There is almost a universal agreement that legislative changes to tax collection and reporting constitutes a powerful measure to tackle tax fraud and non-compliance. Consistent with this approach, the Cyprus Parliament has enacted on 31 July 2020 some important amendments to the Value Added Tax Law (L.95(I)/2000) aiming to tackle VAT fraud and improve tax collection. Key amendments include:

  • Extending the obligation of taxable persons to self-account for Cypriot VAT by applying the reverse charge mechanism on services received, even from non-VAT registered domestic suppliers, in relation to construction, modification, demolition, repair or maintenance of a property (expansion of Article 11B).
  • Introduction of new obligation for taxable persons to self-account for Cypriot VAT by applying the reverse charge mechanism on transactions concerning mobile phones, other devices operating in networks, microprocessors, central processing units, gaming consoles, tablets and laptops supplied by domestic suppliers and acquired by the taxable persons in the context of furtherance of a business (new Article 11E). This is effective as of 1 October 2020.
  • Suspension of the right of a taxable person for VAT refund (together with applicable interest) if the taxable person failed to comply with the obligation to submit income tax returns (i.e. Company Income Tax Return (IR4), Self-Employed Income Tax Return (IR1) and Employer's Return (IR7)).

Similar provision is included in Income tax law for tax refund and interest suspension in cases of VAT obligations non-compliance.

  • In addition, the right of taxable persons to request VAT refunds is now limited to six years from the end of the VAT period in which the VAT refund arose. This can be extended for cases where evidence exist at the discretion of the Tax Commissioner.
  • With effect from 01 July 2021, failure of taxable persons to correctly apply the domestic reverse charge provisions as per Articles 11, 11A, 11B, 11C, 11D, 11E or 12A will result in the imposition of a €200 one-off penalty per VAT return but will not exceed the total penalty amount of €4.000. In addition, the penalty for late submission of a VAT return increases from €51 to €100 for each lately submitted VAT return.

The above-mentioned legislative amendments introduce a new era to the battle against VAT fraud. The effectiveness of these measures is an interesting development worth monitoring. What is certain though is that the Cyprus VAT Law enters into a new and long-awaited anti-abuse role.

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