Juncker proposals to harmonise tax rates find (again) Cyprus unprepared

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By Stelios Orphanides

European Commission President Jean-Claude Juncker’s favouring of a relaxation in EU decision-making rules based on qualified majorities on matters including further harmonisation of tax rates, is likely to have implications for certain member states including Cyprus.

Juncker, who was delivering his State of the EU address at the European Parliament on Wednesday, said that “so-called ‘passerelle clauses’ in the current treaties allow us to move from unanimity to qualified majority voting in certain areas,” provided all heads of state or government give their consent.

“I am also strongly in favour of moving to qualified majority voting for decisions on the common consolidated corporate tax base, on value added tax, on fair taxes for the digital industry and on the financial transaction tax,” the former Luxembourgian prime minister, who was addressing the parliament in French and German, said according to the English translation of his speech on the website of the European Commission. “Europe has to be able to act quicker and more decisively”.

The harmonisation of the corporate tax rate, already on the agenda of the European Commission since October when it tabled proposals for a common corporate tax base (CCTB) and a common consolidated corporate tax base (CCCTB), is considered anathema in Cyprus, which taxes corporate profits at 12.5 per cent. As one of the lowest rates in the EU, the island regards it as a comparative advantage for the business services sector.

Six months ago, the parliamentary energy, commerce, industry and tourism committee dismissed the European Commission’s proposals after consulting stakeholders, including law and accounting firms and the executive branch.

Other member states, also expressed reservations about the harmonisation of tax rates in the past, including Luxembourg, Ireland and the UK, which last year decided to leave the EU, thus weakening opposition to CCTB and CCCTB.

“The discussions on a common consolidated corporate tax base should serve as a warning for us in order to start planning how to diversify our economy which to a great extent is currently relying on services,” said Andreas Assiotis, Hellenic Bank’s chief economist.

The Cypriot economy, the euro area’s second smallest, emerged two years ago from a prolonged recession as traditional key sectors, such as tourism, the business sector and construction saw their output in the years continuously rise following the fiscal and banking crisis. Key reforms agreed with international creditors, including the overhaul of the civil service, privatisations, the modernisation of legislation governing the financial sector and the opening of professions were not partially implemented, if at all.

Juncker also advocated in favour of transforming the European Stability Mechanism (ESM) into a “European Monetary Fund” and the office of the European Commissioner of Economic and Financial Affairs into that of a European Minister of Economy and Finance.

The ESM, established five years ago during the euro crisis –which engulfed five EU members–, to finance bailouts in the euro area together with the International Monetary Fund (IMF). The latter supervised the bailouts, including that of Cyprus, jointly with the European Central Bank and the European Commission.

A European minister –“ideally also a vice-president” and president of the Eurogroup– promoting and supporting structural reforms in member states “can build on the work the Commission has been doing since 2015 with our structural reform support service,” a body helping EU members design and implement reforms, said Juncker who served as chairman of the Eurogroup, the informal body of the euro area finance ministers until early 2013.

“The new minister should coordinate all EU financial instruments that can be deployed when a member state is in a recession or hit by a fundamental crisis”.

The Commission will submit concrete proposals about the future of ESM in December, Juncker said and added that “we do not need a budget for the Euro area but a strong Euro area budget line within the EU budget”.

Michalis Florentiades, chief economist at the online financial service provider XM.com said in an interview that he is not taking for granted that Juncker’s agenda will be finally implemented. “His job is to present his vision but whether the heads of state and government will ultimately do, that’s another story,” he said.

Much may be determined following the German elections scheduled for September, he continued. “The Germans want a European finance minister with lots of powers and small budget but it is the other way around with the French,” who elected a new government and parliament in the second quarter of the year, he said.

Still, the focus in the EU will shift to reform following the completion of the election cycle when Italians elect a new parliament before May next year, said Ioannis Tirkides, who heads Bank of Cyprus’s economic research division.

“Whilst everybody agrees on the need for reform there is less agreement amongst member countries on the nature of the reforms that are needed,” Tirkides continued. He added that reforms proposed by the president of the Commission and likely to centre on budget risk sharing measures including a common unemployment insurance programme, “will not be easy and negotiations will likely be tense”.

The Bank of Cyprus economist added that he considers it certain that the euro area’s north will seek more say over national fiscal policies.

“In principle, I am in favour of European integration,” Hellenic Bank’s Assiotis said adding that this process should prevent widening the gap among member states by undermining their competitive advantages.

