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Stelios Violaris, partner and head of international tax services at PwC Cyprus, has looked at the adoption of the minimum tax rate of 15%, laying out the ramifications and prospects for Cyprus.
In December, the European Commission declared that it has formally accepted the implementation of a minimum tax rate across its entire territory beginning in 2024. This provides member states, without exception, just one year to enact the applicable European Directive into national law, requiring Cyprus to do the same.
By October 2021, the agreement had already been achieved internationally and was ratified by about 140 OECD members. Therefore, notwithstanding the early opposition by a small number of nations, like Poland and Hungary, it was only a matter of time before EU member states would consent to completely embrace the directive.
According to their consolidated financial accounts, only local and international firms with a combined yearly sales of at least 750 million euros are impacted by this new reality, according to Violaris. The additional tax will be paid by groups of this size when the effective tax rate on their book profits in each individual jurisdiction is less than 15%.
"The impact of imposing this additional tax of up to 15 per cent on accounting instead of taxable profits is huge since in many jurisdictions accounting profits are much higher than taxable profits due to several tax exemptions and deductions they offer," according to Violaris.
He continued, "Cyprus is, of course, such a jurisdiction and therefore companies based in our country and belonging to such groups by having their parent company here or abroad, whether in the EU or in other third countries, are inevitably subject to this increased tax on their profits." He noted that "the general rule works by imposing the additional tax on the ultimate parent company, which pays this tax to its own tax authority for all its group companies, worldwide."
However, Violaris noted that each nation can choose to apply the directive at the domestic level for companies based in its own jurisdiction and, as a result, for this additional tax to be collected by the member state itself. This is in accordance with the European Directive that has been passed and in order to preserve the sovereignty of EU member states.
"The question that naturally arises is how Cyprus will possibly be affected by this new situation and whether there are such companies in Cyprus that belong to global giant groups," according to Violaris.
He added, "We at PwC Cyprus conducted our own internal study some months ago, the result of which demonstrates that the number of such companies based in Cyprus is indeed reasonably high. The annual taxes paid by these companies in the Republic of Cyprus are quite significant in terms of the total taxes collected by our state on corporate profits."
The impact of implementing these new laws should thus be carefully, properly, and immediately evaluated, the tax consultant added.
"The bet for us as a centre of international activities is, on the one hand, to fully harmonise with the European Directive and at the same time somehow manage to remain competitive," he said.
Violaris continued, "Our goal should not be simply to find ways to retain foreign corporate investors, who have so far trusted Cyprus, but also to turn this new challenge into an opportunity to attract even more foreign investors."
Furthermore, Violaris warned that if Cyprus cannot find the "golden ratio" in how this new regulation is implemented or impacted by other pieces of law, these significant revenues collected by the state "may well more than double or even lost altogether."
According to Violaris, "What is important, in our opinion, is to react as soon as possible and certainly earlier than the other member states and third countries with a similar profile to us."
By fLEXI tEAM