Cypriot companies whose shareholders are tax residents of Cyprus.
In case the shareholders of the company are not tax residents of Cyprus then the above legislation does not apply. This creates unfair competition between Cypriot companies with shareholders from Cyprus and Cyprus companies where their shareholders are not tax residents of Cyprus or are located in Cyprus under the Non-domiciled regime.
As a compensatory measure, the CCCI says, the Corporate Tax could be increased to 15%, so that as Cyprus we can be in full compliance with the European directives for a single tax rate in the EU.
OEB
In view of the upcoming tax reform, we asked the General Manager of OEB, Michalis Antoniou, to codify the basic positions and proposals of the Federation on this issue. In a written statement to Insider, Mr. Antoniou notes:
Tax transformation should be part of the broader modern economic model that we are trying to build through reforms and institutional changes. Therefore, the new tax system that will emerge should be modern, simple to design, easy to implement, enhance the competitiveness of Cyprus and contribute to its establishment as an international business center.
For the Cyprus Employers and Industrialists Federation (OEB) it is extremely important that through tax reform all necessary measures are taken to drastically reduce the shadow economy, which leads to the unfair distribution of tax burdens and distortions not only of citizens' consumer behaviour but also of the conditions of competition of businesses that act perfectly legally against those that evade taxes.
Particular consideration should be given to the introduction of regulations that will ensure that Cypriot companies receive treatment equal to that of foreign companies, so that there is no discrimination between them and healthy competition operates effectively and fairly, at the level of both the company and the investor.
This will be helped either by the complete abolition or drastic reduction of the deemed dividend distribution levy that is now imposed on 70% of profits for shareholders who are tax residents of Cyprus. As far as the defence levy on the actual distribution of dividends is concerned, it is our suggestion that it be reduced from the current 17%.
Furthermore, we call for the abolition of the employer's contribution to the Social Cohesion Fund of 2% on the wage bill and a reduction of the employers' contribution to the Redundancy Fund from 1.2% to 0.6%.
A series of specific, elaborated and realistic proposals for compensatory measures in favour of businesses to eliminate the impact of green taxation has been prepared and will be submitted to the President of the Republic by OEB within days.
