ICPAC Accountancy Cyprus 2017

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52 ACCOUNTANCY CYPRUS COVER STORYLOIZOS TIMINIS members. Cyprus is one of them. For Cyprus to attract international busi- Partner, Timkas Chartered Accountants nesses to set up headquarters here, we need much more than full transpar-What, in your opinion, are the most important issues and challenges facing tax ency: for example, the expansion toprofessionals worldwide today? our bilateral Investment ProtectionThe most important issues facing tax professionals worldwide are increased regula- Treaty network, attracting at leasttion, which includes stricter rules on transfer pricing and artificial transactions, the one reputable International Bank, themove towards full transparency through FATCA and CRS compliance, and the provision of custodian services by ourcriminalization/upgrading of tax evasion to a money laundering offence. The chal- banks, improvements to our workforcelenges are twofold: on the one hand, tax professionals will have to make sure that in terms of retraining it in areas suchthey are not implicated in any way, directly or indirectly, in tax crime activity and, as fund management and administra-on the other, they need to ensure that they provide their clients with the correct ad- tion, custodian and compliance, etc.vice so that the latter are fully compliant with tax laws in the various countries where Unless a country has the capability tothey reside, operate or derive income from. provide these services, it cannot really move into financial sector managementHow do these issues affect Cyprus’ centre, fully transparent and fully to attract international businesses. Inposition as an international business compliant with international regula- short, unless we decide on the targetcentre? tions, directives and agreements. Do markets we wish to attract, determineThe issues described in the previous you think this is the correct strategy the means by which we plan to attractquestion directly affect Cyprus firstly as to attract international businesses in the “players” from those markets anda country, secondly as an EU member setting up local headquarters? prioritise our goals, I cannot see howState and, finally, as an international Cyprus’s compliance with interna- we can gain a competitive advantagebusiness centre. Cyprus, in these two tional regulations, directives and over other international financial cen-capacities, finds itself right in the mid- agreements is not a strategy as such; it tres. Last but not least, our country’sdle of all these changes. is an obligation of any modern state. credit rating and the fact that this has The challenge of full transparency, for been in the ‘junk’ category for a longCyprus’ strategy is to portray itself example, is faced by all modern states, period, is a real obstacle to building theas a reputable international business especially those States who are EU image that Cyprus wishes to have as both an International Business Centre and an attractive destination for inward

53ACCOUNTANCY CYPRUSAS WE HAVE ALREADY MOVED INTO THE ERA AND but challenging and valuable, both inENVIRONMENT OF FULL TRANSPARENCY AND REGULATION, terms of ensuring compliance and inTHE ROLE OF THE TAX CONSULTANT BECOMES MORE choosing tax arbitrage strategies fromAND MORE DIFFICULT less available options, requiring tax consultants to become more and moreinvestment in its real economy. This revenues in Cyprus – in most cases, innovative.problem with the country’s rating may it accounts for more than half of thealso be the reason why reputable In- total. Tax services may not account for The case of the European Commis-ternational banks are not considering a very large percentage of the total rev- sion vs Apple & the Government ofsetting up operations in Cyprus and it enue stream but, without these services, Ireland: (a) Do you think the Com-is something which we really have to income from other services such as ac- mission’s verdict is fair?focus on and improve swiftly. counting, audit and fiduciary, would The Apple case is a classic example of not exist. a massive tax avoidance scheme underHow attractive is the tax regime of the auspices of the Irish Government,Cyprus compared with that of other As the business world becomes more as the whole structure was set up on thejurisdictions? What should be done in complicated, do you think that tax basis of two tax rulings issued by theorder to make it more competitive? services will become more important Irish Ministry of Finance. This struc-The Cyprus tax regime is attractive, es- for corporations (both local and in- ture allowed artificial transactions inpecially to some ex-Soviet jurisdictions’ ternational) and individuals? the form of expenses paid to the ‘headbusinesses. There is always room for You are right in saying that the busi- office’, which never had the operationalimprovement so as to be able to attract ness world is becoming more compli- or functional capability of providingbusinesses from other markets but tax cated but this new state of affairs does the expensed services to the Apple Incis not the only factor under consider- not all relate only to companies’ tax Irish subsidiaries, thus eroding the Irishation when international businesses bills. More agile rules by banks are also tax base drastically. Note that this iscome to locate their headquarters or a factor to consider. not the only case in an EU State (refer-even their regional branches. Other Obviously, a multinational’s tax bill is ence is made to the Fiat case in Luxem-factors include geographical location, a significant expense, which reduces the bourg and the McDonalds case in theculture and even religion so we need to availability of its after-tax profits for Netherlands, for example) nor the onlyfocus on all these, too, so as to be able reinvesting and/or dividend payouts. case in Ireland either! Major cases into formulate an effective strategic plan. This is why multinationals have been Ireland, I believe, are about to come to applying resources to tax structuring light involving American hedge fundsHow important are Tax Services to with a view to optimizing their tax acquiring the Irish Banks’ distressedInternational Investors (corporate arbitrage policies. The same applies to loans and later disposing of or other-and individual) as a revenue stream High Net Worth Individuals and lo- wise exploiting them at excellent profitfor local accounting, audit and tax cal clients, although the latter do not margins with extremely low corporatefirms? have much room for manoeuvre. As we tax rates, taking advantage/abusingIncome from services (not only tax have already moved into the era and section 110 of the Irish tax law. In rela-services) to international business sec- environment of full transparency and tion to the Apple case specifically, thetor companies represents a very large regulation, the role of the tax consul- European Commission has acted fairlypercentage of local audit and tax firms’ tant becomes more and more difficult on the basis of the ‘prohibition of State Aid’ principle, i.e. the State has been providing financial aid to Apple Inc. by firstly issuing the two tax rulings and, most importantly, by allowing Apple Inc. to operate through Ireland at ef- fective corporate income tax rate well below 0.1%. It must be noted that, following on from the discussion on

54 ACCOUNTANCY CYPRUS COVER STORYtax rulings and ‘State Aid prohibition’, ments in line with the Vienna Conven- one of these two countries, both of which have relatively low corporate taxthe Cyprus Tax Department has speci- tion on the equal treatment of taxpay- rates. If, instead of Cyprus and Malta, the only EU state allowing such activ-fied chargeable fees when a tax ruling ers principle, which allows a State to ity was Sweden, which has a very high corporate tax rate, in which jurisdictionis applied for, as from this current treat foreign taxpayers more favorably would these companies operate? In Sweden, obviously.year, so as to cover the administration than local taxpayers and it will be very Taxation in Cyprus: (a) Do youcost of the tax ruling issuance itself, in interesting to see the decision of the think any changes should be made to the current corporate tax rate?response. Additionally, I believe that European Court of Justice. I believe that the corporate income tax rate of 12.5% is ideal as thingsan application for a tax ruling must be stand at the moment. The reason is that 12.5% is not less than half ofmade within a unified framework or (b) How might this affect Cyprus’ 25%, which is the corporate income tax rate of many other countries withmethodology, which our Tax Depart- position as an attractive EU destina- which Cyprus has (or does not have) bilateral Double Tax Avoidancement will have to develop and require tion for international businesses? agreements. This means that Cyprus should not be on the black list of If Apple Inc., instead many countries and this is something that perhaps our Ministry of FinanceI BELIEVE THAT THE CORPORATE INCOME of setting up and ‘us- should be looking at. However, we ing’ subsidiaries in Ire- could improve on our corporate tax system by increasing the corporateTAX RATE OF 12.5% IS IDEAL AS THINGS land, had done so in income tax rate to 25%, abolishingSTAND AT THE MOMENT. HOWEVER, WE Cyprus, the same is- the special defence contribution on sues would have arisen distributions and embark on a par- tial imputation system of taxation.COULD IMPROVE ON OUR CORPORATE TAX between the European Under a partial imputation systemSYSTEM BY INCREASING THE CORPORATE Commission, Apple of taxation, the 25% corporate rateINCOME TAX RATE TO 25%, ABOLISHING THE Inc. and Cyprus. It tax would include, for example, aSPECIAL DEFENCE CONTRIBUTION is imperative that the 10% corporate profit tax and a 15% Cyprus tax authori- imputed dividend tax on the share- holder. The dividend tax deemed ties be ‘friendly’ to to be withheld from non-resident/ multinationals in non-domiciled shareholders may be refunded on submission of an ap- order to be an at- plication by the shareholder, leaving an effective tax rate on corporatefrom applicants of such rulings. To tractive competitive jurisdiction but, profits of 10%. This system would also require the abolition of the taxenhance my opinion on this point, one at the same time, the Apple case has exemption of dividend income for companies and the introduction of ancan put oneself in the position of an demonstrated that EU member states optional participation exemption of foreign dividend income and capital‘Irish-owned’ Irish company, which need to be transparent in their dealingspays for ‘artificial expense’ invoices with multinationals, as they will alwaysto a company in a tax haven jurisdic- come under European Commissiontion. If the Irish tax authorities came scrutiny. I repeat what I said in replyacross this case, would they allow these to an earlier question: the tax systeminvoices as legitimate tax allowable ex- is not the decisive factor in the choicepenses? I do not think so. Based on the of a jurisdiction by large multination-principle of fairness, therefore, this type als and that we, as a country, need toof expense should be disallowed for tax put much more effort into creatingpurposes in the Apple case as well. In an attractive and competitive jurisdic-addition, I would note that, as soon as tion for international companies. I willthe European Commission issued its give another example to support thispress release in late 2013 if I recall cor- opinion: companies dealing in ‘binaryrectly, Apple Inc changed its structure options’ are excluded from the Euro-in Europe. If Apple’s ‘Irish structure’ pean Union due to the fact that ‘binarywas a legitimate one, I am convinced options’ are not treated as financialthat the company would have stood by instruments or derivatives. The onlyit, defended it and continued using it. EU states that allow and license suchI am sure that Apple Inc and the Irish operations are Cyprus and Malta, soGovernment will put forward argu- all ‘binary options’ firms operating in

OCIAL INSURANCE CONTRIBUTORS SHOULD BE GIVEN THE CHOICE OF CONTRACTINGOUT FROM THE STATE-RUN SOCIAL SECURITY FUND AND TAKE OUT PRIVATE INSURANCEPENSION CONTRACTS WITH LIFE ASSURANCE COMPANIES OF THEIR CHOICEgains for the purposes of having an rate of 15% and I am sure that this has security contributions mostly end upoptional exemption in place. A lot of attracted some high earners to Cyprus. in a ‘black hole’ out of which theywhat I have just described has been However, one needs to focus also on will have very little benefits in com-practiced with great success in Malta local Cypriot taxpayers, both salaried parison to what they pay over theirfor a number of years now. and self-employed, as it is a fact that active working lives. after the tax reforms of 1992 and 2002 (d) Can you suggest ways to improve(b) Can you suggest ways to improve on the implementation of lower in- individual tax collection procedurescorporate tax collection procedures come tax rates, the State’s tax revenues and methods? Are there any otherand methods? Are there any other had increased due to less tax evasion. issues you would like to mention?issues you would like to mention? I would like to touch on another I would like to make a general com-Capital gains tax could be modern- type of direct taxation, which is rath- ment in relation to how the socioeco-ized by requiring the buyer to with- er high –social insurance. I under- nomic framework works in Cyprus. Inhold from the seller a percentage, say stand that studies show that the so- general, no-one likes to pay taxes. The10% (corporate profit income tax cial insurance fund may not be viable way things work these days in Cyprusrate) or any other suitable percentage due to the ageing of the population. is to encourage this attitude/culture forrate of the agreed disposal price of It is also, however, a fact that succes- the simple reason that people declaringthe immovable asset and pay it over sive governments have been putting high incomes are ‘penalised’ by notto the State as provisional tax on be- their hands deep into the Cypriot having access – or by having restrictedhalf of the seller. This would simplify people’s pension pockets. Further, access – to the state’s social aid pro-tax clearance procedures and reduce it is also a fact that the social secu- grammes, such as healthcare and edu-the possibility of tax evasion through rity fund has not been investing its cation. So people tend to try and ‘save’under-declaration of disposal pro- monies in any profitable investment money to cater for their respectiveceeds. The seller would then be able schemes. As I am strongly opposed needs and for ‘a rainy day’, so to speak.to claim a refund if he/she can prove to any type of centralization (as the In order, therefore, to create a differentthat the capital gains tax that should latter provides opportunities for cor- culture and attitude of people towardshave been paid should be lower. ruption and higher administrative paying taxes, the whole framework has cost burdens), my opinion is that to change so that people in Cyprus(c) Would lowering taxation for in- social insurance contributors should know that paying taxes and contribu-dividuals be an incentive for interna- be given the choice of contracting tions will have a positive effect on theirtional High Net Worth Individuals to out from the state-run social security lives and their quality of life by im-relocate to Cyprus? fund and take out private insurance proving their own and their families’I feel that the top personal income tax pension contracts with private life as- sense of everyday safety.rate of 35% is high. If someone adds surance companies of their choice, athe special contribution, which will measure which was introduced in the IN GENERAL, NO-ONE LIKESbe abolished next year, it becomes ex- late 1980s in the United Kingdom. TO PAY TAXES. THE WAYtremely high. I believe that the top rate We can certainly draw conclusions THINGS WORK THESE DAYSshould be reduced to 30%, but a ceil- and avoid mistakes from the UK IN CYPRUS IS TO ENCOURAGEing should be set for this top rate (say experience. This will most certainly THIS ATTITUDE/CULTURE€100,000), after which a lower flat attract large International life assur-rate of 15% should apply. At present, ance companies to the island andthere is a provision for high-flying for- also act as an incentive for decreasingeign employees earning salaries above undeclared work. At the moment,€100,000 to be taxed at an effective people feel that payments of social

