TaxLegi 30.07.2021
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Exemption of natural persons from the obligation to submit a personal income tax return for the year 2020
Τhe Council of Ministers, exercising its powers conveyed to it by the Assessment and Collection of Taxes Law, issued a decree (No.288/2021) exempting natural persons, whose total gross annual income is below €19.500, from the obligation to submit a personal income tax return for the tax year 2020. The decree was published in the official gazette of the Republic on 9th July 2021.
The said decree was issued further to amendments in the Assessment and Collection of Taxes Law, published in the official gazette of the Republic on the 20th of August 2020, according to which all individuals would have an obligation to submit a personal income tax return from tax year 2020 onwards, subject to a decree to be issued by the Council of Ministers which may provide conditions for an exemption.
Our team remains at your disposal for more information and support.
Herodotos Hadjipavlou - Manager, Direct Tax -
OECD announces conceptual agreement in BEPS 2.0 project
Executive summary
On 1 July 2021, at the conclusion of two days of virtual meetings of the OECD[1] /G20[2] Inclusive Framework on BEPS[3] (the Inclusive Framework), the OECD released a Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy (the Statement), which reflects agreement of 130 of the member jurisdictions of the Inclusive Framework in connection with the BEPS 2.0 project. The nine members of the Inclusive Framework that have not joined the Statement are Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka.
The Statement describes agreed components with respect to both elements of the BEPS 2.0 project: Pillar One on revisions to nexus and profit allocation rules and Pillar Two on new global minimum tax rules. The Statement further indicates that remaining issues and a detailed implementation plan will be finalized by October 2021.
The G20 Finance Ministers are scheduled to consider the outcome of the Inclusive Framework meeting at their meeting in Venice on 9-10 July 2021.
Detailed discussion
Background
On 12 October 2020, the OECD released a series of major documents in connection with the BEPS 2.0 project. These documents included Blueprints on Pillar One[4] and Pillar Two[5] , on which stakeholder comments were requested through a public consultation.
At the same time, the OECD also released a lengthy Economic Impact Assessment that was prepared by the OECD Secretariat[6]. The cover statement accompanying the Blueprints indicated that while the OECD/G20 Inclusive Framework on BEPS had not reached a consensus agreement in 2020, which had been the target[7] they agreed to keep working to swiftly address the remaining issues with a view to bringing the process to a successful conclusion by mid-2021.10
The Statement issued by the Inclusive Framework on 1 July 2021 follows earlier expressions of strong support for the work on the BEPS 2.0 project that were issued at the conclusion of the G7[8] Finance Ministers and Central Bank Governors meeting in London on 5 June 2021[9] and at the conclusion of the G7 Leaders’ summit in Cornwall on 11-13 June 2021[10] .
Statement
The 1 July 2021 Statement provides a description of agreed key components of each Pillar.
Pillar One
The scope of the Pillar One rules is to be multinational entities (MNEs) with global turnover above €20 billion and profitability (i.e., profit before tax/revenue) above 10%. Exclusions are provided for the extractive and regulated financial services industries. The Statement notes that the turnover threshold may be reduced to €10 billion, contingent on successful implementation of the new rules including tax certainty. For this purpose, a review process would begin seven years after the agreement comes into force and would be completed in not more than a year.
The Statement further indicates that segmentation would be applied in exceptional circumstances where, based on the segments disclosed in the financial accounts, a segment of an MNE would meet the scope rules.
For in-scope MNEs, between 20-30% of residual profit, which is defined as profit in excess of 10% of revenue, would be allocated to market jurisdictions where there is nexus. For purposes of this allocation, profit or loss would be determined by reference to financial accounting income (with a small number of adjustments), and losses would be carried forward.
Under a special purpose nexus rule that will apply for these purposes, the new rules for allocation to a market jurisdiction would be applicable if the in-scope MNE derives at least €1 million in revenue from that jurisdiction. A lower threshold of €250,000 would apply in the case of smaller jurisdictions that have a gross domestic product lower than €40 billion. For this purpose, revenue would be sourced to the end market jurisdiction where goods or services are used or consumed, with detailed sourcing rules to be specified.
