Tax Experts Call for Action

Global events delayed the state’s plans for tax reform last year but here, sector specialists outline the changes that, in their view, should be prioritized in 2023. By Athena Yiazou

Two leading local tax experts have shared their thoughts on the Government’s reform of Cyprus’ tax regime, amid hopes that the highly anticipated changes will be implemented this year. Philippos Raptopoulos spoke to GOLD in his capacity as Vice Chair of the Tax Policy Committee of the Institute of Certified Public Accountants of Cyprus (ICPAC) while Christos S. Christodoulou commented within his role as Chair of ICPAC’s VAT Committee. Both called for immediate action on long-overdue tax reform.
Raptopoulos noted that, “Due to the unexpected impact of the war, we are facing delays in carrying out the expected tax reform,” while acknowledging that the Government had nonetheless managed to enact several well-targeted amendments, primarily in relation to personal taxation.
“In our opinion, a holistic tax reform should be structured for subsequent political implementation, preferably by an international institution specializing in tax jurisdictions design,” he said. “Cyprus cannot simply introduce any type of tax reform without taking into consideration recent and upcoming global tax developments. We believe that the Government should opt for the support of both international and local experts and consider EU facilitation to further strengthen the tax regime,” Raptopoulos added.
He underlined that reform was both crucial and urgent, “Tax reform in 2023 is a must. Inflation, socioeconomic needs and international developments demand immediate tax reform this year.”
Raptopoulos remarked that the green transition, covered by the EU’s Recovery and Resilience Facility (RRF), provides for green taxation enactment which will be one of the most significant changes that the tax system will undergo. “It is of paramount importance that tax neutrality is retained while adopting green reform and sustainable environmental actions. As such, countermeasures and reliefs should be planned and executed along with green taxation implementation,” he suggested.
Christos S. Christodoulou agreed that an all-embracing reform of Cyprus’ tax regime was warranted.
“A holistic tax reform is required, in accordance with the geopolitical and economic conditions of the new era. And it should include simplifying the tax system and the practices followed by the Tax Department and enhance tax awareness by providing incentives and benefits to consistent and compliant taxpayers,” he said.
Raptopoulos, meanwhile, also underlined the importance of the country’s tax regime remaining competitive. “Apart from efficient tax rates and allowances, it is crucial that administrative burdens are reduced,” he said, adding, “From our perspective, the simplification and consolidation of the Law on the collection and assessment of taxes with multiple direct tax legislations needs to be carried out. Equally, administrative processes must become speedier, more flexible and user-friendly for taxpayers – both legal and natural persons – so that Cyprus becomes a more attractive location for business and new investment.”
On whether the new government to be formed following February’s Presidential elections should, while considering wider tax reform, keep in mind current Finance Minister Constantinos Petrides’ suggestion that corporate tax be increased to 15%, Raptopoulos suggested that the increase should be applicable only for companies having a turnover in excess of €750 million. “The tax rate of 15% should be revisited by the new government in the context of a holistic tax reform, also assessing and evaluating other taxes currently in place along with those that will need to be implemented in the next couple of years due to global and European developments,” he elaborated.
Also looking to the future, Christodoulou had some recommendations and advice for the next government, more specifically regarding VAT and the way the Tax Department operates.
“VAT is not a business tax but a consumer tax. Businesses are required to perform the duties of a tax official, to study and apply a sometimes quite complex law, to collect and manage VAT and to pay it on time. The failure to exercise good governance and leniency, taking the above into account when carrying out a VAT examination by the Tax Officers and the imposition of tax and fines on businesses, creating costs for them – and I am clearly not referring to cases of tax evasion – should be reexamined,” he suggested.
Instead, Christodoulou proposed that incentives and privileges should be given to businesses that are punctual and compliant and help the economy by exercising their function in the imposition and collection of VAT, so that the collection capacity of the state increases. “The Tax Department should be modernized and use its resources based on correct risk assessment parameters, targeting the specialized audits of tax-evading businesses and, at the same time, serve businesses with their tax requests when they are compliant with the requirements of the law,” he added.
Christodoulou also revealed that 2022 ended with several important issues left pending in relation to VAT.
“The most urgent issue to be resolved is the decree of the Council of Ministers dated November 11, 2022 which amends the 8th Schedule of the VAT Law and completely changes the tax treatment of used buildings,” Christodoulou said. He explained that now, in order for a building to be considered ‘used’, a period of five years must have passed since its completion, of which two years should have been under a systematic use of that building.
