Commission names and shames Cyprus for aggressive tax planning

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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.”

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About Author

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

  • Evergreen

    Sad.

  • alexander reutersward

    Imagine the affect a closure of tax planning would have on the island…bankruptcy of 90% of all lawyers

  • Alex

    Why not “harmonize” tax downwards? Why should Germany and France dictate the leve of natonal business taxes? No wonder voters are walking away from this failed “project”……

    • alexander reutersward

      The problem is german and French companies that do all their business in Germany and France and is tax resident in Cyprus.
      Pays no taxes in their own country and Cyprus that has nothing to do with their business earns taxes from them.

      I believe taxes should be paid where they are earned

      • Kevin Ingham

        Either that or the corporate tax rate should be standard across the EU (which would still leave Cyprus in deep do do and Ireland too).

        These economies have been allowed to boom (then bust) on unsustainable policies and economic mismanagement by the ECB , which has caused a lot of the current problems. The EU needs to standardise tax rates and set national budgets before they can pool debt required to keep the Euro intact

        • Alex

          A good old worn out record from the liberal know-alls – standardise to higher taxes – so us Germans can always be on top of the pile.

          You offer nothing but servitude to workers, which is why we had Brexit, Trump, Germany, Italy (and more to come) voting against people with your elitist big government wealth-destroying ideas…..

      • Alex

        Sounds like a legal and free way to do business, perhaps you will decide where taxes are earned?

        • alexander reutersward

          If I am a consultant living and working in Sweden , all my clients is Swedish should I be allowed to have a letter box company in Cyprus paying 0 tax in Sweden ?

          If I have a company in Sweden selling clothes to Swedish customers, living in Sweden all my staff is in Sweden should I be allowed to have a letter box company on Cyprus where I buy my clothes from China, the clothes never enter Cyprus, no one besides a lawyer I pay 1000 EUR per year to be a director doing nothing is employed in Cyprus.

          I make an invoice from the Cypriot company to the Swedish company charging 3 times the price I paid from China to avoid paying company tax in Sweden?

          All Cyprus do is sucking wealth from other nations that need tax money for infrastructure, social care, schools and so on instead of feeding lawyers in Cyprus.

  • Barry White

    Naming perhaps, shaming never.

  • Pullaard

    If it is not against the law, all companies and individual persons with the money to do so are within their rights to seek to establish themselves in the lowest taxed countries. It might not be morally correct but, if you don’t like the law, change it. And if the EU doesn’t like what some of its members are doing, cut off their subsidies.

    • Alex

      Nothing like choice and free speech to get the liberals scattering for cover……

  • desres

    The actual statement was The European Commission named and shamed seven EU Member States for facilitating tax avoidance on Wednesday. Who changed it to tax planning