International Tax Planning and Transfer Pricing Planning: Cyprus from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
EXTRACTO GRATUITO

Professor Dr Rainer Zielke[1]

Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Cyprus in the OECD context
    • 2.3 Transfer pricing rules of Cyprus
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Definition of related companies
      • 2.3.6 Reporting requirements
      • 2.3.7 Documentation requirements
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Cyprus and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Cyprus-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Cyprus in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Cyprus to the US
      • 2.4.8 Case study 2: Interests from Cyprus to the US
      • 2.4.9 Case study 3: Royalties from Cyprus to the US
      • 2.4.10 Case study 4: Management and technical service fees from Cyprus to the US
      • 2.4.11 Case study 5: Capital gains with Cyprus as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Cyprus
      • 2.4.13 Case study 7: Interests from the US to Cyprus
      • 2.4.14 Case study 8: Royalties from the US to Cyprus
      • 2.4.15 Case study 9: Management and technical service fees from the US to Cyprus
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Cyprus as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Cyprus confirms in 2016 with a gross domestic product (GDP) of US$ 19,931 million the twenty-eight-highest GDP of the European Union. In Cyprus, the general rate of corporation tax is 12.50%. Foreign-source dividends are not taxable in Cyprus. Thus, Cyprus is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Cyprus has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the IMF, while congratulating Cyprus for its impressive policy achievements over the last three years, the IMF pointed to pending tasks: tackling non-performing loans, reducing public debt, and completing growth-enhancing reforms. Cyprus cancelled its program on March 7. What are the main achievements of the program from the IMF’s perspective? The IMF arrangement had two main goals: to put the banking sector on a sound footing and to return public finances to a sustainable path. Both of these objectives were met. Positive growth returned earlier than expected, already last year, despite the large fiscal consolidation. As a result, unemployment has begun to fall. Significant institutional and legal improvements were also introduced, which will help ensure that Cyprus can avoid similar economic hardship in the future. On the fiscal front, the Cypriot authorities carried out a strong fiscal adjustment under difficult economic circumstances. At the same time they also took care of the most vulnerable by adopting a well-targeted income support scheme. As a result, while overall public spending was reduced, the vulnerable received adequate assistance. This chapter provides a survey on the actual tax law frame conditions in Cyprus and provides practical support in international tax planning and transfer pricing planning between Cyprus and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Cyprus applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the profit split method (PSM), the transactional net margin method, and the transactional net margin method (TNMM). There is no hierarchy between the methods. Briefly, the following circumstances constitutes companies to be related: when a company, directly or indirectly, participates in the management, control or capital of another company, and when a company, directly or indirectly, participates in the management, control or capital of several other companies. Control is defined as holding of voting rights or shares in a company, or power by provisions in a shareholders' agreement. There are no specific reporting requirements and no documentation requirements. The customs authorities may make adjustments of the prices for imported goods if they are below the market price. The general policy of the tax authority is not to make advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Cyprus, where in the early 21st century the Cypriot economy has diversified and become prosperous, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [2] Cyprus confirms in 2016 with a gross domestic product (GDP) of US$ 19,931 million the twenty-eight-highest GDP of the European Union. In Cyprus, the general rate of corporation tax is 12.50%. Foreign-source dividends are not taxable in Cyprus. Thus, Cyprus is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Cyprus has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the IMF, [3] while congratulating Cyprus for its impressive policy achievements over the last three years, the IMF pointed to pending tasks: tackling non-performing loans, reducing public debt, and completing growth-enhancing reforms. Cyprus cancelled its program on March 7. What are the main achievements of the program from the IMF’s perspective? The IMF arrangement had two main goals: to put the banking sector on a sound footing and to return public finances to a sustainable path. Both of these objectives were met. Positive growth returned earlier than expected, already last year, despite the large fiscal consolidation. As a result, unemployment has begun to fall. Significant institutional and legal improvements were also introduced, which will help ensure that Cyprus can avoid similar economic hardship in the future. On the fiscal front, the Cypriot authorities carried out a strong fiscal adjustment under difficult economic circumstances. At the same time they also took care of the most vulnerable by adopting a well-targeted income support scheme. As a result, while overall public spending was reduced, the vulnerable received adequate assistance. In addition, new legislation modernized the budget process, strengthened accountability for public spending, and established medium-term fiscal planning. The authorities also made tax collection more efficient and equitable. Impressive progress was also achieved in the banking sector. Capital positions and liquidity have been restored. New foreclosure and insolvency rules encourage banks and borrowers to come together to find workable solutions for unpaid loans. The system for issuing and transferring real estate title deeds was changed to finally address the long-standing problem of assigning full ownership rights to buyers who have paid for their properties. Cyprus has gone from the acute care stage and is now well into the recovery phase. The program equipped it with the appropriate tools; which now need to be vigorously applied to reform the economy and build resilience. In the banking sector, the ratio of non-performing loans (NPLs) remains very high at 60 percent, equivalent to 150 percent of GDP. Public debt, at just over 100 percent of GDP, is also a vulnerability. Encouragingly, Finance Minister Harris Georgiades has committed to maintain prudent policies and to continue to implement reforms after the program period. It is also critical to further reduce the unemployment rate, which stands at over 15 percent. And the most effective way to create jobs is by implementing growth-enhancing structural reforms which keep the output growing.

According to Orbitax, [4] (Daily Tax News Digest of 13 January 2017),

on 1 January 2017, a new incentive for investment in innovative and start-up companies entered into force in Cyprus for independent private investors. The incentive provides that a qualifying investment may be deducted from taxable income, with a limit equal to the lower of 50% of taxable income in a year or EUR 150,000. Any surplus may be carried forward for up to five years. Qualifying investments may be made directly or through an investment fund. Qualifying conditions for an invested company include that the company is operating in Cyprus, has been approved by the Ministry of Finance as an SME, and has spent at least 10% of its operating capital in R&D in at least one of the past three years. For new companies, approval may be made based on business plans.

The pivotal question is therefore, how groups of affiliated companies with group companies in Cyprus and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the low tax country Cyprus is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Cyprus (see section 3), and constructive hereon 10 case studies in international tax planning between Cyprus and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in...

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