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UPDATE 1-Cyprus mulls tax hike, Athens plays down talk of help for banks
March 11, 2013 / 1:35 PM / in 5 years

UPDATE 1-Cyprus mulls tax hike, Athens plays down talk of help for banks

By Michele Kambas

NICOSIA, March 11 (Reuters) - Cyprus is inching towards raising corporate tax to stave off IMF pressure for investors to take losses on bank deposits as it seeks to secure a bailout, a source close to the talks said on Monday.

International lenders, who resumed talks with Cyprus last week, are urging Cyprus to lifts its corporate tax rate from 10 percent, and introduce a capital gains levy, to ensure it can repay an international bailout which it requested last year.

A source with direct knowledge of the island’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.

Media reports in Cyprus have also speculated that the island’s new government may 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 on Monday.

“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 Cyprus’s newly elected President Nicos Anastasiades met Greek Prime Minister Antonis Samaras in Athens on Monday.

Cyprus, one of the smallest euro zone members, needs up to 17 billion euros 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.

Corporate tax, now at a nominal 10 percent and among the lowest in the European Union, was previously considered a no-go area for Cypriot authorities.

Government officials, however, have been dropping hints that Cyprus’s resistance to a tax increase may be waning in the face of what is seen as a more serious threat: bank depositors being called to pay the cost of aid via a so-called haircut, in a process known as a bail-in.

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.

There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money-laundering. Russian individuals and companies have a high level of deposits in the banking sector.

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

Averof Neophytou, deputy leader of the ruling Democratic Rally party, asked on Monday whether a corporate tax increase might be on the cards, said Cyprus needed to make some choices because a bailout accord was needed to avert bankruptcy.

“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,” he told state radio.

Cyprus has been shut out of international financial markets for almost two years. It has been forced to rely on high-yielding short-term borrowing from domestic lenders to pay its day-to-day bills.

Cypriot President Nicos Anastasiades, who won presidential elections last month replacing a communist administration accused of running the economy to the ground, has vowed to work for a swift bailout deal.

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