New Cyprus Tax Reforms May Discard Defence Levy But VAT Could Be Up By 3 Per Cent

Lorys Charambolous, Tax-news.com, Nicosia

10 January 2001

Not only has the Cyprus Finance Ministry proposed to increase the tax-free earnings limit from CY£6000 to CY£7000 per year but it is has also announced possible plans to discard the defence levy and to raise VAT from 10 to 13 per cent.

This is according to Finance Minister Takis Klerides who presented his tax reform plans to the House Finance Committee on Monday this week. The general feeling among Cypriot commentators is that parliament will approve of the reforms although Committee chairman Marcos Kyprianou of DIKO told reporters that some Committee members had raised queries over the tax reform.

It is unclear whether the House vote will take place prior to the May parliamentary elections or after them. Kyprianou said: 'We might decide to wait until after May to vote on the tax package to make sure no biased decisions are made on behalf of the government or the parties in the light of the forthcoming elections.'

At a Monday morning press conference Klerides stated: 'If implemented, the government-proposed tax package will benefit the average citizen who at the end of the day will have more money in his pocket, at the same time as bringing Cyprus into line with EU economic criteria.'

He continued: 'An increase of VAT to 15 per cent must be implemented gradually in the space of the next two years for the island to join the EU in 2003 as planned.'

Klerides also commented on the government's decision to adopt European Union regulations regarding consumer taxes. He explained: 'By January 1, 2003, the diesel tax should have increased from 2 cents per litre to 14.2 cents, while petrol tax will have to rise by 30 per cent, coming up to 19.5 cents per litre. Pure alcohol tax will have to be £3.20 per litre, up from the current £1.19. Cigarette tax must increase by 2 per cent. But the increases will be coupled with duty reductions.'

Furthermore said Klerides the government will cease to subsidise the Social Security Fund (SSF) but 'employers will benefit from the abolition of the defence levy' as they will pay an additional
2 per cent to the SSF instead.

The reforms also provide for a reduction of corporation taxes from 25 to 23 per cent as well as a raft of incentives to induce mergers, reorganisations and takeovers.

In the attempt to deter tax evaders the Finance Ministry is also calling for the rate of interest to be upped to 9 per cent (from the existing rate of 5 per cent) on taxes that become overrdue. A 10 per cent withholding tax at source for interest payable will also be introduced.

The government has said it will implement the tax reforms immediately it is given the green light by the House and the Finance Committee will decide upon its time-scale to vote on the reforms in the next few days.

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