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58 ACCOUNTANCY CYPRUS COVER STORYALEXIS TSIELEPIS all require specialized knowledge. Gone are the days when attending a seminarDirector, Head of Taxation, Costas Tsielepis & Co or two was good enough to keep one’s head above water. Knowledge is key andWhat, in your opinion, are the most important issues and challenges facing tax planning is everything in our business.professionals worldwide today? Compliance: Anti-money launderingInvesting in knowledge and in their business is the biggest challenge facing tax profes- (AML) and knowing your client (KYC)sionals. It is not possible in this ever-changing environment to say “I know enough.” are a big part of any engagement in theYet many enter a certain comfort zone of knowledge and falsely believe they can simply modern world. Regulation is heavy andrely on their existing knowledge to offer their clients the advice they need and expect. expensive to maintain for businessesWhen we talk about international business, this includes the successful businessman but, in my opinion, it has not gone farwho will be more likely to personally undertake cross-border investments today than enough in Cyprus to eradicate the “cow-in the past. The correct recipe for advice requires a number of “ingredients” from the boys” that still exist in the corporate“chef,” who is the tax professional: services world. Investing in a robust and effective compliance department is aMulti-disciplinary service: The one- when advising on a transaction. I have must for the professional.man show is no longer viable as a port of never been a fan of the ‘one-stop shopcall for the client. Knowledge of various international name’ as this restricts How do these issues affect Cyprus’aspects of taxation (capital gains, income the choice of professionals to the one position as an international businesstax, VAT) need to be offered in parallel who has the same company name on centre?to related considerations (CRS, FATCA, his door. Over the years, our office has The regulation of professionals in Cy-BEPS). These require expert and special- formed its own network of professional prus that offer advice is improving butized knowledge across a number of disci- associates based on experience, rejecting it is a market that is still marred withplines, including tax, compliance, audit, those who do not adhere to the same interventions, both political and private.legal and bookkeeping, and controlling standards and values as our firm. It is The practice by regulators coveringthe quality of the product from start to never about the global corporate name up what should, in fact, be disciplinedfinish is the only way to ensure maximisa- but always about the personal ability of sends out the wrong message and pro-tion of the potential benefits of structur- the specific advisor, regardless of where motes the very thing that they want toing, as well as of the subsequent preserva- he is employed. eradicate. Cyprus does not have a qual-tion of a structure. Specialization: Nowadays more than ity brand name in international busi-International network: Local expertise ever before, Double Tax Treaty inter- ness. Its reputation has been tarnishedof domestic tax systems is imperative pretation, national tax laws and VAT by external factors, mostly foreign competition. Yet as an island, we neither

59ACCOUNTANCY CYPRUSpossess a competent PR arm to counter pens, prepare for Cypri-leaks! has long been characterized as a stable EU “non-offshore” tax-competitivethese attacks nor the intelligence to col- The reputation of the island as an inter- jurisdiction with exciting tax planning potential for EU and non-EU investorslectively form a strategy in this respect. national business centre is immensely alike. Individually, the various exemp- tions, exceptions and special regimes important and we should do everything are not ground breaking – they exist in most jurisdictions where internationalCyprus’ strategy is to portray itself we can to safeguard it. No government business is being promoted. Perhaps one specific advantage making Cyprus moreas a reputable international business budget exists to defend our brand against competitive than other jurisdictions is the flexibility of what is deductible in arriv-centre, fully transparent and fully malicious media coverage. We fail to ing at the taxable income – the “wholly and exclusively” test is less strict, whencompliant with international utilize the brand names that exist in our compared to other jurisdictions, which require, for example, that an expense isregulations, directives and corporate world (such as Messrs Acker- deductible only if it is incurred “wholly, exclusively and necessarily” for the pur-agreements. Do you think this man or Ross) who are recognized and poses of generating income. However, the overall result – the package – is attractiveis the correct strategy to attract respected the world over and, instead, let and competitive. The country’s growing Double Tax Treaty network is importantinternational businesses in setting up our politicians (who are not recognized and a good strategy, so as to allow as many circumstances as possible to con-local headquarters? and certainly not respected in the business sider Cyprus as a potential jurisdiction within tax structuring. Agreements withI am glad you think there is a strategy! world) man our front line at international regard to investment protection and tax reciprocity should also form part of ourFrom my viewpoint, there are knee-jerk conferences and debates. Regulation has targets, especially, with regard to countries that are important business partners, suchreactions that are mutually exclusive of not gone far enough to deal with those as the Russian Federation. It is puzzling why these remain pending.one another. We have opted to be part service providers – accountants, auditors, How important are Tax Services toof the first wave of countries implement- lawyers and advisors – who are willing International Investors (corporate and individual) as a revenue streaming CRS, at a time when the macro- to take on clients they should not and for local accounting, audit and tax firms?economic shock of the bail-in of 2013, facilitate transactions that should not go Immensely important. Tax services have been the biggest area of growth in ourthe closure of Laiki Bank, the transfer ahead for a few dollars more. The Mon- business. A good tax practitioner (and I include indirect taxes) can advise and eyval report, the report structure transactions and investments in a way that saves a significant amountTHE REPUTATION OF THE ISLAND AS AN from KPMG Italy and of money through legitimate tax plan-INTERNATIONAL BUSINESS CENTRE IS ning. Such money can then be used to the Basel AML Index invest in the business and strengthen all show that Cyprus is its long-term existence or in new busi- highly compliant and nesses. Tax considerations are not solely about what will drive an investment andIMMENSELY IMPORTANT AND WE SHOULD ranked higher than having a strong tax advising team to inDO EVERYTHING WE CAN TO SAFEGUARD IT those who pointed the finger at us, notably Germany, the Neth- erlands and the UK inof activities from the failing bank to the 2013. Yet we are perceived as the inferiorBank of Cyprus at a highly questionable brand. Is this the result of a strategy?value, and the sale of the Greek opera- Despite my comments, we should ap-tions of all the Cyprus banks, are still plaud the new measures introduced overbeing felt in our banking system and the last couple of years (i.e. the intro-the banks have barely recovered. The duction of notional interest deduction,Central Bank appears to have no con- non-dom rules, tax neutrality of foreigncrete idea of what compliance should exchange differences, etc.), which furtherentail, issuing circulars to the banks ev- support the promotion of economicery time they change their minds about development and the establishment ofhow compliance should be practically corporate substance by offering persua-enforced. The registry of beneficial own- sive advantages to companies and to in-ers of Cyprus companies which we are dividuals from a personal tax perspective.called, under an EU Directive to enforceand one of the most important decisions How attractive is the tax regime ofwith regard to our jurisdiction, will Cyprus compared with that of othermost probably be handed to the Office jurisdictions? What should be done inof the Registrar of Companies – the order to make it more competitive?most chaotic, badly run, and inefficient Our corporate tax legislation offers adepartment on the island. If this hap- very attractive overall package. Cyprus

60 ACCOUNTANCY CYPRUS COVER STORYyour corner is a worthy investment in Apple contends that it received no special lower professional fees coupled with whatitself. Gone are the “supermarket” days treatment that was not available to an- is normally a high quality service. Underwhen “products” were sold off the shelf. other company, yet its Irish structure sits a harmonized direct tax system, I still feelProper tax planning and strategizing on that fine line where avoidance greets Cyprus can perform well given a levelis the very first point of contact now evasion. As a tax advisor, I have sympathy playing field. I do not, however, trust ourfor clients. We can’t – and we won’t – for Apple, as it is being placed under the European partners to build a level playingmove on to the next step without it. microscope at a time when governments field in the first place and I do not have are looking to balance their budgets and confidence that our politicians will be ableAs the business world becomes more where greedy capitalist behaviour by the to know the difference. As always, it willcomplicated, do you think that tax few has created a society in which being fall on private sector professionals to spendservices will become more important successful is akin to a crime. Apple is time, energy, money and resources andfor corporations (both local and paying the price of political instability. ensure our competitiveness.international) and individuals? Why else did it take the EU so manyAbsolutely. Successful businesses and busi- years to decide to look into this particular Taxation in Cyprus: (a) Do you thinknessmen have more opportunities avail- structure that has been in place for almost any changes should be made to theable to them for their next expansion or three decades? The US Treasury is critical current corporate tax rate?investment than even before. The world is of this approach. Of course it is. In theo- The corporate tax regime is overall verymuch smaller in that sense. Family offices ry, all profits declared and taxed outside of good and competitive. The 10% corpo-have become global players in interna- the US limit the profits and the tax (net ration tax rate was psychologically moretional investment opportunities, as impor- of double tax relief) available to the Trea- attractive, but not the decisive factortant as the corporate funds themselves. Yet sury. We see that the US is reciprocating, as some feared when it was increasedtransacting in this “smaller world” exposes as in the cases of Airbus and Deutsche to 12.5%. How the Tax Departmentthe mistrust that exists between nations. In Bank. This is not a good path to be on. has interpreted some aspects of the leg-many cases, tax administrations appear to islation goes beyond what is necessaryexist to impede business, not to promote (b) How might this affect Cyprus’ and creates uncertainty as to taxpayers’it. Tax fraud and tax evasion are high on position as an attractive EU obligations. One example is the relatedeveryone’s agenda, yet in many cases the destination for international party transactions whereby secondarypersons charged with regulating this can- businesses? adjustments are made contrary to thenot distinguish between what is legitimate Cyprus’ economy relies heavily on its philosophy of the provision, which de-and what is not, what is allowable and international business. If the European rives from the OECD. Another examplewhat is not, what is beneficial and what Commission prevails in the Apple case, is the difficulty with which bad debtis not. Tax legislation and regulations, there will be a strict watchdog looking relief is provided, even in cases whereincluding the formal and substantive pro- at the member states and their direct tax it is easily verifiable that the debtor willcedures that exist in every country, are like practices. There will also be a new wave never pay. There are more examples. Aquicksand. The tax advisor is the guide of attempts to harmonize direct tax and tax system that provides legal certaintywho should prevent the business from be- this will be a real challenge for Cyprus. over the obligations it imposes is easiering built on such dangerous foundations. Our professionals distinguish themselves to understand and comply with, and from their European counterparts mainly easier to monitor. One other aspect ofThe case of the European in terms of the relationship that they es- policy making is a public debate, or inCommission vs Apple & the tablish with their clients, as well as their the case of Cyprus, the lack of it. Ran-Government of Ireland: (a) Do you dom (and I chose this word carefully)think the Commission’s verdict is I HAVE SYMPATHY FOR amendments to the tax code appear al-fair? APPLE, AS IT IS BEING most overnight and are provided to theThe European Commission has been PLACED UNDER THE tax or VAT committees of ICPAC onsupporting a more integrated EU direct MICROSCOPE AT A TIME Friday in order to offer comments to thetax policy for a number of years. The WHEN GOVERNMENTS discussion of the proposed law that willstrongest opponent has, sadly, just taken ARE LOOKING TO BALANCE take place on Monday in the Financethe Brexit route. For the Commission, THEIR BUDGETS Committee of the House of Representa-the next best thing to legislating an EU- tives. It is almost comical. There shouldharmonised direct tax is policing it and be a public call for comments and athis is at the heart of the Apple ruling. timeframe that allows for brainstorming

61ACCOUNTANCY CYPRUSand understanding of the consequences per and help them reach higher. The including the Migration Department.of the proposed amendments. benefits will be for the business and the state. Currently some tax officers treat (d) Can you suggest ways to improve(b) Can you suggest ways to improve their employment as a licence to carry individual tax collection procedurescorporate tax collection procedures out a witch-hunt. and methods? Are there any otherand methods? Are there any other issues you would like to mention?issues you would like to mention? (c) Would lowering taxation for in- When it comes to the matter of physicalSome practices of the tax administra- dividuals be an incentive for interna- persons, the Tax Department could betion are not helping tax collection. For tional High Net Worth Individuals to more efficient with the method of final-example, the Limassol District Office relocate to Cyprus? ising tax assessments. It is slow and inef-raises hundreds of assessments every The recent amendments to private indi- ficient and a more risk-based approachyear’s end to keep the previous sixth vidual tax legislation in Cyprus, with the would also help eliminate this backlogtax year open for scrutiny, a practice introduction of domicility, was a superb and focus on tax collecting from a moreknown as ‘protective assessments’. This move and has proven very successful at targeted group of high-risk taxpayers.results in hundreds of additional assess- attracting not only the retired High Net Certain categories of taxpayer, notablyments with little substance or founda- Worth Individuals but also upcoming the self-employed, should be examinedtion. The lack of staff then results in young entrepreneurs. Both will invest in closely and where evasion is found, theyhuge delays in dealing with taxpayers’ their lifestyle in Cyprus and purchase local should be incentivised to correct theiraffairs, resulting in frustration and a goods and services. With regard to lower- practices and monitored to ensure theylack of focus on those taxpayers who ing the higher rate of income tax to attract adhere to the new mentality. Compli-may be more likely to evade tax. In HNWIs, of course the answer is yes, but ance should then improve, as should taxpublic and private meetings over the there are many more related consider- collection. I have seen from my clients,last two years, the tax administration ations, which cannot be separated from the as well as from my own personal taxhas been advocating a risk-based ap- decision. Firstly, we would need to exam- assessments, that where a tax refundproach to examining taxpayers and the ine where the revenue from the foregone arises, the Department raises an assess-creation of a Department of Large Tax- income tax would come from in order to ment based on no evidence to ‘eat away’payers to provide a more efficient ser- balance the government budget. I am very at exactly that amount of tax. This isvice to those important large taxpayers. critical of salaries in the public sector, hav- provocative and it is unacceptable andWhat has been delivered is the contin- ing seen first-hand how they are awarded – it is this exact mentality that needs touation of old, unhelpful practices and not based on ability but on need – i.e. they be eradicated. People I know, who hada new Department of Large Taxpayers need employment to earn money to exist, a bright future in the tax administra-that has been working more akin to a regardless of quality or quantity of output. tion, who are intelligent, dynamic andHoly Inquisition. The tax administra- Their rewards are based on other factors hard-working, have resigned, citingtion would benefit from working with that result, in many cases, in employing disappointment and a lack of motiva-taxpayers rather than against them. I persons unable to handle their tasks and tion as their main reason for leaving.would recommend a practice whereby over-remunerating them for the sub-par How to improve the tax administrationa very small percentage of businesses work that they do manage to accomplish. and tax collection? An overhaul and aare reviewed every year but in great Secondly, the tax legislation in Cyprus complete re-engineering of the system isdetail. Where tax evasion has been dis- already has many benefits for individuals, required. This is what we believed wascovered, penalties should be strict but, such as the tax-free dividend and interest happening with the new structure of theinitially, the business should be pro- for 17 years for non-domiciled persons, the Tax Department. We received instead avided with an opportunity to correct relief for new employees who are highly more confused and more inefficient De-its errors and to be monitored carefully remunerated, the special mode of taxation partment. The current Commissioner isover the next two years to ensure bet- for foreign pension income, the 90-day pro-business and if he can see throughter tax compliance. The penalties for rule for working abroad when being a Cy- the politics of his job and focus on therepeat offenders should be draconian. prus tax resident, the generous €19,500 problems at hand, he has a golden op-Such a system has been enforced in the tax- free bracket of income tax, to mention portunity to take decisive and beneficialNetherlands with impressive results. In but a few. I believe the system is good action, starting from human resourcing.addition, the tax administration should enough to attract foreign High Net Worth As a tax professional, I am ready to offerbe more business-friendly. It should Individuals. It would be helpful if the all the help he requires, if he can cir-welcome the fact that businesses pros- administration were more pro-business, cumvent the politics of his job...