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

  • Monica

    For “harmonise tax rates” …. read ‘increase tax rates’ !
    They will not be averaged out over the EU to give some a possible reduction.
    He needs your money to fill the EU’s financial black-hole !

    • Pc

      We’re talking corporate tax rates here. In other words, the closing of loopholes whereby companies like Amazon, Apple and Starbucks can earn billions without paying any taxes on it because of tax havens like Cyprus, Ireland, the UK and the Netherlands.

      • Monica

        So that’s three out of four who will be at his mercy … still in the EU after Brexit. Those companies need to sell their wares to the general public … who will pay in the end.

        • Pc

          Don’t worry. The fourth one will be at the mercy of the EU as well. Either the UK remains part of the internal market, which implies being part of the tax directives, or the EU will levy import charges. In the latter case either the EU collects its tax that way or it forces large corporations to move to within the EU, which brings them into the tax realm of the EU.

          But seriously, it is not exactly fair that a company like Starbucks pays almost no tax, while its local competitor Coffee Island needs to cough up 29 cents on every Euro to pay to the state.

          • Monica

            Percentages of imports/exports are not as important as the total financial amounts of trade … The UK will reciprocate (a serious disadvantage to the EU).
            And I’m capable of making my own cup of coffee (I’ve never been in a Starbucks café … and only twice in a Costa café).

          • Pc

            I’m very happy you can me your own coffee. But avoid answering to the real point that your local companies are at an unfair advantage against their international competitors.

            How do you think Asos (big UK online retailer) feels that it needs to pay tens of millions in tax while Amazon gets away with paying near to nothing because it has some shady construction set up with the governments in the UK, Luxembourg and the US?

          • Monica

            Have you considered the ‘shady deals’ within the EU, which mainly benefit some of the larger member nations ?
            One of the reasons that the UK is leaving.

          • Pc

            The UK is one of those larger member nations? The UK is leaving so it can keep more of the shady-deal spoils for itself?

          • Mike

            But will soon be seeing the reality and wishing it hadn’t I suggest. Give it another couple of years. All that hot air about sovereignty, control of borders, British jobs for British people was just that, a load of hot air. The reality is that UK will suffer in time and is now seeing the exodus of city jobs (they supply 70% of UK tax income) and hospitality / Agriculture jobs are remaining unfilled. Brits don’t want to be doing those kind of jobs when they can claim benefits for being at home. The clock is ticking and when all the employable are forced to take any job (if they are) who fills the thousands that are left. Shame really but Sir Alan Sugar hit it on the button when he said the likes of Boris Johnson, Michale Gove etc should be imprisoned for lying to the British public. Now they have to come out with silly statements just to save face.

      • Didier Ouzaid

        What’s illegal about this? Nothing.

        Should we set our corporate tax at the same rate as France (33% now, 28% soon) because it’d be fairer to them? In other words, should we lose our competitive advantage so we can pay for their welfare state and public finance mismanagement over decades? Because that’s what it is here. Tax is the first sovereign right of a Nation, it is basically how the citizens view and shape their Nation. If France decides, for instance, that public Universities shall cost less than 500 euros a year (and that’s what I paid for my first years of Uni there), it is their right. It is THEIR right to finance the rest of the tuition through public taxation. But if Cyprus decides that there will be less welfare and perks in exchange for less taxation, or that the reduced corporate tax rate will be offset by the volume of companies setting up shop here, it’s as much OUR right.

        And don’t think that any new average tax rate across the EU would be lowered down to 20%, when the two main powerhouses currently have corporate tax rates that are much higher. They’re not ready to lose on much of that. No, smaller countries with different competitive advantage and economic structures would suffer. Period.

        What is Cyprus supposed to do? Grow a market of 50 million people so we can have adequate economies of scale? Become a manufacturing power overnight so we dont rely on services? Diversification can only take you so far, you dont magically mimic the economic structure of a larger country.

        • Pc

          Who said anything about illegal?? I didn’t.

          The point about the tax havens is actually a classic case of a failing Nash equilibrium. There are many parties offering, and only one taker (the company), so there is a market distortion that causes a race to the bottom. And in this case it shifts the burden of taxation from (international) companies to the consumer. You can clearly see this as the average corporate tax rate in the EU states has fallen over the last 40 years while the average income tax has remained roughly the same.

          What Cyprus can do, and should do anyways, is stop competing on price alone. Our low tax rate for international companies (currently 12% – it is 12% plus 19% defense tax for companies trading in Cyprus) makes us only attractive from a tax perspective. So, we only attract “Postbox” companies that are legally based in Cyprus while they conduct their actual business elsewhere. That only creates some legal and accounting jobs.

