NOBODY expected auditors, lawyers and business organisations to embrace finance minister Harris Georgiades’ suggestion for an increase of corporate tax from 12.5% to 15%. Low corporate tax, which was 10% before the economic crisis and 4% for foreign businesses before entry to the EU, was arguably the main incentive for foreign companies setting up in Cyprus. For companies making good profits, relocation costs could be covered from the first tax year’s additional profit earnings, which made the move a no-brainer.
The finance ministry floated the idea of raising corporate tax on Tuesday and within 24 hours representatives of the business community met at the Cyprus Chamber of Commerce and unanimously rejected it. Not only this, but in a statement issued by all participants they demanded “an immediate end to any discussion regarding the particular issue and the express revocation of the ministry’s intention.”
This demand was understandable to an extent because uncertainty over the tax regime would be a big disincentive for companies considering moving here. Businesses would take into consideration, before moving, whether there is a tendency for the government to raise corporate tax and it would be difficult for Cyprus to claim there was no such prospect after raising it twice in less than six years (assuming it the finance ministry implemented its plan). What guarantee was there that in three years it would not be raised again?
Georgiades did not float the idea on a whim or because he wanted to keep out foreign businesses, but he was looking to the future. Raising corporate tax was part of the government’s drive to clean up the image of Cyprus which had been viewed as a money laundering tax haven. Internationally-sanctioned anti-money-laundering (AML) measures have been in force for several years now and are strictly implemented, so the next step, logically, would be to discard the tax haven label.
Cyprus, like Ireland, which has the same corporate tax, has been under pressure from big EU countries to increase it, but according to Georgiades there would be other benefits from such a move. Low corporate tax cancelled or restricted double taxation treaties “which are one of the most important tools for growth and the preservation of the services sector,” said Georgiades, adding that we needed to “look ahead and not just at today.” While we should protect our competitive advantage, he believed that “we should also try to create conditions for sustainable growth of the services sector.”
The minister has a point, but he will need a lot more work to persuade the business community to agree to his plan and success is far from guaranteed.