TaxLegi 31.05.2021

Introduction

Further to our previously issued Tax Alert in relation to tax forms T.D. 602 and T.D. 603 , we would like to inform you that through an announcement issued on 4 May 2021, the Tax Department provides further details regarding the new forms for SDC and GHS withheld on interest and dividend payments.

The below forms are accessible through the Taxisnet portal and through the account of each Taxpayer as follows:

1. Form T.D.602 – SDC and GHS withheld on interest paid.

2. Form T.D.603 – SDC and GHS withheld on dividends paid.

 

➢ Who has the obligation to submit such forms?

Any taxpayer who has or had the obligation to withhold SDC and GHS contributions, on interest/dividends declared from 1 January 2019 onwards, is obliged to electronically submit forms T.D.602 and T.D.603.

Should the taxpayer wish, they may grant access to their authorised representative / tax consultant, enabling them to complete and submit the said forms to the Tax Department on their behalf.

 

➢ What is the deadline for these forms to be submitted?

• Forms relating to the period January 2019 until December 2021 shall need to be electronically submitted by 31 January 2022.
• Forms relating to the month January 2022 and onwards shall need to be electronically submitted by the end of the month following the month in which the withholding was made (i.e. the deadline is the same as the due date of the payment of SDC and GHS contribution withheld).

 

➢ When should the payment of withheld SDC and GHS be made?

As noted above, the payment of SDC and GHS is due by the end of the month following the month in which the SDC and GHS contribution were withheld. 

It should be noted that in case the payments have already been made, these should be reflected automatically in the forms T.D.602 and T.D.603. In case the SDC and GHS contribution is due after the electronic submission of the forms T.D.602 and T.D.603, the relevant liability should be automatically created and reflected in the tax portal system. The payment of the relevant liability can be made via online banking from a Cypriot bank account, or JCC Smart application/website or wire transfer from a foreign bank account.

 

Additional information:

• The taxpayer has the right to submit multiple forms for the same tax year. The submission of an additional form does not overwrite the prior submitted tax return but rather represents a supplementary declaration (e.g. in case a company made 3 separate dividend declarations during 2020 for different months, then 3 separate T.D.603 forms shall need to be submitted via Taxisnet).
• Forms T.D.602 and T.D.603 can accept negative amounts in relation to prior payments, for which there are grounds for correction, provided that the statute of limitation of 6 years has not elapsed from the withholding date.
• The penalty for failure to submit the relevant forms within the due date will amount to EUR 100 for each form that ought to have been submitted. In addition, in case of delay in payment of SDC and GHS contribution due, a penalty equal to EUR 100 and a flat 5% penalty on the amount due is imposed. Interest is also imposed based on the official rate set by the Minister of Finance calculated based on completed months (the official rate as of 1.1.2020 being 1,75%).

How can we help you?

EY Cyprus can assist taxpayers with the completion and electronic submission of forms T.D.602 and T.D.603 to the Tax Department together with any additional calculations that may be connected with these forms.

 

EY Cyprus remains at your disposal for any information and/or clarifications required.

 

 

Despo Kyrmitsi - Assistant Manager, Direct Tax

By the end of 2021, it is expected that the transition of multiple Interbank Lending Rates (‘IBORs’), including the London Interbank Offer Rate (‘LIBOR’), will take place. These IBORs are expected to be replaced, to an extent, by Alternative Reference Rates (‘ARRs’). There are multiple implications in the financial systems that may arise as a result of these transitions. The potential impacts on the Transfer Pricing practice will be examined below.

Taking into account the timeframe for the transition from the IBORs to the ARRs, it is important to identify and analyze the impact of the transition to risk-free rates (‘RFRs’) to lenders and borrowers alike.

 

Overview

In the United Kingdom (‘UK’), the Bank of England has been working to ensure a transition from LIBOR to the Sterling Overnight Index Average (‘SONIA’), a rate produced by the Bank of England. SONIA reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.