Where the residual profits of an in-scope MNE are already taxed in a market jurisdiction, a marketing-and-distribution-profits safe harbor would apply to cap the residual profits that are allocated to the market jurisdiction under the new rules.
Double tax relief is to be provided under the exemption or credit method for profit allocated to market jurisdictions under the new rules.
The Statement indicates that mandatory and binding dispute prevention and resolution mechanisms are to be provided for issues related to the new allocations to market jurisdictions. However, it further notes that consideration will be given to use of an elective binding dispute resolution mechanism for certain developing countries.
MNEs would be allowed to manage the tax compliance process with respect to the new rules through a single entity.
The Statement indicates that work on Amount B, relating to a simplified approach for the application of the arm’s-length principle to in-country baseline marketing and distribution activities, is to be completed by the end of 2022 and will focus in particular on the needs of low-capacity countries.
With respect to unilateral measures, the Statement references appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes (and other relevant similar measures) on all companies.
Finally, the Statement indicates that the multilateral instrument through which the new rules for allocations to market jurisdictions are to be implemented will be developed and opened for signature in 2022, with the new rules coming into effect in 2023.
Pillar Two
The Statement describes Pillar Two as having two elements. The GloBE[11] rules are a set of interlocking rules: an Income Inclusion Rule (IIR) that allows parent entities to impose a top-up tax on low taxed income of a constituent entity, and the Undertaxed Payments Rule (UTPR) that denies deductions or requires an equivalent adjustment for low-tax income that has not been subject to tax under an IIR. The Subject to Tax Rule (STTR) allows jurisdictions to impose a withholding tax on certain related-party payments that are taxed at a low adjusted nominal rate. Although the STTR is described second, it would apply before the GloBE rules and thus take priority over those rules.
The Statement describes the GloBE rules as having the status of a common approach, specifying that Inclusive Framework jurisdictions would not be required to adopt these rules, but, if they choose to do so, they are to implement and administer the rules in a way that is consistent with the agreed design and accept the application of such rules by other Inclusive Framework members.
The GloBE rules would apply to MNEs with total consolidated group revenue of at least €750 million in the immediately preceding fiscal year. However, the Statement notes that countries would be free to apply the IIR to MNEs that are tax resident within their jurisdiction even if this threshold is not met.
An exclusion from the GloBE rules would be provided for investment funds, pension funds, governmental entities, non-profit organizations, and international organizations that are at the top of an MNE group. The Statement also indicates that further consideration will be given to a possible exclusion for MNEs that are in the initial phase of their international activity.
The Statement indicates that the rights to impose a top-up tax would be allocated to jurisdictions under a top-down approach under the IIR (with special rules for split ownership situations) and under a methodology to be agreed under the UTPR.
The GloBE top-up tax would be determined using an effective tax rate (ETR) test calculated at the jurisdictional level, with a common definition of covered taxes and a tax base measured by reference to financial accounting income (with adjustments to be agreed and mechanisms to address timing differences). The Statement notes that in the case of existing distribution tax systems, no top-up tax would apply if earnings are distributed within three to four years and taxed at or above the minimum level.
According to the Statement, the minimum tax rate for purposes of the IIR and the UTPR would be at least 15%.
The GloBE rules would provide for a formulaic substance carve-out that would exclude income in the amount of at least 5% of the carrying value of tangible assets and payroll. The Statement notes that for a transition period of five years, this amount would be increased to 7.5%. In addition, a de minimis exclusion is to be provided. Furthermore, international shipping income would be excluded.
The Statement also notes that mechanisms are to be incorporated in the GloBE rules to avoid compliance and administrative costs that are disproportionate to the policy objectives of Pillar Two.
