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Cyprus needs to get ready for the post-low tax economy (Updated)

By Stelios Orphanides

As pressure rises against low tax jurisdictions, Cyprus can no longer rely on its tax regime to attract foreign investment and keep its economy growing, and should therefore prepare for the post-tax harmonisation era, according to economist Marios Zachariades.

“There is increasing pressure against countries with low tax rates, which is difficult for us to avoid,” said Zachariades, who teaches economics at the University of Cyprus and is member of the fiscal council, a state body tasked with monitoring budget planning and implementation. “The US and the European Union are going after low tax regimes and as a result it might be more difficult for a country to differentiate its tax rates. If it comes to a fiscal union, EU leaders will make sure there won’t be different tax rates in the EU”.

Zachariades said the existing pressure may indicate that the current economic model based on low tax regime may no longer be sustainable. “We need to plan ahead to avoid a rude awakening,” he said, adding that authorities also need to look into the possible impact of a change in rates on the budget and the economy.

In 2013, Cyprus increased its corporate tax rate from 10 per cent to 12.5 per cent mainly, on pressure from European creditors who cited unfair tax competition. The rate is still one of the lowest in the EU and is considered as one of the factors that attract foreign investment to Cyprus.

According to the International Consortium of Investigative Journalism, Mossack Fonseca, the Panamanian law firm which helped companies, heads of government, criminals and celebrities set up offshore companies, launder money, and evade taxes, also operated in Cyprus. Mossack Fonseca clients with operations in Cyprus included friends of Russian president Vladimir Putin and Ukrainian president Petro Poroshenko. The Panamanian company denied any wrongdoing.

The consortium listed Cyprus among the 21 countries described as “tax havens used by Mossack Fonseca.” In 2013, again following pressure from international creditors,Cyprus introduced stricter anti-money laundering laws.

Zachariades said Cyprus needs to strictly enforce its laws to restore its credibility and reputation.

“You need to be able to say that you are not worse than others and you can only say this with the implementation” of laws, he concluded.

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