Tax reform to focus on green taxes, energy costs, business incentives

The University of Cyprus’ Economics Research Centre (CypERC) is entering the second phase of its tax reform project, it emerged on Monday, after it had been tasked to come up with a series of proposals by the government.

The proposed tax reform is set to focus on green taxation, reducing dependence on expensive electricity, and offering tax incentives to businesses, while at the same time considering the impact on state finances.

The centre is expected to present its progress and findings by the end of September at the Finance Ministry, with all relevant stakeholders in attendance.

Before this presentation takes place, a meeting is scheduled to take place between the CypERC team, the Finance Ministry, and President Nikos Christodoulides to discuss the key points, according to a report by local outlet Stockwatch on Monday.

The centre has already conducted numerous exercises to assess the impact of green taxes on households and businesses, particularly regarding fuel, water, and waste.

The goal is to develop counterbalancing measures that consider the burden on public finances, ensuring that the tax reforms remain fiscally neutral.

Moreover, during the upcoming presentation, CypERC members and technocrats will analyse the economic impacts and econometric estimates of the proposed green taxes on different income groups and population segments.

A significant aspect of the reform, the reports added, is to reduce dependence on high-cost energy, with taxation and the provision of incentives, discounts, and subsidies for households and businesses playing a central role.

In addition, the Economics Research Centre and the Finance Ministry are said to “see the shift away from expensive energy as a critical challenge within the broader tax reform”, while specific recommendations will be discussed during the presentation.

The forthcoming presentation will also examine individual components of the reform based on suggestions from professional associations and trade unions.

Business groups have called for the protection of competitive advantages in corporate tax rates, the elimination or reduction of taxes, and the lowering of corporate burdens.

In a recent closed-door meeting at the Presidential Palace, the president reportedly viewed two requests favourably.

These include the abolition of the social cohesion fund tax and the reduction of contributions to the redundant employees’ fund.

These were put forth and supported by the Employers and Industrialists Federation (Oev) and the Cyprus Chamber of Commerce and Industry (Keve).

Meanwhile, trade unions are pushing for an increase in the tax-free income threshold, despite a CypEC study indicating that 40 per cent of current taxpayers already pay no tax. The current annual tax-free income is set at €19,500.

Moreover, the research centre, through its work so far, has been reported to believe that despite its flaws, the existing tax system, in place for nearly 24 years, has been crucial in attracting foreign companies to Cyprus.

“Our tax system is highly competitive and has been beneficial to the economy,” George Syrichas, an economist and CypERC member, told Stockwatch.

He mentioned that foreign companies, particularly those focused on exports, have historically contributed significantly to the Cypriot economy.

“We want to maintain the tax system’s competitiveness and we will argue in favour of this at the presentation,” Syrichas added.

He also highlighted that the tax reform would include measures to make the labour market more attractive.

Furthermore, the economist stressed the importance of weighing the cost of proposals from stakeholders against their economic implications for the state.

“This is why various combinations of tax burdens, compensatory measures, and the overall impact on public finances will be proposed,” Syrichas explained.

It was also reported that key aspects of the reform will include enhancing the competitiveness of Cyprus’ tax model, reducing the administrative burden on taxpayers and businesses, and ensuring a fairer redistribution of the tax burden while maintaining fiscal neutrality.

It should be noted that in March of this year, President Christodoulides met with the advisory committee on tax reform, asking that progress on this matter be accelerated, in order to reap any benefits at the earliest opportunity.

In statements after that meeting, Finance Minister Makis Keravnos said there is satisfaction that work is progressing at a satisfactory pace.

The goal of this tax reform, he said, is “to encourage entrepreneurship, relieve households, have a strong social character, and contribute to the fair distribution of income.”

Finally, also said that the tax reform aims to address any tax evasion and avoidance, while it will also be fiscally neutral.