According to the Statement, because the Pillar Two rules are to apply on a jurisdictional basis, consideration will be given to the conditions under which the US GILTI[12] regime will co-exist with the GloBE rules, in order to ensure a level playing field.
With respect to the STTR, the minimum rate would be from 7.5% to 9% and the taxing right allocated to the source country under the STTR would be limited to the difference between the minimum rate and the tax rate on the received payment. The Statement indicates that the Inclusive Framework members recognize that the STTR is an integral part of achieving a consensus on Pillar Two for developing countries. In this regard, it further states that Inclusive Framework members with nominal corporate income tax rates below the STTR minimum rate for interest, royalties and certain other payments are to agree to implement the STTR into their bilateral treaties with developing members when they are requested to do so.
According to the Statement, Inclusive Framework members are to agree and release an implementation plan, that will include model GloBE rules together with the possible development of a multilateral instrument for coordination of such rules, an STTR model provision together with a multilateral instrument to facilitate adoption, and transitional rules including the possibility of deferred implementation of the UTPR. The Statement notes that Pillar Two should be brought into law in 2022, to be effective in 2023.
Implications
The Statement is an important step in advancing the work on the BEPS 2.0 proposals for fundamental changes to global tax rules. However, it reflects a conceptual agreement and there is significant work to be done to flesh out the technical details and address the remaining open questions. That work will need to be completed quickly in order to achieve the objective of reaching a final agreement in connection with the October 2021 G20 meetings.
It is important for companies to follow these developments closely as they unfold in the coming months and to evaluate the potential impact of the proposals to their businesses. In addition, looking ahead, companies will need to monitor activity in relevant countries related to the implementation of these proposed rules through changes in domestic tax rules and bilateral or multilateral agreements.
[1] Organisation for Economic Co-operation and Development.
[2] The G20 includes the European Union and 19 individual countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom (UK), and the United States (US).
[3] Base Erosion and Profit Shifting.
[4] See EY Global Tax Alert, OECD releases BEPS 2.0 Pillar One Blueprint and invites public comments | EY - Global, dated 19 October 2020.
[5] See EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments | EY - Global, 19 October 2020.
[6] OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising From Digitalization, dated 12 October 2020.
[7] OECD/G20 Base Erosion and Profit Shifting Project, Cover Statement by the Inclusive Framework, dated 12 October 2020.
[8] The G7 countries are Canada, France, Germany, Italy, Japan, the UK and the US.
[9] See EY Global Tax Alert, G7 Finance Ministers express strong support for global tax changes under BEPS 2.0, dated 6 June 2021.
[10] See EY Global Tax Alert, G7 leaders affirm commitment to global tax changes under BEPS 2.0 | EY - Global, dated 14 June 2021.
[11] Global Anti-Base Erosion.
[12] Global Intangible Low-Taxed Income.
Petros Krasaris - Partner, International Tax and Transaction Services
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Payment of temporary tax for the tax year 2021 and final tax for the tax year 2020
Assessment and Collection of Taxes Law, every company or individual (who derives income other than from emoluments) must pay by 31 July 2021 an estimate of the taxable profit for (corporate) income tax purposes and the resulting tax liability for the year 2021.
Even though according to the law, the due date for both the submission of the return and payment of the 1st instalment is 31 July 2021, as long as the 1st instalment is paid before 31 August 2021, there should neither be a monetary charge nor any interest for late payment of tax.
1. The temporary tax on such income is payable in two equal instalments as follows:
- 31 July 2021;
- 31 December 2021.
If the tax is not paid before the end of the month following the month the instalment is due (i.e. 31 August 2021 and 31 January 2022, respectively), interest is payable at the rate in force which is currently 1,75% per annum. Interest is calculated on the basis of completed months.
2. Furthermore, failure to pay the due tax by 31 July and31 December will result to a monetary charge of5% on the tax due for each instalment (in addition to the 1,75% per annum interest). However, in practice the imposition of the 5% monetary charge will be made only if the tax is not paid by the end of the following month to which it relates (i.e. 31 August 2021 and 31 January 2022 respectively for each instalment).
