Harris Georgiades, Cyprus’ minister of finance, talks to Natalie Leonidou about tax reform and why his country is an attractive investment hub despite the drive for transparency in the wake of BEPS.
Harris Georgiades was appointed minister of finance as the Cypriot economy was imploding in 2013. It had been a year of uncertainty and economic turmoil, but the minister successfully worked on the implementation and conclusion of an economic reform plan for Cyprus. He was selected by POLITICO as one of the 28 most influential Europeans of 2016.
Georgiades is also a member of the board of governors of the IMF, the European Investment Bank and the European Stability Mechanism. He was elected chairman of the board of governors of the European Bank for Reconstruction and Development. Prior to his appointment as minister of finance, he was a Democratic Rally member of the House of Representatives from 2011.
He explains to International Tax Review how Cyprus is determined to maintain a stable and attractive tax regime that will be supportive to business, investment and job creation.
Natalie Leonidou: In terms of taxation, how has Cyprus maintained its attractiveness as a hub for investment? What tax incentives other than low corporate tax rates attract business?
Harris Georgiades: Cyprus, following the 2001 major tax reform and after rebounding from the 2013 economic crisis, has successfully enhanced its status as an advanced business centre.
Indeed, Cyprus maintains a corporation tax of 12.5%. A tax reform was introduced in 2014 to 2017 with an aim to streamline the tax system, and introducing incentives for raising the potential output of the economy as well as addressing the high indebtedness of corporations. Namely throughout the last three years the most predominant measures refer to the following:
- Introduction of notional interest deduction (NID) which applies to new equity introduced to a company as from January 1 2015 in the form of paid-up share capital or share premium is eligible for an annual NID. This reform essentially equates the tax treatment between equity and debt financing.
- A framework has been established to create an attractive set of incentives through tax relief to individuals A reduction of transfer fees on real estate transactions by 50% and annulment of the immovable property tax.
- Changes to Cyprus’ intellectual property (IP) regime providing for the gradual phasing out of the current IP regime and the introduction of a new regime that is in line with the latest international developments on the taxation of IP income and recommendations under Action 5 of the OECD’s BEPS Project, introducing the modified nexus approach for IP regimes.
Beyond the recent revamping of the tax regime there are also several other elements that have played an integral role to that respect. These include the Global Forum’s rating on exchange of information for tax purposes and transparency, which has yielded an overall rating of largely compliant for Cyprus. This constitutes a token of confidence for businesses and other organisations to establish in Cyprus. Furthermore, the accelerating double taxation treaties (DTT) network affirms the expansion of business partners with Cyprus, currently numbered at 62. What drums up support for Cyprus’ improved status is the advanced business services provided, the high skilled labour, the effective and robust institutional and supervisory framework together with a favourable tax environment for investments.
NL: How have the changes between the India-Cyprus DTA impacted foreign investment and the tax landscape?
HG: On November 18 2016, India and Cyprus signed a revised agreement for the avoidance of double taxation and fiscal evasion. The treaty entered into force a month later. Concurrently India has rescinded the notification for Cyprus as a non-cooperative jurisdiction under theIncome Tax Act (ITA), with a retrospective effect as from November 1 2013.
The amended treaty is the result of a prolonged and extensive negotiations. The amended treaty provides for source-based taxation on capital gains arising from the alienation of shares, instead of residence-based taxation as provided under the existing tax treaty. Further, a grandfathering clause has been provided for investments made prior to April 1 2017, in respect of which capital gains will be taxed in the country of which the alienator is a resident.
The agreement and the rescinding of the notification enhances Cyprus’s position as an unrestricted partner to India. The agreement also has important implications for investors that have already made investments through Cyprus, as now they can rely on the ground fathering clause of the new DTA.
NL: How important is tax transparency in Cyprus and what are the key issues that you think need to be addressed?
HG: Tax transparency is a very important component in building upon a tax system that its structure should safeguard, inter alia, the fiscal revenues of a country. Businesses nowadays should be transparent and able to explain their tax planning and allocation of income to safeguard equity and fairness.
Cyprus adheres to all initiatives of the EU as well as the international community through the OECD that have been put forward towards enhancing tax transparency. Moreover, Cyprus belongs to the early adopters for the automatic exchange of financial account information, bringing in line the national legal framework with the provisions of the Common Reporting Standard of the Global Forum to initiate the exchange of information in quarter three of 2017. Notwithstanding the above, the automatic exchange of cross-boarder tax rulings and advanced pricing arrangements (APAs) as well as the automatic exchange of country-by-country reports (CbCR) have already been put into trajectory to give an insight to the tax authorities for potentially aggressive tax planning and base erosion profit shifting (BEPS). These tools will adequately equip the tax administrations to safeguard that the cross-border allocation of income is fair and equitable, the companies established have indeed substance and real economic activity and tax revenues are attributed in a proper manner.
NL: What are your thoughts on the BEPS Project, and what changes is Cyprus undertaking to align with the initiative?
HG: Cyprus as an EU and euro area member state implements a comprehensive and effective legal framework that safeguards the avoidance of harmful competition in tax matters by enhancing transparency and combating tax evasion and avoidance.
Cyprus fully supports the BEPS Project which aims to combat tax planning strategies that exploit gaps and mismatches in tax rules with the intention of artificially shifting profits to low or non-tax jurisdictions, the result of which is little or no payment of corporate tax.
