But highest environmental tax
Cyprus has the lowest tax on labour in the EU and the lowest corporate tax rate, according to figures released by European Commission Services, but has the highest ratio of environmental taxes as a proportion of GDP.
The “implicit tax rate on labour” (ITR)–see note below–was 23.1% in 2005, the lowest rate in the EU, compared with an EU25 average of 35.9%. The second lowest rate was the UK, at 24.8%.
The list of countries on labour excluded data on Poland, Portugal, Slovakia and Norway, although we know that Poland, Slovakia and Norway, at least, are not famous for low labour taxes.
Key reasons for Cyprus’ good score on labour are no doubt the high threshold for income tax (the first CYP 10,000 is tax-free), the low top rate (30%) and the comparatively low social security contribution rate (6.3% for employees and even less if you work for the government).
Lowest corporate tax rate in the EU
Something that has escaped the attention of a distinguished international magazine twice in the past few weeks is that Cyprus has the lowest corporate tax rate in the EU, at a flat rate of 10%.
The next lowest is Ireland at 12.5%, while the EU average is 25.9%.
Cyprus may have escaped attention of the rest of the world because of the confusion caused by the surcharge imposed on profits above CYP 1 mln in 2004 and the fact that semi-government organisations are taxed at 25%.
Clearly, the EU thinks that the semi-government organisations don’t count, and has listed the top rate at 10%.
Tax on consumption has risen sharply
As any Cyprus-dweller will tell you, tax on consumption has risen sharply in recent years, from an ITR of 12.2% in 1995 to 19% in 2004, compared with an EU25 average of 21.9%.
The sharp increase in Cyprus is largely owing to a rise in VAT from 8% to the EU minimum of 15% over a relatively short period (because the parliamentarians put it off as long as possible).
Relative burden of environmental tax is high
While scoring well on labour and corporate tax, Cyprus comes bottom of the class for environmental taxes, at 11.9% of total tax revenue, compared with an EU average of 6.6%.
Transport taxes are the the highest (as a proportion of total tax revenue) at 5.7%, while energy taxes are higher than average at 6.2%.
The near total absence of public transport, combined with a climate in which gas-gobbling air-conditioning is used by drivers for around four months a year, could be the main reason.
Fiona Mullen
*For those at www.cyprus-forum.com who had a full-scale discussion on these issues last time we wrote about them, the Commission says the implicit tax rate is “the preferred indicator for the average tax burden”. The ITR on labour “includes all personal income taxes, payroll taxes and compulsory social security contributions and, as the tax base, the total amount of compensation of employees in the economy. The average may conceal important variations in the tax burden across the income distribution.”