62 ACCOUNTANCY CYPRUS COVER STORYKARLOS ZANGOULOS GENERALLY SPEAKING OUR TAX REGIME IS AMONGST Managing Partner, BDO Ltd THE BEST, THOUGH WE STILL NEED TO ADAPT IT TO NEWWhat, in your opinion, are the most important issues and challenges facing tax BUSINESS AREASprofessionals worldwide today?Ethical tax practices. There has been a marked shift in perception regarding tax carbons industry, for example the taxavoidance as opposed to tax evasion. The risk of significant reputational damage treatment of people coming to Cyprusthrough tax practices which, even though they are perfectly legal, are now seen as to provide services to the industry onunethical or overly aggressive, is much higher than it was just a few years ago. short-term contracts. How important are Tax Services toHow do these issues affect Cyprus’ position as an international business centre? International Investors (corporate andIt is only natural that Cyprus, along with all international business centres, will come individual) as a revenue stream for lo-under increased scrutiny. We should expect increased media attention to our prac- cal accounting, audit and tax firms?tices and it is, therefore, imperative that we make every effort to place ourselves at Tax services typically account for onlythe forefront of good practice, quality and compliance. a small portion of most accountancy firms’ revenues – typically less than 20%Cyprus’ strategy is to portray itself How attractive is the tax regime of – but tax services are a fundamentalas a reputable international busi- Cyprus compared with that of other element of our overall service offering.ness centre, fully transparent and jurisdictions? What should be done in Without a beneficial tax regime and afully compliant with international order to make it more competitive? quality tax service offering, other rev-regulations, directives and agree- Generally speaking our tax regime is enues would be severely impacted.ments. Do you think this is the amongst the best, though we still needcorrect strategy to attract interna- to adapt it to new business areas. For As the business world becomes moretional businesses in setting up local example, where it comes to funds, we complicated, do you think that taxheadquarters? are at a disadvantage regarding the services will become more importantThere is no other sustainable alternative. taxation of interest and uncertainty for corporations (both local and in-Over the coming years I expect that concerning the tax status of common ternational) and individuals?only those jurisdictions with the highest funds. We also need to address many Undoubtedly yes, in two ways:standards will survive. aspects that are critical to the hydro-

63ACCOUNTANCY CYPRUSTAX-WISE, CYPRUS IS ALREADY VERY ATTRACTIVE international High Net WorthTO INTERNATIONAL HNWIS. WHAT NOW NEEDS TO BE Individuals to relocate to Cyprus?DONE IS TO MAKE CYPRUS A PLACE WHERE WEALTHY Tax-wise, Cyprus is already very at-INDIVIDUALS WANT TO ACTUALLY LIVE tractive to international HNWIs. The new non-dom regime is oneRegulation will continue to evolve authorities and it would not have of the best of its kind. What nowand tougher compliance require- been difficult for the US to change needs to be done is to make Cyprusments will require greater expertise its tax law to tax those entities if a place where wealthy individualsand resources. The accounting pro- it wished to do so. Ultimately the want to actually live. We need tofession is ideally placed to help cli- courts will have to decide whether improve our international flightents meet these requirements. Also, the EU has the right to correct an connections and provide incentivesbusinesses will need (and we should unfair advantage that exists in the and opportunities for investments inactively encourage them) to increase US tax system and whether it can infrastructure.their substance in Cyprus, creating impose a tax in Ireland on a tax thatnew opportunities for us to provide should rightly have been paid in the (c) Can you suggest ways to improvea host of services to assist them in US. Personally I think it has over- individual tax collection proceduresrunning their business and meeting stepped its bounds. and methods? Are there any othertheir compliance obligations as ef- issues you would like to mention?ficiently as possible. (b) How might this affect Cyprus’ One of the most common complaints position as an attractive EU that we receive from clients is thatThe case of the European Commis- destination for international tax years remain open for too long.sion vs Apple & the Government of businesses? This creates business uncertaintyIreland: (a) Do you think the Com- This case sets a dangerous precedent and client frustration. Similarly, itmission’s verdict is fair? in that it changes existing rules and in- often takes too long for the RevenueBusinesses should have a level play- fringes on domestic tax sovereignty. If to complete examinations. The Lawing field and, to the extent that a anything, it sends the message that any should be amended so as to introducecompany is given an unfair advan- kind of tax planning is unwelcome and strict deadlines. Certain tax depart-tage over others, it is only fair that a warning against aggressive tax struc- ments are clearly understaffed andthis be corrected. In Apple’s case, tures that are not supported by adequate overworked and this needs to be ad-the situation is complicated by substance and business reasoning. dressed as a matter of urgency. Thethe fact that Apple was not given more effective use of software toolsany special treatment by the Irish Taxation in Cyprus: (a) Do you would assist in increasing efficiencytax authorities. In fact, many US think any changes should be made to by directing resources to high-riskGroups use the exact same mecha- the current corporate tax rate? cases and by automating processesnism – that is the use of an Irish No, I do not see any reason to change and reducing bureaucracy. Examplesincorporated non-Irish tax resident the existing corporate tax rate. include introducing online applica-company to hold intellectual prop- tions for the issuance of certificateserty rights deferring the payment of (b) Would lowering taxation for and statements and the online sub-US taxes. This was known to the US individuals be an incentive for mission of commonly used forms, such as those for the amendment of data or registrations etc. It is always easy to criticize Government depart- ments and, all too frequently, we forget the fact that many are working very hard and under pressure. As with any organization, an appropriate system of monitoring performance, motivating and rewarding employees is needed.

64 ACCOUNTANCY CYPRUS ACCOUNTING & AUDIT THE IMPACT OF IFRS 16‘LEASES’ ONSHIPPINGThe new lease accounTing sTandard will fundamenTally change TheaccounTing for lease TransacTions and is likely To have significanTbusiness implicaTions for shipping companies.By Tasos N Nolas, THE NEW STANDARD AT A GLANCEPartner, Assurance andAndreas Avraam, Director, WHEN IS IT EFFECTIVE?Assurance Services, PwCCyprus IFRS 16 will become effective in 2019 (subject to EU approval) and include pre-existing leases (some transitional reliefs exist). WHAT IS THE SCOPE OF THE STANDARD? The standard covers every lease except for rights to explore non-regenerative resources, rights held under licensing agreements, leases of biological assets and service concession arrangements. For lessors, leases of intellectual property are excluded from IFRS 16; lessees are not required to apply IFRS 16 to certain rights held under licensing agreements. ARE THERE ANY EXEMPTIONS? A recognition and measurement exemption for short term leases and leases of low value assets is available as a policy choice. However, this is only available to the lessee. WHAT IS THE DEFINITION OF A LEASE? A lease is a contract (or part of a contract) that conveys the right to use an asset for a period of time in exchange for consideration. A contract contains a lease if fulfilment depends on an identified asset and it conveys the right to control the use of that identified asset throughout the period of use. Each lease component should be identified and accounted for separately. WHAT IS AN IDENTIFIED ASSET? An asset can be identified explicitly or implicitly. A contract does not depend on an identified asset if the supplier has a substantial right to substitute the asset. WHAT IS THE “RIGHT TO CONTROL THE USE” OF AN ASSET? A customer has the right to control the use of an identified asset if it has the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset, i.e. to decide how and for what purpose it is used. HOW IS LESSEE ACCOUNTING AFFECTED? Lessees will recognise almost all leases on the balance sheet. The lessee initially recognises

65ACCOUNTANCY CYPRUS The impact a “lease liability” at the present value of are likely to contain both a lease (i.e. right to future lease payments and a “right-of-use use the vessel) and service components (e.g.staofnthde naewrd asset” to an equal amount plus initial direct operation and maintenance of the vessel by costs. A lessee will recognize interest on the the owner). A lessee can choose, by class of on charterers’ lease liability and depreciation of the right- leased asset, not to separate services from a financial of-use asset in profit or loss. Variable lease lease and instead account for the entire con- payments not included in the lease liability tract as a lease.sigrenpoirftiincgains t are recognised in the period the obligation • Voyage charters are not likely to meet the is incurred. new definition of a lease, as the charterer typically does not have the right to direct the HOW IS LESSOR ACCOUNTING use of the vessel i.e. how and for what pur- AFFECTED? pose the vessel is used. • Similarly, contracts of affreightment are IFRS 16 does not substantially change unlikely to meet the definition of a lease, lessor accounting. Lessors will still since they are contracts for the provision of distinguish between finance leases a service rather than the use of an identified (recognise a lease receivable) and operating asset. leases (continue to recognise the underlying asset). WHICH SHIPPING INDUSTRY PARTICIPANTS ARE LIKELY TO BE WHY IT MATTERS TO IMPACTED THE MOST AND HOW? SHIPPING COMPANIES Whilst the new standard leaves lessor WHICH TYPES OF ARRANGEMENTS accounting substantially unchanged, it will MIGHT MEET THE NEW DEFINITION OF have a significant impact on the industry’s A LEASE? customer base, its charterers (lessees). The PwC Global Lease Capitalisation study According to the new standard, the performed in 2015, indicated that there following arrangements are likely to be would be a median debt increase of 24% treated as follows: and 20% median increase in EBIDTA for • Bareboat charters will typically meet the the transport and infrastructure industry. new definition of a lease as, under these Historically, most charter contracts have agreements, the charterer controls the use been considered as operating leases and of the vessel. • Time charters and pool arrangements

66 ACCOUNTANCY CYPRUS ACCOUNTING & AUDIThave, therefore, not had any impact on the balance • Separation of lease and service components in time charters:sheets of charterers. Under the new lease standard, If a contract contains both lease and service components, the new standard requiresthese contracts will be recognised on the charterers’ to separate these and recognise them at their respective fair values. Even thoughbalance sheets. This implies that charterers’ assets the new standard grants a practical exemption which allows the whole contractand liabilities will significantly increase. being accounted for as a lease, such an approach may significantly further increaseCharter-in hires were typically recognised in the lease liabilities. If there is a separation, the high volatility of charter rates make itincome statement of charterers on a straight- challenging to determine the fair values of the lease and service components.line basis over the lease term and classified fully • Impairment assessment of right-of-use assetsas operating expenses. Under the new lease A lessee shall apply IAS 36 Impairment of Assets to determine whether the right-ofstandard, the income statement charge will use asset is impaired and account for any impairment loss identified.need to be allocated between operating expenses • The measurement of the lease liabilities will be highly judgmental and complicated and is(depreciation) and finance costs. A more “front- going to be affected by different terms. For example:loaded” recognition of expenses is also expected Renewal and/or purchase options; given the volatility of the market, the calculationi.e. the lease expenses (depreciation plus interest) of the lease liability is likely to be challenging, as lessees will need to assess whether it isat the initial period of the lease will be higher than reasonably certain to exercise the renewal and/or purchase options both initially andthe straight-line operating lease expenses under the subsequently at each reporting date.existing standard. Re-measurements of the lease liability will be required whenever cash flows under theThe impact of the standard on charterers will lease change. Where the charters are linked to an index, this need for re-measurementbe such as to change their behaviour towards will likely be challenging due to the volatility of the charter rates. Re-measurementsparticular types of charter arrangements, as they would require a relevant adjustment to the right-of-use asset or might affect thetry to manage the impact of the new accounting income statement.treatment of these contracts on their financialperformance and accounting metrics. In this case, WHAT ARE THE WIDER POTENTIAL BUSINESS IMPACTS?lessors would also likely face business implications. The new accounting treatment could affect a number of areas for lessees:WHICH OTHER PROVISIONS MIGHT BE • Impact on various key metrics monitored by stakeholders, including net debt andCHALLENGING TO SHIPPING COMPANIES? gearing (increases as lease liability included in net debt) and EBITDA (increases as operating lease expense replaced by interest and depreciation).Apart from the recognition of lease liabilities and • Debt covenants might need to be renegotiated.right-of-use assets on balance sheet, IFRS 16 also • Dividend policy: The revised profile of the profit or loss might affect the ability toprovides some new guidance on the recognition pay dividends.and measurement which may be challenging • Lease negotiations: Market behaviour might change towards shorter lease tenures orto shipping companies when these are put into change of other terms to minimise lease liabilities. This will also impact lessors.practice. • Future transactions: Decisions such as (re)financing or raising capital to fund growth, acquisitions and mergers and lease versus buy options are expected to be For many affected. shipping companies, CONCLUSION SHBpFNreEROpOaGOrUaWItMiLNonD The impact of the new standard on charterers’ financial reporting, as summarized above, is significant and may lead to a change in their behaviour when negotiating new contracts. This will, in turn, have a business impact on ship owners as well. Although the new standard will not be effective until 2019 (subject to EU approval), the extent of data-gathering, including identification and assessment of implications of numerous lease contracts and their relevant terms, will likely lead many entities to embed new data gathering and assessment processes. This implies that, for many shipping companies, preparation should begin from now.