          If Cyprus wants to attract real jobs for its highly skilled youths, it needs to become competitive in other areas. Cyprus is, compared to Germany, Denmark, Sweden, the UK, the Netherlands, a badly run country with laws that are outdated, incomplete and that are badly supervised. Property rights are less well enforced in Cyprus than elsewhere in the EU and it is difficult to cut through the red tape. Applications take too long to process (i.e. a residence permit for an EU citizen will take around 3 month to process in Cyprus. It will take 1 hour in the Netherlands or Germany and you can do it by appointment. Similar stories on the founding of new companies and getting permits.). Its infrastructure is outdated (internet bandwith is amongst the lowest in Europe) and because the government keeps state monopolies in place, innovation does not happen fast enough in this area. Once Cyprus gets those straightend out it will become attractive for companies that will bring real jobs, not just for tax evaders.

          • Monica

            Quote :- “it shifts the burden of taxation from (international) companies to the consumer”.
            No matter if the tax is levied on ‘international companies’ or not …. Those companies need consumers for their wares ….. So the consumer has to pay in the end anyway.

          • Pc

            So you actually state that you don’t mind paying 50% income tax instead of 40%?

          • Monica

            No, I don’t want that.
            If you read my first comment … that should be evident to you.

          • Pc

            Ok, so then you support fair taxation of companies and an end to the race-to-the-bottom on taxes.

          • Mike

            Monica – those who make large sums of money in the tens of billions do not manufacture anything (other than apple that is) the majority are financial services companies and pay little by way of taxes. All very legal of course albeit immoral, unethical and some may say illegal in some juristictions. Those offering zero or very low corporate tax rates only do so for the advantage it gives them in attracting global money which would otherwise be taxed to provide services for the people of the juristiction it was earnt in.

          • Rock Climber

            “internet bandwith is amongst the lowest in Europe” – and amongst the most expensive.

  • Bystander

    Umm, are we talking suffocating time frames again…

  • Paranam Kid

    Cyprus is unprepared because it can’t even get its own house in order: 5 years behind with tax collection in a country that was/is in financial difficulty & got a bail-out loan. And the unions have policy-making in a stranglehold, with the lawmakers lacking the guts to address this, probably because its lining their pockets nicely too.

    • Evergreen

      True.

    • Cydee

      Not forgetting NPLs…

      • Paranam Kid

        I fully agree !!!

  • Luke Coolhand

    The view of the EU through the bottom of “Drunkers” brandy snifter. As the late Helmut Schmidt said ” if you have a vision, go and see an optician”.

  • Stuart Muir

    Harmonisation, qualified majority next the United States of Europe led by unelected Presidents. We are different people with different languages and cultures it just won’t work. Thank goodness i voted to leave this undemocratic institution!!

    • HighTide

      Just for the record. EU presidents don’t lead, they are mere spokesmen. Laws must pass EU parliament, and treaties need unanimous consent of the EU Council. In may cases parliamentary approval of member states as well. Such treaties, past and present, have all been signed by the UK.

  • Didier Ouzaid

    “provided all heads of state or government give their consent.”

    Then it is simple, dont. Easy as that. Say yes to a fair tax rate for the digital industry and on financial transactions to show compromise and will, but just dont cave on corporate tax. It is the country’s survival at stake here. What’s the worst that could happen? Blackmail? On what? You cant blackmail someone that has nothing further to lose anyway.

    They’ve asked us to comply on money laundering issues, and to a large extent we did. But dont be fooled, that was a first, direct attack at that competitive advantage they’re talking about.

    • Disruptive

      MOney laundrey is competitive advantage? Are you serious?

      • GSP

        Of course! It made several Cypriot ‘business men’ and a lawmaker very rich.

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  • Wanderer

    Why would he expect Cyprus to be “prepared” to sign its own death sentence? The arrogance of these crooked unelected power-hungry bureaucrats such as Junker is unbelievable.
    What Cyprus needs to be prepared to do is to rigorously defend itself from this destructive power grab.

  • xenonx

    So Britain will regret Brexit, according to Juncker – what is he sniffing?His politics play directly into Britain’s hands to set their own rates for VAT, corporate tax and domestice tax rates.

    Somebody should tell this moron there may be a lot more EU countries playing the EXIT card as turkeys do not vote for Christmas!