Written by Giorgos Pantelis*
More than two decades have passed since the last tax reform in Cyprus, which was carried out in 2002. From then until today, the economic facts have undoubtedly changed significantly, both on the European and international scene as well as on the national level. The development of digital activities, the European Commission's initiatives for a green transition and the new business models of companies are creating more and more challenges not only in the area of tax enforcement but also in the wider economy.
Internationally and also at the European level, in recent years a special effort has been made to enforce new taxation rules against the erosion of the tax base and the shifting of profits, through the harmonization of the tax systems and taxation rules of the member states as well as the member states of Organization for Economic Co-operation and Development (OECD), demonstrating the importance of fair and efficient taxation at least at the level of multinational companies.
The existing corporate tax framework of Cyprus, undoubtedly, includes various touches which either came from provisions from various European directives or came from the context of national efforts to comply with international practices to combat tax evasion and tax avoidance. At the same time, in recent years the tax laws have been significantly enriched with tax reliefs and exemptions, with the ultimate aim of strengthening revenues and by extension public finances through, among other things, the attraction of investments, the creation of new jobs and the expansion of the potential rate of growth, which we consider to have largely fulfilled and served their purpose.
Nevertheless, there is a need for further modernization and improvement of the wider tax framework of Cyprus, so that it becomes more simplified, while remaining competitive and attractive, promoting social cohesion as well as technological development and innovation.
The Ministry of Finance, in this context, wishes to promote comprehensive tax reform on the basis of a thorough and comprehensive study that holistically approaches the tax framework of Cyprus, and reflects the changes being promoted in the global and European setting. The main axis of the proposed tax reform is focused on increasing the competitiveness of the tax model of Cyprus, reducing the administrative burden for taxpayers but at the same time providing a fairer redistribution of the tax burden, while maintaining fiscal neutrality. This study is expected to be completed within the next year. In this context, a broad information and extensive public consultation will be held with all the relevant bodies involved, so that their positions and recommendations can be submitted.
Our basic principle is that the tax framework of Cyprus should remain in line with the European acquis, with the guidelines of the EU Code of Conduct on business taxation, as tax exemptions should be consistent with the wider state aid rules while at the same time fair tax competition is promoted.
At the same time, the implementation of the Council's European Directive 2022/2523 of 14 December 2022 on “ensuring a global minimum level of taxation of multinational business groups and large-scale domestic groups in the Union”, also known as Pillar 2, has been put into motion. it provides that multinational business groups or large-scale domestic groups that have a presence in EU member states and declare annual consolidated revenues of more than €750 million, will have the obligation to pay a corporate tax of at least 15% on their corporate profits.
The said coefficient also concerns the profits of affiliated entities (subsidiary companies) based in jurisdictions outside the EU. The purpose of the Directive is to counter the phenomenon of erosion of the tax base of the transfer of profits of the member states. The provisions of this Directive are largely aligned with the global rules in relation to Pillar 2 adopted by the OECD, which has begun to develop guidelines for the practical application of these rules.
The basic provisions of the Directive should be transferred to the national legal order by 31/12/2023. The harmonization timetables have been set, which include consultation, legislative review and approval by the Council of Ministers and submission to the House of Representatives in October 2023 for final vote and publication. With the implementation of this Directive, no significant fiscal impact is expected.
Our goal at the same time remains the promotion of tax compliance. An important factor is the use of electronic governance both in matters of compliance and in matters of tax control. The Tax Department has already implemented the first of three phases of a new software system (Tax for All) that will contribute to better serving taxpayers, both in the processing of their obligations to the state and in better informing and complying with citizens.
The only strategic path for the government remains the achievement of the commitments given in the context of the National Plan for Recovery and Resilience of the economy, for a faster transition towards a digitized and green development model, taking into account the relevant European recommendations for our country, in terms of specific reforms.
An important reform remains the crackdown on extreme tax planning, within the framework of the National Economic Recovery and Resilience Plan. In this context, specific reform is promoted, through the achievement of specific milestones that have been agreed with the European institutions. Achieving the milestones will contribute to improving the name and prestige of Cyprus internationally, while at the same time significant funds will be disbursed to help achieve the state's goals.
The promoted tax reform will be fiscally neutral. , avoiding the further burden on households and businesses. Our effort is to better distribute the tax burden in a targeted and intelligent way, so that it helps the real economy and moves in better development directions, improving the standard of living of our people.
We argue that the tax burden is appropriate. to be such, for citizens and businesses, that for individuals it allows better living conditions, and for businesses it does not limit their investment activities for their further development and contribution to society.
*The Mr. Giorgos Pantelis is Director General of the Ministry of Finance
