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Cyprus Praised For Putting Its Finances In Order

by Mike Godfrey, Tax-News.com, Washington

04 July 2014


The International Monetary Fund (IMF) has praised measures taken by Cyprus – including the hike to the corporate income tax to 12.5 percent, the increase in the VAT rate to 18 percent, and the tax hike on interest to 30 percent – as part of an "ambitious fiscal consolidation" plan, which the Fund said has significantly improved the territory's finances.

The IMF made the comments after the completion of its fourth review of Cyprus's performance under an economic program supported by a three-year USD1.38bn financial assistance package. The completion of this review enables the disbursement of another USD115m, bringing the total disbursements under the arrangement to USD574m.

Christine Lagarde, IMF Managing Director, said: "The Cypriot authorities are to be commended for their achievements during the first year of their economic program. They recapitalized and restructured the financial sector, removed domestic payment restrictions, implemented an ambitious fiscal consolidation, and initiated important structural reforms. As a result, macroeconomic and fiscal outturns have been better than expected, and Cyprus recently re-accessed international capital markets. Looking ahead, challenges and risks remain, and full and timely policy implementation will be critical to the program's continued success."

"Building on the progress made in strengthening the financial sector, efforts should focus on addressing the high level of non-performing loans, which is hindering the provision of credit and the resumption of growth."

"The authorities' ambitious fiscal consolidation and prudent budget execution have helped reduce the fiscal deficit. Given lingering macroeconomic uncertainty, the authorities should continue to implement the budget cautiously. Further well-paced fiscal adjustment is needed in the medium term to ensure debt sustainability. Fiscal efforts should be complemented by structural reforms to protect vulnerable groups, modernize the revenue administration, strengthen debt and fiscal risk management, and privatize state-owned assets."

The report sets out fiscal measures taken or to be taken during 2014, including: an increase to the standard rate of VAT from 18 percent in 2013 to 19 percent in 2014, and an increase to the 8 percent reduced rate of VAT to 9 percent. Other measures include reform of the tax system for motor vehicles, an increase to excise duties on energy, and a low-rate levy on gratuities to certain contracted workers.

In addition to the IMF's extended arrangement Cyprus's economic recovery is also supported by financial assistance from the European Stability Mechanism (ESM) amounting to EUR9bn (USD12.29bn).

TAGS: VAT rates | tax | value added tax (VAT) | interest | capital markets | budget | International Monetary Fund (IMF) | offshore | Cyprus | regulation

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