Foreign inflows boost tax revenue

Author: | Published: 1 Dec 2005
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Many articles have presented the importance and contribution of Cyprus to the international business sector. By contrast this article highlights the importance of the international business sector to Cyprus. The international business sector has become a vital contributor to Cyprus's economy over the past few years and its importance has recently increased further, for the following reasons.

First, capital inflows and deposits from foreign companies helped boost revenues recorded by the Cyprus Inland Revenue Department by 8.9% year-on-year in January-September 2005, with revenues reaching CYP450.2 million ($916.5 million) compared with CYP413.3 million in the same period of 2004. This increase in revenue is reportedly largely the result of foreign company activity, which has boosted both the corporate tax take and the defence tax, which is levied on corporate dividends and on interest paid on deposits.

Second, the relative importance of tourism in Cyprus's external finance (CXR) has declined. Tourist numbers recovered slightly in 2004 following the 2002-2003 trough caused by the general slowdown in the global tourism industry and preliminary indications point to further recovery in 2006. Even so, tourism now accounts for just over 26% of all CXR, representing a significant rebalancing of the economy from previous levels (35% of all CXR in 1995 and over 40% in the early 1990s). On the other hand, business services are a further important source of foreign exchange (19% of CXR).

Thirdly, the widening of the visible trade deficit (to 26% of GDP from 24% in 2003) added to the current account deficit in 2004. Demand was fuelled by reductions in import duties (particularly for cars). At the same time a rise in oil prices outstripped visible export earnings by 4.5 percentage points. By contrast, invisible (service) exports showed robust growth, despite the lacklustre performance of tourism. Business services were the main driver of service receipts, growing by over 30% in dollar terms and contributing to overall service income growth of 17.6% for the year.

The final factor was an increase in net Cypriot investment abroad. Since 2001 equity foreign direct investment (FDI) inflows have not been enough to cover the current account deficit. However, in 2004, for the first time in a decade, total net FDI inflows (including debt flows) were lower than the current account deficit, reflecting an upturn in Cypriot investment abroad. One component of the increased capital outflow was net lending abroad by the banking sector, which reached $4.8 billion, largely reflecting the growing activities of Cypriot banks abroad. There was also a big increase in Cypriot equity investment in Greece, the new EU candidate countries, Russia and Ukraine.

The figures suggest that the international business sector is set to continue, and probably increase, as a source of revenue to the economy, highlighting the continuing importance of promoting Cyprus as an international business centre and providing a business-friendly environment.

Alexandros Sinkas