ECONOMIC INTEGRATION AND THE TRANSFORMATION OF THE TAX MIX: CYPRUS 1990-2001

1. ECONOMIC INTEGRATION AND THE TRANSFORMATION OF THE TAX MIX: CYPRUS 1990-2001 Glenn P. Jenkins Queen’s University, Canada and George G. Poufos Inland Revenue Department Republic of Cyprus

2. Proposals for Free Trade Area of the Americas (FTAA) have similar implications for the fiscal systems of the participating countries as now faced by countries preparing to gain entry into the European Union. • Involves reducing taxes on international trade and increasing some combination of sales taxes (usually VAT), excise taxes, and income taxes.

3. Paper examines the evolution of the tax system of Cyprus 1990-2001 after it began preparations to enter into the European Union. • Compares its fiscal strategy over time with the present one facing of Belize. • Common characteristics: Island economies, inherited the British system of public administration, similar mix of taxes, tourism services very important.

4. Cyprus 2001: Per capita income – US$ 13,500 Real growth rate 1995-01 – 4.2% Tourism makes up – 20% of GDP Imports – 41.1% of GDP Exports – 11.9 of GDP Domestic Savings – 14.0% of GDP Domestic Investment – 18.5% of GDP Rate of inflation – 2.0 % Unemployment rate – 3.0%

5. Cyprus Fiscal Issues in 1990: Public sector deficit – 5.3% of GDP Individual Income tax – 3.9% of GDP Corporation Income tax – 1.4% of GDP Import duties – 3.4% of GDP Selective excises – 0.0% of GDP VAT – 0.0% of GDP Other Direct Taxes – 8.1% of GDP

6. Cyprus 1991 began reform process with changes to income tax to reduce burden. • Introduced VAT in 1992 at a rate of 5%. • 1993 raised VAT rate to 8% • Income tax changes in 1996 • 2000 raised VAT rate to 10% • 2002 raised VAT rate to 13% • Major reform of Income Tax System • 2003 will raise VAT rate to 15%

7. Direct and Indirect Taxes as Share of GDP.

8. Direct Taxes as Share of Total Tax Revenues.

9. Composition of Indirect Taxes as Share of GDP.

10. Cyprus Fiscal Situation 2001: Public sector deficit – 2.8% of GDP Less distortionary tax system Individual income tax – 4.4% of GDP Corporate income tax – 3.9% of GDP Import duties – 1.3% of GDP Selective Excises – 3.0% of GDP Value Added Taxes – 5.9% of GDP Other indirect taxes – 2.1% of GDP

11. Revenue Buoyancies of Cyprus Taxes, 1990-2002. Total Taxes 1.32 Total Direct Taxes 1.41 Individual Income Tax 1.03 Corporation Income Tax 2.33 Other Direct Taxes 1.17 Total Indirect Taxes 1.25 Import Duties -.40 Selective Excises 1.13 Value Added Tax 2.53 Other Indirect Taxes -.60

12. The Challenge Facing Belize • Total Tax Revenues: - 19.8% of GDP • Taxes on Trade – 8.0% of GDP • Excise Taxes only on Domestic Production • Substantial Public Sector Budget Deficit

13. Framework for Reform in Belize • Phase I • Revenue Neutral Tax Changes • Reduce import duties on excisable commodities to 10 % • Replace revenue on excisable commodities with excise taxes • On non-excisable commodities, make minimum tariff rate of 5%, and place all other imports into 10%, 15% and 20% tariff rate categories

14. Framework for Reform in Belize • Phase II: • Reduce rates on non-excisable imports to 5%, 10%, and 15% • Phase III: • Eliminate tariffs on excisable imports and compensate by increasing rates of excise • Eliminate tariffs on non-excisable imports and increase sales tax rate to 12 percent.