67ACCOUNTANCY CYPRUSACCOUNTING developing their competitive & AUDIT position.THE FINANCIAL ManageMent In a post-crisis world, com- panies still need to achieveCRISIS accountantshave growth. Management ac- an increasingly countants have an ever more iMportant role to important role to play in play in inforMing providing the managementAS A DRIVER OF MANAGEMENT both ManageMent information needed by or- ganisations. This is set to con- and shareholder tinue as business appreciates the potential value of the dataACCOUNTING decisions. captured digitally on their systems and through social By Loukia Sergiou, media. Assistant Professor of It is evident that the fi-CHANGE Accounting, P.A. College nancial crisis has imposed the need for a better analysisThe role of better working capital manage- same time, very important to and appraisal of the internal the ac- ment and provide more reliable do so. The crisis increased the environment and external counting forecasts. importance and use of long- environment of companies profes- term planning techniques, such as well as better strategic sional in In times of crisis, the position as long-range forecasting and planning and management. periods of management accountants strategic plans developed with The growth of management of eco- within their companies is influ- budgets. accounting is the result of the enced by increased economic specialised information needs uncertainty. Greater interac- Additionally, cost accounting used by management to make nomic tion between management is aimed at providing informa- decisions. crisis accountants and other depart- tion to managers, both in mat-derives from that of the ac- ters of planning and organising In times of crisis, it is vital ments should be considered work and in the final phase, for a company to have a goodcounting profession, which is at all times. This may result in that of controlling economic degree of organisation in thedifferent from other professions an improved understanding activity. Surveys have revealed accounts department and tobecause it takes responsibility of management accounting that the importance and use work with skilled accountants.for the activity taking place of ABC systems, planning, The role of accountants is not techniques and the informa- strategy, and SMA techniques just about recording and sys-in a company characterised increase during a crisis while, at tematising data but also about tion needs of these departments the same time, the level of im- interpreting accounting infor-by transparency, relevance, portance and use of traditional mation and providing prac- within management account- cost accounting techniques tical solutions to reduce costsconsistency, comparability and ing. decreases. and unnecessary activities.reliability. The new economic environ- The financial crisis caused Moreover, in a period of ment requires corporations toManagement accountants crisis, keeping cost accounts adopt innovative management the systematic questioning of means having information that accounting techniques forare called upon to roll up their enables the right decisions to be better crisis and uncertainty established budget- taken, tailored to the needs of management.sleeves to internal users. In the post-crisis ing routines and situation in Cyprus, cutting Organisations should in-access cus- costs became a priority but tegrate management accoun-tomer and In a the adoption of business leaders recognised the tants into their management corresponding need to balance this austerity team because there is a strongoperational post-crisis with continuing to invest in strategic relationship betweendata which world, ideas within the business strategy, accountingleads to companies studied. control systems and corporate In times of crisis performance. It is clear thatfinancial out- companies management accountantscomes. They still need characterised by have an increasingly import-can thus economic and fi- ant role to play in informing nancial instability, it both management and share-present better to achieve holder decisions.management growth is extremely difficultinformation to make forecasts or estimates but, at theto enable

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69ACCOUNTANCY CYPRUS IMAGE &interviewREPUTATION REMAIN KEY FACTORSCYPRUS NOT ONLY HAS NO REASON TO ENVY tion is already working on an have real substance. IsOTHER JURISDICTIONS AND IT CAN PROUDLY initiative which will soon this becoming more of theCLAIM TO BE PERHAPS ONE OF THE VERY FEW be communicated to other norm or are there still tooPLACES TO OFFER A COMPLETE PACKAGE, IN interested parties, including many ‘brass plate’ opera-TERMS OF BEING ATTRACTIVE FOR INVESTING, ICPAC. tions being set up?SETTING UP OR RELOCATING A BUSINESS. Although all internationalBUT, SAYS GEORGE SAVVIDES, MANAGING How does Cyprus compare developments are leading to-DIRECTOR OF FIDUCENTER (CYPRUS) LTD, with other jurisdictions in wards substance, it is goingIF PEOPLE ABROAD ARE TO KNOW THIS, THE the provision of Administra- to take some time until weCOUNTRY NEEDS A PLAN AND A CONCERTED tive Services? can say that this is the norm.PROMOTIONAL CAMPAIGN TO HELP IT THRIVE Regarding what it has Cyprus is an ideal location to offer, not only does it for the creation of substanceHow has the local Adminis- are no statistics currently held have no reason to envy in structures, not only be-trative Services sector fared in for the sector. The only objec- other jurisdictions but it can cause of the various fiscal2016? tive indicator is the number of proudly claim to be perhaps and corporate incentivesThe sector is, once more, sur- new company registrations at one of the very few juris- available but for a plethora passing the overall economy in the Registrar of Companies but dictions which currently of other reasons, including even that is distorted somehow. offer a complete package, its geographical location, the terms of growth and boasting As I was never a proponent of in terms of being attractive abundance of highly educat- a healthy rate, although it has the evaluation of how well we for investing, setting up or ed and experienced staff, the to be said that, due to its re- are doing only by the number of relocating a business and high quality of professional silience, it has never suffered new incorporations, I strongly having people move to the services, the quality of life, to the same extent as other believe that all stakeholders in country. Following various the weather, etc. sectors or even the economy the sector should work towards legislative introductions as a whole. Having said that, creating some reliable indicators. and/or amendments over Following the publication it is hard to speak with num- The Cyprus Fiduciary Associa- the last year, this package is of the Panama Papers, will bers as, unfortunately, there fully up to date and compli- a well-regulated jurisdiction ant with international legal, like Cyprus benefit from regulatory, tax and other an influx of companies and developments. individuals wishing to show that their dealings are trans- You have personally al- parent or will such people ways supported and pro- seek other tax havens? moted the idea that Cy- It is hard to say at this stage prus companies should because this case is still in its

70 ACCOUNTANCY CYPRUSPREOSCFEOERSNVSIOCIOEMSNYAL interviewTHE FUTURE LIES with quiring any minimum stay in work was done in the yearsfully compliant jurisdictions Cyprus has been one of the that followed, mainly as a re-like Cyprus, which follow strong points of the schemes sult of the private sector andand promote principles but, at the same time, it has especially those profession-such as TRANSPARENCY, been the main argument als who invested time andSUBSTANCE and good for opponents of Cyprus in money in travelling aroundcorporate governance this field, so by considering the world and passing on this we could actually help the message that things hadinception. During the initial ments around the world are safeguard the schemes and changed in Cyprus. Thenperiod I think that there using is aggressive negative make them more sustain- came the events of Marchwill be a general numbness publicity, taking advantage able. There are certain other 2013, which delivered a hugeas people will be reluctant of the fact that many people points to consider, such as blow to the whole effort andnot only to move existing around the world are strug- making rental of properties we had to start again fromstructures but even to set up gling financially because of an option instead of restrict- scratch. The sector has prov-new ones. Yet, in the long the effects of the global eco- ing access to the schemes en its resilience once moreterm and in conjunction nomic crisis. To what extent through the purchase of real but I believe we are at a criti-with all other international the professionals engaged in estate, especially for the Resi- cal stage where we mainlydevelopments, such as BEPS, the sector will be affected by dency Scheme. need two things: a plan and aFATCA and the CRS, for this frenzy will depend on concerted promotional cam-sure the future lies with fully how far it goes. Are we any closer to having paign. The Cyprus Fiduciarycompliant jurisdictions like a single regulatory authority Association tried to comeCyprus, which follow and How successful in your for the fiduciary sector? up with a plan through thepromote principles such as view have the Government’s I believe we are, through annual forum it organizestransparency, substance and Cyprus Citizenship by ex- practice and because of the and indeed it has presented agood corporate governance. ception and Permanent Res- various developments in or draft to the Under-Secretary idency schemes been? Can related to the sector both to the President. Although itThere seems to be a grow- they be improved? in Cyprus and internation- can be a good start, we needing mood of negativ- This is perhaps one of the ally. Legal and regulatory something more comprehen-ity towards tax avoidance very few parts of the sector requirements are gradually sive than that, which will beschemes in many countries. where numbers can speak by becoming aligned between the result of the contributionWill this affect business in themselves and they are very the three regimes both on of all stakeholders in orderCyprus in any way? impressive! As per the latest paper but, more importantly, to receive universal approvalAlthough no diligent Ad- reports from the Ministry of in practice and the presence and backing. Then we needministrative Service Provider Finance, the amount invest- of the Troika (especially the a vehicle through whichor other professional engaged ed in the country through quarterly monitoring reviews the plan will be executedin the sector should be aid- the Citizenship Scheme it performed) has played a and which will report theing or even encouraging alone over the last few years very significant role in that. progress to the stakeholdersclients in tax evasion or even has exceeded €2.5 billion. I and through a process of as-aggressive tax avoidance, it think that the schemes can Are there still major steps sessment, realignment andhas to be said that, perhaps be streamlined in order to that need to be taken to response to developments,the whole issue has now promote substance as well, improve the image of Cy- will reach out more stronglyreached a stage where even in the sense that they can prus regarding the sector? and decisively. The messagelegitimate tax planning is help towards having people I cannot stress the word ‘pro- we have to send should notcondemned. Indeed, as there actually spend some time in motion’ enough in answering be defensive (as the initialare no legal grounds against Cyprus, spend money in the the question. If there is one response to the Panama Pa-such planning (either from local economy and perhaps area in which we are lagging pers case was) or apologetic;legislation or from case law), even make further invest- behind other jurisdictions, it instead, we should shout outthe only tool various govern- ments. I know that not re- is image and reputation. We loud that Cyprus today is have to realise that we didn’t one of the most attractive, have the best of images when efficient, compliant and we joined the EU because of diligent places in which to the offshore regime we had invest, set up and operate a before accession. Extensive business and live.



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73ACCOUNTANCY CYPRUS ECONOMYMERITOCRACY, RELIABILITY, CREDIBILITY A return to timeless vAlues will leAd to A more productive, less corrupt stAte, sAys HAris stAvrinides, investment mAnAger And AnAlyst At osys globAl diversified investment fund (ogdif)

74 ACCOUNTANCY CYPRUS ECONOMYWhat has actually changed How do you foresee the at a rate in excess of 4% in the real economy, now indicators of economic per year in order to serve that the Troika era is over? growth moving in the private debt, which in Deep wounds still remain coming quarters? turn indicates that it is no in the real economy in Economic growth rates longer viable and that the the post-Memorandum well be positive but this banks should make provi- era. The country’s much- will not translate into an sions for a large part of it advertised exit from the improvement in the eco- not being recoverable. Economic Adjustment nomic situation of house-Programme and our ability to borrow from the markets will holds and SMEs. The high What measures do youlead to borrowing at an interest rate twice or even higher rate of private debt (300% consider imperative for jobthan the one we had during the Troika period, thereby of GDP) when the EU creation?creating a multimillion servicing burden of the public debt. average is close to 50%, Here comes the role of theThis money will be removed from the real economy when does not leave much room state, which should haveit could otherwise been channeled into more productive for optimism. Consider already drawn up a growthareas to stimulate consumption and create jobs. Our official that servicing this debt of plan for the post-bailout era,exit from the programme and the fact that we are still non- around €60 billion with and a new economic modelinvestment grade (junk bonds) immediately excludes the an average interest rate of that, in my opinion, shouldcountry from participating in the European Central Bank’s 4% corresponds to €2.4 be based on the develop-quantitative easing programme. This means that our banks billion in interest payments ment of the knowledgewill be deprived of the cheap funding which was available per year. This means that economy. Innovation andfrom the ECB when the country was still in the programme. the economy needs to grow entrepreneurship are theway to create jobs and sus- tHis is not tHe economy tHAt of a fictitious prosperity.tainable economic growth. we deserve And we tHerefore Implementing these time-But this requires planning need to revive And resHApe it less values will lead to aand incentives to attract more productive, less cor-venture capital funds, which large banking names such many people ended up rupt state (unfortunately,will finance new, innovative as HSBC would help the on relying on food banks corruption will not bebusinesses with high growth financial services sector at- and the Guaranteed Mini- eliminated) and, with newpotential in the not-too- tract major companies to do mum Income (GMI) of ideas and technocraticlong term. These funds, business on the island. €480 per month. This is planning, will recover thebeyond financing which not the economy that we real economy and notthe banks do not under- How can the increased eco- deserve and we therefore simply present impressivetake, provide expertise, nomic/financial inequal- need to revive and reshape numbers. In this way wesupervision and access to a ity caused by the crisis be it. How? Through meri- will be able to regain ourlarge network of partners tackled and reduced? tocracy, reliability and credibility and move awayand other companies with From thriving in an credibility. As a society, from junk ratings, both inwhich they can collaborate. economy fuelled by a lend- we must demand a return bonds and in real terms,Additionally, since the ing spree of the abundant to these values, which and regain our dignity.Eurogroup’s March 2013 cash held in Cyprus banks, were lost in the course Unfortunately there are nodecisions, our old economic magical solutions but theremodel is no longer the same are things that can be doneand needs to be updated to can get us out of thisand upgraded. Attracting depressing landscape.



