ECOFIN accepts Cyprus’ VAT exemption

European Union Finance Ministers have accepted a request from Cyprus to postpone VAT on the purchase of foodstuff, medication and restaurant services until the end of 2009. The decision was taken unanimously at the European Union Economic and Financial Affairs Council (ECOFIN) by all 27 member-states, after negotiations, which took place with the participation of Cyprus Finance Minister Michalis Sarris.
The Cypriot Minister had the support of Commissioner for Taxation and Customs Union Laszlo Kovacs and the Portuguese President of the Council. According to the accession agreement to the EU, Cyprus had gained an exemption as regards the VAT on medication, food and restaurant services until 31st December 2007, which meant that from 1st January 2008 Cyprus would move on to impose VAT and further increase the price of the specific goods and services.
During the negotiations, the Cypriot Minister argued that since the EU will review the VAT system in 2010, all exemptions could be discussed, given the fact that apart from Cyprus several other Eastern European states have asked for a postponement.
Sarris also briefed his partners on Cypriot preparations for the introduction of the euro in Cyprus on January 1st.
During a celebration ceremony on 18 January 2008 in Cyprus, high ranking EU officials, including Commission President Jose Manuel Baroso, will participate.
Cyprus, which became a member of the EU in 2004, will join the euro area on 1 January 2008.

Up to 2010 Cyprus is allowed to apply a zero VAT rate to the supply of a number of necessity goods (pharmaceuticals and some foodstuffs), and to maintain the reduced rate of 5% to restaurant and hotel services. This development is expected to partially ease up inflationary pressures in the economy. Specifically, the Ministry of Finance (MoF) is expected to revise its inflation estimate of 2.8% for 2008 as such tax increases were included in its 2008 estimates. According to estimates, the extra revenues foregone from such VAT increases were estimated by the MoF at CYP 40 mln (CYP 20mln from pharmaceuticals and foodstuffs and CYP 20mln from restaurant and hotel services).