Further modernisation of tax procedures in Cyprus
December 2017 | SPECIAL REPORT: GLOBAL TAX
Financier Worldwide Magazine
December 2017 Issue
Prior to 2014, direct taxes such as income tax and capital gains tax in Cyprus were administered by the Inland Revenue department and VAT was administered by the VAT department. In 2014, the two departments were merged to create a single tax department (Tax Department). One of the main objectives of the new department has been to modernise and streamline tax administration, and replace the existing paper-based system, which involved taxpayers submitting returns and making payments in person, with electronic filing of returns and settlement of tax liabilities.
Substantial progress has been made. It is now possible to pay all direct taxes through online banking and the queues that used to be endemic in tax offices towards the end of April, July and December, when returns and payments were due, have almost disappeared. Early in 2017, it became possible to pay VAT liabilities online, rather than paying in person at a bank, and electronic submission of VAT returns became mandatory.
In July 2017, further amendments to the Assessment and Collection of Taxes Law and the VAT Law were enacted, making electronic filing of income tax returns mandatory and aligning the VAT appeal procedure with the procedure for other taxes.
Amendments to the Assessment and Collection of Taxes Law
Law 97 (I) amends the Assessment and Collection of Taxes Law of 1978 to 2016 (ACT Law) with effect from 14 July 2017. Its main innovation is to require tax returns for 2017 and subsequent years to be submitted by electronic means or by any means approved by the Commissioner of Taxes. It is generally recognised that electronic submission is the only option in practice, as has been the case for VAT returns since the spring of 2017. The Tax Department is currently undertaking a campaign to encourage taxpayers to register for its online ‘Taxisnet’ service.
In addition to the changes regarding submission of returns by taxpayers, the means by which the Tax Department may communicate with taxpayers have also changed. The Tax Department may now serve notices of assessment electronically, as an alternative to personal or postal delivery.
The amendment law also introduces new penalties for failure or delay in submitting returns, aimed at encouraging timely compliance on the part of taxpayers.
Firstly, in addition to any penalty imposed in the event of omission to pay any tax due by the specified deadline, a further penalty of 5 percent of the tax due will be imposed if the omission continues for more than two months after the deadline.
Secondly, an administrative fine of up to €20,000, depending on the gravity of the infringement, may be imposed for breach of the ACT Law or any secondary legislation issued under it, irrespective of any criminal liability.
Thirdly, the amending law introduces specific administrative fines for failure to comply with 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 (CRS) set out in ministerial orders issued under the ACT Law. These range from €500 for failure to provide information to enable the Tax Department to verify its records to €10,000 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 €20,000.
Finally, before it imposes any 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 Administrative Court.
Amendments to the VAT Law
Law 86(I) amends the VAT Law to align the appeal procedures with those applying to other taxes. Previously, taxpayers who disagreed with VAT assessments raised following examinations of their records had three options for resolving the issue. They could submit a written objection to the commissioner of taxes under article 51A of the VAT Law or a written objection to the minister of finance under article 53 of the VAT Law. In either case, this should be done within 60 days of receiving the assessment. Furthermore, they could file an application to the Supreme Court of Cyprus within 75 days of receiving the assessment for a review of the decision under article 146 of the constitution. The first two options do not rule out the third. Taxpayers who were dissatisfied with the decision of the commissioner of taxes or the minister of finance could subsequently file an application to the Supreme Court for a review of their decision.
Two important developments have taken place since these appeal procedures were established, namely the establishment of the Administrative Court with exclusive jurisdiction to adjudicate recourse applications under article 146 of the constitution, aimed at lightening the workload of the Supreme Court, and the establishment of the independent Tax Tribunal under article 4A of the Assessment and Collection of Taxes Law.
The amending law transfers responsibility for determination of taxpayers’ objections on VAT matters to the independent Tax Tribunal and to the Administrative Court with effect from 7 July 2017. The taxpayer still has the right of recourse to the Supreme Court as the ultimate court of appeal.
The amending law removes the references to the minister of finance and the Supreme Court in article 51A of the VAT Law, and instead requires the commissioner of taxes to notify persons whose complaints are rejected of their right to submit an appeal to the Tax Tribunal or bring an action in the Administrative Court.
In addition, the amending law replaces article 52 of the VAT Law and extends the scope of issues on which taxpayers have the right to submit an appeal to the Tax Tribunal, including: (i) VAT imposed on the supply of goods or services, or the acquisition of goods from another EU member state or a third country; (ii) deductible input VAT; (iii) VAT assessments imposed on persons who fail to submit returns or keep proper records under articles 49 and 49A of the VAT Law; (iv) supplementary VAT assessments issued under article 50; (v) any directions under paragraph 2 of part I of Schedule One, which allows the aggregation of businesses which the commissioner of taxes considers to have been artificially segregated for the purpose of avoiding VAT; and (vi) decisions taken pursuant to paragraph 1 of part I of Schedule Four, which allows the commissioner of taxes to adjust transactions between related parties onto an arm’s length basis.
It also adds a new article 52A giving taxpayers the right to submit objections to the commissioner of taxation on a range of issues including registration and deregistration of a taxable person for VAT purposes, enrolment in special schemes such as the special regime for farmers, repayment claims, recovery of input tax and imposition of penalties.
The taxpayer deadline for the taxpayer to submit an appeal to the Tax Tribunal is 45 days from receiving the notification of the relevant decision or act of the commissioner of taxes. The Tax Tribunal has discretion to extend the period on written application by the taxpayer if there are reasonable grounds for doing so, such as the applicant’s illness or absence overseas.
In order for the tax tribunal to consider an appeal, the applicant must have met all the following conditions that apply, including submission of all the necessary documents and evidence to substantiate the merits of the appeal, submission of all the requisite tax returns and payment or interim settlement of the amounts indicated in these statements as payable and in the case of appeals on matters referred to in article 52, payment of the undisputed amount or provision of security for payment.
There is no right to appeal against settlements concluded under the VAT Law or the VAT Regulations, and the Tax Tribunal may summarily reject appeals which it considers to be unsubstantiated. The amending law inserts a new article 54A into the VAT Law requiring the Tax Tribunal to notify the commissioner of taxes that an appeal has been lodged, and to require the commissioner to provide the Tax Tribunal with his statement and any other information the tax tribunal requires within three months.
At the hearing of the appeal neither party may present any new arguments or evidence, unless the evidence only came to light at a late stage as a result of an inquiry by the tax department. Appeals should be concluded with the minimum possible delay, with a backstop date of one year from the submission of the appeal allowed for the Tax Tribunal to issue its decision. The tribunal may uphold or reverse the original decision entirely or in part, 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. Any administrative action required as a result of a decision by the Tax Tribunal must be undertaken within 60 days. Appeals against decisions of the tax tribunal may be submitted to the administrative court and appeals against decisions of the administrative court may be submitted to the Supreme Court.
The enactment of the two laws marks another significant milestone in rationalising and modernising tax administration in Cyprus. The change to electronic filing of tax returns will make the process much more efficient and convenient for taxpayers, and the amendments to the VAT Law align the procedures for resolution of VAT disputes with those for direct taxes, and place them in the hands of an independent body.
Philippos Aristotelous is a partner at Elias Neocleous & Co LLC. He can be contacted on +357 25 110110 or by email: email@example.com.
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