By Stelios Orphanides
The European Commission said that Cyprus is among seven member states facilitating aggressive tax planning and does so even after taking steps to address it.
“However, the existence of specific tax rules combined with the lack of some anti-abuse rules, suggest that Cyprus’ corporate income tax rules may still be used in tax avoidance structures,” the European Commission said in its 2018 European Semester report on Wednesday.
Rules facilitating the aggressive tax planning in Cyprus included the corporate tax residency, the absence of withholding taxes on dividend – which applies in the case of non-residents – interest and royalty payments by Cypriot companies and potential risks associated with the design of notional interest regimes, the Commission said.
The other six member states of the EU engaging in aggressive tax planning are Belgium, Hungary, Ireland, Luxembourg, Malta and the Netherlands.
An indication of Cyprus’s aggressive tax planning practices is the higher than the EU average revenue from value added tax (VAT) and corporate income tax as a percentage of economic output, the Commission said. While in the EU, the share of VAT revenue and corporate tax were in 2016 7 per cent and 2.6 per cent, in Cyprus they made up 9.2 per cent and 5.8 per cent respectively.
By contrast, Cyprus’s effective corporate tax rate was 13.1 per cent in 2016, versus a 20.9 per cent average in the EU, it said.
“As a result, Cyprus appears exposed to corporate income tax revenue decreases due to potential changes in the international corporate tax framework eliminating incentives for tax planning,” it added.
Further, a study shows that Cyprus’ high inward and outward foreign direct investment stocks can be only partly explained by real economic activity in the country, the European Commission continued.
“The high levels of dividend and interest payments as percentage of gross domestic product continue to suggest that its tax rules are used by companies that engage in aggressive tax planning.”
“The absence of withholding taxes on dividend, interest and royalty payments by Cyprus-based companies may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction,” the Commission said.
“This absence, together with the corporate tax residency rules, may continue to facilitate aggressive tax planning. Notional interest deduction regimes, while helping to reduce the debt equity bias, can also be used for tax avoidance purposes if not properly safeguarded.”
Sven Giegold, a Green member of the European Parliament, commented in response to the Commission’s step to name and shame the seven countries for their aggressive tax planning practices, that it “at last” acknowledged their role.
“The big offenders are not just distant tropical locations like Panama and Bermuda,” Giegold said in an emailed statement, hours after the publication.
“By naming and shaming the worst offenders, the Commission has corrected the huge error made by the Council in excluding EU countries from its blacklist of tax havens,” he said in reference to a December 5, document naming initially 17 countries as non-cooperative jurisdictions.
On January 23, the EU Commission removed eight countries from the list which now includes American Samoa, Bahrain, Guam, Marshall Islands, Namibia, Palau, Saint Lucia, Samoa and Trinidad and Tobago.
The EU’s “big offenders are not just distant tropical locations,” the German MEP added. “The countries singled out today owe it to their citizens, and people all across Europe, to bring forward robust plans to end their complicity in tax dodging.”