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Gov’t under fire over corporate tax hike plans to plug deficit
Will MPs throw out the bill?
The government has come under fire from all professional bodies over its plans to table legislation before parliament seeking to raise the corporate tax rate, one of the lowest in the EU, by a percentage point to 11% over two years.
The House Finance Committee is expected to debate the planned tax hike today in what could be a heated session with the ruling communist Akel party testing the already fragile coalition it maintains with the Democratic Party (Diko) that was not consulted.
The measure for 2010 and 2011 aims to contain a deficit that is more than double EU limits, but the 75 mln euros the government hopes to raise falls far short from plugging the deficit hole, burdened by an excessive public payroll.
The announcement, which drew the ire of businesses, came a day after the EU formally took disciplinary action against Cyprus for a projected deficit of 7.0% in 2010, well above a limit of 3% under EU rules.
"This will be (valid) for two years. It is a temporary measure to improve the budget position," Finance Minister Charilaos Stavrakis said. Businesses said the tax rise could stifle the island's nascent recovery from its first recession in more than three decades.
The government said it would submit legislation raising the tax to 11 from 10% for parliamentary approval this week. However, press reports suggest that most of the MPs will reject the bill.
The Institute of Certified Public Accountants said that the proposed tax hike was “a bomb in the foundations that support the Cyprus economy”, pushing foreign companies to Luxembourg, Malta and even Belgium, while the Cyprus Bar Association added that this would shake the image of Cyprus as an international business centre.
Even the government’s own adviser on foreign investments, the Cyprus Investment Promotion Agency, said that Cyprus would lose its international credibility.
Only last week, Marfin Laiki’s CEO Efthymios Bouloutas said that the banks were not consulted and would be expected to cough up nearly a quarter of the fresh revenue, under pressure from populist demands to exclusively “tax the rich banks”.
Akel press spokesman Stavros Evaghorou admitted that the proposed tax increase “is aimed at the big capital,” but that it was a temporary measure that does not justify the level of reactions.
Stavrakis said the higher tax will raise an extra 73 mln euros for the government, based on calculations of 730 mln euros in corporate tax earnings in 2009. A further 65 mln euros is expected this year from the fuel tax hike imposed last week.
Tax revenue has been crimped by the poor performances of the real estate and tourism sectors. Cyprus's economy contracted by 1.7% in 2009 but stabilised in the first quarter of this year.
Killing the sacred cow
"This is like killing the sacred cow of our economic model," Stelios Platis, an independent economist told Reuters.
"Businesses have relocated here because of our stable tax regime and low taxes. If you create instability this is the wrong thing to do. It is definitely wrong," he said.
Local and foreign companies have paid 10% corporation tax since 2002 after Cyprus scrapped a 4.25% tax on offshore companies under pressure from the EU, which it joined in 2004.
By phasing out the discrepancy, it also brought down the tax rate for domestic companies to 10% from 20 and 25%, depending on their turnover.
The employers and industrialists federation, OEV, said the measure was short-sighted. It said the construction industry would be hard hit as the finance ministry is also planning to introduce a new calculation of tax in real estate transactions.
Until now property tax has been calculated on the basis of 1980 land values but in future will reflect current market values for properties worth 170,000 euros or more. The plan has yet to obtain parliamentary approval.
"While other countries are taking measures to drastically cut spending, including the state payroll, Cyprus is unfortunately opting to tax businesses, harming our credibility as an international business centre," OEV said.
Punish enterprise
Earlier it had warned that any tax hike would compound the existing problems made worse by rate hikes in water, electricity and fuel, the increase in the frequency in tax declarations, the cutback in research grants and the freezing of all subsidies to entrepreneurs taking part in overseas exhibitions. It added that the only way for the economy to recover was through supporting development, while there is a concerted effort to punish enterprise and expel foreign investors.
Finally, OEV called on the government to support businesses if it genuinely cares to reduce unemployment and recover from a recession, and urged it to reconsider the federation’s proposals to help curb the public deficit.
The proposed tax hike also initiated a joint meeting of leading executives from OEV and the other major employer group, the Cyprus Chamber of Commerce and Industry (KEVE) prior to the parliamentary discussion.
