Cyprus to accept corporate tax hike in bailout

Cyprus will accept raising its low 10 percent corporate tax rate as part of an international bailout deal, a senior official said Tuesday.

Christopher Pissarides, a Nobel laureate and advisor to the president, said the government would accept the move but only if further increases are ruled out for a long time so that companies aren’t discouraged from setting up business.

“t’s not important whether the tax goes to 12.5 percent, or 11.5 percent or 11 percent,” Pissarides told state broadcaster CyBC. “What’s important is that wherever it goes, we can say absolutely convincingly that it won’t change, it’ll stay there for many years.”

Pissarides also said that Cypriot authorities are “almost certain” that the prospective bailout creditors — fellow eurozone countries and the International Monetary Fund — will not ask that Cypriot bank bondholders or depositors share the cost of a bailout. He said they recognize that such a move, which European officials have in the past ruled out, would destabilize financial markets in Cyprus and across the other 16 EU countries that use the euro.

Cyprus’ economy is tiny, contributing only 0.2 percent to the eurozones total economic output, but it needs a hefty 17 billion euros to save its banks and keep its economy afloat. The sum is equal to the country’s entire gross domestic product, raising doubts it would be able to pay it back.

The bailout would be so large because Cyprus’ top two banks need a lot of money to plug losses on Greek debt they held during the financial crisis there.

Pissarides, a co-winner of the 2010 Nobel Prize in economics who now heads a presidential advisory body on economic issues, said it would be “ideal” to have those two banks’ units in Greece be designated as Greek, allowing them to draw some 2-3 euros billion directly from that country’s own bailout funds.

But Pissarides said hes unsure whether this arrangement would be accepted.

He also said Cypriot authorities strongly oppose a tax on financial market transactions as part of a bailout accord because it would “cause us a lot of harm.”

Eleven EU countries, including France and Germany, want to adopt the tax, but others are reluctant, with non-euro member Britain vehemently opposed. Pissarides said Cyprus would only accept such a tax if it became obligatory for all eurozone countries.

[AP]