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Insults fly over who’s to blame for VAT on homes debacle

The government and the opposition traded barbs on Monday over whose fault it is that Cyprus has come under the European Commission’s scrutiny over its VAT policy on primary residences.

In parliament, Finance Minister Constantinos Petrides harangued the opposition parties, blaming them for ‘messing up’ the law governing the levying of lower VAT rate but now having the gall to point the finger at the government.

And he warned MPs that if they now tinker with a new bill brought by the government to fix the situation, the EU could take measures against Cyprus, including imposing a fine.

“You accuse the executive branch for a law which you yourselves voted unanimously and which you then reported to the European Union…and here we are now trying to fix the unfixable,” he told MPs.

The matter relates to a bill the government tabled earlier this month amending the law governing VAT. It provides for levying 5 per cent VAT only on the first 140 square metres of a primary residence – that is, on the buildable area – with a maximum area of 200 square metres.

Currently the law provides for applying a lower rate of VAT of 5 per cent (the norm is 19 per cent) for the first 200 square meters of primary residences, without any qualifications. This lower rate is applied irrespective of the income, property or economic conditions of the person or the family residing in the house. Moreover, the total surface area of the home bears no relevance.

The current law took effect in 2016 with the passage of a legislative proposal brought by the parties.

But in July last year the European Commission said it was taking measures against Cyprus because of its failure to comply with EU rules for VAT, in relation to homes.

The Commission sent a letter of warning to Cyprus, asking for the government’s position. If the reply is not to the Commission’s satisfaction, it may proceed with a reasoned opinion and even take action before the Luxembourg court.

The allegation is that Cyprus did not properly apply VAT rules for homes purchased or built here, and that effectively the Republic is not contributing its fair share of taxes to the bloc.

VAT directive 2017/541 allows member states to apply a lower rate for first homes as part of social policy. But the wide interpretation of the Cyprus provision apparently exceeds the social policy aim stated in the directive, for such an exemption. It’s also understood that citizenship recipients of the ‘golden passports’ scheme benefited from the lower VAT rate.

Petrides explained where the 140 square metres benchmark for social policy in housing comes from – Eurostat figures from 2011 showing that the average area of residences in Cyprus was 141 square metres.

Going above that benchmark now in terms of applying a lower VAT – as opposition parties want – would inevitably complicate matters, he cautioned.

Backing up the finance minister, MP Harris Georgiades of the ruling Disy party said that up until 2020 the European Commission had made no noises about the VAT issue.

He noted that after the government pulled the plug on the controversial citizenship-by-investment scheme in early November 2020, the Audit Office came out with an opinion that the VAT-related legislation passed by parliament was incompatible with EU law.

On the back of this, on November 11, 2020 Costas Mavrides – a EuroMP for the Diko party – tabled a question to the European Commission, inquiring as to whether the Audit Office was correct in its assessment.

According to Georgiades, at the time the Commission replied it did not see a violation of EU law.

The Disy deputy went on to say that on April 9, 2021 the auditor-general’s office again reported that Cyprus ran afoul of the relevant EU directive – and on July 15 of the same year the European Commission sent the letter of warning to Cyprus.

“To those who today express their angst, warning that any modification may cause great upset, let us be clear who caused this upset in the first place,” he remarked.

But opposition MPs insisted it was the government who mishandled the issue of the lower VAT rate, with Akel dubbing this “a monument to sloppiness, incompetence and expediency.”

Socialists Edek said they propose bringing back the old system dating from 2011 – a lower tax rate for 200 square metres of buildable area, with the maximum area of the property being 275 square metres.

 

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