Tax Reform Experts weigh in on upcoming changes to Cyprus’ taxation system

By Athena Yiazou

International companies often cite Cyprus’ competitive taxation system as a significant reason for their setting up shop on the island but some two decades after the most recent significant tax reforms, change is afoot once more. On presenting the 2022 Budget to the House of Representatives last month, Finance Minister Constantinos Petrides announced that the present system would be reformed this year with the objectives of reducing tax inequality, enhancing transparency, simplifying the tax system and reducing the administrative compliance burden.

Speaking exclusively to GOLD, taxation experts have welcomed the move, predicting a positive impact on the economy, if the reform is carried out properly, even as the Organisation for Economic Co-operation and Development (OECD) announced a major international change, making multinational enterprises subject to a minimum15% corporate tax rate from 2023.

Philippos Raptopoulos, Head of Tax and Legal Services at EY Cyprus described the reform as “a move in the right direction.”

“Cyprus implemented tax reform 20 years ago prior to joining the EU in order to harmonise our tax law with EU legislation. Today it is widely agreed that Cyprus has to update its tax system to bring it in line with OECD and EU regulations while retaining its competitiveness,” he continued.

Raptopoulos noted that it was for this reason that tax reform should not only focus on maintaining Cyprus’ competitiveness in the international environment but also “on correcting some inefficiencies of the existing tax system, which affect primarily local businesspeople.”

“In our view, tax reform, introducing new tax legislation and amending existing legislation should also focus on removing current administrative challenges and inefficiencies which taxpayers are faced with when interacting with the tax authorities,” he said.

The EY Cyprus expert also noted that, “Over the years, we have come to believe that the ability of Cyprus to attract foreign investment is due exclusively to its competitive tax system. This is a fallacy. Clearly, an attractive tax environment remains a key factor when considering where to invest. However, while tax remains an important factor, it is, today, only one of many considerations, and by no means the most important one.”

He said that, as indicated by the EY Attractiveness Survey Cyprus, investment decisions in the coming years will be driven by a number of mega trends set in motion by the COVID-19 pandemic.

Raptopoulos continued, “Such trends include, inter alia, an acceleration of technology adoption and a renewed focus on sustainability. Thus, the ability of Cyprus to attract FDI will not only depend on its tax framework, but should encompass a broader agenda as to what investors consider critical to their decision.”

Raptopoulos suggested that changing the perception of Cyprus as one of the countries with the lowest tax rate in Europe “will significantly improve our image and credibility among serious international investors and stakeholders.”

“We will be sending a positive message that Cyprus is following and respecting global tax rules, including both the OECD and EU directives,” he added, noting, “In our view, the main challenge is to remain competitive as well as to maintain an equilibrium with the tax burden on local businesspeople.”

The expert is confident that the reform’s overall impact for Cyprus will be positive.

“There is no doubt that Cyprus’ tax model needs to be reassessed in the light of international tax developments and, more specifically, the OECD BEPS 2.0 project. The reform will strengthen the competitiveness of the economy and enhance Cyprus’ position as a business centre,” he said.

Raptopoulos also noted that countries that have zero tax rates – so-called ‘tax havens’ – will have to adopt much more substantial changes to their legislation and their attractiveness will be severely impacted.

“By contrast, for Cyprus this is an opportunity to take advantage of the momentum and introduce any necessary tax changes to its tax code which will help improve its credibility and perception internationally. That, combined with our competitive level of services and business attitude, will possibly attract more companies to establish their headquarters in Cyprus,” he concluded.

For his part, Antonis Taliotis, Tax & Legal Leader at Deloitte, believes that the reform’s impact will depend on the form it takes.

“So far, it appears that the priority of the Ministry is to increase the corporate tax rate to 15%. However, it is not as clear what the counterbalancing measures will be and who will benefit from them,” he noted.

Taliotis continued, “For the reform to help in attracting foreign investments, there have to be incentives – tax and other – to compensate international business for the increased tax burden. That is why the tax reform should be holistic and accompanied by the design of a new economic model for the country, focusing on the industries that we would like to attract.”

