Macron’s victory may threaten reliance on low tax rates, passport schemes

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By Stelios Orphanides

Cyprus is likely to face mounting pressure to increase its corporate tax rate soon and needs to diversify its economy with meaningful reforms as the victory of Emmanuel Macron in Frances’ presidential elections signals a new push for a fiscal union, a Cypriot academic said.

“Our economy needs to diversify risk,” said Marios Zachariadis, who teaches economics at the University of Cyprus. “We don’t want to see lawyers or accountants lose their business but by creating conditions through institutions and legislation that improve the business environment, we (can) establish the foundation for the economy’s risk diversification”.

Macron, 39, a former investment banker, elected on a pledge to reform and modernise the French economy, said a week ago after meeting German Chancellor Angela Merkel, that he would favour a change of the European treaty to establish a euro area finance ministry.

In the absence of a fiscal union allowing fiscal transfers from one euro area member to the other, “the monetary union will run into problems and may break down in the years or decades to come,” Zachariadis who was commenting in a telephone interview on Friday said. “Therefore, there will be a lot of pressure for fiscal transfers to happen but for this to be accepted, there has to be a fiscal harmonisation not only affecting spending but also taxation”.

The “best-case scenario” will involve a reduction of high (corporate) tax rates in various euro area countries, while a possible upwards harmonisation could affect Cyprus’s business services sector which profits from the 12.5 per cent corporate tax rate which attracts companies to Cyprus, he said.

The Cypriot economy, which expanded last year 2.8 per cent and, after it emerged from a prolonged recession, 1.7 per cent in 2015, is expected to grow 2.9 per cent this year. Last year, growth received a serious boost from tourism and construction, with the latter benefitting from incentives offered to foreign property buyers, including the Cypriot citizenship or residence permit.

This type of schemes, Zachariadis continued, may be necessary in the short term to kickstart the economy. “One can acknowledge that some of the measures taken by the Anastasiades government have resulted directly in growth but at the same time I would like to see investment in reforms which does not imply more spending,” the academic economist said.

On the other hand, these schemes are already causing side-effects, discouraging economic activity in other areas, causing a “bubble in a neighbourhood in Limassol with the construction of large buildings,” he said.

“Local bubbles impact negatively those who take business decisions,” by reducing the motivation of entrepreneurs to engage in more sustainable forms of economic activities, Zachariadis said.

In order to reduce the economy’s reliance on distorting activities such as the low corporate tax rate or the citizenship-by-investment schemes, the island will need to address areas such as education, where Cyprus spends more than the EU-average, transparency and judiciary, where it performs worse compared to other European Union countries, the economist added.

According to the 2015 results of the Programme of International Student Assessment (PISA) of the Organisation of Economic Cooperation and Development (OECD), Cypriot students were the worst performing in the EU, trailing Romania and just ahead of Moldova.

In the World Bank’s 2017 Doing Business Report which assessed he business environment in 190 countries, Cyprus which last year completed its reform programme agreed with international creditors in exchange for a bailout, ranked below Moldova and just ahead of Croatia. Cyprus was ranked 129th in enforcing contracts, a process that takes 1,100 days, 125th in dealing with construction permits which requires 507 days and 91st in registering property.

“Governments cannot change the structure of an economy in five or ten years but they can create the preconditions (for this to happen) in the future,” Zachariadis said and admitted that it also “takes guts to reform”.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • fupuvu

    Some will soon understand that Le pen and Farage “national” view isn’t that bad after all…
    Ask the greeks for more information…:)

    • Alexander Reuterswärd

      One union, one currency dont work unless you have one common tax system. I think its a good move, either go alll the way, or remove the Common currency.

      • fupuvu

        I agree with you, but not sure it may be the best solution for some european countries, out of which Cyprus…

        • Alexander Reuterswärd

          agree, Cyprus will find it difficult since it built its whole businbessmodel on attracting companies who want to avoid paying taxes in northern Europe. Then again, Europe will increase its income and should be able to support Cyprus with money to change its businessmodel.

          • fupuvu

            Hopefully, but good luck with that… just remember how the troika’s demands have been enforced so far here…

    • Disruptive

      One side’s deficiency doesn’t make the other side better. Le Pen is still xenophobic lunatic, fiscal policies aside.

      • fupuvu

        “lunatic”, I agree.
        “xenophobic”, what does that mean? That someone wants to limit migrations in countries with high unemployment rate? Doesn’t sound completely senseless to me.

        • Disruptive

          Those migrations are from countries that France destroyed through decades of ruthless colonialism, and most recently by bombing Lybia with their oil/weapon dealer cronies, and it’s called karma.

          • fupuvu

            well, when looking at those countries during the colonialism era and now, well, the best thing I wish for them, is to be colonised again.
            As for the reasons Lybia is bombed today, and by whom, I strongly encourage you to read some serious books about the issue….

          • Disruptive

            The same applies to Cyprus then?

          • fupuvu

            I guess Cyprus will be better off today, if it had stayed under british rule, yes.

          • Disruptive

            Do you have Queen’s photo in your valet?

          • fupuvu

            is there something wrong with my comment? 🙂

          • Slomi

            Exactly. And Bangui still needs a recovery and France needs to acceptBangui people too in near future.

  • Alexander Reuterswärd

    Macron is right, you cant have one currency and different finance ministers. Cyprus should be able to build other businesses that is within Solarpower, tourism etc 🙂

    • fupuvu

      ….and an efficient tax recovery dept….:)

  • Barry White

    An economy based on” schemes and the worst performing students in the EU….”

    Not a recipe for future success in a competitive world…..

    • Waxing Lyrical

      Then why did you choose to spend thousands upon thousands of pounds to relocate here?

  • Slomi

    Macron is right.

    • fupuvu

      Very clever comment Slomi, and supported by strong arguments. Bravo.

    • Neroli

      I agree with you!

  • Erol Riza

    Cyprus, together with Ireland, the UK, Malta and Luxembourg, have not favoured corporate tax harmonisation. Bret doe snot help but the fact is that there are German and Dutch interests which is not as simple as the author makes it out to be to deal with corporate tax. Indeed there is a need to have more fiscal harmonisation but more important is the fiscal measures that countries implement in the budgets. In this area Brussels can, and should, have more say to avoid politicians being profligate. The real challenge for Cyprus is to change the economic model and introduce more technology and increase productivity while at the same time reduce the judicial time needed to resolve cases and stricter measures to reduce corruption. Mario’s is right to suggest that other countries reduce corporate taxes but this is not on the table as more spending is needed in some countries to support healthcare and again populations.

  • KAITANOU

    I agree with the above with respect to diversification, transparency etc. However small countries such as Cyprus, especially if they are on the periphery of the Union, are at a disadvantage when compared to big countries especially when they are situated at the centre of the Union. Apart from some small eastern European countries a classical example is Ireland which would be at a disadvantage if there are uniform corporation tax rates etc. There would have to be negotiations for differentials in tax rates.

  • cyprusclive

    Just imagine how Cyprus could prosper if it regained its freedom, independence and left EU. It could become as rich as Gibraltar, the financial centre of the western Mediterranean. Dreams do come true sometimes.

    • cyprus observer

      Just imagine how Cyprus would be if it were not a member of the EU in March 2013.

    • Neroli

      They had that in 74 and look what happened

      • Waxing Lyrical

        What?

    • prof

      a rather simplistic view

  • Jeremy Rigg

    This article is “about exactly why the EU with one common currency will never work”.
    And no, ‘Cyprusclive’, this country will never become a financial centre after what has just happened to the banks here. No one would trust them.