76 ACCOUNTANCY CYPRUS ECONOMYVIEW FROM THE The evenTs surrounding The March 2013 eurogroup MeeTings on cyprus By Michael Sarris Economist, Former Minister of FinanceThe experience of Cyprus in better than the one decided repeated urging from Europe crisis was characterized by the a week later in the second as well as internally, the Gov- three main common elements meeting. However, the first ernment opted for a loan from of the financial crisis in the decision was rejected by the Russia which made possible eurozone: serious national Cyprus House of Representa- the continuation of inappro- economic policy mistakes, tives in what was perhaps one priate fiscal policy. In parallel significant shortcomings in the of the most tragic mistakes in with missed opportunities architecture of the monetary Cyprus’ economic history. to resort to the European union and mismanagement In May 2011, Cyprus lost Support Mechanism, in the of the crisis by the eurozone access to the international following 18 months thereleadership. Starting in 2008, an acceleration of govern- capital markets to cover its was a significant increase inment spending resulted in a rapid and significant increase financing requirements. The financing requirements, dueof public debt. This, in combination with the ongoing only rational option in the to the worsening position ofexcessive growth in bank lending, for which the rules of period that followed was the banking system; and bythe eurozone did not require monitoring, led Cyprus to to resort to the European March 15, Cyprus had littlea vicious circle of banks needing capital and in danger of Stability Mechanism, under credibility and negotiatingbankruptcy and public finances not in a position to help. a relatively mild adjustment power. While there had beenIn the case of Cyprus, the stronger member states of the programme. Instead, despite rumours, unofficial statementseurozone, instead of responding with financial assistanceand an adjustment programme along the lines of othercountries like Ireland, Portugal and Greece, decided toforce depositors to capitalize the troubled banks. Despiteour weak position, during the first Eurogroup meetingof March 15-16, 2013, Cyprus managed to conclude anagreement which, though unfair and harsh, was much

77ACCOUNTANCY CYPRUSINSIDEand newspaper articles about how to deal with Cyprus. through a bail-in of bank public debt and that the twoa possible haircut of bank Under the first approach, shareholders, creditors and systemic banks should bedeposits, such a proposal was the IMF and a number of depositors. The second ap- resolved.officially put on the table influential member countries proach was a detailed adjust- In the early hours of Marchfor the first time at the start argued that the only way ment programme, presented 16, following lengthy dis-of the Eurogroup meeting. for Cyprus’ public debt to by Cyprus and supported cussions and with CyprusBefore the Eurogroup there become viable was to recapi- by the European Commis- politically isolated, thewere only two proposals on talize the two systemic banks sion. This programme was Chairman of the Eurogroup based on a long period of called upon the representa- The first decision was rejected by adjustment with tough fiscal tives of the Troika to bridgethe Cyprus House of Representatives measures (a high tax burden their differences and agree on future generations) and on a compromise proposal in what was perhaps one of the structural reforms, along that could form the basis of most tragic mistakes in Cyprus’ the lines of the Memoranda a final agreement. Despite signed with Ireland, Portu- strong objections from our economic history gal and Greece. The IMF side, the European Commis- insisted that this programme sion proposed the imposi- would not result in a viable tion of a levy on all deposits in the Cyprus banking system: that is, all depositors in all banks should be taxed so that the systemic banks could be recapitalized and continue their operations. Under the threat of the immediate and disorderly bankruptcy of the systemic banks and the Government, we had to accept a very harsh proposal, which, after discussions, was formulated by the Eurogroup as follows: The imposition of a one-off “stability levy” of 6.75% on deposits from €20,000 to €100,000 and 9.9% on deposits in excess of €100,000. The interpreta- tion given by the Eurogroup for this decision, which was taken in the presence of high-ranking officials of the eurozone, the IMF and the ECB, was that the “stability levy” was a wealth tax in an economy with high interest rates on bank deposits. The

78 ACCOUNTANCY CYPRUSlevy was necessary to collect also worth noting that the tecting small depositors and be two main possibilities.the capital required for the Parliamentarians objected putting a disproportionate First, the decision couldrecapitalization of the banks, to the whole proposal of burden on large depositors. have been accepted, despiteso as to avoid their closure imposing a levy on deposits Finally, the Eurogroup de- concerns about guaranteedand, therefore, it was not with no special concern for cided that the Cyprus gov- deposits, and rationalizedcontrary to the Directive those under €100,000. ernment, when implement- on the grounds that it waswhich protects deposits up The plenary of the House ing the decision of March a one-off levy imposed into €100,000 in the case of a of Representatives, evident- 16, should have flexibility in exceptional circumstances.bank resolution. ly under the impression the percentage of the levy, Second, the EurogroupFor the Eurogroup on the that a vote against the draft adopting a progressive sys- could have proposed tonight of March 16 and law would cause turmoil tem, provided that deposits exclude guaranteed depositsfor the Institutions pres- in the European markets up to €100,000 would be and include in the financialent, this harsh stance was and force the Eurogroup to exempted from the levy. package of the adjustmentbased on the thinking that reconsider its stance, first The press release issued by programme an amount ofCyprus was not a systemic postponed the decision the Eurogroup recorded about €2 billion that wouldrisk for the eurozone and and, when it reconvened this decision, confirmed the have been required to coverthat the “stability levy” on on March 19, 2013, MPs political agreement between the shortfall resulting fromall depositors would not voted down the draft Law, itself and the Cyprus Gov- the exemption of depositspose a threat to the stabil- which had already been ernment on the decision of up to €100,000 from theity of the banking system rejected in substance by March 16, and urged the “stability levy”.of other countries in the the party leaders and the Government and the House By rejecting the first propos-eurozone. But for Cyprus, Finance Committee. What of Representatives to imple- al, we enabled senior officialsthis proposal, though unfair followed at the second ment what had been agreed. of the IMF and the ECB toand hugely damaging to meeting of the Eurogroup In periods of uncertainty, distance themselves frommany Cypriots, was, under a week later is well known: nothing can be taken for the imposition of a levy onthe circumstances, the only we were forced to accept granted. However, the small depositors and made itway out compared to the the measures which we had strong reassurances that im- easier for them to impose thealternative. It would have managed to avoid the pre- posing a levy on all deposits decision of the second Eu-imposed a burden on all rogroup. To this day, seniordepositors but to a much To this day, senior officials in the officials in the Europeansmaller extent compared to European Commission are still Commission, speaking towhat, in fact, finally hap- wondering why we did not accept their Cypriot counterparts,pened to depositors in the are still wondering why wetwo systemic banks. In ad- the first Eurogroup decision did not accept the first Euro-dition to the saving of the group decision.systemic banks, we would vious week. would be a one-off event, Despite the severe blow,have avoided declaring In the meantime, late on the commitment of the three years after the tragic“bank holidays” and impos- Monday evening (March ECB to provide liquidity events, the Cyprus economying capital controls. 18), a Eurogroup teleconfer- until the Cyprus banking is well on the road to recov-With this is mind, under ence was held, during which system could be stabilized, ery. This is largely due tothe leadership of the Presi- the matter of taxing deposits and our pleas to Members sound government fiscal anddent of the Republic, we below €100,000 was raised. of Parliament about what macroeconomic manage-made intensive efforts It was obvious that there was certain to follow in the ment and the resilience andto persuade the House of had been negative reactions event of a rejection of the entrepreneurship of the Cy-Representatives to pass the in many European capitals proposal, made the House of priot people. There are still,relevant legislation. The as well as in the IMF and Representatives’ decision a however, serious challengesleaders of the political par- the ECB to the proposal to tragic mistake. for the implementation ofties were, from the very impose a levy on these de- If one were to hazard a guess key reforms which requirebeginning, absolutely nega- posits and to the interpreta- as to how the Eurogroup, political courage.tive. During the weekend, tion given by the Eurogroup the IMF and the ECB Future historians will per-we had lengthy discussions on March 16. There was a would have reacted if Par- haps be in a better positionto try and persuade the discussion on the need to liament had accepted the to decide whether the bail-inFinance Committee to ac- find a balance between pro- first proposal, there might was a costly experiment atcept the painful but only the expense of Cypriots or asolution, warning of the rational approach for dealingconsequences of rejection with Cyprus’ challenges atbut with no success. It is the time.



80 ACCOUNTANCY CYPRUS ECONOMYMISSED ot industries, which could not pros- per here (due to a lack of labour andOPPORTUNITIES high production costs, etc.), were eventually activated in Syria (and Why past efforts aimed at expanding the later in Jordan, etc), tourist enter-economic boundaries of cyprus often failed prises tried to expand their activities to the seashore of Syria, efforts were By Dr Iacovos Aristidou made to expand international tour- Former Minister of Labour & Social Insurance ist tours to both countries, whereas and former Director General, Planning Bureau large Syrian businesses (such as Nahas Enterprises) showed interestIwas reminded recently of sulted in today’s excellent economic in including Cyprus in their activi- the great efforts that were relations with Russia and other ties in the other Arabic markets up exerted after the 1974 Eastern European nations. to the Gulf countries. The prospects Turkish invasion to expand Back then, neighbouring Syria, for the success of these endeavours the economic boundaries with its potentially great market were enhanced when the EU pro- of Cyprus and upgrade its and other advantages, was a natural ceeded to adopt a kind of Customs technological standards. venue for the expansion of Cyprus’s Union with all those Mediterranean The starting point in 1975 economic boundaries. Thus we countries that were not eligible for was the signing of an proceeded in 1975 with the signing accession, where Cyprus could play Economic and Technical of a similar Economic/Technical an important intermediary role.Cooperation Agreement with the Cooperation Agreement with Syria. Later, as a Minister of Labour, I con-Soviet Union, followed by similar During the meetings of the Mixed tinued to work towards this. When Iagreements with all the countries Committee, existing great potential was informed by the Syrian Ministerof Eastern Europe. In many re- was pinpointed and a framework of of Tourism that they were facingspects, those agreements have re- action was laid down. Many Cypri- problems due to a lack of trained hotel personnel, we undertook the training of Syrian students at the Institute for Hotel Studies in Nicosia at no cost to them. With the salaries they received during their practical training at hotels, the students fi- nanced their whole studies. It should be noted that a similar programme was implemented later in the case of students from Cuba. That, too, was

81ACCOUNTANCY CYPRUS part of our efforts to establish Cyprus with China and the first meeting of Mining Company. as a place for the training of foreign the Mixed Committee took place The same thinking guided our ef- students and the expansion of our in Nicosia shortly afterwards. In forts towards the improvement of economic boundaries. addition to increasing bilateral trade economic relations between Cyprus The same degree of interest shown relations, we agreed that Cyprus and India. India, a developing in Syria was displayed in other was suitable for joint action towards country with a great emphasis on neighbouring countries, such as third countries as well. Unfortu- technology, especially electronics, Jordan, Egypt, Lebanon and Israel. nately, for many years there were no and hugely important in many I could mention in this respect the official meetings of the Committee respects, could become a very close very good cooperation we had with until 2006. After the liberaliza- economic partner of Cyprus. In our Kuwait, which provided finance for tion of economies internationally efforts through diplomatic channels development projects in Cyprus, the in the 1990s, China proceeded to to conclude an Economic/Technical expansion of Cypriot contracting conclude other arrangements with Cooperation Agreement, we faced firms into Iraq and Libya under a countries in the wider European and various difficulties, which prevented programme of Government guar- Middle East area including Greece its finalization. At a meeting be- antees for political risks as well as (ports). I believe that we missed a tween President George Vassiliou the very large increase of Cypriot good opportunity for Cyprus to be and the Indian Prime Minister Rajiv exports to all these countries. Unfor- part of these arrangements. How- Gandhi, during his visit to New tunately, the political instability that ever, such opportunities still exist. Delhi in 1989, the discussion turned appeared later in the region, coupled As a result of our strong complaints to to cooperation in the economic field with a lack of professionalism and Japan because of the imbalances in our and the best way to promote it. I trading accounts, I was invited to To- drew from my briefcase a draft ofOne Japanese firm that kyo in 1987 to discuss economic rela- the Agreement we had been work- had been convinced tions. With the kind assistance of the ing on and asked if instructions to establish itself in UNDP, I also visited South Korea and could be given to finalize and sign it the Free Industrial Singapore for the same purpose. Japan before the departure of the Cyprus Zone of Larnaca left was the country that had benefited delegation. Upon our return from Cyprus soon after more after the liberalization of trade a short visit to the Taj Mahal, the following Cyprus’ Independence from Agreement was ready for signature. commitment on behalf of some British rule in 1960. Its exports to What we had not achieved in several Cypriot businessmen, led this gran- Cyprus were now second to those of years was done in a couple of days! diose experiment to a standstill fol- Britain, whereas exports from Cyprus A number of meetings were held in lowing complaints such as the one to Japan were minimal. With the ac- the framework of the Mixed Com- stating that customers had received tive support of R. Horiuchi, a former mittee. Special mention should be shirts with one short and one long technical manager of Hellenic-Hitachi made of the decision by the huge sleeve and identical pairs of shoes. Technical Enterprises in Cyprus and Indian company Tata to expand But we did not limit ourselves to later Honorary Consul of Cyprus in to Cyprus, following my talks with neighbouring countries. In addition Japan, we had very useful discussions them during the same visit to India. to the protracted and very hard ne- on exports to Japan (e.g. agricultural Tata was interested in using Cyprus gotiations for the completion of the products), the use of Cyprus’ airports as a base for its activities in the wider Customs Union with the European and ports by Japan Airlines and Japa- region. When I met them a few Economic Community, concluded in nese ships for intermediate stops dur- years later as a private citizen, they 1987, the prospects for turning Cyprus ing their flights and voyages to Europe still maintained a very small office in into a regional economic and trade and the Middle East, the inclusion of Nicosia, which they were about to centre led us to seek cooperation with Cyprus on Japanese tourist itineraries, close. “Unfortunately, everywhere faraway countries, especially in areas the production of Japanese industrial we applied there was no positive where they displayed technological and products in Cyprus together with lo- response,” was their complaint. Ap- other advantages. In this respect, we cal industries etc. Of course, we were parently, neither the visit of President sought cooperation with China, India, not expecting spectacular results im- Papadopoulos to India nor the visit of Japan, South Korea and Singapore. mediately. Unfortunately, there was the Indian President Mrs. Pr. Patil to In 1984 an Economic/Technical no follow-up in this case either. One Cyprus had helped towards changing Cooperation Agreement was signed Japanese firm that had been convinced the situation. However, the prospects to establish itself in the Free Industrial are there. The same applies to all the Zone of Larnaca left Cyprus soon other above-mentioned countries. So after, as did Hitachi, when Hellenic- who is going to initiate and coordi- Hitachi was taken over by the Hellenic nate the appropriate action?

