FINANCIAL services have been a big earner for the Cyprus economy. In fact, the sector is the biggest contributor to GDP and has been more important to the economy than tourism for well over a decade. Yet the authorities have always taken it for granted, seemingly unable to grasp the devastating effects an exodus of international businesses would have on the economy.
Suffice it to say that a top executive of a Cypriot bank recently told staff that if foreign businesses withdrew their money the bank’s business would be halved. And when we consider the contribution of Cypriot banks to GDP we could only shudder to think about the consequences of a mass outflow of funds.
Members of auditing firms have also been expressing grave concerns about the future of the financial services sector after the spate of negative publicity with regard to the Cyprus economy in international business publications. This publicity, about our poor state finances, the exposure of banks in Greece and the government inability to go to international markets for its borrowing requirements, has made many foreign businesspeople jittery.
The most worrying thing is the government’s indifference. It has done nothing to re-assure foreign businesses that their investments in Cyprus were safe and that economic stability was guaranteed. It is too busy pandering to trade unions and begging them to make small concessions that would help it put public finances in order to bother with the financial services sector, the life-line of the economy. On the contrary, it has decided to start taking extra funds from foreign businesses to keep union bosses happy.
First we had the €350 annual levy on all companies which was announced as part of the first package of measures. Initially, the government had toyed with the idea of a €1,000 levy. While this is a negligible amount it was not justified in any way. For instance, the government could have said the levy was part of a rationalisation drive to encourage companies to submit records to the Registrar on an annual basis.
But nobody thought it necessary justifying the levy. The government needed money and to get unions on side, it decided to impose a levy on all companies. Next year, for all we know, it could decide to double or triple the amount because it might not be able to meet its budget forecasts.
Worse still, there are now reports that the finance minister was considering increasing the corporate tax to persuade unions to accept his second package of measures. Union bosses have rejected his proposals, repeating their tiresome slogan about taxing the rich. The corporate tax increase may be small – from 10 to 11 per cent – but it would give the impression that there was no financial stability and cultivate uncertainty among foreign businesses, the last thing a country that sees itself as an international business centre should do.
This could also give rise to fears that the government would make a habit of going after foreign companies to plug budget holes. There is also the matter of trustworthiness as Cyprus attracted foreign companies here by using the incentives of low corporate tax and financial stability. By increasing the tax, even by a small amount, it could drive companies, fearing additional increases in the future, away, while also discouraging other companies from moving here.
We do not want to be alarmist, but the government’s complacency is a cause for serious concern, especially as the competition from other countries is growing. A few weeks ago, the Russian Federation signed a double taxation treaty with Luxembourg, and the Russian government website promoted it as being as beneficial as the treaty it had with Cyprus. Then there are many non-EU countries, which can offer even more attractive incentives than Cyprus, vying for international businesses.
In these difficult times for the economy, our government should have been pulling out all the stops to make sure foreign businesses stayed here. Instead it has been treating them with disdain, seeing them as nothing more than another group it could take money off. Nobody in the government understands that these companies are in Cyprus not for the clear skies or the blue sea, but because they enjoyed real business benefits. Once these benefits are eroded or financial instability sets in they would find another international business centres to go to while we will be left wondering why our GDP has become so small.
