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By Shavasb Bohdjalian
Approved Investment Advisor and CEO of Eurivex Ltd.
The decision of 11 EU member states to impose a levy on all transactions in shares, bonds and derivatives such as forex and CFD trades is likely to worry many Cyprus Investment Firms (CIFs) which one way or another will be affected by the move.
The eleven EU member states, including Germany, France, Italy, Spain and Greece, have agreed to impose a 0.1% Financial Transaction Tax (FTT) on shares and bonds and 0.01% on derivatives including forex and CFD trading in a move that the Commission believes will raise EUR 30-35 bln a year.
Cyprus, along with the UK, Luxembourg and other low tax states, has not joined the move.
The FTT will apply if any party to the transaction is based in a participating member state, regardless of where the transaction takes place. In an effort to stop investors from moving their trades outside of the EU11 to avoid the tax, both the buyer and seller in any trade will be liable for the tax as long as either of them is based in one of the participating states. And even when the parties to a trade have no relation to the EU11, they will still be taxed if they are trading an instrument issued in one of these countries, such as German government bonds, according to an analysis in the WSJ.
The implications for Cyprus are huge since there are more than 100 investment firms actively involved in share but mostly trading in forex, which will be loathe to pay the tax at a time when other financial centres are not affected by the move. The problems for Cyprus are compounded in view of the bailout negotiations and pressure from abroad to broaden the FTT grouping. The suggestion by a German official calling on Cyprus to join the FTT initiative in order to win support from German MPs who will vote on whether or not Germany will participate in the EU bailout for Cyprus, is seen as an attempt to bully Cyprus into participation.
To be honest, we all knew that Germany would make a lot of noise about our low tax regime and AML procedures and we all knew that we could withstand the pressure and keep our low tax regime based on the justification that with so many jobs dependant on the low tax regime, any change would ruin our economy especially after a bailout agreement is signed.
Even if the Troika insisted on tampering with the 10% tax rate, such an attempt would be fought all the way, taking into account the strength of the “Low Tax” lobby, made up of the lawyers, banks, auditors and fiduciary companies who basically rule Cyprus. But the same cannot be said of the lobby representing the interests of the Cyprus Investment Firms, which is practically non-existent and does not have the necessary muscle.
If Berlin gives Cypriot negotiators a choice of either the 10% corporate tax rate or join the FTT, our negotiators could “sacrifice” the CIFs and take the FTT bait. I hope not, but if indeed we are forced to join the EU11, then the prospects of the CIFs will not be good with an acute risk that many of the existing firms which are providing valuable jobs and income for the country will pack up and leave.
Cyprus has already lost its competitive edge with respect to the VAT rate, which from the record low of 15% a year ago is now 18% and climbing to 20% within the next couple of years. This has placed international companies with EU sales which had relocated to Cyprus at a very disadvantageous position since they have lost the tax advantage on top of operating from a country with junk status.
If Cyprus joins the FTT initiative, it will probably spell the end to the booming investment services industry.
Our only hope is that the FTT may face a legal challenge either at the European Parliament or at the European Court of Justice, which may delay the debut of the FTT from the planned January 2014 implementation day or at least postpone the move until a time when the tax is globally imposed by all major financial centres.
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(Eurivex Ltd. is a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10, licensed to trade in forex, offer portfolio management services and hold client funds. Eurivex is also an approved Nominated Adviser for listings on the Emerging Companies Market of the Cyprus Stock Exchange. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
