Opinion: Thoughts on the upcoming tax reform

Any tax reform should strive towards fiscal policies that strive for sustainable finances and ecconomic Equity

By Orestis Aristides

With regards to personal income tax, the option of taxing family income is in the right direction. A ballpark figure of €25,000 per individual or €50,000 per family tax-free is in line with realities in Cyprus.

Moreover, a tax break of 10,000 per child would be beneficial. Children are costly, and as Cyprus has one of the world’s lowest birth rates, families need all the support they can get.

The other various brackets of 25-35 per cent must be scrapped, as well as the “preferential treatment” given to certain other categories of workers. Instead, the government should keep a flat 20 per cent tax on all personal income above the tax-free bracket. This will level the playing field, while still being a reasonable incentive for any “high-value” employees who moved to Cyprus in recent years.

The disparity that applies today against Cypriot businesses must also come to an end. It is inconceivable that a European or third country national pays only 12.5 per cent, while a Cypriot entrepreneur has to pay double, around 24.4 per cent (12.5 per cent plus 17 per cent on 70 per cent) on their company’s earnings. A flat corporate tax rate of 20 per cent would level the playing field, while still remaining competitive in attracting foreign and European companies to Cyprus. In addition, dividends must not be taxed, if profits are already affected by corporate tax.

What is more, a problematic tax evasion practice in Cyprus is landlords not declaring their rental income. At the same time, Cyprus has one of the world’s highest percentages of vacant properties, around 10-15 per cent. Both of these problems could be resolved if we had a fair tax on immovable property. This would put an end to tax evasion, while also incentivising owners of vacant property to rent them out. Of course, the home of an individual, for example, up to 100 sqm or 200 sqm per family, can be tax-free.

Our land registry regularly updates property values, so the government knows the value of buildings, apartments and houses. Annual rent usually equals a 20th of that value. So an apartment worth 200,000 will rent for around 830 per month. We can also assume that half of the rental income goes to interest, or other maintenance and repairs. An annual 0.5 per cent tax on property values would equate to a 20 per cent tax on rental income after expenses. In our example of a €200,000 euro apartment, that is €1,000 per year, which sounds very reasonable.

Rent, just like income taxes, should be taxed at 20 per cent, but deducting any immovable property tax already paid, as should capital gains on immovable property.

In Cyprus, most items at 19 per cent are luxury goods or imported goods. Imports skew our balance of payments deficit, so bringing it up to 20 per cent would not be necessarily detrimental to our GDP, in the medium term, if there is a need to do it. The lower, 9 per cent rate of VAT can be taken to 10 per cent as it applies mostly to hotels. While it is still a competitive rate relative to other EU countries.

The €2.50 tax on hotel rooms is also in line with practices in other European countries, but these funds have to be used for the sustainability of the industry. The tax must be levied in the “busy” summer months, and given back as subsidies to promote winter tourism. This will help in the long-term sustainability of tourism.

Road tax for cars has been calculated using emissions and other factors like engine size. This has made consumers prefer lower-emission vehicles, and that is a good thing. But at the same time, emissions are not the only part of the equation. Road infrastructure, public transport and traffic systems are needed, even if one drives a low-emission or electric car.

All these costs have to be bundled together and a flat road tax per car has to be applied to cover them. Not only for the needs of today, but also to cover any future investment and maintenance in public works, infrastructure and public transport.

If we do not do that, then in a few years, when all cars are low or zero emission, there will be no funds to fix the roads these cars will be driving on.

Instead, carbon emission taxes have to be put on fuels, and the revenue of those used on carbon reduction, renewable energy and the energy transition.

Orestis Aristides is an entrepreneur based in Limassol, with interests in tourism, real estate & finance. He holds a Masters degree in Finance from Cass Business School.