‘No turning back’ on tax reform

‘There is no turning back’ but no changes likely next year

The carbon tax, increased taxation on fossil fuels and ‘green rates’ which the finance minister warned of when presenting the 2022 state budget to the legislature this week, are very unlikely to be introduced before 2023, a ministry source has said.

“We are still at the initial stages of planning, we are looking at what other countries are doing, and we hope to have our proposals ready by the middle of next year,” a finance ministry source told the Sunday Mail.

He added there would also have to be consultations with stakeholders before anything is finalised and submitted for approval.

The same applies to other tax measures announced in Finance Minister Constantinos Petrides’ budget speech on Thursday, including the increase in corporate tax from 12.5 per cent to 15 per cent, which is in line with the international agreement for the imposition of a minimum, world corporate tax rate of 15 per cent. A directive from the European Commission is expected soon.

Petrides said it was an opportunity to improve the national taxation framework. “After about 20 years, tax reform is a necessity,” he told MPs.

He added that he did not expect this increase to “substantially affect foreign investments in Cyprus,”

Tax issues would be examined in a “holistic way” as part of the broad reform, he said. Apart from the increase in corporate tax, the government is also to look at the reduction or abolition of the 17.5 per cent defence withholding tax on dividends, the 30 per cent tax on interest earnings and the €350 annual levy on companies.

“As long as the tax reform is on a zero-sum basis, we are all for it,” said the President of the Cyprus Chamber of Commerce (Keve) Christodoulos Angastiniotis, who considered the increase in the corporate tax inevitable given the international agreement, but felt this would be offset by the cuts in other taxes.

Keve had no objection to the carbon tax and green rates, Angastiniotis said. “Keve is fully committed to the green deal and will soon be announcing its own cooperation agreements on green development. There is no turning back.”

The government will also be able to readjust VAT rates as part of the tax reform. The EU finance ministers (ECOFIN) recently agreed on a proposal for a Council directive to this effect.

The directive, which is expected to be approved in March, would give flexibility to each member-state to change VAT rates, especially for products and services related to public health as well as the green and digital transition.

“The tax reform measures are being studied and are likely to come into force in 2023,” said the finance ministry source. “We have to carry out consultations with the stakeholders before these are finalised, and this may take some time.”

Petrides said the reform would be “fiscally neutral”, that is, it would not affect state finances, either positively or negatively and would be finalised within 2022.

“The aim of the reform is strengthening of the competitiveness of the Cyprus economy and of Cyprus as a business centre, the reduction of taxation unfairness, the boosting of transparency, the simplification of the taxation system and the decrease of the administrative burden,” the minister said.

The reduction of the administrative burden would be achieved through the digital transition, the finance ministry source said, but added a note of caution.

“This will require some time to complete but when it is completed, not only would the administrative cost of businesses be reduced, but government services would be obliged to reduce their charges as less time and effort would be required for processing applications and documentation.”