By Hamza Hendawi
TWO RECENT rounds of negotiations between old friends Cyprus and Russia have surprisingly failed to achieve their declared objective – renewal of a double taxation treaty seen as crucial to the island’s lucrative offshore sector.
The delay might turn out to be long, and whether a third round of talks scheduled for next month will iron out differences remains to be seen.
Speaking to reporters yesterday, Finance Minister Christodoulos Christodoulou warned that a stalemate in the negotiations would have a far greater negative impact on the Russian economy than on that of Cyprus.
An annual total of $20 to $25 billion are invested in Russia through Cyprus, and Russian firms make available through Cyprus goods worth $500 to $600 million a year, the minister said after meeting Russian Chargé d’affaires in Nicosia Sergei Rokov.
“An agreement will only be reached when there is a new (Russian) approach which serves the interests of both sides.”
Lack of progress on the taxation treaty has given Russian offshore companies and others doing business with the former communist country from bases in Cyprus something to worry about, but it has also led some to ponder the long-term future of the island’s offshore sector on its current basis.
The apparent deadlock has also lent weight to recent predictions that the more than 30 double taxation treaties signed between Cyprus and foreign countries, the backbone of the offshore industry, might fall away with time as authorities the world over improve tax collection and as groupings such as the European Union, which Cyprus aspires to join by 2003, begin actively to seek tax harmonisation.
If such forecasts hold true, and there are signs that they might, the island’s offshore sector could lose one of its main attractions: low taxation.
The importance of the sector to the Cyprus economy can hardly be exaggerated. It is one of the fastest growing areas of the economy, accounts for four per cent of GDP, 11 per cent of invisible receipts and employs thousands of people, and is also essential to the growth of the services industry.
There are more than 30,000 offshore companies registered on the island, of which more than 1,000 maintain fully-fledged offices.
“It is not just useful, it is not just a good addition to our economy, it is a part of our life that you cannot take away,” was how former president and millionaire-businessman George Vassiliou recently summed up his views on the offshore sector.
But the difficulties into which negotiations with the Russians have run reminded everyone concerned that the money-spinning sector cannot be taken for granted.
“Everyone is worried,” said Valere Gigarev of the Limassol-based Russian Businessmen Association, referring to the negotiations over the treaty. “We are interested to see the new treaty unchanged from the old one,” he told the Cyprus Mail.
Gigarev’s wish to see an unchanged treaty, however, is not likely to be granted, according to tax experts at PricewaterhouseCoopers, the giant accounting firm with extensive dealings with Russian businesses on the island.
Speaking to the Mail, partners Phidias Pilides and Panikos Kaouris said Russia has recently pledged to the International Monetary Fund to improve its tax collection and that that might have been at the root of its insistence on taxing interest profits, the main point of contention in the negotiations.
“The new treaty will not be exactly the same as the old one,” said Pilides, who warned that “the Russians stand to lose by discouraging companies from investing in their country.”
Kaouris said one demand put forward by Cypriot negotiators was that Moscow agree to a taxation treaty similar to those recently signed between Russia and other countries, a point on which Christodoulou said yesterday: “We do not seek special treatment. We only seek equal treatment.”
“They (Cypriot negotiators) told the Russians that if they wanted to change their approach to taxation treaties, they should not start with us,” said Kaouris.
The two PricewaterhouseCoopers tax experts, however, sought to play down the significance of low taxation to the island’s offshore sector, saying many of the companies which set up shop here did not do so solely for tax purposes, although the low taxation offered (4.25 per cent) was important.
“If a disadvantageous taxation treaty with the Russians was to be signed, it would not be the end of the world,” predicted Pilides. “The industry will weather the damage.”
Definitely not the end of the world, but the industry would be dealt a body blow, given the huge volume of Russian-related business on the island.
“If the Russians are not satisfied with the new taxation treaty, they will go somewhere else where they can find a better refuge,” Popular Bank’s chief economist Ioannis Tirkides told the Mail.
Tirkides’ counterpart at Hellenic Bank, Marios Clerides, agrees. “We have created a superficial atmosphere in which the survival of many offshore companies depends on low taxation.
“The problem is that if you take that away, companies will go elsewhere.”
Views such as those held by Tirkides and Clerides are hotly contested by the Central Bank, the chief regulatory body of the offshore sector.
“We are not a tax haven, what we have is a tax-planning jurisdiction,” said George M. Georgiou, of the Central Bank’s Offshore Enterprises Section. “You’ll be surprised to know how many people came here for reasons other than low taxation,” he told the Mail.
Georgiou also dismissed as too premature suggestions that the island’s offshore sector would end once the EU moves to harmonise its internal taxation, thus cancelling preferential treatments such as those accorded to offshore companies in Cyprus and EU member states Portugal, Italy and Ireland.
“It will take a very long time to accomplish this, it is even a more contentious issue than the single currency, over which the EU fought something of a civil war,” he said.
