As we approach the turn of the year it is an appropriate time to summarize the various changes that have taken place to date in 2017 and look forward to the changes on the horizon.
In Part I of this two-part series,1 I reviewed the double taxation agreements and direct taxation developments in Cyprus during 2017. In this Part II, I reflect on value-added tax and tax administration developments.
Value-Added Tax (VAT)
Imposition of VAT on building land
Law 157(I) of 2017 amends the VAT Law by imposing VAT at 19 percent on land transactions for business purposes, bringing it into line with the common EU system of VAT. When Cyprus joined the EU, it was granted a temporary derogation under Article 383 of the EU VAT Directive allowing it to continue to exempt the supply of building land from VAT, but this derogation expired almost ten years ago.
The amendment law provides for VAT to be charged on the transfer in the course of the economic activities of the transferor of undeveloped buildable land which is intended for the construction of one or more fixed structures, and the leasing or letting of immovable property to a taxable person for the purposes of undertaking taxable activities, excluding the leasing of a building used for private dwellings. The amendments with regard to the leasing or letting of immovable property took effect on November 13, 2017, and the other amendments will take effect on January 2, 2018.
Certificates of tax residence for individuals
In March 2017, the Tax Department formalized its arrangements for issuing certificates of tax residence in Cyprus to individuals qualifying under the conventional criteria of 183 days' residence. Individuals can apply for a certificate of tax residence at any time. A certificate will be issued even if the applicant has not yet completed the 183 days of physical residence in Cyprus in the relevant year as long as he or she is registered with the Tax Department and has been issued with a tax identification number, on condition that he or she provides an affidavit stating that he or she intends to stay in Cyprus for one or more periods which exceed 183 days in total in the tax year.
The new system makes it much easier for individuals who have interests abroad to provide evidence of their residence status to tax authorities overseas, particularly under DTAs.
For individuals qualifying for tax residence on the "60 day" basis,2 provided that all other conditions are satisfied the tax residence certificate can be issued before the 60 days' stay has been completed if the application for the issue of the certificate relates to dividends or interest to be received from overseas. In this case the applicant must provide evidence of the imminent receipt of the income and details of the tax authority or organization to which the tax residence certificate will be submitted.
New arrangements for settlement of tax arrears by instalments
The Process of Adjustment of Tax Arrears Law 2017 (Law 4(I) 2017) was published in the Official Gazette on February 3, 2017. It establishes a procedure for settling tax arrears from earlier years by monthly installments. It covers all nationally imposed taxes, including income tax, VAT, Special Contribution for Defence, capital gains tax, stamp duty, and the special contributions to be paid by employees, pensioners and the self-employed.
Arrears up to EUR100,000 (approximately USD119,000) may be settled in 54 equal monthly installments; larger amounts may be settled in 60 equal monthly installments. The Tax Department may apply to the Attorney General to suspend enforcement proceedings if an agreement for payment by installments is reached. The scheme is not available in cases involving undeclared funds or transactions.
The first installment must be paid no later than the last day of the month in which the applicant indicates its agreement to the Tax Department's acceptance of the proposal for payment by installments, and the arrangement becomes binding as soon the first installment has been paid, provided that it does not create any new overdue debt.
Each of the remaining installments must be paid no later than the last day of the month to which it corresponds. If a debtor misses a payment, it must be paid with the following installment, failing which the missed payment will be spread over the remaining installments. Installments are allocated against the oldest debt on a first-in, first-out basis.
The arrangement is automatically terminated if the debtor is more than two months late in paying an installment, or misses three installments, or fails to submit a return or pay a tax debt. In the event of termination, the Tax Department will collect any outstanding balance in the usual manner.
Although the law was enacted in February 2017, it did not take effect immediately, in order to allow time for the necessary payment systems to be put in place. The deadline for submitting applications to participate in the scheme was set at three months after the law took effect. The law took effect on July 3, 2017, and the initial deadline for submitting applications was therefore October 3, 2017.
The law was subsequently amended 3 to extend the deadline for submitting applications to six months after the law took effect, meaning that applications may be submitted until January 3, 2018. In addition, it relaxes the requirement regarding submission of outstanding tax returns. The initial law required all tax returns for tax years up to and including 2015 to have been submitted before an application was made. The amendment to the law replaces this requirement with a stipulation that applicants must submit any pending tax returns for tax years up to and including 2015 no later than June 30, 2018.
One of the current priorities for the Cyprus Tax Department is to modernize the administration of the tax system, moving away from a paper-based system to a more streamlined electronic system for submitting returns, and for making payments and refunds, both for direct taxes such as income tax and Special Contribution for Defence, and for VAT.
The department stopped accepting paper VAT returns after April 28, 2017. All returns now have to be submitted electronically via the Taxisnet system, and the VAT liability can be paid via electronic banking, avoiding the need to visit a bank branch. Refunds of VAT are also processed electronically by bank transfer.
Changes to the Assessment and Collection of Taxes Law
Law 97(I) of 2017 amends the Assessment and Collection of Taxes Law of 1978 to 2016 ("the ACT Law") with effect from July 14, 2017. The principal changes introduced by the amending law are as follows:
- Tax returns for 2017 and subsequent years must be submitted by electronic means or by other means approved by the Commissioner of Taxes.
- The six-year limitation (12 years in the event of deliberate omission to provide information) on raising assessments provided for in Articles 21 and 23 of the ACT Law does not apply if the assessment is issued after a court decision.
- Notices of assessment may now be served electronically, as an alternative to being served personally or by mail.
- In addition to any penalty imposed in the event of omission to pay any tax due by the specified deadline, an additional amount of 5 percent of the tax due will be imposed if the omission continues for more than two months from the deadline.
