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The Government appears prepared to agree to a small increase in Cyprus’ corporate tax rate to stave off IMF pressure for investors to take losses on bank deposits as part of a bailout, a source close to the talks with international lenders said yesterday.

A source with direct knowledge of the government’s consultations with the lenders told Reuters that a “small” corporate tax increase could be considered by Cyprus, along with a temporary levy on capital gains.

“It looks like consultations are starting to yield results, and the proper compromises are being found,” the source said.

International lenders, who resumed talks with Cyprus last week, have asked the government to raise its corporate tax rate to 12.5% from 10%, and introduce a capital gains levy, to ensure it can repay an international bailout which it requested last year.

Media reports have also suggested that Cyprus would ask Greece to use some of the funds from Athens’ EU/IMF bailout to help Cypriot banks with a presence in Greece.

Athens, however, played down such talk yesterday.

“There has been no specific request by the Cypriot side to Greece to contribute to the recapitalisation of Cypriot banks,” Greek government spokesman Simos Kedikoglou told reporters after President Nicos Anastasiades met Greek Prime Minister Antonis Samaras in Athens yesterday.

Ahead of the two leaders’ meeting, Finance Minister Michalis Sarris met his Greek counterpart Ioannis Stournaras in Athens on Sunday.

“What there is close cooperation and determination to get out of the crisis together,” Kedikoglou said.

Cyprus needs up to €17 billion in emergency loans – almost the size of its gross domestic product – mostly to recapitalise its banking sector, which has been hit by its exposure to debt-laden Greece.

The island’s corporate tax, among the lowest in the European Union, was previously considered a no-go area but harsher alternatives mooted by international lenders appear to leave little option.

Seen as more serious threats are a haircut on bank deposits and financial transaction tax (FTT).

“As a state we need to make certain choices because at the end of the day the bailout accord is necessary to avoid bankruptcy,” ruling DISY deputy chairman Averof Neophytou told the state broadcaster yesterday. “You cannot reject everything. At the end we will look at the pros and the cons, lay out priorities then decide what measures can be taken which are not destructive for the promotion of growth.”

Although government sources said the European Commission has ruled out a haircut on deposits, the IMF insists on keeping the option on the table.

German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the cost of the rescue.

Cyprus, fearing a rapid withdrawal of funds from the island, says any haircut on deposits is out of the question.

Other measures that could be part of a bailout agreement are privatisations of public companies a couple of years down the line, a 40% tax on revenues over €100,000.00 and a levy on income from interest, reportedly at 10%.

Talks between international lenders and the government continued yesterday on a technocratic level as reports said Cyprus wanted to wrap up the agreement by March 15.

Our view:

Cyprus’ main attraction of late has been it’s low corporation tax. A 2.5% increase is not a small increase by any means and will definitely result in many companies moving their operations to other destinations.

As we would say, “don’t bite the hand that feeds you!” and in this case, this is exactly what will be happening.

Some people might say it’s a conspiracy, but Germany and the TROIKA team certainly seem like they want to drive major corporations away from Cyprus, therefore the economy will result in being more depended on it’s future gas reserves to repay the debt and avoid bankruptcy.

This is definitely Corporate Suicide!

Written and published by the Cyprus Mail. Copyright 2012, all rights reserved.

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