Despite the fact that Cyprus in not an OECD country, the authorities have proceeded with the adoption of the minimum standards of the BEPS project. These include the amendment of the existing tax regime regarding the intellectual property in order to be aligned with the modified nexus approach under Action 5, assignment of the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports, which has been developed by the OECD under Action 13, and by signing the Multilateral Instrument which endorse the introduction of the BEPS standards to counter treaty abuse in all tax treaties between Cyprus and other jurisdictions as well as how to improve dispute resolution tools.
NL: What problems does the BEPS Project pose to Cyprus?
HG: The problem that the BEPS project poses to Cyprus is the administrative burden that it places on the authorities with respect to human capital and systems.
NL: What changes and challenges is Cyprus facing on implementing the MLI?
HG: Cyprus offers a wide network of double taxation treaties with 62 double tax agreements in force.
The MLI was developed to provide a vehicle for the swift implementation of the tax treaty-related measures produced under certain actions of the OECD’s BEPS Project, to provide potential to the signatories with significant flexibility to decide which portions of the MLI to adopt, modify, or reject.
Cyprus together with 78 Jurisdictions signed last June the MLI. The MLI allows jurisdictions to transpose the BEPS guidelines, including those indicated as minimum standards, to prevent treaty abuse and "treaty shopping", into their existing networks of bilateral double tax treaties in a quick and efficient manner.
MLI is an innovative tool that has not been applied in treaty practice before, therefore Cyprus chose to take advantage of it. One of the main challenges, in our view is the precision in defining the actual modification introduced in specific treaty clauses, in accordance to the BEPS guidelines.
In addition to the above the authorities are faced with increased administrative burden arising from the amendment of the existing 62 double tax agreements.
NL: How will Cyprus resolve its MLI issues? Will it ever implement the agreement?
HG: Cyprus has participated in all ad-hoc OECD Group meetings since its establishment of the group (November 2015). The MLI text derived after several constructive meetings of the ad-hoc Group, to which Cyprus agreed, both on the philosophy of the MLI and on the wording of the text (agreement and explanatory statement).
Recognising the complexity of designing a general instrument that applies to the covered tax agreements (CTA) and to the specific provisions included in bilateral tax treaties, the MLI provided itself flexibility for the contracting jurisdictions to implement parts of the MLI provisions based on their needs.
Cyprus, following a Council of Ministers’ approval, agreed to the signing of the MLI as well as its coverage. It was agreed that the MLI will include all the DTAs even though the MLI gives the right to reserved opt-out specific treaties, by incorporating the minimum provisions of Action 6 of the BEPS actions on treaty abuse’ and BEPS Action 14 on dispute resolution, in a coordinated and consistent manner across the treaty partners.
The MLI will be implemented, following ratification, acceptance and approval per all contracting jurisdictions. Timing for this will depend on domestic legal requirements. It is generally expected that reservations and notifications, including a list of the CTAs, can be made both at the time of signing, at the time of depositing the instrument of ratification, and when acceptance or approval by the other jurisdiction.
As you can understand this procedure is very complicated and time consuming. Cyprus is currently preparing the documents for ratification per domestic procedure, with the intention of fully implementing it within 2018.
NL: Are you aware of any other countries in a similar position?
HG: Some countries previously indicated that they intended to include only a small number of treaties as cover tax agreements at signature, but have added treaties to their list of CTAs as they complete bilaterally agreed implementation with respect to those treaties. In addition, some other countries previously indicated they intended to take a conservative approach at signature, but were considering a more expansive approach at ratification, so important changes to the provisions ultimately adopted by particular countries may occur during ratification.
Nonetheless, generally speaking it is clear that most of the countries are in a similar position as Cyprus in terms of MLI reservations.
NL: What is next on your agenda?
HG: Cyprus’ regulatory regime is in full compliance with the requirements of the EU and OECD. During the upcoming months, the Anti-Tax Avoidance Directive (ATAD) will be transposed into the domestic legislation.
At the OECD level we have committed to follow the four minimum requirements of the BEPS Project, namely Action 5, harmful tax practices, Action 6, treaty abuse, Action 13, transfer pricing documentation and country–by-country reporting, and 14, dispute resolution, which have already been to a great extend introduced by the Cyprus authorities. In particular, Cyprus will be expanding its legal framework in order to be in line with Action 5’s transparency framework that provides for the compulsory spontaneous exchange of cross-border rulings and APAs. The same applies for Action 14 which is in alignment with the respective EU Directive, providing for a more effective dispute resolution mechanism. In addition, Cyprus is in the process of introducing provisions beyond Action 13 and making mandatory the master file and local file for companies, which constitute the two other complementary to the country–by-country report elements, for the proper transfer pricing documentation.
At the EU level, we are in the process of introducing in our national legal order the provisions of the ATAD which proposes anti-abuse measures against common forms of aggressive tax planning. Additionally, we are also in the process of harmonising our legal framework with the recent amendments of the Directive on Administrative Cooperation in the Field of taxation (DAC) which will provide the legal tools to the tax authorities to allow timely and unrestricted access to beneficial ownership and customer due diligence implementation measures, documentation and information pursuant to the Anti-Money Laundering EU Directive.
The above article was published on www.internationaltaxreview.com on 25 July 2017 and has been republished with the approval of the Publisher.