82 ACCOUNTANCY CYPRUSECONOMYENSURING PENSIONSFOR AN AGEING POPULATION In the future we shall be system needs modifications The second basic rule is that workIng more and makIng in order to remain viable. For at the Social Security system example, if there is a problem should be funded by contri- hIgher contrIbutIons with the viability of the sys- butions and not by taxpay- tem, the retirement age could ers’ money. That means that By Marios Mavrides, MP rise and contributions may if something goes wrong also rise. with the projections of the Professor of Economics, European University Cyprus In extreme circumstances, the Government and the fund amount of the pension re- needs more money, workers’T he consequences of Cyprus’ ceived may be lower. Greece contributions will increase demographic problems are had it all! The Government (this is a form of targeted growing larger each year was forced to raise the retire- taxation). It is fair however, in the social insurance and ment age to 65, increase and more appropriate, for health sectors. As the popu- contributions and reduce the system to be funded lation ages, the state needs pensions. These changes were by workers’ contributions money for pension and absolutely necessary for the and not by taxpayers. It is health services. The latest system to continue to operate. therefore very likely that study on the viability of the However, many economists people in Cyprus will work Social Insurance scheme in argue that more measures longer and contribute moreCyprus reveals the magnitude of the problem. The will be needed in the future. towards the Social Secu-number of workers contributing for each pensioner Fortunately, in Cyprus the rity scheme over time. Ofwill become smaller over time, from 2.9 today to situation is not as dramatic course, the fact that workers1.8 to 2060. The implications of this number alone as it is in Greece. In fact, the in Cyprus will be payingare tremendous regarding the viability of the Social Government, with the help more for social insurance,Insurance scheme and the proposed National Health of experts from World Bank as well as for their medi-System, which is currently under development. and the European Union, has cal expenses, reduces theirAs the number of pensioners grows, their financial agreed on the implementation disposable income and theirneeds grow even faster. Life is becoming more and of some basic rules which standard of living as well.more demanding and health expenses are growing at a will govern the operation of God help us!very fast pace. The amount of money that needs to be the Social Insurance scheme.set aside will definitely be higher for everyone – work- The first basic rule is thaters, businesses and the Government. the retirement age willThere are other implications as well. As fewer workers increase according to lifewill be funding the pensions of more retirees, the viabil- expectancy. Today, theity of the system may be questioned and modifications retirement age is 65 andmay be necessary. The viability of the system depends life expectancy is 80. If, inon at least three parameters: retirement age, contribu- the next few years, lifetions, and the amount of the pension. According to expectancy goes upthe new rules, an actuarial study will show whether the to 82, the retire- ment age will be increased to 67. That will ensure that the fund will pay a pen- sioner for a pe- riod of 15 years, on average.

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84 ACCOUNTANCY CYPRUS ECONOMYA FREETRADE DEALFIT FORTHE 21STCENTURYWith CEtA, EuropEAn CompAniEs D imports businesses need toWill rECEivE thE bEst trEAtmEnt make their products, offeringthAt CAnAdA hAs offErEd to Any espite last-minute hitches, the greater choice for consumerstrAding pArtnEr EU recently concluded a new and upholding the EU’s strict free trade deal with Canada standards for products. By George - the Comprehensive Eco- CETA will significantly Markopouliotis, nomic and Trade Agreement, improve business op- Head, or CETA for short. portunities for European Representation The deal is possibly the most companies in Canada. With of the European advanced of its kind to date. CETA, European compa- Commission in It will help generate growth nies will receive the best Cyprus and jobs by boosting exports, treatment that Canada has lowering the cost of the offered to any trading part- ner, thus levelling the play- ing field for EU companies on the Canadian market. Following a decision by the Council, it will be possible to provisionally apply CETA. Its full entry into force will be subject to the conclusion by

85ACCOUNTANCY CYPRUS As of the first day of its first time – at provincial level. will be able to bid to provide implementation, Canada will In CETA – as in all its trade goods and services not only eliminate duties worth €400 agreements – the EU fully at the federal level but also million for goods originating protects public services. to Canadian provinces and in the EU. At the end of the municipalities – the first non- transitional periods for duty mutual reCOgnitiOn Canadian firms to be able to elimination, that figure will Of prOfessiOnal do so. Canada’s provincial rise to €590 million a year. QualifiCatiOns procurement market is esti- Opening markets also has the mated to be double the size potential to keep prices down The agreement provides a of its federal equivalent. Can- and provide consumers with framework to approve the ada has also agreed to step up more choice. recognition of qualifications transparency by publishing At the same time, free trade in regulated professions such all its public tenders in a does not mean lowering or as architects, accountants and single procurement website. changing EU standards that engineers. The relevant pro- Access to information is one protect people’s health and fessional organisations in the of the biggest obstacles for safety, their rights as consum- EU and Canada will have to smaller companies in access- ers and the environment. jointly work out the technical ing international markets, so These standards will remain details of recognition of their this will be a boon for smaller businesses in Europe. CETA is the by far the most far-reaching agreement ever Cutting COmpanies’ concluded by the EU in the area COsts WithOut of services and investment Cutting COrners On standardsthe EU, through a Council untouched and imports from respective qualifications ondecision with the consent Canada will have to satisfy all the basis of the framework. The EU and Canada haveof the European Parliament EU product rules and regula- The competent authorities in agreed to accept each other’sand by all Member States tions – without exception. Canada and the EU will then conformity assessment certifi-through the relevant national approve their work and give cates in areas such as electricalratification procedures. Opening up serviCes it legal effect. goods, electronic and radio and enCOuraging CETA will make it easier equipment, toys, machineryCutting tariffs for company staff and other or measuring equipment. This investment professionals to work on the means that, under certainCETA will bring tangible other side of the Atlantic, circumstances, a conformitybenefits to European con- CETA is the by far the most and for firms to move staff assessment body in the EUsumers and companies by far-reaching agreement ever temporarily between the EU can test EU products for ex-eliminating or cutting tariffs, concluded by the EU in the and Canada. This will help port to Canada according toin most cases as soon as it area of services and invest- European companies run Canadian rules and vice versa.comes into effect. This will ment. European firms will their operations in Canada. This will avoid both sidesprovide important market have new advantages when it It will be also easier for other doing the same test and couldopportunities for European comes to getting investment professionals to temporarily greatly reduce costs for com-companies, in particular the projects approved in Canada. supply legal, accounting, ar- panies and consumers alike.smaller ones, and could save European firms will also chitectural or similar services. This is of particular benefit toEuropean exporters hundreds have more opportunities to smaller companies for whomof millions of euros a year. provide services, for example, giving eu firms paying twice for the same test specialised maritime services aCCess tO gOvernment can be prohibitive. like dredging, moving empty tenders As President Juncker said containers, or shipping cer- in his State of the Union tain cargoes within Canada. Canada has opened up its speech, the EU-Canada trade In other service sectors, such government tenders to EU agreement is the best and as environmental services, companies to a greater extent most progressive deal the telecoms and finance, market than with any of its other EU has ever negotiated. It access is ensured, both at trading partners. EU firms was finally signed by Cana- federal level and – for the dian Prime Minister Justin Trudeau and EU officials on October 30.

86 ACCOUNTANCY CYPRUS ECONOMYBy Marina Joannou, BSc (ActuarialScience), DAT (UK FIA), RiskManager at a CySEC regulatedFund ManagerAIMING FOR THESTARS Can Cyprus really be a Fund On the same note, the Govern- sees things differently. ment and Central Bank should There are indications that ap- Hub in europe by 2020? maybe review the banking laws proval times by the Cyprus and perhaps make the Fund regulator are longer than in otherA Fund Hub by 2020? OK, maybe Cyprus Industry exempt from any future jurisdictions. Speakers from may need a bit longer but, as Les Brown haircuts. It is all well and good Ireland and Luxembourg gave said, “Most people fail in life not because protecting fund assets in custody an indication of much shorter they aim too high and miss, but because but that still leaves the capital approval times by their regula- they aim too low and hit.” So perhaps we of fund managers exposed. The tors though I should say that, at should take advice from Reinhold Niebuhr, capital of fund managers generally the same Summit, CySEC in- who said, ”Aim for the stars and maybe increases as assets under manage- dicated that it has been grantedyou’ll reach the sky.” Better still, “Aim for the moon. If you miss, ment increase and that capital a budget and has hired and isyou may hit a star” (W. Clement Stone). needs to be liquid. Perhaps only training more staff, so somethingWhere am I going with all this? The International Funds Summit the guarantee of no haircut will is indeed being done about thisin Limassol on 29-31 May 2016 had a phenomenal turnout and provide the comfort needed to en- shortcoming.hosted speakers from Luxembourg, UAE, Iran, UK and Cyprus tice fund businesses into Cyprus. One of the speakers indicatedas well as industry bodies such as EFAMA and ALFI. This point also ties in with ad- that, in order for Cyprus to get toIt is pretty evident that Cyprus has come to the same level as vice from Bank of Cyprus CEO where it wants to be it, it needsexisting Fund Hubs in terms of its legal framework, tax, and the John Hourican (and I agree to differentiate itself. Copyingavailability of a local multilingual and qualified workforce. It was with him) to bring in people Luxembourg, Ireland or Maltaannounced at the event that EFAMA would promote Cyprus to from other countries who have may not be good enough to ef-full member status in June 2016. done what we are trying to do. fect the change intended. SomeSo why is Cyprus not moving up the ranks? It certainly doesn’t make sense ideas mentioned on this topicIn random order, here are some points that I have picked up in to waste the time and money included relations with Russiathe last few months and from the Summit: on learning the lessons of other and the proximity of Cyprus toThe negative media surrounding the 2013 haircut and banking cri- countries if Cyprus can take the Middle East. A speaker fromsis in Cyprus discouraged many players from Cyprus. After speaking the shortcut. Furthermore, one Iran indicated that his countrywith Cypriot Banking representatives acting as depositaries, they cannot see the whole picture if would be willing to work withassured me that assets held in custody at the time were not affected. one is part of the picture so an Cyprus as a Fund Hub.Perhaps local banks offering custody/depositary services should ar- outside mindset may bring fresh None of the above seems impos-range some international media conferences and send out a loud and workable ideas because it sible to me, including Cyprusand clear message about what was not affected. being a Fund Hub in Europe. Maybe not by 2020 but it’s cer- tainly possible...



