Tax reform could net more cash from evaders

ECONOMISTS said yesterday that tax cuts proposed by DIKO on Tuesday would crackdown on widespread tax evasion but harm the poor, as the country shifts from direct to indirect taxation.

Given that Cyprus is forced to raise VAT to a target of 15 per cent before joining the European Union, DIKO deputy Marcos Kyprianou yesterday told the Cyprus Mail that the tax cuts were a way for people to cover some of their losses.

“A reduction in income tax and an increase in VAT could be more equitable. The only problem with DIKO’s suggestion is that if you increase VAT and lower income tax, then you don’t help the people who don’t pay tax. Yes, you catch the tax evaders, the big fat rich guys, but the poor are hit by VAT,” one economist told the Cyprus Mail.

He said the package could increase state revenue, by netting more money from the rich in terms of VAT, given endemic tax avoidance and tax evasion.

But Kyprianou, chairman of the House Finance Committee said that direct housing benefit and education subsidies would benefit the poor, as tax cuts would the better off.

“This is the EU approach, not to have social policy through taxation, but to make direct payments to those in need,” he said.

He added that the details of extra subsidies would be discussed in the new parliament, after the May 27 general elections.

Responding to criticism that the tax pledge was blatant electioneering, Kyprianou countered that only half of the party’s six-page document on the economy, published on Tuesday, related to the tax issue.

“We’ve published other documents on all aspects of life in Cyprus. We couldn’t announce our proposals on the economy without mentioning out proposals on tax,” he said.

He said the tax cuts were less important than the need to simplify the taxation system to bring Cyprus into line with US and European practice.

Kyprianou said 25 different tax brackets would be replaced by three basic rates.

Economists were yesterday divided over whether the cuts would inject more liquidity into the economy, or bolster savings and investments, given that people would have more disposable income.

Kyprianou said the extra income would keep pace with the rising cost of living and the planned VAT hikes, which in turn would stimulate growth.

DIKO also supports a lowering of corporate tax to 12 per cent, which Kyprianou said would keep serious offshore companies in Cyprus. International businesses are currently taxed at 4.25 per cent, while domestic companies pay between 20 and 25 per cent tax to the government. EU harmonisation requires a single rate for all companies.

The DIKO paper on the economy wants to raise the taxable threshold to £10,001, compared to the current £6,001.

Income between £10,001 and £18,000 would be taxed at 10 per cent; £18,001 to £28,000 taxed at 20 per cent and income over £28,001 at 25 per cent.

The current tax brackets are £6,001 to £8,000 at 20 per cent, £8,001 to £11,000 at 30 per cent, with all incomes over £11,001 at 40 per cent.

The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.