* VAT hike to 17% expected in September *
Parliament approved on Friday the Cyprus government’s first package of austerity measures aimed wrestle down its high deficit, which politicians said had been watered down in order to calm union leaders, particularly those representing civil servants and employees in the semi-government sector.
Authorities say the measures could pull the deficit down to 5.5% of GDP this year from a now projected 6.5%, and below 3.0% next year.
However, despite its members’ contributions to the state pension fund upped by MPs from the proposed 2.5% to 3%, the civil servants’ union Pasydy said in a statement issued on Monday that it would continue its dialogue with the Minister of Finance, hopeful that matters would not lead to a conflict in the labour market.
On the other hand, leading audit professionals said the package that aims to raise some 700 mln euros for the state, was “balanced”, but warned that a 2 percentage hike on the VAT rate to 17% would probably come through in the second package expected later next month, earning the state some 160 mln euros.
“This represents the first set of measures that the Cypriot government will be taking in order to reduce public spending and to boost public revenues without putting at risk the competitiveness of Cyprus as a financial centre,” said Nicos Chimarides, Partner in charge of Direct Tax Services at PwC.
“Long-standing structural imbalances have been addressed in what appears to be a balanced first package geared towards immediate results,” Chimarides explained in a newsletter distributed to associates and clients.
“The second phase of the austerity measures is expected to be enacted by the middle of September … and these are expected to include an increase of the VAT standard rate from 15% to 17%,” explained Marios Kallias of M. Kallias & Co. Chartered Accountants.
The measures are as follows:
1. New top rate for personal income tax (EUR 5 mln)
Cyprus resident individuals or individuals exercising an employment or profession in Cyprus will be taxed at the rate of 35% (from 30%) on their taxable income exceeding 60,000 euros as from the current tax year 2011. The initial ceiling was for 70,000 euros.
2. Tax incentives for highly-paid employees
In order to encourage the relocation of new businesses to Cyprus, 50% of the income of employees relocating to Cyprus and with an income exceeding 100,000, will be exempt from tax for the first five years following the relocation. This will apply from 2012 onwards.
3. Defense Contribution on dividends and interest (65 mln)
The Special Defence Contribution on dividends is increased from 15% to 17% with immediate effect. This will mostly affect individuals resident in Cyprus earning or deemed to be earning dividends, and groups of companies ultimately held by Cyprus tax resident individuals.
“In relation to groups ultimately held by non-Cyprus residents, an announcement is expected to be made soon clarifying that the deemed distribution rules will not apply to them in the future,” PwC’s Chimarides added.
The Special Defence Contribution on interest is increased from 10% to 15% with immediate effect. This measure will again mostly affect individuals resident in Cyprus earning bank interest. Individuals whose total income does not exceed 12,000 euros as well as Provident Funds continue to be taxed at 3%. Special Defence Contribution on interest earned by individuals from government bonds also remains at 3%.
“Companies will generally remain unaffected as their profit from interest should in most cases be subject to income tax at 10% and be exempt from Special Defence Contribution,” Chimarides added.
4. Fixed annual duty for companies
All companies (except for dormant and those not owning any assets) are required to pay an annual fixed duty of 350 euros to the Registrar of Companies. For groups of companies the total duty is capped at 20,000 euros.
The duty for 2011 is due by December 31, 2011 and for subsequent years by June 30. Financial penalties of 10-30% will be levied for late payment within 2-5 months from the due date. The Registrar may strike off the company in case of further delay. The fee for reregistering is 500-750 euros depending on the circumstances.
5. Property Tax (EUR 24.2 mln)
The bands and rates for immovable property tax for properties in Cyprus have been revised as follows as from the year 2012:
Property value as at January 1, 1980:
Up to 120,000 euros: 0%
120,000 – 170,000: 0.4%
170,000 – 300,000: 0.5%
300,000 – 500,000: 0.6%
500,000 – 800,000: 0.7%
Over 800.000 euros: 0.8%
6. Public sector employees: pension contributions (EUR 108 mln)
Public sector employees will contribute 3% of their salaries towards future pension benefits, with immediate effect.
New hires in civil service will pay into the social insurance fund, as opposed to the present system where 70,000 public sector employees have pension contributions paid for by state which is equivalent to 2.8% of its GDP. Without adjustments, it can reach 5.2%.
7. Public sector employees: one-off contribution
Public sector employees will make progressive contributions at rates ranging from 1.5% to 3.5% for incomes above 1,500 euros per month for two years as a temporary measure. This contribution is not deductible for Income Tax purposes. The measure will come into effect from September 1, 2011.
8. Decreased VAT on first home
VAT on the purchase or construction of one's first home is decreased from the standard rate to 5% in relation to the cost corresponding to an area of 200sq. m. provided the dwelling is not larger than 300 sq.m.
“This replaces the previous measure through which buyers paid VAT at the standard rate but were later entitled to a refund,” Marios Kallias explained.
The reduced rate applies as from November 1, 2011 and only for homes which are used as the primary and permanent place of residence.
OTHER MEASURES
The government also aims to introduce a more efficient management of social payments, helping it to earn some 360 mln euros.
A long-standing demand of the trade unions has been the clampdown on tax evasion. The authorities want to regulate, by law, a requirement of every business or service to issue receipts and also to pursue tax evasion more vigorously without the deterrent of the personal data protection act.
As part of the measures, the government has proposed the reduction of starting pay scales in civil service by 10%.
Another pending issue is the cost of living allowance. The government says it is in consultation with labour unions for a fairer distribution of the index-linked system calculated on salaries twice a year based on inflation. Employer organisations and the IMF want COLA abolished.