3. The estimate of chargeable income may be revised (upwards or downwards) at any time before 31 December 2021. If the estimate is revised upwards, interest is payable on the difference between the revised amount payable for each instalment due and the amount initially declared and paid. The interest is calculated for each completed month for the period the instalment was due (e.g. if a revised estimation is prepared in September, the interest will be imposed only for the 1st instalment for one complete month). No monetary charge is imposed on the revised estimates on the proviso that the incremental tax liability is paid on the date the temporary tax is revised. If the estimate is revised downwards, the lowest amount that can be declared as temporary tax should equal the amount of the previous payment made.
4. If the estimated chargeable income (as finally revised) is less than 75% of the actual chargeable income as this will be declared on the submitted income tax return for the year, then there will be an additional tax of 10% on the difference between actual tax payable and the temporary tax paid.
5. Any difference between the actual tax payable and the temporary tax paid for year 2021 is payable by 1August 2022.
Payment of 2020 final tax and 2021 Provisional tax payments can be made either via JCC smart or through the Tax Portal
The Tax Department announced that the payment of Provisional tax (Code 200) and Final Income tax (Code 300) can be made either via JCC smart or through the new Tax Portal , provided that a self-assessment form for the respective tax payment has been entered into the system.
However, it should be noted that any payments that are subject to interest and penalties or relating to revised provisional tax, can now be made either at any District Income Tax Office or through the Tax Portal, provided again that a self-assessment form for the respective tax payment has been entered into the system.
Repercussions of late payment of tax for Companies and Self-Employed individuals preparing audited financial statements.
1. Any difference between the actual income tax payable for the year 2020and the temporary tax paid during that year is payable by 1 August 2021. As explained above, in cases where the temporary tax paid was less than 75% of the actual tax liability, a 10% additional tax is imposed on the outstanding balance. If payment is not made by 31 August 2021, interest will accrue at the applicable rate in force (currently 1,75% per annum) as from 1 August 2021 on the basis of completed months.
2. Furthermore, failure to pay the outstanding balance in respect of the 2020 income tax by 31 August 2021 will result to a fixed monetary charge of 5% on the tax due. In addition, any outstanding tax (as this is declared on the income tax return) is subject to an additional monetary charge of 5% in case it is not paid within 60 days after the last day of the deadline for the payment of the relevant tax liability for that specific tax year (i.e. failure to pay for tax year 2020 by 1 October 2021 will result in a 5% monetary charge).
Payment of 2020 final tax and repercussions of late payment of tax for Self Employed individuals not preparing Audited accounts.
Self Employed Individuals who file an electronic tax return:
1. Self Employed individuals not preparing audited financial statements who file an electronic tax return (filing deadline is the 30th of September 2021), must pay their 2020 final tax by 30th of September 2021.
2. If the payment is not made by 31st of October 2021, a monetary charge at the rate of 5% is imposed. 3. Also an additional tax is imposed at the rate of 5%, 60 days after the last day of the deadline for the payment of the relevant tax liability for that specific tax year (i.e. failure to pay the tax year for 2020 by the deadline will result in a 5% monetary charge).
Payment of the 2nd instalment of the 2020 Provisional tax
We note that the deadline for the payment of the 2nd instalment of provisional tax for the tax year 2020 has been extended to 30 September 2021, without the imposition of penalties/ interest.
Special tax on the bank deposits applicable only for financial institutions
The bank levy which is applicable only for financial institutions will be imposed on deposits as at the end of the previous calendar quarter at the rate of 0.0375%. Thus the levy which will be paid on 31 March 2021 will be based on the deposits as at 31 December 2020, the levy which will be paid on 30 June 2021 will be based on deposits as at 31 March 2021, the levy payable on 30 September 2021 will be based on deposits as at 30 June 2021 and the levy payable on 31 December 2021 will be based on deposits as at 30 September 2021.
