Corporate Tax

Subsequent steps for Cyprus on minimal corporate tax

The Cypriot government is already working to find a solution for the country to the OECD minimum corporation tax proposal agreed by the G7 and G20 political forums.

On June 11, key stakeholders including the Institute of Accountants, the Cyprus Bar Association, the Cyprus Employers and Industry Association – to name a few – met with officials from the Cyprus Chamber of Commerce and Industry (CCCI) to prepare a proposal for the Ministry of Finance.

“The aim is”, explains Leonidas Paschalides, Head of the International and Public Relations Department at the CCCI, “to manage possible tax increases for companies here.” The work of this group will be continued with the Ministry of Finance.

However, Cyprus will have no choice but to sign the OECD agreement, to which 131 countries that are members of the OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting Group (BEPS) have already agreed when it is completed as planned in October becomes .

“Cyprus is not a member of the BEPS initiative because Turkey has vetoed our admission,” explains Savvas Klitou, director of the tax service at Baker Tilly Cyprus. “But Cyprus has adhered to the BEPS program fairly strictly. In these circumstances, it is not surprising that Cyprus is waiting for the agreement to be concluded while taking an active part in the EU discussions on the proposal. “

Countries that refuse to sign are unquestionably blacklisted by the OECD, and that has been a strong persuasive in the past.

The OECD expects to raise additional taxes of 250 billion euros through this new proposal, which essentially looks like this:

  • Pillar 1 would give the market jurisdictions new taxation rights for the largest and most profitable multinational companies (with a global turnover of over 20 billion euros and a profitability of over 10 percent), whether or not they have a physical presence.
  • New taxation law for market jurisdictions – Under the first pillar, part of the profits (20-30 percent) above a fixed profit margin would be reallocated to the market jurisdictions in which their users and customers are located;
  • The second pillar proposes a minimum tax on corporate profits of at least 15 percent in order to give tax competition a lower limit. Governments around the world would agree to allow additional taxes on foreign profits of multinational corporations based on their territory, up to an agreed minimum rate.

These Income Inclusion Rules (IIR) are intended to apply to multinational companies with a turnover of 750 million euros (with exceptions for certain institutions such as government agencies and pension or investment funds).

“However, the OECD Declaration states that countries are free to apply the IIR to multinational corporations resident for tax purposes in their territory, even if this threshold is not met,” warns Petros Krasaris, Partner, International Tax and Transaction Services , EY Cyprus.

A critical issue for Cyprus is tax incentives: Cyprus offers a number of them to businesses moving here. But incentives could no longer work under the OECD agreement.

Krasaris explains, “The main mechanism proposed to ensure the taxation of“ untaxed ”or“ low taxed ”profits is the Income Inclusion Rule (IIR), which is supposed to work in a similar way to the rules for controlled foreign companies, according to which profits are made from a the constituent legal person, which is taxed with an effective tax rate below the minimum tax rate, is included in the tax base of the ultimate parent company (UPE) and is therefore subject to a “top-up tax” in this legal system.

If the country in which the UPE is located does not take over the IIR, the next intermediate holding in the chain of ownership would calculate and pay the “top-up taxes” on the low-tax subsidiaries. In addition, there is also a backstop rule, the Undertaxed Payment Rule (UTPR), which refuses deductions or requires an equivalent adjustment, provided that the low tax income of a constituent unit is not taxed according to an IIR. “

Marios Andreou, Partner and Head of Tax Advisory at PwC Cyprus, agrees:

“Ultimately, it may be that certain companies that currently pay less than 15 percent corporate income tax (also taking into account the withholding tax withheld), either in Cyprus or in another country (e.g. the country where the multinational company is based).”

However, Krasaris suggests that we should look at all of this in a larger perspective.

“Multinational corporations are already in the process of adapting to BEPS 2.0, and this involves a much deeper transition than just determining corporate tax rates.

The changes proposed by BEPS 2.0 could of course reduce the scope for tax competition, although tax competition will not be completely eliminated. As Cyprus implements BEPS initiatives, this will have a profound impact on Cyprus’ taxation. It will make the offer of tax incentives like the IP Box less attractive to foreign companies considering moving to Cyprus. “

How countries implement BEPS 2.0 will be an important factor.

“Complex negotiations on how countries will actually implement the new rules continue as changes in national tax laws and tax treaties are required and obstacles can arise in countries’ efforts to implement these changes,” he added .

However, Krasaris notes that Cyprus has many other attractions besides tax incentives for multinationals.

“It is an exaggeration to say that all business decisions are driven by tax reasons. Multinational companies are constantly shifting their business operations to take advantage of various synergies such as access to talent, infrastructure, political stability, geographic location and other synergies. There is no doubt that tax competition will decrease, but competition will be shifted to other areas. Countries like Cyprus, which have a number of comparative advantages and strengths, are likely to benefit from these changes. “

Klitou notes that Cyprus has already done a lot to differentiate itself from other low-tax areas. “We offer many advantages, including low costs, English as the spoken language, geographical location close to Asia, Europe and Africa, and we are already the gateway to the EU for many companies. Cyprus will build on its advantages. “

What is likely to happen at EU level in the meantime?

“The European Commission has announced that it will propose EU guidelines to ensure their uniform application within the EU and compatibility with EU law, which reflect the OECD model rules with the necessary adjustments for the internal market. The Cyprus Finance Minister has made it clear that Cyprus does not intend to veto this area, ”concludes Andreou.

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