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Plenary to vote on 15% minimum tax for multinationals, one-year extension may be granted

The government bill securing of a global minimum level of taxation of 15% for multinational enterprises, aimed at harmonising the Republic of Cyprus with the European directive, is being put before the Plenary for a vote.

The proposed legislation, set to go before the House Plenary on the afternoon of 12 December, also concerns large-scale domestic groups with an annual turnover of over €750 million.

However, and although the Ministry of Finance has expressed its opposition to granting any extension to the imposition of the supplementary tax, it has not been ruled out that, before the legislation is passed, MPs will be asked to decide whether or not to accept an amendment that would extend the exemption from the imposition of the said tax until the end of 2025 instead of until 31 December 2024.

The amendment is intended to be tabled by the Cyprus Greens-Citizens’ Cooperation MP, Stavros Papadouris, following the strong concerns expressed by stakeholders regarding the negative impacts that will arise from the implementation of the proposed regulations for entities operating in Cyprus. These include the possibility of their relocation to other countries with a more favourable tax regime and, by extension, the adverse impacts that may arise for the Cypriot economy.

What does the legislation include?

It is worth noting that the purpose of the proposed law is to enact legislation for harmonisation with the European Union act entitled "Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation of multinational enterprise groups and large domestic groups in the Union," also known as the Pillar 2 Directive.

As known, and according to the Directive in question, the Organisation for Economic Cooperation and Development (OECD), in an effort to end tax practices of multinational companies that allow them to shift their profits to jurisdictions in which they are subject to zero or very low taxation, developed a set of international tax rules to ensure the payment of a fair share of taxes by these companies wherever they operate.

This reform aims to put a floor on competition in corporate income tax rates by establishing a global minimum level of taxation.

According to what was reported in the House Finance Committee where the legislation was discussed, the abolition of a significant part of the advantages of shifting profits to zero or very low tax jurisdictions is expected to ensure a level playing field for businesses worldwide and allow jurisdictions to better protect their tax bases.

In this regard, it was emphasised, Directive 2022/2523 regulates, through the application of a series of rules, the imposition of a minimum effective tax rate of 15% on entities belonging to multinational enterprise groups or to a large-scale domestic group with annual consolidated revenues exceeding €750 million.

Based on data submitted to Parliament, the imposition of taxation is implemented based on the following regulations, which are aligned with the corresponding global rules developed by the OECD's comprehensive framework, following approval by the 20 largest and fastest growing economies (G20):

  • Income Inclusion Rule (IIR): This is the primary Pillar 2 rule, according to which the parent entity(ies) of a group or a large domestic group calculates and pays its share of the top-up tax in respect of the low-taxed constituent entities of the group. In this case, the revenue arising from the imposition of the top-up tax on all entities of the group across borders is collected by the jurisdiction in which the parent entity(ies) is/are established.
  • Rule regarding profits subject to reduced taxation UTPR (Under Tax Profit Rule): This is a safety mechanism in cases where, for various reasons, the additional tax cannot be collected through the IIR, either in whole or in part, and an equivalent adjustment is made in order to recover the remaining tax.

It is noted that Member States additionally have the option to apply a domestic additional tax for companies with low taxation that are based in their own territory, in order to collect additional tax in their own jurisdiction.

It is also worth mentioning that, based on data collected from the Taxation Department's database and relating to the years 2021 and 2022, the number of affected entities in Cyprus is estimated at 1,900, while according to calculations based on conventional tax rules applied in national legislation and without taking into account changes in the strategic decisions of the entities or the possibility of their relocation, with the implementation of the proposed measure, an increase in state revenues for the year 2026 is estimated, which is expected to range between €200 million-€250 million.

The positions of the Ministry of Finance

It is noted that, in the context of the discussion of the proposed law, the spokesperson for the Ministry of Finance has stated, among other things, that the mandatory taxation rules are expected to positively affect the tax revenues of all jurisdictions, including the Republic of Cyprus, as it is a framework that increases corporate taxation.

However, he stressed, the calculation of the increase in tax revenue cannot be carried out with certainty, as the affected companies may reorganise their Cypriot entities or relocate them, which could potentially affect the amount of tax revenue as a whole.

In addition to what the spokesperson for the Ministry of Finance said, the spokesperson for the Taxation Department has clarified, among other things, that business groups falling within the provisions of the bill, which operate in Cyprus and pay actual tax corresponding to a tax rate that is lower than the minimum effective tax rate of 15%, will be required to pay the difference in the form of a supplementary tax.

Stakeholder concerns

For their part, the representatives of the Cyprus Shipping Chamber (CSC), the Cyprus Association of Chartered Certified Accountants (ICAPC), the Cyprus Bar Association, the Cyprus Shipowners' Association (CSA), the Cyprus Chamber of Commerce and Industry (CCCI), the Employers' and Industrialists' Federation (OEB), the Cyprus Association of International Business Companies (CIBA) as well as TechIsland, while recognising the necessity of immediately promoting the bill in question for passage by Parliament, in order to avoid sanctions against the Republic by the Court of Justice of the European Union, have also expressed reservations on more general issues concerning the proposed law, which are summarised as follows:

  • The low degree of adoption of the proposed tax framework by G-20 countries and OECD members, a fact that does not serve the original purpose of implementing a minimum effective tax rate on a global scale and, by extension, ensuring a level playing field.
  • The potential negative impacts that will arise from the implementation of the proposed regulations for entities operating in Cyprus, the possibility of their relocation to other countries with a more favourable tax regime and, by extension, the adverse impacts that may arise for the Cypriot economy.

Based on the above reservations, they suggested:

  • Examination of the possibility of extending the application of the mandatory IIR and UTPR taxation rules by the Republic.
  • Consultation with the European Commission for the implementation of the measure at the member state level, after it has been adopted by a significant number of countries with a large tax territory.
  • Initiation of a dialogue between the Ministry of Finance and the relevant bodies to examine the possibility of granting tax relief or compensatory measures to the affected entities operating in Cyprus.
  • Extension of the date of commencement of the national supplementary tax until 31 December 2025, instead of until 31 December 2024 as proposed in the bill under reference.

The Ministry of Finance does not want an extension

Responding to the concerns of the stakeholders, the Ministry of Finance and the Taxation Department stated that the Republic of Cyprus cannot utilise the option provided by the said Directive to extend the application of the mandatory IIR and UTPR taxation rules, as the number of affected ultimate parent entities established in its territory far exceeds the number set as a limit by the said Directive for utilising such an option.

In fact, although the implementation of the national supplementary tax falls within the discretion of the member states, the Ministry of Finance expressed its strong opposition to extending its implementation date, since, as was emphasised, this will lead to a loss of tax revenue for the Republic.

At the same time, however, the Ministry of Finance expressed its intention within 2025 to discuss with the stakeholders the design of potential incentives that may be granted to the affected entities, provided that these incentives do not undermine Pillar 2 rules and are compatible with European state aid rules.

(Source: InBusinessNews)

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