- An administrative fine of up to EUR20,000 may be imposed for breach of the ACT Law or any regulations or other secondary legislation issued under it, depending on the gravity of the infringement, irrespective of any criminal liability. Before it imposes an administrative fine the Tax Department must notify the person concerned and give them the right to make representations. An appeal against an administrative fine may be made to the Tax Tribunal or the Administrative Court.
- Specific administrative fines may be imposed for failure to comply with the country-by-country (CbC) reporting requirements under the Multilateral Competent Authority Agreement, and for breach of obligations relating to FATCA and the Common Reporting Standard contained in the relevant ministerial orders issued under the ACT Law. These range from EUR500 for failure to provide information to enable the Tax Department to verify its records to EUR10,000 for failure by the reporting entity of a group of multinational enterprises based in Cyprus to submit a CbC report. In the event of failure to pay the administrative fine or failure to remedy the breach, the amount may be increased to EUR20,000. Before it imposes an administrative fine, the Tax Department must notify the person concerned and give them the right to make representations. An appeal against an administrative fine may be made to the Tax Tribunal or the Administrative Court.
Changes to the VAT appeal procedure
In the past, taxpayers who disputed VAT assessments raised following examinations of their records had three options:
- To submit a written objection to the Commissioner of Taxes within 60 days of receiving the assessment, under Article 51A of the VAT Law;
- To submit a written objection to the Minister of Finance within the same time limit, under Article 53 of the VAT Law; or
- To file an application to the Supreme Court of Cyprus within 75 days of receiving the assessment for review of the decision under Article 164 of the Constitution. Taxpayers who initially submitted an objection to the Commissioner of Taxes or the Minister of Finance could also file an application to the Supreme Court for review of their decision.
The VAT Amendment Law of 2017 (Law 86(I)/2017) amends the procedures and transfers responsibility for determination of taxpayers' objections on VAT matters to the independent Tax Tribunal established under Articles 4A and 20A of the Assessment and Collection of Taxes Law (Law 4/1978 as amended) and to the recently established Administrative Court. The taxpayer still has the right of recourse to the Supreme Court if dissatisfied with the decision of the Tax Tribunal or the Administrative Court. The new procedures apply from July 7, 2017.
Appeals to the Tax Tribunal must be filed within 45 days from the notification to the taxable person of the relevant decision or act of the Commissioner of Taxes. The Tax Tribunal may allow an extension of this time if there is reasonable cause, such as the applicant's illness or absence overseas.
In order for the Tax Tribunal to consider an appeal, the applicant must have:
- Submitted the necessary documents and evidence to substantiate the merits of the appeal;
- Submitted all the required tax returns and paid the amounts indicated in these statements as payable or made a settlement with respect to them; and
- Paid any undisputed amount or provided appropriate security if required.
The amendment law requires appeals to be concluded as expeditiously as possible, and the Tax Tribunal is required to issue its decision not later than one year after submission of the appeal. The Tribunal may wholly or partially uphold or reverse the original decision, amend it, issue a new decision to replace the original decision, or remit the case to the Commissioner of Taxes with instructions to him to undertake specific actions.
A taxpayer who is dissatisfied with a decision of the Tax Tribunal may submit an appeal to the Administrative Court. Any appeal must be lodged within 42 days of the Tribunal's decision.
The amendments to the law align the procedures for resolution of VAT disputes with those for other taxes, and ensure that disputes are settled by an independent body, whether the Tax Tribunal or the Court.
Guidance on provision of financial account information under international agreements
In June 2017, the Tax Department published detailed, comprehensive guidance in English on its website regarding the application of international agreements and Cyprus legislation on the automatic exchange of financial account information between Cyprus and other tax jurisdictions.
Legislation is in place for automatic exchange of financial account information under three different regimes:
- The United States Foreign Account Tax Compliance Act (FATCA);
- The Common Reporting Standard developed by the OECD (CRS); and
- The EU Directive on Administrative Cooperation in the Field of Taxation (DAC).
All three regimes have significant common requirements. Since the CRS is incorporated into the tax legislation of Cyprus and other EU member states via the DAC, and since it is the DAC which ultimately governs taxpayers' obligations, the guidance manual focuses on the requirements of the DAC and the CRS and highlights the differences that apply under FATCA.
The DAC advises member states to use the OECD Commentaries on the Model Competent Authority Agreement and Common Reporting Standard as a source of illustration or interpretation and in order to ensure consistency in application. The Tax Department therefore advises that if taxpayers have doubts about how any element of the directive applies, their first point of reference for guidance should be to the OECD Commentaries. The Cyprus guidance is secondary to this and assists with using the commentaries by summarizing key issues and dealing with any Cyprusspecific areas where the CRS allows for a degree of national discretion. The guidance cannot alter the scope of the CRS as set out in the DAC, as that would go beyond the powers of the domestic tax authority.
Prospective developments and conclusion
Public consultations are currently in progress on proposed legislation to implement the EU Anti- Tax Avoidance Directive, as amended, and on proposed guidance on taxation of benefits in kind. A common theme underlying these consultations, and motivating the changes that have taken place during 2017, is the Tax Department's strategic initiative to rationalize and modernize the Cyprus tax regime, to make it clear, consistent and easy for taxpayers and their advisors to understand, and to give them a reliable, predictable basis for financial decisions, consistent with the government's strategy of offering investors an attractive, benign tax and business environment compliant with international best practice.
1 See Global Tax Weekly, Issue No. 265, December 7, 2017.
2 Id, under the heading "New tax-residence route for individuals".
3 By Law 129(I) of 2017, which took effect on September 29, 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.