The finance minister’s rash decision to try to plop an increase the corporate tax rate from 10% to 11% on parliament will cost us for many years to come for several reasons.
First, it means that Cyprus will have ceded the lowest corporate tax rate in the EU to Bulgaria, which is also at 10%.
Second, he has ignored Investment Promotion Rule Number 1, namely never mess with tax rates.
Third, he has ignored Investment Promotion Rule Number 2, namely, if your boss really does make you increase tax rates instead of cutting the pay of overpaid, underworked civil servants, make sure that you get everyone on board and that there is plenty of notice.
Fourth, if you know that you are never going to get such an insane law through parliament anyway, don’t go and ruin your reputation as a location for low and stable taxation by pretending to the unions that you are going to keep your boss’s promise to tax the rich.
Last but not least, don’t hit the only two dynamic sectors in the economy that have kept us going while tourism has been in decline all these years and which have even weathered the recent deep recession.
While foreign exchange income from tourism dropped from 20% of GDP to 9.1% of GDP between 2000 and 2009, Central Bank data show that exports of financial services rose from 7.6% to 9.1%.
During the same period, which included hits from September 11th, the SARS virus, the CSE fallout, the Iraq war and the global financial crisis, exports of accounting, legal and merchanting services remained steady at 8.1% of GDP.
In the crisis year of 2009, while income from tourism collapsed by 16.7%, financial services rose by 7.4%.
Exports of financial and professional services combined reached EUR 2.2 bln in 2009, compared with just EUR 1.6 bln for travel.
In other words, these two sectors are now more important than tourism to our economy.
Moreover, these sectors depend more than anything on our reputation for not only the lowest corporate tax rate in the EU but also a stable tax regime.
The finance minister must know this. So why is he killing the goose that lays the golden egg?
Fiona Mullen
Sapienta Economics Ltd
