Cyprus recently held a regular session of parliament. One of the main topics of discussion was a bill to increase the corporate tax rate for multinational companies from 12.5% to 15%.
During the vote, 42 MPs voted in favour of the changes, 4 against and 2 abstained.
From the new year, companies with an annual turnover of more than 750 million euros will have to pay a higher tax. It is specified that groups of companies falling under the provisions of the new law, operating in Cyprus and paying an effective tax corresponding to a tax rate lower than the minimum effective tax rate of 15%, will be obliged to pay the difference in the form of additional tax.
According to the Tax Department, there are approximately 1.9 thousand of them in Cyprus. This is expected to add at least 200-250 million euros a year to the Cypriot treasury. Interestingly, many MPs were upbeat about fears that multinationals would leave Cyprus because of the increase in corporate tax. Many agreed that the country would remain competitive in the global financial market even after the increase.
It should be recalled that the idea of the Organisation for Economic Co-operation and Development (OECD), which proposed the introduction of a global tax on companies amounting to 15% of profits, has so far been supported by more than 140 states.
The main purpose of this innovation is to put an end to the race for minimum tax rates. Many multinationals pay tax not where they make profits but where they are registered, choosing countries with more lenient tax regimes. This leads to obvious distortions in the distribution of tax revenues.
Since 2013, the OECD has been fighting for the introduction of a unified system of taxation for companies. One of the main initiators of the introduction of a unified tax is the United States. The fact is that the US treasury is underpaid by tens of billions of dollars a year due to the clever financial schemes of large IT giants. We are talking about Apple, Google, Facebook and Amazon.
According to an investigation by the US Senate, these companies have accumulated most of their profits in Ireland through subsidiaries. The country has one of the lowest tax rates in Europe - 12.5 per cent. But even that seemed too high for the corporate giants. In 2007, Apple agreed with the Irish authorities to pay just 1.9 per cent on its profits. The deal was formalised through a complex scheme involving the creation of subsidiaries in Ireland and Bermuda.
Google and Facebook have been caught using similar schemes. In 2017, for example, Google paid just 3.4 million in taxes on billions of dollars in profits. Both US and European authorities were unhappy.
Also diluted and unfair is the system of sharing fees between states. Today, large companies pay tax where they are registered, regardless of where the final consumers of goods and services are located. The introduction of the tax will help to eradicate devious schemes in the tax system. It is called digital because it will mainly affect the IT sector. However, the authors of the project themselves do not envisage any differentiation by sector.
The main changes are elaborated and outlined in two concepts:
- Pillar 1 proposes that transnational corporations should pay taxes in the countries where they make profits, even if they are not physically present there. The changes apply to large companies with a net profit margin of at least 10% and a turnover of more than €20 billion per year. Companies that extract natural resources and provide financial services are excluded.
- Pillar 2 provides for the introduction of a minimum tax rate of 15% for companies with a turnover of more than €750 million. Such companies will have to pay this tax regardless of where they are registered and where they earn their income.