The Finance Ministry has accepted changes to tax reform bills but insists they must be limited to avoid derailing public finances, with the tax-free income bracket likely to rise only modestly from the proposed €20,500.
The ministry costed opposition party proposals to determine the fiscal impact and is expected to submit revised bills to Parliament today with accepted changes on personal income tax, sources told Phileleftheros.
The scenario gaining ground is for the tax-free allowance to increase to between €21,000 and €21,500, rather than the €20,500 proposed in the bills.
The government wants to minimise the loss of state revenues, with every €1,000 increase in the tax-free allowance costing the state €30 million. A €500 increase would cost €15 million, whilst a €1,000 increase would cost €30 million.
The income ceiling for taxpayers to qualify for additional tax deductions for children, students and interest on serviced loans is estimated to be set at around €90,000 to €100,000 in combined annual income for spouses or partners, sources said.
If the ceiling reaches €100,000, there will be an increase for large families, with their annual income calculated at between €110,000 and €120,000, according to sources.
The bill requires single persons to have incomes of €40,000 to qualify for deductions, though an increase in the total amount is not ruled out.
Tax deductions are being considered for an increase from the €1,000 for children and students provided in the bills to €1,500, provided the number of children in the family exceeds three, sources said.
There may also be differentiation in the amounts of deductions for interest on serviced housing loans and for green investments in primary residences.
The bills provide a €1,500 deduction for interest on loans for purchasing a primary residence or covering rental of a primary residence and a €1,000 deduction for energy upgrades to primary residences or purchasing new electric vehicles.
The ministry worked on paper exercises until late yesterday afternoon, with the final decision on tax deductions to be locked in today, sources said.
Yesterday, Finance Minister Makis Keravnos told the Parliament Finance Committee he is open to changes, but they must not dismantle the basic pillars of the tax reform regarding fairer distribution of the tax burden and economic resilience.
Keravnos said the tax reform is not a social policy proposal, as that is handled through the Deputy Ministry of Social Welfare.
He explained the changes being examined include the tax-free allowance, tax deductions and support for taxpayers below the tax-free income threshold.
He pointed out that the neutrality of the tax reform relates to economic resilience, noting that risks should not be created today that might have future impacts.
Keravnos made clear that parties must not touch the corporate tax rate, which increases from 12.5% to 15% in the government’s proposal, saying it determines the balance of the tax reform.
He explained that if the corporate tax rate differs from what the government proposes, other points of the reform would need to change.
The minister noted the ministry weighed all factors proposed in the study by the Economics Research Centre of the University of Cyprus, pointing out that the special defence contribution will decrease from 17% to 5%.
Keravnos cited offshore companies as an example, which were taxed at 4.25% until 2002. When taxation was set to increase to 10%, there were fears companies would leave, but this did not happen, he said.
Regarding AKEL’s bill to impose a tax on properties worth over €3 million—a proposal made by the Economics Research Centre but not adopted by the government—the minister said this would be examined after the tax reform.
According to Keravnos, the issue will be studied comprehensively on how such a tax could be imposed by Local Authorities. He also said the proposal for a progressive levy on companies would be examined later.
On the taxation of Provident Funds’ investment activities, the minister noted that the State Aid Commissioner’s opinion considers their non-taxation to constitute state aid. “The EU will ask us for explanations,” he added.