88 ACCOUNTANCY CYPRUSECONOMY oriented economic policies, have substantially outper-PROBLEMS formed the eurozone. Recover- ing from the recession, both countries reacquired their 2008 level of GDP some years agoFROM WITHIN (the USA in 2010 and the UK in 2012). By 2015, the USA’s GDP was 10% above its 2008 level and the UK’s some 5% higher. Eurozone growth hasThere is growing opposiTion To germany’s economic been slower, only reaching itsgrowTh policies and The eurozone iTself is causing 2008 level of GDP last year. Although the eurozone hasThe observed diversiTy in growTh and prosperiTy lagged, however, Germany has done very well. FollowingBy Dr. Jim Leontiades, Academic Dean, Cyprus International Institute of Management its own economic model of low debt and low governmentOpposition within the Europe to Ger- spending, together with high man economic policies is hardly new. France and Italy, not to men- projects that may be part of a exports, it has far exceeded the tion Greece and some of the smaller national strategy to increase growth of most other eurozone countries, have voiced concerns about competitiveness. countries. Germany enjoys the present economic policies of the Economists leaning toward virtually full employment, Keynesian theory point out steady economic growth and that there are times when it stability. Other economies in the eurozone, which have been eurozone and particularly those of is best to increase debt (to virtually forced to follow this Germany. Opposition also surfaced at stimulate demand) and oth- model (Spain, Italy, Portugal,G7 meeting in Tokyo, where Canada and Japan took the oppor- ers when the reverse is called Greece), have had just the op-tunity to stress the need for more government action (increased for. In a period of low growth posite experience: low growthspending) to stimulate economic growth in Europe. Germany such as that which the euro- and high unemployment.opposed this. The USA has also tried – without success – to per- zone is experiencing today, The convergence of economiessuade Germany to adopt more growth-friendly policies. More the main problem is a lack of that the eurozone was expectedsurprising is the recent position of the IMF and its difference with demand. Who will invest in to deliver has not happened.Germany over the third Greek bailout. Departing from its histor- new facilities if there are too Quite the reverse: there is aic hardline position on government debt and spending, the IMF few customers (over-capacity) great and growing diversity.has recently taken the view that the eurozone’s plan for Greece’s and many existing facilities are The differences and contrastsdebt and its repayment is not practicable. lying idle? Anyone walking between rich and poor, lenders down Makarios Avenue in and debtors, are not merelyIt has stated that debt relief for tiveness, including the elimina- Nicosia can see the problem. divisive; they undermine theGreece should be “an upfront tion of monopolistic practices. feeling of unity which lay atand unconditional component” It also stipulates that national comParinG outcomes the foundation of the EU inof any new plan. Under pres- debt should not exceed 60% of its early years and threatens tosure from the German Finance GDP and the annual national What is the practical result of destroy it. Is it possible thatMinister Wolfgang Schauble, deficit be limited to no more these different economic poli- the structure of the eurozone,the IMF has backed down, at than 3%. These limitations on cies? Despite all the efforts of having eliminated so manyleast temporarily, but a new po- government spending are the the European Central Bank, barriers between countries andsition and a break with German heart of the “austerity econom- the eurozone is not doing very instituted a common currency,policy has been made clear. ics“ favoured by Germany. well. While not growing as fast is itself contributing to this The theory is that, by follow- as they would like, the UK and diversity in growth and pros-Germany’s Policy ing this path, growth will even- USA, following more demand- perity? Yes, it is possible. tually follow. UnmentionedAt the risk of oversimplifica- is the uncomfortable fact that Despite all the efforts of thetion, Germany’s economic phi- limiting national debt may European Central Bank, the eurozone is not doing very welllosophy can be viewed as plac- prevent government spendinging emphasis on restructuring on restructuring roads, schoolsto increase national competi- and general infrastructure



90 ACCOUNTANCY CYPRUS ECONOMY TOWARDS A NEW COMPETITION POLICY LANDSCAPE By Dr. Panayiotis Agisilaou, Managing Director, Trojan EconomicsC ompanies which have infringed have established an infringe- competition law face severe fines ment of competition law imposed by the National Com- rules, the victims remained petition Authorities (NCAs) or uncompensated. According the European Commission (EC). to an estimate by the EC, Apart from the fines, companies victims of competition law that fail to comply with competi- infringements forego nearly tion law rules encounter the risk €23 billion in compensation of follow-on damages actions that every year. can be brought before the national One of the main reasons forcourts by companies or individuals that have suffered loss as a this undesirable situationresult of anti-competitive behaviour. arises from the fact that the national rules of the MemberAlthough it is well established an abuse of dominance, his- States regarding damages ac-that competition law has a di- tory has shown that it is not tions are not harmonized,rect effect, implying that any- easy for victims of competi- which often makes it costlyone can claim full compensa- tion law violations to exercise and difficult to bring damagestion before national courts their right to compensation. actions before national courts.for harm caused to them by Thus, in the majority of cases The EC submitted in Junean infringement by a cartel or where the NCAs or the EC 2013 a proposal for a Direc-

91ACCOUNTANCY CYPRUS The EC’s aspiration is for Disclosure will be jointly and severallythe harmonization of Member of eviDence liable for the harm causedStates’ national laws to make by the infringement. The National courts are empow- injured party can thus claim claims for compensation ered to order companies to full compensation from any a genuine option disclose specific categories of of the jointly and severally evidence in order to allow the liable infringers (i.e. mem-tive on antitrust damages into national laws. The EC’s victims claiming compensa- bers of a cartel). Exceptionsactions which was voted on aspiration is for the harmo- tions to prove the infringe- to this rule apply in caseby the European Parliament nization of Member States’ ment (in stand-alone cases), of medium-sized compa-in April 2014 and adopted national laws to make claims quantify the harm and prove nies, leniency applicantsby the Council in November for compensation a genuine the link between infringement and parties to a consensual2014 (Directive 2014/104/ option, especially for smaller and harm. Certain categories settlement (i.e. arbitration,EU). Member States will companies and consumers. of evidence (i.e. leniency state- mediation, out-of-courthave until December 2016 The key characteristics of the ments, settlement submis- settlements).to transpose the Directive Directive are the following: sions) included in a NCA’s or the EC’s files will be pro- PAss-on Defence tected, so as not to undermine the effectiveness of the public A company that violates enforcement of competition competition law is allowed to law. Moreover, the national argue that the claimants have courts will weigh the relevance passed on, fully or partially, and the proportionality of the the overcharge to its own disclosure requests. customers. BinDing effect limitAtion of ncA Decisions PerioD rules NCA’s final decisions will The limitation period for have a binding effect for damages actions is set to 5 damages actions before the years. The commencement courts of the EU Member of this period will begin to State whose NCA has taken run from the moment when the decision. The binding victims had the possibility to effect is however limited to discover that they suffered the infringement of compe- harm from an infringement. tition law; it does not cover The limitation period will the existence or the size of automatically be suspended the harm. A NCA’s deci- once the NCA initiates pro- sion will constitute at least ceedings. However, it will prima facie evidence of the continue for the duration of infringement for courts in any consensual dispute reso- other Member States. lution process. PresumPtion QuAntificAtion of hArm of the hArm It is presumed that cartels National courts are empow- cause harm. ered to estimate the amount of harm. Moreover, national liABility courts are allowed to estimate the share of the overcharge in Companies which have cartel cases that was passed- infringed competition law on to indirect purchasers.

92 ACCOUNTANCY CYPRUS ECONOMYPRIVATIZATIONSAND THEIRSIGNIFICANCETO THE STATE By Andreas Sfikouris Manager, Deal Advisory, KPMG LimitedP risk transfer and responsibility national defence, which cannot paid to the private entity per- towards the private sector, fac- be practically privatized primar- forming the service, needs torivatization can be broadly tors which are determined by ily for security reasons) in addi- be considered. During a reces-defined as an action that is the privatization objectives and tion to the existence of difficul- sion, it might be tempting todesigned to limit the role of the type of goods or services. ties in the implementation of privatize state assets in order togovernment in offering goods Although the objectives that free market mechanisms. relieve the state of its debt ob-and/or services, while strength- government will attempt to The first driver mentioned ligations but care is needed toening the private sector. It achieve through privatiza- above – the reduction of ensure that the state maximizesis the process of shaping an tion may vary, they generally government debt – needs to its income.existing offering arrangement originate from two basic needs: be considered from a macro- Regarding the second driverwith the purpose of reducing foremost, to reduce govern- economic standpoint. Ideally, – dealing with underperform-or eliminating government ment debt and secondarily to the government’s long- termparticipation. Privatizations can cope with underperforming view of the appropriate Debttake various forms, from the state entities due to inefficien- to GDP level needs to be takencontracting of third parties to cies, over-staffing and low into account when decidingperform certain activities to the productivity. Whether a priva- on privatizations. Also, thecomplete sale of entities owned tization is the right decision long-term net impact of a po-by the state. These two options depends largely on contextual tential reduction of revenues,occupy opposing ends of the issues such as the service in along with the potential in-privatization spectrum but, in question and at what point in crease in costs due to amountsfact, privatizations may take the economic cycle the financesvarious forms and can be char- of the state are. For example, it The introduction ofacterized by varying degrees of can be argued that free markets competition to the market, are much more efficient than which will serve the public monopolies but that depends interest, should be one of on the number of buyers and the main objectives of any sellers available in the market and information distribution privatization efficiencies. It must be borne in mind that certain services have unique restrictions (such as

93ACCOUNTANCY CYPRUS Privatization should be part of a broader set of economic reforms and not an end in itselfing entities – an evaluation ment growth are an increasing This leads to questions about at the same time protectingof the government’s ability to demand for public services, an whether there is a need to economically vulnerable groupsintroduce the right incentives increasing supply of govern- reduce the size of the state ma- and citizens in general.to tackle such an issue, prompts ment services on offer but also chine, the role of government Ideally, the introduction ofus to look at the size of govern- increased inefficiencies within in society and how this will competition to the market,ment, in terms of the number the government. Increased de- benefit the citizens of the state. which will serve the publicof employees, the cost and mand for government services Decentralization of the econ- interest, should be one of thethe number of state units (e.g. can occur for various reasons, omy will potentially promote main objectives of any privat-municipalities) and the fac- such as demographic changes economic growth, attract for- ization. Establishing compe-tors that cause governments to in the population and an in- eign investment and improve tition requires an approachgrow. The evolution of the size crease in the average income. the credit status of the govern- which will deliberately create aof a government, which grows Generally, growth due to an ment. However, this should be climate promoting the creationdisproportionately to GDP or increased demand for services done at the right time, through of product alternatives and re-is discordant with the chang- is not an issue. However, the the appropriate means and for ducing dependency on a singleing demands for services and increase in the supply of specific services. In addition, market supplier. This reductiongoods to the public, is probably public services and inefficien- for those services that will be benefits both the governmentthe result of influences that cies within government are privatized, the government and the public, as it protectscause inefficiencies and waste of closely linked and they end to should ideally act as regulator both parties in case of worksovereign wealth. These same generate losses for the state as and facilitator, and the services stoppages, unresponsiveness orinfluences also tend to work they are created by incentives should operate based on free high prices. The privatizationagainst privatizations. which are not aligned with market forces to achieve any of state entities of itself, howev-The main drivers of govern- those of the state. of the desired objectives, while er, is not enough. Appropriate policies, laws and regulations are needed and should be im- plemented to achieve the de- sired objectives by creating the right incentives for all parties involved. Privatization should be part of a broader set of eco- nomic reforms and not an end in itself.

94 ACCOUNTANCY CYPRUS TAXATION DIFFICULTIES IN ESTABLISHING THE VAT TREATMENT OF FINANCIAL SERVICES UNDER THE COMMON EU VAT SYSTEM By Michael C. Grekas Principal, Indirect Tax Services, KPMG LimitedI n general, supplies of financial services are exempt for Justice (ECJ) in handing down taxable person is only deduct- VAT purposes in all Member States as per the provi- its decisions, emphasizing how ible ‘in so far as the goods and sions of Article 135(1) (b) to (g) of the VAT Directive fundamental they are to the services are used for the pur- 2006/112/EC. These provisions are fully transposed Community’s common VAT poses of the taxed transactions in Schedule 7, Part B of the Cypriot VAT legislation. system. By introducing exemp- of a taxable person’. Preliminary work, which preceded the approval of tions, such as those referring Consequently, and as a general the Sixth VAT Directive in 1977, demonstrates that to financial services, the two rule, a taxable person providing supplies of financial services are exempt, due to the principles described above often exempt financial services cannot difficulty of taxing these supplies under a VAT system contradict each other. recover input VAT incurred on – the so-called difficult-to-tax services. the acquisition of services and/However, in the early 1990s, the European Commission present- Provisions of or goods. In practice, irrecover-ed the Transaction Cost Analysis (TCA) report and expressed its the vAt Directive able VAT increases the cost ofintention to review the provisions governing the aforementioned organizations which provideservices. Nevertheless, over almost 30 years since the report was As already mentioned, most exempt financial services. Thisfirst presented, the provisions governing the financial services supplies of financial services ‘additional’ cost is then passedexemptions remain unchanged. are exempt for VAT purposes on to their clients; at least inPrior to analyzing exemptions regarding financial services, we in all Member States. How- most cases.should emphasize that the common VAT system is founded on ever, in contrast to the general The only exception to this ruletwo basic principles: perception that this exemption applies in situations where theVAT as a general consumption tax (ECJ: ‘VAT is a consumption works in favour of the provider recipient of exempt financialtax designed to be borne only by the final consumer’) of financial services, who does services is established outsideFiscal neutrality (in general, a neutral tax is one that does not not impose VAT on the value the Community as per the pro-influence commercial decisions and must affect all taxpayers in of such services, the exemp- visions of Article 169 (A21(2)the same way) tion carries considerable costs (c) of the Cyprus VAT Act)Both principles have been widely used by the European Court of both for the providers and the recipients of financial services. Pursuant to the provisions of Article 168 of the VAT Direc- tive, input VAT incurred by a

95ACCOUNTANCY CYPRUS The principle of ‘strict interpretation’ is used in almost all ECJ judgments when exemp- tions are being interpreted. Essentially, the Court has consistently stated that “the excep- tions provided for in Articles 132, 135 and 136 of the Directive must be interpreted strictly since they constitute exceptions to the general principle that turnover tax is to be levied on all services supplied for consider- ation by a taxable person.” In some cases, the Court has adopted a more flexible approach to the principle of uniform interpretationof the VAT Directive (i.e. en- down by the ECJ should always The Court uses the principle of ‘strict inter-abling the provider to recover be taken into consideration. pretation’ when establishing the nature ofinput VAT). It must further be noted that services falling under the specific exemptions. the ECJ ensures and empow- However, it is important to note that incAse lAw AnD vAt PrinciPles ers the uniform interpretation recent judgments, the Court has sometimesDeveloPeD by the ecJ of Union legislation. How- departed from this strict interpretation in ever, ECJ cases must always its effort to implement the principle of fiscalIt is widely agreed that the be analysed in the light of the neutrality and its consequence, the principleabove provisions regarding general interpretative principles of VAT uniformity or equal treatment, whichfinancial services exemptions developed by the Court itself precludes similar goods from being treatedare difficult to interpret and, and they are applicable to all differently for VAT purposes,.in most cases, further guidance exemptions. With regard to the application of the prin-is required. This is the case, Specifically, the following prin- ciple of ‘contextual interpretation’, the ECJ has stated in severalespecially nowadays, where new ciples must always be examined judgments that “exemptions constitute independent concepts offinancial products are continu- and taken into consideration by Community law which must be placed in the general context ofously being developed (i.e. bina- taxable persons and/or their tax the common system of VAT introduced by the EC Directive”. Inry options, CFDs, outsourcing, advisors when analyzing finan- simpler words, exemptions must be interpreted by equally takingetc.). Establishing whether a cial services exemptions: into consideration the intention of the legislator at the time whenfinancial transaction falls within • The principle of strict inter- the rules were introduced (1977) and not only by referring to thethe scope of exemptions or not pretation context and the purpose of the rules of which they form part.is quite important to businesses • The principle of contextual Last but not least, the ECJ has held, with regard to the prin-as well as to consumers. interpretation and ciple of ‘uniform interpretation’, that “exemptions constituteHence, when analyzing a fi- • The principle of uniform in- independent concepts of Community law whose purpose is tonancial transaction, the relevant terpretation of exemptions. avoid divergences in the application of the VAT system from onedecisions that have been handed Member State to another”. However, as with the principle of ‘strict interpretation’, it should be stressed that, in some cases, the Court has adopted a more flexible approach to the principle of “uniform interpretation” in the light of the general principle of fiscal neutrality (i.e. the tax must affect all taxpayers in the same way). Taking into account the above principles developed by the ECJ, as well as the complexities surrounding the financial services in- dustry, we must be extremely careful when analyzing a financial service/transaction for VAT purposes and take into account ex- isting case law before establishing whether the service falls within the scope of exemptions or not.

