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Cyprus Hanging On To Fiscal Autonomy

by Lorys Charalambous,, Cyprus

20 September 2012

Cyprus plans to wrap up bailout talks with the troika of lenders within a month, Finance Minister Vassos Shiarly has confirmed, and will seek less funds than on offer, as the government seeks to avoid being bound to the punishing terms outlined in a recently-leaked list of demands from European financiers.

Following recent talks with representatives from the troika - comprising of the International Monetary Fund, the European Central Bank and the European Commission - Cyprus has committed to speeding efforts towards drafting a 2013 Budget. The nation says it will pursue a fraction of the funds on offer from Europe, and is engaging with Russia on the terms of a short-term loan, which the government said would involve fewer fiscal provisos, and instead be based on a 'political' understanding.

The potential cost of a fully European-funded bailout for Cyprus was laid bare recently in a leaked 20-page document from the troika which suggested that Cyprus would have to slash public spending and raise taxes in return for the funds.

It is said that under a European bailout, taxes on cigarettes, petrol, and tobacco would be hiked, and authorities would be urged to lean on the nation's affluent to derive fresh revenues from real estate holdings, accumulated wealth, and income. A 1% increase in value-added tax (VAT) is also a strong possibility.

On the expenditure side, the troika would seek a 15% cut in public sector salaries, and the reining in of generous employee benefits, including the year-end bonus, known as the 13th month salary. The Cypriot authorities would also be required to commit to more substantial public sector layoffs, with as many as 2,250 redundancies, despite sustained government opposition to such a downsizing.

The Cypriot banking sector is heavily exposed to Greece, and it is thought that any bail-out would total around USD15bn (USD19.6bn) over three years.

In the first wave of austerity measures agreed last year, the government hiked the rate of VAT to 17%, from 15%, and introduced a new top tax bracket of 35%, applicable to income above EUR60,000. In addition, withholding tax on savings interest derived by Cypriot residents was hiked to 15% from 10%, tax on real estate was increased, and a new EUR350 annual fee was introduced on companies.

TAGS: tax | investment | European Commission | fiscal policy | public sector | banking | international financial centres (IFC) | offshore | offshore banking | tax rates | Cyprus | individual income tax | Europe

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