A revision to the Cypriot corporate tax regime is not for negotiation, the government has underscored as it prepares to discuss a trade-off of austerity measures for a financial assistance package with European Union member states and international donors.
In advance of bail-out negotiations, the nation's Finance Minister, Vassos Shiarly said the government would rebuff pressure to hike the nation's highly competitive corporate tax regime, with its effective rate of 10%. Sustained pressure was placed upon Ireland as one of the first nations to receive a Troika bailout, with Germany and France leading the assault with claims that Ireland's 12.5% rate has a predatory impact on the tax bases of other European states.
The announcement that Cyprus will require a bailout comes despite reassurances that the nation would be able to overcome political division and implement deep structural reforms, to reduce the significant deficit in two successive steps, from a deficit that topped 7% of Gross Domestic Product at the start of this year, to 2.5%-2.7% in 2012, and to 0.5% of GDP in 2013.
The government managed to obtain EUR2.5bn in credit from Russia in 2011 to finance state debt and resist a European bailout that year. However the government has failed to find domestic sources of credit to refinance the nation's second largest financial institution, Cyprus Popular Bank, which reportedly requires an injection of funds worth at least EUR1.8bn (USD2.25bn), but may require as much as EUR4bn, equal to around 23% of Cyprus' GDP, according to estimates from Fitch Ratings.
In addition, Shiarly has confirmed the bailout will not be limited to the banking sector, as the Cypriot economy has significantly weakened this year, undermining austerity measures introduced in 2011 and 2012, designed to rapidly cut the deficit.
Fiscal room for new measures is limited. The government has already this year hiked the rate of the value-added tax rate to 17%, from 15%, and introduced a new top tax bracket of 35%, applicable on income above EUR60,000. Withholding tax on savings interest derived by Cypriot residents was also hiked to 15% from 10%; tax on real estate was increased; and a new EUR350 annual fee was introduced on companies.
In lieu of an increase to the corporate tax rate, the International Monetary Fund may reiterate the message it delivered in its report in October 2011, that Cyprus's value-added tax rate, despite already being hiked from March this year, is below the European median level of 20%. This would generate significant revenue, and would have a lesser impact on the island as a international financial centre, but would add pressure on the struggling economy, and would require measures to counteract the hike's impact on lower-income citizens.
In advance of bail-out negotiations, the nation's Finance Minister, Vassos Shiarly said the government would rebuff pressure to hike the nation's highly competitive corporate tax regime, with its effective rate of 10%. Sustained pressure was placed upon Ireland as one of the first nations to receive a Troika bailout, with Germany and France leading the assault with claims that Ireland's 12.5% rate has a predatory impact on the tax bases of other European states.
The announcement that Cyprus will require a bailout comes despite reassurances that the nation would be able to overcome political division and implement deep structural reforms, to reduce the significant deficit in two successive steps, from a deficit that topped 7% of Gross Domestic Product at the start of this year, to 2.5%-2.7% in 2012, and to 0.5% of GDP in 2013.
The government managed to obtain EUR2.5bn in credit from Russia in 2011 to finance state debt and resist a European bailout that year. However the government has failed to find domestic sources of credit to refinance the nation's second largest financial institution, Cyprus Popular Bank, which reportedly requires an injection of funds worth at least EUR1.8bn (USD2.25bn), but may require as much as EUR4bn, equal to around 23% of Cyprus' GDP, according to estimates from Fitch Ratings.
In addition, Shiarly has confirmed the bailout will not be limited to the banking sector, as the Cypriot economy has significantly weakened this year, undermining austerity measures introduced in 2011 and 2012, designed to rapidly cut the deficit.
Fiscal room for new measures is limited. The government has already this year hiked the rate of the value-added tax rate to 17%, from 15%, and introduced a new top tax bracket of 35%, applicable on income above EUR60,000. Withholding tax on savings interest derived by Cypriot residents was also hiked to 15% from 10%; tax on real estate was increased; and a new EUR350 annual fee was introduced on companies.
In lieu of an increase to the corporate tax rate, the International Monetary Fund may reiterate the message it delivered in its report in October 2011, that Cyprus's value-added tax rate, despite already being hiked from March this year, is below the European median level of 20%. This would generate significant revenue, and would have a lesser impact on the island as a international financial centre, but would add pressure on the struggling economy, and would require measures to counteract the hike's impact on lower-income citizens.