By way of example, if the September payment is not made by 31 October 2021, a monetary charge at the rate of 5% is imposed. If payment is not made by the end of the next month from the date is due (i.e. 31 October 2021), interest will accrue at the applicable rate in force (currently 1,75% per annum) on the basis of completed months.
Final remarks
The information in this memorandum is only intended to provide general guidelines and is not intended to be complete or exhaustive. This memorandum is distributed with the understanding that Ernst & Young Cyprus Ltd is not responsible for the result of any actions taken on the basis of information included therein. Ernst & Young Cyprus Ltd is not attempting through this memorandum to render any tax or legal advice. It is recommended to consult with professional advisors for advice concerning specific matters before making any decision. This memorandum reflects current information as of 8 July2021 based on tax laws currently in force and tax circulars issued by the Cypriot tax authorities.
Petros Liassides - Partner, Direct Tax
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Extension to the deadline for submission of personal income tax returns and payment of the due liability
Τhe Ministry of Finance, through the tax department, issued an announcement on 23 July 2021 in which informs the taxpayers that the 2020 personal income tax return (Form T.D.1) for employees and pensioners as well as for self-employed persons (Form T.D.1 self-employed) with turnover below EUR 70,000 and who do not have the obligation to submit audited accounts, is available for submission through the Taxisnet system.
The relevant announcement mentions that the Minister of Finance intents to issue a decree in relation to the extention of the electronic submission of the 2020 personal income tax returns as well as for the payment of the relevant income tax due.
Specifically, the said decree is expected to provide an extension to the electronic submission of the 2020 personal income tax return (Form T.D.1) for employees and pensioners, whose total gross annual income exceeds €19,500, from 30 September 2021 to 30 November 2021. The relevant extension is expected to also apply for the payment of the related income tax due, as per the submitted TD1, via self-assessment.
Additionally, the above mentioned extension is expected to be applicable for the electronic submission of the 2020 income tax returns for self-employed persons (Form T.D.1 self-employed) with turnover below EUR 70,000 and who do not have the obligation to submit audited accounts as well as to the payment of the relevant income tax due, as per the submitted return, via self-assessment.
EY Cyprus is at your disposal for any information and/or clarifications required.
Herodotos Hadjipavlou - Manager, Direct Tax -
Approval of the Recovery and Resilience Plan of Cyprus
Introduction
On 26 July 2021, the Economic and Financial Affairs Council (ECOFIN) approved Cyprus’ National Recovery and Resilience Plan (RRP). The RRP sets out the measures that will be supported by the Recovery and Resilience Facility (RRF). The RRF is supported by the NextGenerationEU which will provide €800 billion across the EU to help EU member states recover from the COVID-19 pandemic.
In relation to Cyprus, the RRP includes several reforms and investments ranging from accessibility and overall resilience of the healthcare sector to
furthering the green economy and measures to improve tax collection and combat aggressive tax planning. These measures include a set of milestones for their enactment and assessment.We summarise the most important measures below which will affect the Cyprus taxation system.
Component 2.1 – Climate neutrality, energy efficiency and renewable energy – Reform 1: Green Taxation
The objectives of this component are to improve the environment policy through measures relating to green taxation. More specifically, this component aims to promote a shift towards a more efficient use of environmental resources, reduce greenhouse gas emissions and to increase the penetration of renewable energy.
The proposed legislative changes will be based on the findings of an independent study and should be implemented by 30 June 2026.
The expected legislative changes include:
- Carbon tax for fuels used in sectors of the economy not under the EU greenhouse gas Emissions Trading System
- Levy on water
- Charge on household/landfill waste
Component 3.2 – Enhanced Research and Innovation - Reform 2: Incentives to encourage and attract investments and human capital in Research and Innovation
The objectives of this component are inter-alia to strengthen links between research organisations and enterprises and increase intensity in research & development (R&D) activity and investments by both public and private organisations. Furthermore, it aims inter-alia to enhance financial support to start-ups, scale-ups, SMEs and internationalise the local research and innovation (R&I) ecosystem.