96 ACCOUNTANCY CYPRUS TAXATIONTAX AVOIDANCE:TAX RATEMEPS CALL FOR MINIMUM CORPORATEIN THE EU OF 15% By Andreas Kettis, Head, European Parliament Information Office, Cyprus.The European Commission’s proposal for an EU anti-tax avoid- pensioners, and small and medium ance directive was welcomed by European Parliament’s Econom- enterprises while, at the same time, ic and Monetary Affairs Committee (ECON) in a resolution the wealthy and multinationals evade voted on five months ago. The Members of the European Parlia- making their fair contributions to tax. ment (MEPs) nonetheless advocated stricter limits on deductions We therefore urge EU member states for interest payments and an effective corporate tax rate of 15%. to be ambitious in the fight against Hence, it is becoming more and more evident that the LuxLeaks tax evasion by large multinationals. and Panama Papers cases have contributed to a very large extent EU citizens are disgusted by the Lux-to strengthening those voices in the European Parliament that have, for a long time Leaks and Panama Papers revelationsnow, been calling for a “more harmonised corporate tax rate” in the EU. and scandals. Today, the fight against tax evasion has become urgent andThe ECON committee approved year. It builds on the principle that a priority. This is a major challenge, Cits text by 20 votes to 15, with 21 tax should be paid where profits are not only to regain the confidence of Mabstentions. This outcome was closer made and includes legally-binding our citizens but also for the future of Ythan expected because at the very last measures to block the methods most the European project.” CMminute the centre-right European commonly used by companies to MYPeople’s Party (EPP) group decided avoid paying tax. It also proposes Stricter limitS on intereSt CYto cast blank votes due to a large common definitions of terms like payment deductionS CMYnumber of amendments made by “permanent establishment”, “tax Kcentre-left groups backed by small havens”, “minimum economic sub- One area, where the ECON com-majorities. stance” “transfer prices” and other mittee wants to go further than theIt is important to note that the anti- terms hitherto open to interpreta- European Commission, is in limitingtax avoidance directive reflects the tion. deductions for interest payments. TheOECD’s action plan to limit tax base The rapporteur for the European Par- European Commission proposes thaterosion and profit shifting (BEPS) liament’s opinion on the issue, Hu- companies should not be allowed toand follows recommendations made gues Bayet, underlined his view that, deduct more than 30% of their earnings,by the European Parliament in No- “It is inconceivable to incessantly ask whereas MEPs say this should be lim-vember in its TAXE 1 report last for ever more efforts from workers, ited to 20% or €2 million, whichever is higher. MEPs also want to limit the period during which these deductions

97ACCOUNTANCY CYPRUS00 CIM MASTER AD 208X140.ai 2 11/07/16 14:05 The anti-tax taxation. The European Commis- avoidance sion proposes that this exemption should be denied if the foreign directive builds income was taxed at a rate lower on the principle than 40% of the national rate. that tax should MEPs favour setting a minimum rate of 15%, i.e. if foreign income be paid where was taxed at a lower rate outside profits are made the EU, then the exemption would have to be refused and the can be made to five years, whereas difference would need to be paid. the Commission did not propose a limit. What next? effective minimum On 21 June 2016, the Eco- corporate tax rate nomic and Financial Affairs of 15% Council of the European Un- ion (ECOFIN or the Council) MEPs are also more ambitious reached final political agree- than the Commission with re- ment on the Anti-Tax-Avoid- gard to the “switch-over rule”. ance Directive (ATAD). It Today, if earnings are taxed in should be transposed in Mem- one country outside the EU and ber States’ national laws not then transferred to an EU mem- later than 31 December 2018 ber state, this so-called “foreign and take effect as of 1 January income” is often exempt from 2019. taxation so as to avoid double

98 ACCOUNTANCY CYPRUS TAXATIONTHECURIOUSCASE OFTHE ‘NON-DOM’ RULESAmendments to the tAxAtion of individuAls ual can have either a domicile received by them at birth (domicile of origin) Non-dom The Special Contribu- or a domicile acquired or retained by rules are still tion for the Defence their own act (domicile of choice). The a rather new Fund of the Republic, domicile of origin of an individual is and unexplored more commonly determined by reference to the domicile known and further re- of his/her father at their time of birth. part of the ferred to as the Defence If their father is domiciled in Cyprus, Cyprus tax Tax, has been turning a individuals obtains Cyprus domicile of few heads and puzzling expats coming to origin, irrespective of the actual country system Cyprus for some time. Recent amend- of birth. An individual can subsequently ments have made the application of the acquire a different domicile of choice byBy Veronika Tikhomirova, Defence Tax even more perplexing. establishing a home in a different coun-Senior Consultant, The previous Defence Tax rules required try with the intention to reside thereInternational Tax Services, that individuals who were tax residents permanently or indefinitely.EY Cyprus of Cyprus in any given tax year should pay 30% tax on any interest income, An individual can only have one dom- 17% tax on dividend income and 3% icile at any given time and the domicile tax on 75% of gross rental income aris- of origin prevails until the domicile of ing in that year, irrespective of whether choice is established. The domicile of or- such income streams were derived in igin is maintained until it is abandoned, Cyprus or abroad. at which point either a new domicile of choice is established or the domicile of According to the new provisions, as of origin is reinstated. 16 July 2015, only individuals who are both tax resident in Cyprus and domi- The vagueness of the above definitions ciled in Cyprus are subject to Defence leads to an inherent difficulty in deter- Tax. mining the domicile of certain individ- uals, particularly in cases where the indi- The concept of domicile is not entire- viduals or their parents have frequently ly new to Cyprus, although previously it moved from state to state or maintained was not used in the context of taxation. a number of households in different The definition of domicile appears in the countries. In order to avoid some of the Wills and Succession Law, which stipu- uncertainty, the Defence Tax Law intro- lates that, at any given time, an individ- duces additional requirements and clari- fications regarding non-dom rules which are applicable for tax purposes only.

99ACCOUNTANCY CYPRUS It is not yet he is a tax resident of Cyprus in each The above examples seem fairly clear how and every year following his move. straightforward, but determination of the domicile domicile can potentially be a lot more status will be Andrei is considered non-domiciled complicated. To illustrate this let usincorporated into in Cyprus until the year 2032 (inclu- come back to Andrei and Kam Yan. As various tax sive) since, by the year 2033, he will mentioned earlier, Andrei likes Cyprus have been a tax resident of Cyprus for 17 very much and decides to settle thereinretCurnyspfilredus out of 20 years preceding the year 2033. permanently. Kam Yan agrees. By 2030 Kam Yan, the wife of Andrei and when their daughter Maria is born, An- • An individual who has, in accord- a national of Hong Kong, moves to drei has established domicile of choiceance with the Wills and Succession Law, Cyprus together with her husband in Cyprus according to the Wills andobtained and maintains a domicile of at the beginning of 2016. Her father Succession Law.choice outside Cyprus, is not considered spent most of his life in Hong Kongto be domiciled in Cyprus for Defence and America. Kam Yan is a tax resident In principle, for Defence Tax purpos-Tax purposes, provided that such indi- of Cyprus up to and including 2018 es Andrei should still be considered asvidual has not been a resident of Cyprus when the company she is working for non-domiciled in Cyprus until 2032 (in-for a period of 20 consecutive years prior sends her to Germany for a two-year clusive). Maria’s domicile of origin shouldto the year of assessment. secondment. Kam Yan comes back at be in Cyprus since it is the domicile of the end of 2020 and resumes being a tax choice of her father at the time of Maria’s • An individual who has a domicile of resident of Cyprus as of 2021. birth. This is, however, not explicitlyorigin in Cyprus but has not been a res- Because Kam Yan is not a tax resident stipulated in the Defence Tax law andident of Cyprus for a period of 20 con- of Cyprus for two years, she is considered derives from interpretation.secutive years prior to 16 July 2016 is not non-domiciled in Cyprus until the yearconsidered to be domiciled in Cyprus for 2034 (inclusive), two years later than CONCLUSIONDefence Tax purposes. Andrei. Simon, a national of United Kingdom, Non-dom rules are still a rather new • Notwithstanding the above, and irre- moves to Cyprus in 2016. Simon’s father and unexplored part of the Cyprus taxspective of their domicile, an individual is lived in many countries before Simon system. While application of non-domnevertheless considered to be domiciled was born but he never visited Cyprus. rules seems to be fairly straightforwardin Cyprus for Defence Tax purposes if Simon is a tax resident of Cyprus since in cases of individuals who, alongsuch individual has been a tax resident 2016 but on 1 January 2020 he decides with their parents, have no previousof Cyprus for at least 17 years out of 20 to take a long break and travel around connection to Cyprus, the rules can beyears prior to the year of assessment. the globe to “reinvent” himself. Simon is tricky to apply in cases of individuals a man of action and so he quickly packs, who left Cyprus and have subsequently “Resident in Cyprus”, when applied leaves the island a week later and comes returned. In addition, it is not yet clearto an individual, means an individual back on 1 January 2024. Following his how the domicile status will be incor-who stays in Cyprus for a period or pe- return, Simon is a tax resident of Cyprus porated into various tax returns filed inriods exceeding an aggregate 183 days in in each and every year. Cyprus.the year of assessment. Below are a few Simon is not a tax resident of Cyprus for Nevertheless there are certain steps thatexamples to illustrate how the non-dom four years and his lengthy absence effectively can be undertaken already. Individualsrules work. “breaks” the 20 year period. He is consid- who are not considered to be domiciled ered as non-domiciled in Cyprus until the in Cyprus can file Form T.D.624/NP Andrei, who is a Russian National, year 2040 (inclusive). - Declaration for the exemption for de-moves to Cyprus at the beginning of Leandros was born in 1994 to Cypriot duction of defence contribution on bank,2016. Andrei’s father spent most of his parents who left Cyprus in 1990 but dividends and rents of individuals. Thislife in Russia and only visited Cyprus for nevertheless maintained domicile of will notify the relevant institutions froma short holiday. Andrei likes Cyprus a lot origin in Cyprus. Leandros gets a job which such individuals receive theirand each year he leaves the island only for with a Cypriot company and moves to affected income of their non-domicilea few short business trips, meaning that Cyprus at the beginning of 2016. This status. Perhaps one should also consid- is the first time he has ever set foot on er the evidence to support one’s claim the island. to be domiciled outside Cyprus and Leandros has a domicile of origin in make sure such evidence is available Cyprus. However, he has not been a in the event of a tax authority inquest. resident of Cyprus for a period of 20 con- Since this article is not meant to offer secutive years prior to 16 July 2015. He is a comprehensive interpretation of the therefore not considered to be domiciled in Non-Dom rules, please seek the help of Cyprus until the year 2032 (inclusive). a trusted and professional tax advisor in case of doubt.

100 ACCOUNTANCY CYPRUS BUSINESS IN CYPRUS EFFECTIVE ENERGY The regulaTory sysTem musT be builT on The principles of independence, Transparency and invesTor/consumer proTecTion By Dr. Andreas Poullikkas Chairman, Cyprus Energy Regulatory AuthorityGenerally, respect for system must be built: The absence of regulatory basic property and • Independence transparency can severely un- contract rights and an • Transparency dermine investor confidence. independent judiciary, • Investor and consumer pro- It is also the regulator’s role to with some ability to tection strike a balance between the command compliance The importance of achieving a encouragement of investors from government and degree of regulatory indepen- and consumer protection. A politicians, are key to dence, although controversial regulatory agency must pro- an effective legal and at times, cannot be under- tect investors from arbitrary regulatory system. estimated. Independence is government actions but, inHowever, there is no perfect regulatory system. Con- crucial to the regulator’s task. turn, protect consumers fromtinuous improvements and adjustments are necessary as Transparency is the key to at- abuse by firms with substantialit adapts to internal and external changes. A good regula- tracting and retaining efficient market power. Finally, a reg-tory system may take a long time to develop. investment, as it creates confi- ulator must be provided withIn many countries, the process of reform of the en- dence in the commitment of the tools and resources essen-ergy sector is still underway. A regulatory agency’s the government and the reg- tial for delivering on its man-structure must therefore permit it to adapt effectively ulator to a set of fair policies date, whether this is in termsto technological evolution and changing market both now and in the future. of laws, financial resources andconditions. In addition, appropriate clarity aroundthe relationship between government and regulator,including definitions in the governing legal frame-work, is crucial to good regulation and reduction ofinvestor risks. Also, the political will must exist, al-lowing regulators to do their jobs. Overall, there arethree basic principles on which an energy regulatory