The government is pushing for reforms to broaden the tax base and diversify revenue sources, which will not only support the sustainability of public finances, but also offer great potential for improving the efficiency of the tax system. The measures are also related to green taxation and at the same time facilitate the green transition.
In addition, as shown by the “Cyprus – Tomorrow” Recovery and Resilience Plan, the country will aim in the coming years to combat tax evasion and avoidance.
According to the European Commission working document, ensuring fiscal and financial stability consists of 10 reforms and two investments of a total funding of € 44.5 million. It addresses the challenges of fiscal and financial vulnerability, as well as the associated excessive macroeconomic imbalances.
The actions
The goal is to ensure financial stability through
(a) reducing the risks inherited from the banking sector in the past, which are largely linked to the reserves of non-performing loans;
(b) implementing measures to tackle high private debt, such as improving governance, strengthening insolvency frameworks and improving financial literacy, and
c) improving supervision in the non-banking sector (insurance, pension funds, securities markets).
In order to ensure fiscal stability, Cyprus aims to combat tax evasion, tax avoidance and aggressive tax planning and to provide comprehensive data to policy makers to design a fair tax system.
The envisaged measures are expected to make revenue collection more efficient and the Cypriot tax system fairer, reducing the secondary effects of aggressive tax planning.
In particular, Cyprus plans to introduce withholding tax on dividend, interest and royalty payments in the first instance in areas of jurisdiction included in the Union list of non-cooperative jurisdictions and in the second step in jurisdictions with low corporate taxation.
The European Commission points out that in the case of low-tax areas of jurisdiction and in terms of interest and royalty payments, the Cypriot authorities can instead consider the non-deduction approach.
It is important, it is stated, that Cyprus also intends to make a subsequent holistic assessment of the various measures related to aggressive tax planning, including those adopted under the plan to tackle aggressive tax planning.
The European Commission notes that the diversification of the tax structure is crucial for the sustainability of public finances, while promoting it without growth exclusions. Cyprus' tax revenue as a percentage of GDP is still lower than the EU average and revenue growth is particularly concentrated in a few revenue figures (VAT and corporate income tax).
