Cyprus tries to avoid ‘tax war’ with EU peers

Germany cracks down on tax dodgers in Liechtenstein

 

The calm with which officials have been reacting to news that Russia, Ukraine and India have either placed Cyprus on their black list or wish to curtail the tax avoidance advantages that Cyprus-based companies enjoy, is seen as an attempt to avoid confrontation with major EU peers, which are clamping down on countries aiding EU nationals and companies to avoid paying high taxes in their home countries.

And this at a time when German tax officials are clamping down on their own nationals who have set up brass-plates companies in Liechtenstein to avoid paying taxes at home.

“We have always stressed that Cyprus is not a tax haven and we understand and appreciate the recent drive by many countries, including Russia, to boost their ability to collect taxes from their citizens,” outgoing Finance Minister Michalis Sarris told the Financial Mirror.

The muted response to the news that Russia’s Finance Ministry has included Cyprus in a list of offshore zones which will no longer grant Russian companies the opportunity of being registered here and then transferring their dividends tax-free back to Russia was criticised by many, including the Financial Mirror. But Finance Ministry officials in Cyprus point out that the move is seen as an attempt by the Russian authorities to boost their tax revenue and forbid a Russian company from paying the 10% tax rate in Cyprus and then repatriate the profits back to Russia and avoid paying the 24% corporate tax rate there.

“We believe quiet diplomacy will yield better results,” Sarris told the Financial Mirror, adding that not all is lost, since Cyprus wants to promote itself as a financial centre catering to the needs of international companies, rather than act as a booking centre.

 

— Liechtenstein under attack

 

Cypriot officials are anxiously following the developments in the tiny state of Liechtenstein, which is currently the subject of a German crackdown on tax dodgers there.

Germany‘s BND intelligence service reportedly paid an informant around 4.2 mln euros for a compact disc containing Liechtenstein bank data on more than 1,000 tax evasion suspects.

Germany has confirmed it paid for information. The probe has already forced out the chief executive of Deutsche Post.

German Finance Minister Peer Steinbrueck this weekend vowed to broaden the quest for hidden cash beyond Liechtenstein to include other countries with banking secrecy rules like Switzerland, Luxembourg and Austria, who all border Germany.

But Swiss Finance Minister Hans-Rudolf Merz shrugged off any links to Switzerland, in a move that underscores the size of the stakes in the war of nerves between Germany and its neighbours. Switzerland is home to trillions of dollars in offshore savings.

“I fail to see how problems for Switzerland could arise,” he told DRS-1 radio at the weekend. “This is about Liechtenstein.”

Merz spokesman Dieter Leutwyler on Monday said Switzerland complied with international standards to prevent tax dodging.

“Switzerland is not a tax haven according to OECD (Organisation for Economic Cooperation and Development) criteria. There is a black list and Switzerland is not on it,” he said.

Luxembourg, home to a huge asset management industry and a slew of private banks, also distanced itself from the affair.

“We do not consider ourselves a tax haven,” the prime minister’s spokesman said.

Both Luxembourg and Swiss laws prohibit revealing bank information to the outside world except in criminal matters.

Tax evasion or the failure to report earned income is not considered a crime in either country, although tax fraud — falsifying documents to avoid taxes — is. Both countries impose a withholding tax on interest earned on undeclared accounts held by Europeans as a way to discourage tax dodgers.

 

— Next stop, Switzerland?

 

Germany‘s former Finance Minister Hans Eichel in weekend interviews also pounced on Switzerland, and Chancellor Angela Merkel has said transparency in financial markets may be on the agenda when she visits Switzerland in April.

Separately, a newspaper reported that Britain‘s tax authority is also investigating up to 100 citizens with bank accounts in Liechtenstein after buying data from an informant.

The scandal has also spread to the United States, where a senior lawmaker last week said citizens had hidden assets at Liechtenstein‘s LGT Bank, adding he planned to urge passage of an anti-offshore tax haven bill.

Switzerland’s record of cooperating with other countries makes a scandal of similar proportions unlikely, but some fear Germany’s assault on Liechtenstein is a proxy war and the focus may next shift to Switzerland’s huge banking sector.

Liechtenstein lashed out at Germany last week and its acting ruler, Crown Prince Alois — whose billionaire family owns Liechtenstein‘s LGT bank — accused the country of buying stolen data and spying on its own citizens.

Switzerland is the world’s largest destination for foreign wealth, with foreigners holding some $2.9 trln worth of assets in its banks, dwarfing Liechtenstein, and making it an obvious target for tax inspectors.

But the country’s fabled banking secrecy has been rolled back in the last ten years, and Switzerland has signed bilateral agreements with dozens of states to open books at its banks in the worst cases of tax evasion.

 

— Dutch chase tax dodgers

 

In a separate dispatch, Reuters reported that the Dutch finance ministry urged citizens who evade tax by putting their money in Liechtenstein bank accounts to turn themselves in or risk paying hefty fines.

State Secretary of Finance Jan Kees de Jager said he expected Germany, which bought information on tax dodgers from a Liechtenstein informant, to notify the Netherlands if Dutch citizens were included on the list.

“We don’t know yet, we haven’t heard that there are Dutch citizens on the list, but it is possible,” de Jager told Dutch television on Sunday. He said it could take months to hear from Germany whether any Dutch names were included.

A Finance Ministry spokesman confirmed the statements.

“People can turn themselves in if they have not been questioned by tax authorities yet and get favourable provisions,” de Jager said.

He also said the government expects multinational companies to pay more in corporate taxes this year after plugging a loophole which had allowed firms to benefit from deductible interest provisions in countries with lower tax rates.

This year’s provisional tax assessments suggest that companies listed in the Dutch blue-chip index will have to pay 1.5 bln euros in corporate tax, up from 1.3 bln in 2007, de Jager said.

He was responding to questions about a report in the NRC Handelsblad newspaper last week that said a growing number of Dutch multinationals hardly paid any corporate tax in the Netherlands.

 

— India clamps down on Cyprus

 

The double taxation avoidance agreement (DTAA) between Cypus and India is all set to lose the capital gains tax exemption benefit, according to the Indian Times.

Both governments are understood to have concluded negotiations on amendments to the tax treaty, following which residents, both individuals and companies of Cyprus, would have to pay capital gains tax at the rate of 10%.

A limitation on benefits clause to ensure ineligible entities cannot get a benefit under the tax treaty is also proposed to be inserted. The changes in the treaty were likely to be notified soon, sources said.

Cyprus does not impose capital gains tax on its residents, and with India exempting the capital gains under the treaty, investors could avail of the benefits similar to the India-Mauritius DTAA. The dividend income is also exempt from withholding tax. The India-Cyprus tax treaty was notified in 1995.

The proposed amendments to the India-Cyprus tax treaty are akin to the changes in the India-United Arab Emirates DTAA notified recently. Under the India-UAE tax treaty, capital gains have been made taxable in the state where the gains are earned.

India is also trying to renegotiate its tax treaty with the island nation of Mauritius.

With tax treaties with the UAE and Cyprus losing their tax concessions, it would be easier for New Delhi to wield pressure on Mauritius for amending the agreement.

Interestingly, Mauritius, which is lobbying hard for continuing the tax treaty, has renegotiated the agreement with China and removed the tax concessions.

Preventing abuse of tax treaties weighs high on the Indian government’s agenda. The tax havens are used by investors to avail tax benefits by routing their investments through shell or paper box companies registered there.