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Information for Cyprus Expats on the possible changes to Cyprus Corporation Tax by the European Union
The Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) released by the EU Commission on March 16th, 2011 has fueled the on-going fierce debate among academics, politicians and tax experts on its rationale and potential effects on national economies and cross-border businesses.
As the freedom of fiscal policy lies in the core of the national sovereignty, taxation has always been particularly sensitive area for the countries, especially in the framework of the EU with its delicate balance of competences distributed between the Member States and the Union.
Being generally very cautious, this time the Commission seems to make a bold move with unpredictable and far-reaching consequences. Disguised as a step towards encouraging “fair competition” in the common market, the CCCTB is, undoubtedly, an encroachment into Members States’ prerogatives to determine the rules and regulations for determining the taxable base for residents and for certain categories of non-residents.
By its nature, the CCCTB is a new, “EU” tax system. As such, it would inevitably require increased financial contributions from the Member States to the Union, thus putting additional pressure on the national budgetary systems already weakened by the economic recession.
At the same time, the €3 billion savings from which the international businesses are expected to benefit from are highly questionable. What is certain is the need to invest substantial financial resources in training company personnel, adjusting software products and generally restructuring the process of bookkeeping and accounting in order to comply with the new rules.
Another concern is that the country of the EU top holding (where the group tax return will be submitted) will be the leading tax jurisdiction. This would present serious problems for the tax authorities, including procedural and language ones. The taxpayers reasonably fear that their right to tax appeal will be substantially affected by having only one, usually unknown to them, legal system to defend their rights.
Among other predictable drawbacks is the difficulty in preparing simultaneously “national” and “CCCTB” tax returns. As they would both need to be based on assumptions regarding the apportionment of the company’s profit between the countries concerned, the final distribution may differ significantly from the preliminary estimate thus rendering the expectations for increased transparency and/or reduction in compliance costs (as promised by the Commission) unreasonable.
We have to admit that there will be certain benefits for international business of having CCCTB such as full deductibility of costs related to research and development, off-setting economic losses on a cross-border basis, avoiding complicated transfer pricing requirements in different jurisdictions etc.
From the point of view of Cyprus, however, the proposed Directive is undeniably less generous than the national tax legislation. Starting from the formula for apportioning taxable profits, the definition of “assets” provided by the Commission takes into consideration only “tangible fixed assets” (immovable property, machinery etc.), but excludes intangible assets such as IP rights, patents and licenses. This “innocent” omission will hit hard on certain economic sectors driving their profits mainly from intangibles (i.e. IT industry, entertaining business). Geographically-wise, the negative effect will be particularly strong on Cyprus which has positioned itself among the top tax-planning jurisdictions for IP-property related structures.
To follow from, albeit the incoming dividends both under CCCTB and under Cypriot national law are exempt from CIT, the taxation of capital gains will be substantially less advantageous under the former. As a result, Cyprus resident companies which opt to apply CCCTB will no longer be able to profit from the exemption of capital gains derived from the disposal of shares in companies within the group but only in subsidiaries outside the group.
Moreover, the income of Cyprus resident companies from their permanent establishments located abroad is generally exempt from taxation. If the Commission’s proposal is implemented, the incentive will cover only incomes of permanent establishments located outside the EU.
Last, bit not least, Cyprus prides itself with its network of over 40 DTTs which the introduction of the CCCTB will render redundant, thus leaving the resident companies with no option to enjoy the treaty tax benefits.
Although the CCCTB does not formally touch upon the right of the Member States to determine their national tax rates, by eroding the tax base, it covertly undermines the whole point of having a variety of tax rates as an instrument to attract foreign investments. Therefore, it should come as no surprise that the proposed Directive is the first, and possibly decisive, step towards unification of all rules and regulations related to corporate taxation.
The “new initiative” will inevitably diminish the attractiveness of smaller countries such as Cyprus and Bulgaria for international business. It is not difficult to predict some of the direct consequences: less foreign investments, decline in the GDP, rising level of unemployment. That is why, when voting in the Council, the Members States should carefully weight the obscure benefits this Proposal promises to bring against the detrimental direct impact it will inevitably have.
© Eurofast Global website
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