THE current state of public finances may not favour a reform of the tax system, Manthos Mavromatis, chairman of the Cyprus Chamber of Commerce and Industry (KEVE) has said.
He was responding to proposals to modernise the system which were submitted to the Ministry of Finance by Phdias Pilides, president of the Cyprus Investment Promotion Agency ahead of the March 11 meeting of the euro area leaders.
At their meeting, the euro zone leaders reached an agreement on the ‘pact for the euro’, based on proposals of the EU President Herman van Rompuy. The pact provides among other things that a common corporate tax base will be developed in the euro zone.
Finance Minister Charilaos Stavrakis’ intentions to modernise Cyprus’ tax system are “sincere”, according to Mavromatis. “But the government will not accept a reduction in revenues to make it more attractive by giving more tax breaks in order to attract foreign companies,” he said. “This is difficult”.
Direct tax revenues fell in the first two months of this year five per cent, year on year, to €314.3 million mainly as a result of a 14 per cent decrease in revenues from the special contribution to the defence fund. This tax is imposed on dividends, interest, rents and the taxable income of public corporate bodies.
But Mavromatis said the need to modernise the tax system is imperative for one reason. “It should provide certainty to foreign investors who want to register companies and have operations in Cyprus about what is taxable and what is tax deductible.”
CIPA’s president Phidias Pilides was unavailable for comment but earlier this month he warned that Cyprus’ tax system which was reformed in 2003 ahead of the EU accession, “will not last another 10 years”, even though the 10 per cent corporate tax is the lowest in the EU.
But according to George Poufos, director of the Inland Revenue Department, there are no grey areas in Cyprus’ tax system and the corporate tax basis.
“There is clarity about the administrative practices we apply, which are also confirmed by case-laws,” regarding what is tax deductible and what is not, Poufos said. Only expenses directly related to operations aiming at creating income are deductible, he explained.
“Even though we lack a computerised system and sufficient staff we at the IRD are in position to serve our purpose and citizens,” he said.
The IRD director warned that a modernisation of the tax system may not involve changes in what is deductible and what is not deductible. “We should not think that tax reform and changes or improvements in administrative practices are the same thing.”