“This decree was issued instead of the preparation of a bill through consultation with ICPAC and the involved bodies and its discussion in the Finance Committee of the Parliament, as was initially the decision of the Council of Ministers on August 31, 2022, and it was put into immediate effect from the date of its issuance, without – unfortunately – any transitional provisions to give time to prepare and readjust the arrangements that were in the place on November 11, 2022 or had been arranged before the publication of the decree in question,” he noted.
He said that ICPAC’s VAT Committee had reacted immediately and requested a meeting with the Tax Commissioner, even though they were told the matter was being handled by the Ministry of Finance and not the Tax Department. “At the meeting, we explained the problems caused by the decree in question and submitted proposals for its amendment or its withdrawal and replacement by a proposed bill, as should have been the correct procedure from the beginning. As far as we know, our proposals have been forwarded to the Ministry of Finance and are being considered,” he went on to say.
Another urgent matter, according to Christodoulou, concerns the imposition of the reduced VAT rate of 5% on the main residence. “Our Committee monitors the debates that take place in the House of Representatives but, because it is a purely political issue, since it concerns the social policy that the state wants to follow, we do not intervene in those debates,” he explained, continuing, “We call on the Parliament to immediately come to an agreement with the EU so that the parameters of these transactions are clear to traders and consumers alike.”
ICPAC’s VAT Committee Chairman also noted that debate on the evolution of the Tax Tribunal was also pending, since the Ministry of Finance had some months ago submitted to the Parliamentary Finance Committee a bill which provided for the removal of the competences of the Tax Tribunal for the examination of hierarchical appeals related to VAT.
According to Christodoulou, “The VAT Committee of ICPAC played a leading role in the expansion of the competences of the Tax Tribunal to cover VAT matters and, for some years now, hierarchical VAT appeals to the Tax Tribunal have concerned the majority of cases. Several months ago, our Committee submitted proposals for the upgrading of the Tax Tribunal and its evolution into a modern, autonomous, Tax ‘Court’ to strengthen Tax Justice in Cyprus and we are clearly opposed to the proposals submitted by the Ministry of Finance.” He went on to say that, “Fortunately, in their wisdom, the members of the Parliamentary Finance Committee postponed the discussion of the bill in question since, as they discovered, there had been no prior consultation with ICPAC and/or the Tax Tribunal itself.”
Christodoulou also referred what he described as the Tax Department’s “ambitious project” regarding the new computerized system, which is expected to be gradually implemented from the beginning of 2023, starting with VAT issues. “We expect that, through this new system, the productivity of the Tax Department will increase and better serve the taxpayer and the professional accountants who handle tax matters, and that the procedural matters such as VAT refunds to businesses will be resolved,” he said.
Speaking to GOLD, Christodoulou also revealed which topics had dominated discussions between ICPAC’s VAT Committee and the Ministry of Finance and Tax Department in 2022.
He noted that ICPAC, mainly through its tax committees, such as the VAT Committee, constituted the main bridge of communication and consultation between the private sector – especially the professionals who deal with tax matters – and the State and, more particularly, the Ministry of Finance and the Tax Department. “As the pre-eminent legally assigned institution and organisation for the profession, ICPAC makes systematic, if not daily, interventions on matters brought to consultation but also ex officio on ‘frontline’ matters as we call them, often quietly solving various everyday problems and/or proposals that are placed on the negotiating table,” he explained.
Christodoulou said that, within this framework, in 2022 his committee had completed its cycle of contacts with the District VAT Offices of the Tax Department, where the particularities of each District Office and their different approaches to procedural issues were examined. “All our findings were brought before the Tax Commissioner in an effort to create a unified approach to these matters,” he noted.
Christodoulou also underlined that the Committee had participated in the planning of the new VAT tax return which is expected to be implemented by the new computerized system of the Tax Department, providing more information to the Department so that taxpayer transactions can be carried out better and faster and, at the same time, enabling the Tax Department to conduct more targeted tax audits based on the risk index of each business.
“Our Committee attended meetings of the House Finance Committee and the House Trade Committee where it provided opinions and suggestions on a number of proposed bills and/or issues registered by Members of the House for discussion,” Christodoulou said, adding, “Likewise, we had a number of meetings with the Tax Commissioner and his officials as well as with the Director General and other officials of the Ministry of Finance to discuss various issues.” By way of example, he mentioned that, through the intervention of his Committee, a number of issues were resolved, including the possible compression of VAT ‘staggers’ into a single ‘stagger’, the imposition of VAT on the disposal of shares of special purpose vehicles (SPV) with real estate, and the change in the way of handling the transfer of an operating economic unit.
Both experts will be keeping a close eye on tax reform developments over the coming year.