TaxLegi 1.1.2024

Tax experts Philippos Raptopoulos and George Liasis, the respective Committee Heads of Tax Planning & Policy and VAT at the Institute of Certified Public Accountants of Cyprus (ICPAC), discuss how the upcoming and long overdue overhaul of the country’s tax system should facilitate the Government’s ambition to create a modern, resilient and green economy.

Ever since Cyprus’ accession to the EU in 2004, the country’s tax framework has remained static, despite back-to-back macroeconomic tremors, from the financial shock in 2013 to the supply chain crunch catalysed by the COVID-19 restrictions and then to recent record-high inflation. Emerging economic models, notably the rise of platformisation - digital platforms facilitating transactions and interactions between users - that are controlling an increasing slice of the global economy also underscore the urgency for new tax strategies. Against this backdrop, Cyprus’ tax architecture not only breeds inefficiencies but also threatens the country’s competitive edge in the era of green economies. To rectify the situation, Nicosia has pledged a comprehensive overhaul within the next two years. In the meantime, the Economics Research Centre of the University of Cyprus (CypERC) has been enlisted by the Ministry of Finance, in tandem with industry bodies like ICPAC, to structure the blueprint of the new integrated tax system, slated to be completed by March 2024.

Cyprus is in the process of revamping its tax regime. How should the new tax framework align with the country’s aspirations outlined in the ‘Vision 2035’ strategy to foster a sustainable and green economy?

Philippos Raptopoulos: One of the three pillars of ‘Vision 2035’ focuses on developing an innovative, resilient, and diversified economy. At the same time, it aligns with the energy transition goals and strives to become a true green economy. The tax reform should aim precisely at this goal by providing incentives for green investments and sustainable business operations, offering tax credits for adopting green practices and technologies, as well as imposing taxes on activities with high carbon footprints. With green tax neutrality and ‘the polluter pays’ as corner- stones, any new pieces of taxation should be adequately accompanied by counter- measures. A focus on renewable resources, energy storage, vulnerability subsidies and sustainable finance can be incorporated into the upcoming tax reform. Any generation of green tax revenues can be injected into reducing other tax burdens where environmentally friendly activities are observed. With the introduction of sustainability- led tax reform, new processes will have to be devised for the efficient collection, handling and management of new taxes and respective deductions. An upgraded system of tax administration and justice will also be needed to address the resolution of potential tax issues and taxpayer disputes. continuous focus on its enhancement, the Tax Department is surely moving in the right direction, showing what dedication, perseverance and good management can bring. We need, nonetheless, to start considering additional uses of technology and processes for better data analysis, quality audits and better coordination between departments. Examples from other countries can shed light and guide us through this. A final point I would like to touch upon concerns tax jus tice, which of course is not restricted to the Tax Tribunal and the Courts but starts within the Finance Ministry and the Tax Department itself. Although it is not part of the upcoming tax reform, modernising the tax justice experience of taxpayers will also enhance the image and perception of the country.

What key adjustments should be incorporated into the planned tax reforms to effectively cater to the needs of the services industry?

Philippos Raptopoulos: The planned tax reform should include certain adjustments that will firstly enhance the simplification of the compliance procedures and the streamlining of administrative tasks, allowing the industry to concentrate on growth rather than being slowed down by a procedural burden. Also, tax credits can be provided for investments in employee training and upskilling, which can support the further digitalisation of the services industry. It might serve a dual purpose as it can facilitate the retention of older employees, thereby addressing the challenge of workforce scarcity. Tax reform should also focus on opening new markets for the Cyprus services industry, like markets that focus on renewable energy and circular economy initiatives. There is, for example, a growing global demand for energy-efficient products and green construction materials. Cyprus can incorporate tax incentives into the planned reform, such as accelerated or increased depreciation or even notional tax deductions for attracting companies that work on the research and development of such products and technologies.

Considering the substantial VAT revenue losses among EU Member States and the complexities faced by businesses, particularly SMEs and cross-border companies, what modifications are essential to modernise VAT for the digital era?

George Liasis: According to the 2022 VAT Gap report, member states lost €93 billion in VAT revenues in 2020, and there are various reasons for that. Indeed, it is a valid question on how to be more practical, especially against the backdrop of the EU ViDA (VAT in the digital age) initiative. ViDA is a series of measures aiming to modernise and make the VAT system work better for businesses and be more resilient against fraud by embracing and promoting digitalisation and addressing VAT challenges raised by the development of the platform economy. It will involve three main reforms. Firstly, the Digital Reporting Requirement, which moves away from the current system of recapitulative statements reporting and moves to a somewhat real- time transaction-by-transaction system, whereby businesses will need to report B2B intracommunity transactions two days from the issuance of a standardised e-invoice. The second reform relates to new rules for the platform economy, starting from short-term accommodation and passenger transport. Currently, the interpretation of the rules is complex and not uniform among member states - the UK is also struggling with these provisions. We do have guidance from important decisions at the EU Court of Justice, such as the Fenix/OnlyFans case, giving us the analysis on a ‘deemed supplier approach’. However, more clarity and uniformity are needed, and the new rules aim to rectify this issue. The last reform is the introduction of a single VAT registration aiming to capitalise on the success and extend the application of the current one-stop-shop schemes. These reforms will surely shake up the VAT landscape, aiming to reduce or even eliminate lost VAT revenues. Affected businesses will need to stay alert for these upcoming developments. 

By:

Philippos Raptopoulos, Partner, Head of Tax and Legal Services Philippos.Raptopoulos@cy.ey.com

George Liasis, Partner, Head of Indirect Tax Services George.Liasis@cy.ey.com