Cypriot Government Calls For VAT Hike

by Lorys Charlambous, Tax-News.com, Cyprus

19 October 2011

Cypriot Finance Minister, Kikis Kazamias has urged the wholesale adoption by parliament of budgetary measures tabled last week, including a 2% increase in the value-added tax (VAT) rate, and cuts to welfare spending.

According to Kazamias, the plan must be adopted in order for Cyprus's deficit to be reduced below 3% of gross domestic product (GDP), to 2.8% of GDP by the end of next year. Failure to do so would see the nation's deficit expand to around 4%, he warned, and push the nation nearer to requiring EU-funded financial assistance.

The government had previously planned for a more aggressive reduction in the deficit to 2.3% in 2012 but has recently had to revise this forecast due to sluggish economic growth in 2011, which is expected to reach just 0.2%, down from 1.5% previously forecast.

The government was forced to abandon a proposed 2% VAT rate hike in the first round of austerity measures proposed in August, and the current government holds just 19 out of the 56 seats in the Cypriot parliament after right-wing parties deserted a coalition.

In this first package, the government gained approval for the creation of a new income band with a rate of 35% on income above EUR60,000 (USD87,000), a hike to the withholding tax on savings interest derived by Cypriot residents from 10% to 15%, increases to the tax on real estate, and a EUR350 annual fee on companies. Other measures in the package included a public sector hiring freeze, cuts in public sector salaries, and a new contribution from public sector workers to state pensions.

The IMF recently called for a "strong and immediate policy response" from the government to restore confidence in the Cypriot economy.

“The government should now move quickly to pass into legislation specific measures in the context of a credible multi-year consolidation plan for 2012-14. It should ensure that the magnitude of the measures is fully sufficient to achieve the target of fiscal balance by 2014, and stand ready to take additional measures if needed in the period ahead,” the Fund said, urging the adoption in particular of a higher VAT rate, which it noted would remain below the EU median of 20%.

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