KEVE president Manthos Mavrommatis said that the measures will hurt the 69,000 small to medium sized enterprises and business are fast becoming the scapegoat for the government’s incompetence to deal with the crisis and tackle the issue of the huge public payroll.
CIPA: concerned
CIPA said it is “deeply concerned” by the whole affair, with negative repercussions that will unavoidably appear as Cyprus tries to attract foreign companies to register and base their operations here.
“The most important problem is Cyprus losing its credibility as an investment jurisdiction which is not attractive to long-term investors,” CIPA said.
“The benefit from the said measure is far smaller than the negative repercussions in the longer term that will arise from loss of revenue due to the departure of international companies and the shrinking of the business services sector.”
ICPAC: A bomb
Speaking on behalf of the accountants’ association, ICPAC, its president Nicos Syrimis described the proposed increase as “a bomb in the foundations that support the Cyprus economy”, with protests fired at the government at the members’ annual meeting last Wednesday.
“Cyprus was successful in its economic recognition because systematic efforts of many years and a clear strategy, secured its competitiveness as an international financial centre. The pillars of this strategy were the tax stability and a corporate tax rate that was the lowest in the EU,” the ICPAC said in a statement.
Only the thought of increasing the corporate tax rate shatters our financial credibility, the most essential means that we have to attract and retain companies and to create thousands of jobs, the ICPAC added.
“We are playing with fire. Instead of adding wings to our economy, we are adding chains. Our future depends on our competitiveness as a financial centre.”
Syrimis told journalists on Friday that other jurisdictions are already luring business away from Cyprus. Luxembourg says it has a corporate tax rate of 28.59%, but in reality, after subsidies and refunds it comes down to 5-6%. Malta, too, has a tax rate of 35% but it returns the 30% for a final tax rate of 5%.
He said he was disappointed that the Ministry would proceed with such measures without consulting with the ICPAC, whereas they have cooperated on many crucial issues on VAT and income tax in recent times.
“The bill will not pass in the House,” Syrimis said.
Fellow ICPAC board member Paniccos Tsailis said “these are rash calculations as we don’t even know if companies will declare the same profits in 2010 as they did in 2009. They will probably be much lower.”
Alternatives
The ICPAC said it has proposed a set of 25 measures to the government to help it overcome the financial crisis and the huge public sector deficit. These included more personnel at the Securities and Exchange Commission which is undermanned and cannot attract foreign capital due to serious delays.
Other proposals include studies that have been put on hold at the Ministry of Labour as part of a new framework for foreign and cross-border pension funds that could attract 50 mln euros in additional services.
Shaken image
The Bar Association said that the proposed tax hike would shake the image of Cyprus with negative repercussions.
It said that foreign investors and companies “rely on five-year and three-year investments plans for their taxes and in good faith entrusted the (Cyprus) government that this tax will remain stable.”
The government keeps on repeating that this tax increase is “minimal”, yet the 1% increase on millions of euros in investments is not at all small or insignificant, the CBA added.
Recall bill
The biggest accounting and audit firm in Cyprus, PricewaterhouseCoopers, said that the “strong foundations of our economy was based on stability and a competitive tax system which provided security and confidence. This is what made Cyprus a credible international financial services centre that attracted thousands of companies and investors.”
“Many jobs were created, the state earned revenues and a higher standard of living was achieved. A tax increase will push away investments and hurt development. The decision to raise the corporate tax should be recalled immediately, as even talk of it is causing serious damage to our economy.”
Ridiculous claim
In an effort to justify the government’s plans, spokesman Stephanos Stephanou said in a statement that “it is ridiculous to claim that certain profit-making and major companies will leave Cyprus, at a time when our country still maintains the lowest corporation tax rate in the whole of the eurozone and one of the lowest in the E.U.”
Analysts believe that the planned tax hike is aimed at appeasing the International Monetary Fund that will send a team to Cyprus at the end of June and propose harsh measures to curb the public deficit which the government will once again ignore. The IMF may even raise concerns about the government’s bond issue in November to raise about 1 mln euros in order to reduce its international debt.
Also, it is seen as a bargaining ploy by President Christofias who wants to convince the powerful civil servants union to agree to a freeze on pay rises and avoid a clash less than a year before the next parliamentary elections.