Moreover, in the Euro area, there is a drive to replace both the EURO LIBOR and Euro Interbank Offered Rate (‘EURIBOR’) by the Euro short-term rate (‘€STR’), which is calculated on the wholesale euro unsecured overnight borrowing costs of euro area banks.

In addition, in the US, the Alternative Reference Rates Committee (ARRC), convened by the US Federal Reserve, has published its Recommended Best Practices for Completing the Transition from LIBOR. The Secured Overnight Financing Rate (‘SOFR’) is the recommended ARR for replacing the USD LIBOR. SOFR represents a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.

 

General differences

There are a number of differences between IBORs and ARRs. The first main difference between them is that IBORs represent the rate at which banks believe they are able to lend to and from one another in the interbank market over a specified time period, whereas ARRs typically refer to overnight transactions. Another main difference is that IBORs typically include an element of risk in the form of a credit spread, where RFRs are effectively nearly risk-free rates.

 

General Transfer Pricing considerations

Immediate focus should be given to intragroup financing transactions considering that IBORs have often been used as underlying rates for intragroup financing arrangements. Considering that for tax purposes transactions entered between related parties (including financial instruments) should be concluded on arm’s length terms, such arm’s length price may have been specified by reference to IBORs (e.g. LIBOR plus a margin).

Following the replacement of the IBORs by ARRs, the terms of both intra-group financing arrangements may need to be reassessed and such terms are expected to be on at arm’s length as at the reassessment date.

Based on the above, taxpayers should determine whether a financial instrument that is amended as a result of the benchmark reform constitutes a variation or rescission of the original financial instrument. This should also be considered in the light of fallback provisions if applicable in the initial loan/facility agreement. By way of example, the discontinuation of an IBOR referenced in a loan facility and its replacement by an agreed alternative benchmark may result in changes to the amount payable under the facility. It is unclear how the increase in the loan amount will be treated for tax purposes.

In addition, the appropriate ARR should be selected for each financial instrument (i.e. in line with guidance from relevant associations, tax authorities etc.). Another implication that should be considered is the potential adoption of timing differences between jurisdictions as well as differing views on the acceptability of each ARR. Such deviations may result to a mismatch of acceptable rates and/or their treatment from a tax perspective in each jurisdiction.

Depending on the circumstances, the transfer pricing documentation of such financial instruments may need to be updated in order to reflect the change from IBORs to ARRs and/or new documentation should be prepared in order to support the financial agreements to be entered into from an arm’s length perspective.

More specifically, considering the Transfer Pricing Circular issued by the Cypriot tax authorities applicable as of 1 July 2017, where for example, a third-party financing institution is involved in the provision of variable interest rate financing (with an IBOR used as the floater) to a Cypriot financing entity that uses the loaned funds to grant variable interest rate financing (with that same IBOR used as the floater) to related parties, the intragroup use of IBOR may need to be investigated. The financing institution may amend the respective ARR based on a fallback provision included in the existing agreement, effectively exposing the group’s financing vehicle to additional risks due to the floater rate mismatch.

The impact of the transition is not restricted to typical lending transactions, but it has a wider impact. For example, currency derivatives will also be affected (the ISDA Benchmarks Supplement may be incorporated in derivatives transactions).

Finally, consideration should be given in cases where a taxpayer has obtained advanced pricing agreements (‘APA’) or rulings regarding specific intragroup transactions, as the applicability and/or validity of an APA or ruling may be challenged due to the discontinuation of the relevant IBOR or lack of acceptability of the underlying IBOR.

 

Takeaway points

There still remains a high degree of uncertainty around LIBOR transition. The transition could have a number of impacts on market participants. These impacts include possible changes to contractual documentation, adaption of operational processes/IT systems, changes to the value of products or the possibility of products no longer serving the purpose for which they were intended. Interesting parties should contact their professional advisors on the possible implications of the changes such as financial, legal, accountancy or tax consequences.

 

 

Charalambos Palaontas - Director, Transfer Pricing

Timotheos Ioannou - Senior, Transfer Pricing Services