The Cyprus government on Monday, November 5 launched a tax reform plan for European Union (EU) accession, aiming to raise the level of VAT and scrap the low corporate tax rates for offshore companies.
The finance ministry said the government proposes to increase value-added tax by five percent, to 15 percent, and double corporate taxes for offshore companies to 10 percent.
Under pressure from Brussels, EU candidate Cyprus needs to hike corporate taxes for the lucrative offshore sector, as the EU views the current 4.25 percent rate as a state subsidy which violates its rules of competition. Local companies are currently charged between 20 to 25 percent corporate taxes, but under the proposed reform, both sectors would be charged a flat 10 percent.
The reform package released after a cabinet meeting will be tabled before the Cypriot parliament. But the government is seeking a gradual introduction of the flat rate, worried that the offshore sector -- comprised of 32,000 foreign-owned firms -- could be hurt in the drive for EU accession.
The target is to increase VAT from 10 percent to the EU average of 15 percent by January 1, 2003, as the island strives to close its two most difficult accession chapters on taxation and competition.
The EU has voiced concern over the island's reluctance to level corporate taxes and give a clear indication that the VAT rate will be in place by 2003, when the accession process is expected to be completed.
Cyprus is a leading candidate in the enlargement process, having already closed 23 of the 29 chapters needed. The island has been divided since 1974 when Turkey occupied its northern third in response to an Athens-engineered military coup in Nicosia, which sought to unite Cyprus with Greece.
Last month, European Commission president Romano Prodi said on a visit to Nicosia that Cyprus will be among the first candidates to join the EU even if it fails to find a political settlement to the division.
The Greek Cypriot administration is the internationally-recognized government of the island, while a breakaway Turkish Republic of Northern Cyprus is recognized only by Ankara. — (AFP, Nicosia)
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
