New Cyprus Tax Package Excites Comment

by Lorys Charalambolus, Tax-News.com, Nicosia

04 July 2002

After dramatic changes to Cyprus's taxation regime were finally agreed by Parliament as part of the run-up to EU membership, special interest groups have been having a field day second-guessing the government over many of the changes.

The improbably named Association of Large Families (just refers to volume, not girth) complained vociferously (believe it!) about what it called regressive changes to personal taxation. The tax-free ceiling has been increased to CYP9,000 but at the same time VAT went up by three per cent to 13 per cent with simultaneous hikes in fuel and other consumer taxes. The Association said that many people would not benefit as they were under the ceiling in any event; equally, it said, the scrapping of the 3% defence levy (a form of income tax) would not make much of a difference to the class that was under the previous tax-free ceiling of CYP6,000.

However, Head of the Cyprus College Socio-Economic and Political Research department, Charalambos Papageorgiou, said that wage-earners who receive a cost of living allowance (COLA) will have their VAT reimbursed after a few months. Wage-earners would also benefit from the abolition of the defence levy and from then on "you have the increases in consumer taxes, which depends on the type of tax and if it is something you use", Papageorgiou said.

Papageorgiou said the overall tax package was not satisfactory, stressing that he had not yet studied the final version. He said that it initially seemed to be beneficial for the rich.

The proposed 10% corporate tax rate, to apply to both onshore and offshore companies, was better received, although many companies complained that the accompanying 2% levy on wage bills (meant to subsidise pensioners) came in for criticism.

The Chamber of Commerce and Industry (KEVE) said rather peevishly that the tax reform was unequal and could only hurt businesses and cut their competitiveness. KEVE said its suggestions had not been heeded at all, adding that the imposition of a 2% tax on all businesses was very unfair. The Chamber of Commerce said the 2%-tax provision was unconstitutional and it would seek to overturn it before the Supreme Court. "The tax reforms have failed to bring the necessary innovative changes to the country's tax system but has effectively increased the overall tax bill for businesses, rendering them less competitive against their rival firms."

According to KEVE, exporting industries will see their tax bill double as a result of the changes. But the 10% corporate tax will give Cyprus the lowest rate in the EU, after Ireland (12.5%), with the (very new) exception of the Isle of Man, which has just announced a nil rate - but the IOM isn't really in the EU anyway for most purposes.

Other changes include an increase in VAT 10% to 13% as of July 1, and then to 15% as of January 1 2003. Cigarettes, which went up 20 cents for a packet of 20 last week, will continue to rise, according to legislator Markos Kyprianou. "They will go up continuously to CYP 5 per packet or until we reach the lowest level that exists for duty on cigarettes within the EU," he said.

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