Reform 2 of C3.2. relates to the extension of the application of the tax scheme for investing in innovative companies to legal entities (from physical persons currently) and shall be implemented by 30 September 2022.
Component 3.5 – Safeguarding Fiscal and Financial Stability
The aim of this component, apart from safeguarding a financial stability, is to ensure a fiscal stability by combating tax evasion, tax avoidance and aggressive tax planning; and providing policy makers with comprehensive data in order to design a fair tax system. The envisaged measures are expected to make revenue collection more efficient and Cyprus’ tax system fairer, reducing the spill-over effects from aggressive tax planning.
Reform 9: Improving tax collection and effectiveness of the Tax Department
The objective of the measure is to make tax collection more efficient and effective, through a higher level of digitalisation and tax compliance, and improve customer service.
The reform shall consist in integrating different tax units, procedures and processes, so as to offer single point of taxpayer service, legislative changes and implementing a new IT system and digitising the Tax department.
The latter shall include:
(a) a single registration to the tax base and Taxisnet (for electronic submission of Income Tax Returns by Individuals, Legal Persons and Employers);
(b) an integrated tax auditing process based on risk assessment;
(c) an integrated refunds audit;
(d) an integrated and enhanced single point of service, including the direct payment of VAT and connecting businesses to a server held within the Tax Department, without the use of specialised mechanisms;
(e) a process to issue single tax clearances:
(f) possibility for immediate adjustments of the system to accommodate any changes in the legislation and/or procedures and extension of secure interfaces with other information systems;
(g) data analysis capabilities and
(h) scanning and electronic storage of all taxpayer paper documents regarding the real estate (immovable property) and capital gains with relevant security, integrity and confidentiality parameters.
The legislative changes shall include and should be implemented by 31 December 2025:
a) a recently introduced legislation to implement the mandatory submission of tax returns by every natural person with income as defined in Article 5 of the Income Tax Law, regardless of the threshold starting from the tax year 2020 (subject to exceptions); and
b) criminalising the non-payment of income taxes.Reform 10: Addressing Aggressive Tax Planning
The overall objective of the measures under Reform 10 of C3.5 is to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning by Multinational Enterprises.
The first reform sub-measures which will be enacted by 31 December 2021 and enter into force by 31 December 2022 consist of:
- Imposing a withholding tax on outbound payments of interest, dividends and royalty payments made to jurisdictions in Annex I of the EU list of non-cooperative jurisdictions on tax matters1.
- Introducing the corporate tax residency test which will be additional to the management and control test. More specifically, the first test shall be the management and control and, in cases where a company is incorporated in Cyprus but its management and control is done from another jurisdiction, it shall be considered as a Cyprus tax resident and shall be taxed in accordance with the relevant provision of the Income Tax Law, provided that the company is not a tax resident elsewhere (to avoid dual residency status).
The second reform sub-measure which should be enacted by 31 December 2024 consist of:- Introducing a withholding tax on outbound payments of interest, dividends and royalty payments to low tax jurisdictions. In respect of interest and royalty payments, the Cypriot authorities may explore instead the approach of applying non-deductibility.
The third reform sub-measure which should be enacted by 30 June 2026 consist of:- An independent evaluation which should be completed by 31 December 2024 where Cyprus shall assess the effectiveness of the overall set of measures related to aggressive tax planning. This evaluation shall assess the Cyprus tax framework holistically including all measures adopted by then. The evaluation shall lead to policy action to be undertaken by Cyprus to address any shortcomings identified, including in the form of legislative changes, which shall enter into force by 30 June 2026.
Eleni Papachristodoulou - Senior Manager, International Tax and Transaction Services
Endnotes
