Cyprus a corporation tax ally for Ireland

Ireland has an ally in refusing to increase its low corporation tax rate, with Cyprus insisting it must not be forced to raise its rate as a condition of its bailout.

The country has announced it had secured an offer of €5 billion from Russia which their finance minister, Vassos Shiarly, said they were considering. They got €2.5bn last year from Moscow at 4.5% over four and a half years.

Some reports say they need at least €10bn to repair their damaged banks. The troika finished its preliminary visit to Nicosia yesterday and on Tuesday EU finance ministers will discuss their report before making an offer.

Mr Shiarly blamed his country’s financial trouble on the haircut on Greek bonds saying the €4.2bn loss by Cypriot banks, which is a quarter of the country’s GDP, should have been shared among all countries.

Cyprus with Bulgaria has the lowest corporation tax rate in the EU at 10%, lower than Ireland’s 12.5%. Mr Shiarly argued that, like Ireland, its low tax rate is one of the fundamental reasons for its economic success.

He said that this was especially so since their economy depends not just on tourism but financial services, and that the same rate applies to all doing business in Cyprus.

“The question was raised by the troika during discussions with Ireland and it was that caused a lot of panic, but we know that did not go through and there was no mention of it in the programme signed by Ireland. So I am very confident that, in the case of Cyprus, no such requirement or conditionality will be raised”.

Mr Shiarly, a London banker up to six months ago when he was appointed Finance Minister, said Cyprus’s problems were because of the private sector involvement in Greek debt negotiated by the EU in March.

Cyprus owns more than 10% of the entire Greek banking sector and with a haircut of 75% in March — which ended up at 81% when all losses were counted — it cost Cypriot banks €4.2bn.

“I say it was not a fair way to deal with it. This was a European problem. I believe we should have shared that loss fairly, in a manner of solidarity. Our share would have been 0.2% of the total right-off of €105bn — our share might have been €200 million — petty cash in these days,” he said.

Mr Shiarly, who took office in March, said the effect of the PSI on a small country like Cyprus should have been taken into account at the time. He implied that the Troika in setting conditions will take this into account now.

Their current problem is a shortage of liquidity as they need to deal with turning over treasury bills every one or three months.

“It’s no longer possible to renew them, especially as a result of last week’s Fitch announcement. We do not require additional finance but we need refinancing of existing short term treasury bills.”

The country lost access to the international markets last year when they borrowed €2.5bn from Russia.

Cyprus has applied to Russia and China for aid and is waiting for a response.

“If and when it comes, we will discuss it with our partners in Europe and deal with it then”, he said. It’s understood they will use this to try to get a better deal from the troika.

Mr Shiarly was senior general manager of the Bank of Cyprus, one of the two Cypriot banks most affected by Greece. His predecessor as finance minister resigned early, blamed, together with the president, for holding onto Greek bonds for too long as they made considerable profits from them.