Klerides and Vassiliou were analysing the conclusions of a major three-day taxation seminar in Nicosia, which concluded on Sunday. The seminar, attended by local and foreign tax experts and representatives from the Finance Ministry, Planning Bureau, Central Bank and Attorney-General's office, aimed at coming up with recommendations for resolving the tax issue.

"One thing is certain, one can expect to see an increase in taxation for international business activities and a reduction in taxation for our companies," Takis Klerides said yesterday. And George Vassiliou repeated that the discrepancy in taxation rates for offshore and local companies had to go by the end of the year if Brussels was to be kept happy.

Currently the 1,300 or so offshore companies registered in Cyprus pay 4.25% corporation tax compared to 20 or 25% for domestic companies. The OECD has pushed for such 'discriminatory' tax practices to be removed in all offshore jurisdictions, but has had to abandon that part of its 'unfair tax competition' initiative in the face of offshore and US opposition. But in the case of Cyprus, it has the EU to deal with as well, and has little choice but to close the gap in rates if it wants to join.

It is widely expected that a uniform corporate tax rate of about 10 per cent will be introduced for both offshore and local companies, which would make Cyprus competitive with all member states, but more expensive than jurisdictions like Gibraltar, the Isle of Man and Dubai which offer zero-tax regimes for offshore companies.

Cyprus has to balance the advantages of EU membership against the loss of its fiscal freedom, and already seems to have made this judgement, although it's quite hard to find people on Cyprus itself who are fully convinced. Oh well, it's too late to go back now!