Sharing his thoughts on some of the reform’s most significant positive points and challenges, Taliotis suggested that, “A thoroughly thought-out reform that will enhance transparency and simplify the tax system – to the extent possible – and allocate the inevitable increase in the tax burden due to the impending increase of the tax rate and the upcoming green taxes in a fair and just way, could improve Cyprus’ image in the international arena.”

He also cautioned, “At the same time, we need to maintain our attractiveness as an international business centre by continuing to offer tax incentives that are acceptable in the new tax world. It is for this reason that we believe that the help of international experts is vitally important, as was the case back in 2003. On the other hand, we have a lot to lose if we apply a rushed and piecemeal approach without carefully considering the impact of the various amendments on taxpayers, especially international business.”

Taliotis noted that the adoption of the OECD’s minimum corporate tax rate of 15% was intended to apply to groups with consolidated revenues of €750 million, adding that not many such groups have a presence in Cyprus and therefore the OECD’s decision per se was not likely to significantly affect Cyprus.

“Considering, however, that the Ministry of Finance appears to be contemplating a rate of 15% for all taxpayers and not just multinational enterprises (MNEs), the challenge will be what we can offer in exchange,” he said. Taliotis continued, “We need to think very carefully about what should be included in the set of tax and other incentives that will be offered, as well as how we can improve the services the state and private sector offers to make doing business in Cyprus easier. If we cannot do this, we should reconsider whether the minimum tax rate should apply to just those MNEs suggested by the OECD.”

Costas Markides, Board Member, International Tax and Corporate Services at KPMG in Cyprus, also believes that the planned reform, if carried out properly, will be advantageous.

“I strongly believe that a targeted tax reform that aims to further simplify and modernise the current tax framework will have a positive impact on further attracting foreign investment and triggering a domino effect on other interconnected sectors of the economy, such as consumption, retail and construction,” he said, clarifying, “In order to be as precise as possible, my understanding of a ‘targeted’ tax reform means incentivising the attraction of specific classes of investors that are active in specific fields of economic activity.”

He suggested that one good example that that has already been seen producing tangible results for the Cyprus economy, and which should be protected and developed further, concerned high-tech companies and corporate headquartering.

“Our tax system must also be simplified further and, at the same time, stay current and relevant in a constantly changing international tax environment. Consolidating existing laws (e.g. Special Defence Contribution, Capital Gains) that are now scattered, or even abolishing outdated laws or provisions of the law (e.g. Stamp Duty, Deemed Dividend Distribution provisions) that have a high cost of administrating compliance without the corresponding level of revenue collection for the State budget, must be within the scope of any reform.”

Markides noted that international investors were actively looking to set up operations and relocate their staff to a jurisdiction that was both regulated and transparent in order to avoid possible reputational risks that could tarnish their brand and at the same time, allow them to operate in a stable, predictable, modern and highly digitalised tax environment.

“The possible increase in the corporate rate to 15% has already been digested by investors and is not expected to impact the competitiveness of Cyprus, considering the generous exemptions from tax, which are expected to continue unscathed. The key to turning the reform into a win is to enhance existing and introduce new tax incentives for corporates with a special focus on individuals, since relocating a family is a challenge on its own and tax should be an accommodating factor in the decision-making process, not a disruption,” he said.

Markides noted that the challenge is to achieve a balance between introducing provisions that could increase revenue collection for the State (by attracting more taxpaying entities and individuals) and, at the same time, simplify the taxpayer’s experience and incentivise foreign investors and specialised-high calibre staff to relocate with their families to Cyprus.

“Global competition for attracting foreign investment is relentless; this is a given. The race to zero tax rates is a thing of the past. The only way forward is to follow the global trends in tax and be in full compliance with all EU tax-related directives. I am confident that there is political will and stakeholder support for a much-anticipated and long overdue tax reform, with the aim of keeping Cyprus on the map of transparent, regulated and reputable top-tier financial centres,” he concluded.