There has been considerable publicity in the financial media
regarding the fact that Cyprus, together with the British Virgin
Islands, Luxembourg and Seychelles, has been assessed as
non-compliant with international information exchange standards by
the OECD Global Forum on Transparency and Exchange of Information
for Tax Purposes. It is important to put this issue into a proper
context.
Compliance with international information exchange standards is
assessed in two phases. The Phase One assessment focuses on whether
the requisite legal and institutional infrastructure and procedures
are in place for effective information exchange to be possible.
Phase Two focuses on the practical implementation of the
procedures. Only countries that have satisfactorily passed the
Phase One assessment can go forward to Phase Two. Cyprus underwent
the Phase One assessment in 2011 and the Phase Two assessment was
concluded in March 2013, at the peak of the banking crisis. The
respective reports were published on 5 April 2012 and 22 November
2013.
It should be noted that Cyprus is one of only 50 jurisdictions
that have undergone a Phase Two assessment. A further 50
jurisdictions have undergone only a Phase One assessment. More than
half (29 of the 50) have been found to lack at least one essential
element and in more than a quarter (14 of the 50) the deficiencies
are sufficiently serious to prevent admission to the second phase
until they have been dealt with. These 14 include Switzerland,
where significant new legislation is required in order to put the
essential legal infrastructure in place.
The Phase Two assessment evaluates compliance against 10 criteria.
Cyprus was found to be fully compliant in five of these, largely
compliant (that is, showing only minor failings) in one, partially
compliant in two and non-compliant in two. Austria, Jamaica and
Mauritius, which achieved full compliance in fewer areas than
Cyprus, were nevertheless excluded from the list of non-compliant
jurisdictions.
The areas in which Cyprus was assessed as non-compliant concerned
the availability of historic accounting records and the use of
compulsory powers to obtain information. In the case of accounting
records the report acknowledged that one of the two reasons for the
"non-compliant" rating was that for most of the
monitoring period trusts were under no obligation to maintain the
information concerned, but that new legislation had recently been
introduced to require this. The other reason was a failure by
companies to comply with the legal requirement to submit financial
information. In their response the Cyprus authorities pointed out
that delay in obtaining information had occurred in only 10 out of
650 cases examined, and that in nine of those 10 cases the
information had subsequently been obtained and in the sole
outstanding case legal proceedings had been instituted. They also
pointed out that personnel numbers and procedures in the relevant
department had been significantly strengthened, leading to a
substantial improvement in its performance in responding to
requests for information, and that this had been noted in the
report but not taken into account in the assessment.
The principal reason for the "non-compliant" rating
regarding the use of compulsory powers was that until the end of
2011 the authorities did not pursue enquiries until a tax return
had been submitted. As the report acknowledged, this policy was
changed from the end of 2011. However, this was not reflected in
the assessment of compliance. The other reason for the
non-compliant rating was a perceived failure to use the powers
under the law effectively. In their response the Cyprus authorities
pointed out that around 2,000 prosecutions are undertaken each
year, which they consider to be an effective and proportionate
response. The authorities also noted that the apparently low
compliance rate in the filing of annual returns is partly due to
the high proportion of inactive companies in the total
population.
While the current rating is undoubtedly a disappointment, it does
not affect the effectiveness of Cyprus holding and financing
structures and it has to be viewed in the context that only 18 of
the 50 jurisdictions assessed were found to be fully compliant.
Several internationally significant finance centres fell short of
full compliance, including the Channel Islands, Germany, Hong Kong,
Malta, the Netherlands, Singapore, the UK and the USA.
No doubt, following the banking crisis and the allegations of
laxity in the Cyprus regulatory environment that preceded it, there
was a general reluctance to give Cyprus the benefit of the doubt,
and the Cyprus authorities' contention is that the
non-compliant rating is unduly harsh and does not reflect the
situation as it is today. The government has announced that the tax
authorities are working with the accounting and legal professions
and all other relevant bodies in order to rectify all the reported
deficiencies, and that it is confident that significant
improvements will be noted at the next review, which is due to take
place in 2014.
The business services sector will be a key driver in rebuilding
the Cyprus economy, since it will be some years before any benefits
accrue from any gas reserves and other sectors are unlikely to fuel
a recovery. Therefore we must repair the damage to our business and
make sure that it does not happen again. We must all compete in
order to survive, but we must do so in a sustainable manner, having
regard to the long term. In terms of the tax and business regime
this means maintaining an appropriate balance. We must offer a
competitive tax and business environment, but not to the extent
that other, more influential countries perceive this as a threat to
their interests, as some may well have done earlier this year. The
most important asset in our sector, whether for an individual, a
firm, or a jurisdiction, is a "good name", a reputation
for integrity and trustworthiness. This takes years to build, but
can be lost in an instant, with disastrous consequences. It behoves
us all to work together to show that Cyprus maintains the highest
standards.
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