Urgent need for a new tax reform

At last year’s conference we have learned some lessons, which, inter alia, include the following:

• the business and economic foundations of the country can be affected by events happening elsewhere, reference is of course made to the warfare between Russia and Ukraine and the repercussions it carries on Cyprus,

• geographical boundaries are becoming less and less relevant, since economies are open and susceptible to the impact of globalisation,

• energy resources and cost are playing a massive and catalytical role in the economic activity and social framework in every country,

• competitiveness is fundamental for every country’s economic growth model, whilst robust and sustainable fiscal policies are mandatory,

• concentration on ESG, with everything relating to the preservation of the environment, the natural resources and Sustainable Development Goals (SDGs) is the way forward.

Hence, it is hereby proven that the international business and economic scenery are volatile and liquid, highlighting how imperative it is to install solid, robust and adaptive economic models, with widely enriched portfolio of activities and associates, whilst remaining compliance friendly.

Cyprus has a small but open economy, susceptible to the fluctuations of the international business affairs and challenges. Currently, many initiatives instigated by various organisations including the EU are under way, which affect the international tax outlook. These initiatives place particular emphasis on the combat against aggressive tax planning, tax evasion and profit shifting, on enhancing compliance, reporting and transparency, as well as on efforts to address digital business and technology, substance rules as well as ESG priorities. Coupled to that, we also hold the hot potato of the consequences of the restrictive measures and sanctions imposed on Russia due to invasion to Ukraine.

The discussions around the “Unshell” Directive of the EU, the “Foreign Direct Investments Screening” Regulation, the UBO Registers, the “BEFIT” proposed directive, OECD’s Pillar II requirements, Transfer Pricing regulations, Anti Avoidance directives, Country by Country Reporting, EU’s DACs 6-7-8 on exchange of tax information, digital tax and taxation on multinational companies, coupled by the data protection and privacy restrictions (as per recent decisions by the European Court of Justice in Luxembourg) are of paramount importance and create a really complex puzzle. It is for these reasons that I take this opportunity to re-iterate ICPAC’s call to the government and to the political establishment to proceed with a wider Tax Transformation, as we named it. We have an obligation to fortify the country’s business arsenal so as to protect it from international competition, whilst planning for the future on a modern and more relevant blueprint. Having in mind the international driving forces and considering the domestic needs for social and economic policies and development, there is no other option but to soon start working on a holistic, across the board and deep down plan to transform our tax regime into a modern, flexible, lean and neat, transparent and adapted to the Long Term Strategic Growth Plan for the Economy (known as “Vision 2035”), offering stability and predictability to the local population, as well as to the investors and foreign businesses which aspire to operate in or from Cyprus. This exercise should contain a radical and outside the box approach, possibly away from our comfort zones, thus creating lasting additional value, fair perception and competitive advantages for the country, based on proportionality, relevance, use of digital applications, with as little as possible bureaucracy and an effective tax justice framework. We do live in an era where countries around the globe strive to keep their economies at an acceptable survival level, with their primary attention being on the health and safety of their populations, as well as on the sustainable development of the business activity and of the enterprises that constitute the productive cells of each country’s economy. Jurisdictions on one hand, governments and corporations on the other, claim their own fair share of tax revenues. This is what Cyprus should do too.

It is for these reasons that we would like to coney a direct and straightforward message to the newly elected President and his government, in order to place the whole subject at the top of their priority list, given that valuable time has already been lost. All of the above, and many more, occupy a substantial part of the tax agenda. The rules of international taxation shape the nature and substance of the international business, which in turn, has a fundamental influence on the economic models of various countries. The traditional international business centers tend to be considered obsolete, with extensive substance, transparency and reporting requirements being more imminent, coupled by a gradual containment of the globalization theorem. Hence, the differentiation from the standard practices of the recent past looks more evident than ever, forcing jurisdictions, businesses and authorities to adjust. ICPAC remains at the disposal of the government and the rest of the economy stakeholder to actively work towards the further improvement and reform of Cyprus’ tax regime, which must me coherent with the local policies and international realities.

Kyriakos Iordanou

General Manager of ICPAC Extract from his address at the 6th International Tax Conference

(PART 2) PRINCIPAL PURPOSE TEST

In order to end tax loopholes used by multinational enterprises (“MNEs”) for improper use of tax treaties, the Organization for Economic Co-operation and Development (“OECD”) has recommended, under base erosion and profit shifting (“BEPS”) Action 6: Prevent Treaty Abuse, an anti-abuse provision, namely the Principal Purpose Test (“PPT”). Such a provision will come into effect in selected tax treaties through the Multilateral Instrument (“MLI”).