Should Corporate Tax be Raised or Not?
Dr. George Theocharides
Corporate tax, and in general the “benevolent” tax regime of Cyprus, has been one of our comparative advantages as a country for several decades. Because of this system an important sector of the economy, that of services, was created which for several years has helped to create thousands of jobs but also contributed a lot towards the country’s Gross Domestic Product (GDP). A suggestion was put forward by the government recently to raise the corporate tax rate, but due of the fear of destabilization, both the organized social groups and the market rushed to reject it. In any case, what could be the arguments in favour or against such a move?
– A major disadvantage, as I mention above, is the destabilization and uncertainty being created in the market and among the foreign investors. We already had a slight increase in the corporate tax rate in 2013 from 10% to 12.5%. At the same time during that period, we had an increase in the Value Added Tax (VAT) rate from 15% to 19%. That decision could be justified as it was a commitment through the Memorandum imposed on us by Troika. A possible new increase through a decision taken entirely by us could have many and negative effects on our economy which has managed to recover through many sacrifices and hard work on the part of the citizens. One could argue that even after a small increase we would still have a low corporate tax rate, one of the lowest in Europe. However, the main problem is not the level of the tax rate, but the intention on the part of the government and the message we send out to the market, that is, that we are willing to change the tax regime due to pressure from foreign parties both within and outside of the European Union. As mentioned above, our economy has to a great extent been based on this model for decades, while other countries in the European Union (bigger and more developed) are not particularly concerned with the competitiveness of their tax regime, as their economies are based on a number of other industries. This, we should not lose this comparative advantage at this point in time.
– The main argument in favour of an increase of the corporate tax rate is that it will, to some extent, help us get rid of the stigmatization of the tax haven status. It is a fact that there has been a lot of slander against our country in recent years, namely regarding the tax haven status but also accusations regarding money laundering issues. A great deal of effort was exerted to comply with international regulations and to a great extent we have succeeded. We are certainly on the right track in terms of this issue. I am of the view, however, that the the corporate tax rate should not be part of this debate. And on this particular issue it is a matter for the competent authorities to convey this message abroad in a clear and convincing manner.
– One could also argue that raising the corporate tax rate could contribute to more revenues for the state. But this is not at all certain, since a possible destabilization of the market and departure of foreign companies and investors from Cyprus would affect state revenues negatively.
In my humble opinion we could only discuss about raising the corporate tax when there is more dispersion in the productive sectors of the economy. Right now our economy is dependent on tourism, manufacturing, and services. When we succeed in effectively developing other sectors such as shipping, education, energy, research, innovation, technology and entrepreneurship, then we could also discuss about bringing about increases to our taxation system. Until then it will be better to maintain this comparative advantage that we have had for many years.
Dr George Theocharides is an Associate Professor of Finance at CIIM – Cyprus International Institute of Management and Director of the MSc in Financial Services.