The recent "hit-lists" of offshore jurisdictions deemed by the Financial Action Task Force (FATF) and the OECD to be conducive to money laundering and to have harmful tax practices had a noticeable omission – Cyprus. The island was one of the six offshore jurisdictions which wrote to the OECD in an effort to avoid making the now infamous lists, promising to conform with international standards of transparency and mutual assistance and to reform financial supervision covering thousands of companies, all in the name of stamping out money laundering, tax evasion and poor supervision.
Cyprus’s offshore sector has a large number of companies registered – around 40,000 – and many of them are Russian or Yugoslavian in origin, which has in itself meant that international eyes have been watching Cyprus rather closely. There is also the fact that only 1,200 companies carry out day-to-day operations on the island, which further instils suspicion. However, the Cyprus government is adamant that the island is an international centre for business, not for tax evasion or money laundering.
Takis Klerides has confirmed that the government is to push ahead with satisfying the OECD’s demands and will submit specific proposals on countering harmful tax proposals to the Paris-based organisation by November 15. Finance Minister Klerides said ‘We are committed to ensuring that Cyprus retains a good name. We’ve undertaken to set up a programme to exchange information on taxation and transparency and other issues. We will implement a timetable to meet all the OECD requirements by the end of 2005.’
The government is clearly relieved that Cyprus - like Bermuda, the Cayman Islands, Malta, Mauritius and San Marino - managed to escape the OECD blacklist. After all, Cyprus is in the queue to join the European Union and is naturally keen to steer clear of any bad press and a possible setback to its EU application. Mr Klerides has indicated that the most damaging consequences of inclusion on the blacklist would have been the cancellation of tax treaties with OECD member states that allows companies to write off tax paid in Cyprus.
However, Cyprus did not fare so well in another report of recent weeks – the Financial Stability Forum’s (FSF) three-tier list of offshore financial centres, which was published at the end of May. This report gave the island a very poor rating on financial supervision, putting it in the lowest of three categories alongside other jurisdictions deemed to require significant improvements in standards, such as Liechtenstein and Costa Rica.
All three reports have been dismissed by the Central Bank of Cyprus, which regulates the offshore sector and which accuses the OECD and its counterparts of adopting double standards. One official is reported to have said ‘There’s a strong element of hypocrisy. The OECD report on harmful tax practices, for example, doesn’t appear to be based on detailed objective criteria.’
The Cyprus authorities have been endeavouring to make changes. Money laundering accusations, which peaked in the early 1990’s when western governments alleged that Cyprus banks were laundering funds for Russian and Yugoslav offshore companies, were met by the introduction of tough legislation to counter money laundering.
The government has also long been reviewing its tax arrangements for offshore companies as part of EU accession procedures. The corporate tax rate for the offshore sector is set at 4.25 per cent, compared with 25% for onshore companies.
Panicos Pouros, permanent secretary of the planning bureau said ‘The major issue is the tax differential between offshore and onshore companies. But these companies don’t pay value added tax, and their employees pay income tax at 50 per cent of the normal rate. We’re studying various alternatives that would meet EU rules on competition, taxation and the internal market.’
Cyprus’s main concern in all of this is to keep its reputable international companies on the island with attractive tax rates, something which will probably be even harder to do after it joins the EU. Planners are therefore considering setting a uniform corporate tax rate of about 12 to 15 per cent. The Cyprus International Business Association (CIBA) has proposed that corporation tax be reduced to 10 per cent while employees should retain privileges such as increased tax-free allowances as an incentive to work in Cyprus. Chairman of the CIBA Khalil Nasr said ‘Most international companies with fully-fledged offices would be prepared to accept a tax rate of up to 12 or 12.5 per cent, but if it went higher they would review their position on whether to stay.’
The Cyprus offshore sector is genuinely seeing some changes. According to the Central Bank, many Russian and Yugoslav companies are starting to pull out of the island and replacing them are more Greek and Israeli firms. Whether this means there will be less international scrutiny remains to be seen, but with plans for EU accession pressing ahead, Cyprus will certainly want to keep in the good books of international organisations such as the OECD.
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