Thursday, June 17, 2010

Cyprus to increase their corporation tax

THE GOVERNMENT said yesterday it plans to raise its corporate tax rate, one of the lowest in the EU, by one percentage point to 11 per cent for two years to contain a deficit that is more than double EU limits.

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 per cent in 2010, well above a limit of 3.0 per cent under EU rules.

"This will be (valid) for two years. It is a temporary measure to improve the budget position," Finance Minister Charilaos Stavrakis told Reuters. 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 per cent for parliamentary approval this week.

Stavrakis said the higher tax would bring in an extra €73 million for the government, based on calculations of some €730 million in corporate tax earnings in 2009.

Tax revenue has been crimped by the poor performances of the real estate and tourism sectors. Cyprus's economy contracted by 1.7 per cent in 2009 but stabilised in the first quarter of this year.

The tax measure will affect local firms and hundreds of international companies which take advantage of Cyprus' low-tax status.

"This is like killing the sacred cow of our economic model," said Stelios Platis, an independent economist.

"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 per cent corporation tax since 2002 after Cyprus scrapped a 4.25 per cent 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 per cent from 20 and 25 per cent, 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 and above. 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.

Jarl Moe