PWC proposes range of tax amendments to fix it
Cyprus is losing ground as an international financial centre to a number of European competitors because it lacks some of the key elements which other jurisdictions boast, according to PricewaterhouseCoopers Tax Partner, Panikos Tsiailis.
Tsiailis was speaking at an event organised by PWC on Tuesday and attended by the Minister of Finance, Michalis Sarris, where the company presented some of its findings of research into a range of competitor countries and suggested a list of changes to Cypriot tax legislation to close the gap.
The research into other financial centres included Luxembourg, Ireland, the Channel Islands Jersey and Guernsey, the Netherlands and the UK.
It found that out of the six key elements that are required for a successful international financial centre, Cyprus has only one, namely legal and accounting expertise.
The other five attributes are lacking in Cyprus. These are: an excellent banking centre with the presence of the world’s largest banks; experienced trustees and fund managers; a single regulatory authority; rapid handling of applications by the authorities; and an excellent reputation among investors.
“Precious ground has been lost and we need to act immediately,” said Tsiailis.
Need to attract (and tax) investment companies
Cyprus tends to attract holding companies and subsidiaries, but a key weakness is its inability to attract investment companies, argued Tsiailis.
This is partly because we have an under-developed banking system, made up mainly of local banks, but also because we have two financial regulatory authorities.
“The existence of two regulatory authorities for investment companies creates inefficiencies and inconsistencies,” said Tsiailis.
All the other jurisdictions studied have only one regulatory authority.
Tsiailis also noted that Cyprus could attract investment companies if they were subject to tax. “The Luxembourg model is not appropriate,” he said.
Although he admitted that calling for a tax sounded odd, Tsiailis said that it would be attractive because a company that is taxed is able to take advantage of the 40-plus double taxation treaties that Cyprus has with the rest of the world and thereby reduce its overall tax payments.
This would not result in a reduction of tax to the state, he said. Tsiailis showed a table that indicated that for every CYP 1,000 spent by an international company in Cyprus, CYP 500 of its ends up with the Cyprus Treasury, via tax on the services it buys, employees paid and so on.
And that is before the company gets taxed on any profits.
PWC prepares a range of tax amendments
Tsiailis said that the tax reform which began in 2002 includes a number of “problematic provisions” which are putting off foreign investors.
The tax system “does not respond to the requirements of our time,” he said.
PWC has therefore presented a very detailed package to the government, including proposed revisions to a range of tax laws in order to make them “more simple, more flexible and more clear”.
Much of the problem relates to unclear wording of laws. For example, income tax is covered by three laws, so “It is not always clear which income is subject to which law”.
There also needs to be a clear distinction between activity as a business, which should be subject only to corporation tax, and activity as an individual, which should be subject only to income tax.
Tax and the defence contribution is also very unclear.
“Defining the law under which interest is taxed is the biggest riddle,” said Tsiailis.
If the Financial Mirror understood it correctly, Cyprus is also breaking EU law by treating dividends received from a company abroad differently from dividends received from Cypriot companies.
These and a range of other proposals outlined, covering both corporate and income tax “are entirely adapted to the Cypriot reality,” said Tsiailis, who called for greater public-sector involvement in boosting Cyprus’ role as a financial centre.
The good news is that it looks like the government is listening.
In his speech just before Tsiailis took the floor, Minister of Finance Michalis Sarris said “we need continuously to improve and organise our systems,” adding that we cannot remain stagnant in this effort.
“The private sector has a very important and primary role to play in this effort,” he concluded.
Fiona Mullen
