Cyprus – Nicos Papakyriacou, Partner, Cyprus Oil & Gas Leader
Deloitte’s oil and gas leader for Cyprus offers his perspective on the country’s real chances of becoming an oil and gas hub, and the hurdles standing in the way of economic diversification.
After the Turkish invasion of Cyprus in 1974 which shattered the economy of Cyprus, and converted one third of the population into refugees overnight, the state has endeavored to develop the attractiveness of Cyprus as an international tax center.
Though Cyprus has been developing since 1977, the big push came when we entered the European Union. At that time, we changed our tax legislation to align it with the requirements of the European Union and managed to marry our newfound EU status with a tax incentive country status. This was an excellent combination in the eyes of potential investors who were attempting to invest in the Eastern European countries and following perestroika, Cyprus represented an ideal stepping-stone for investments in these countries due to its attractive tax treaty network. Furthermore, the high standard of professional services, the friendly business and legal infrastructure and the very attractive living conditions for expatriates, became a strong driver for the further development of the professional services sector in Cyprus. Although Cyprus still remains an attractive international business center with significant tax incentives it needs to respond and adapt to the developments in the international business and tax environment in order to maintain and enhance the future prospects of this important sector of the economy.
The Cypriot economy has recently been through a severe banking crisis, and remains disproportionately dependent on a triumvirate of sectors: shipping, tourism, and professional services. To what extent can the rapidly developing hydrocarbons industry play a role in guiding the country back to economic health and prosperity?
The hydrocarbons can, of course, play a very significant role in helping the country’s economy and in bringing prosperity to future generations, not only from the direct income from the sale hydrocarbons but also from the indirect impact of significant infrastructure projects and support facilities (such as LNG, FLNG and pipelines), the creation of thousands of jobs, as well as the multiplier effect on the economy in general. Although we have already started seeing some of the benefits of the oil and gas industry, with big operators and other support companies coming to Cyprus to explore the region, the real benefits will only come in the medium to long-term and will depend on the timing and quantity of the confirmed reserves discovered, as well as the future price expectations for hydrocarbons. In the meantime, we must not lose focus or put all our eggs in one basket; we cannot expect that the development of the oil and gas industry will solve all our problems in the near future. We must continue to develop all the sectors of the economy, while all the time planning for the early utilization of our energy reserves in order to develop and diversify the existing sources of revenue for Cyprus.
What contributions can the professional services sector ultimately make in professionalizing Cyprus’s oil and gas industry and ensuring that international standards of quality are upheld?
In addition to supporting the private sector of the Oil & Gas industry to achieve operational excellence through expert advisory services, the Oil & Gas professional advisors can also play a significant role in assisting and supporting the Government, as well as governmental organizations with a governance/regulatory role, to manage the challenges of this new industry. The local professionals, who are part of a global firm with the necessary industry expertise, can assist and advise in creating a transparent and clear legal and regulatory framework, and an efficient administrative infrastructure based on best international practices. The aim will be, on the one hand, to help the State to maximize the potential benefits from its Oil & Gas reserves and on the other hand, to create an attractive framework for private investors to operate efficiently and transparently. Last but not least, the local professional associations can act as ambassadors of the industry by promoting to the Government, recommendations and ideas that will improve the standards of the industry and also where necessary apply gentle pressure to the administrators to reduce bottlenecks and take things forward for the good of the industry and the country as a whole.
What potential does Cyprus actually have to become a regional hub?
Cyprus has a great potential to become a regional Oil & Gas hub because of its unique advantages over the other possible alternatives in the region. Specifically, Cyprus is the only country in the Eastern Mediterranean which is a member of the EU. It has a strategic geographical location, has a transparent and respected legal framework consistent with EU guidelines and directives, offering a very high standard of living and a politically stable and safe environment which is very inviting for expatriates and their families. Furthermore, Cyprus maintains very good relations and cooperates closely with all of its neighbors (except Turkey). Despite the existing advantages we need to take further steps in order to strengthen the proposition of Cyprus as a regional energy hub. For example, we need to upgrade our regulatory and legal framework relating to the industry by adopting best practices followed by more mature Oil & Gas markets. We need to strengthen the transparency, clarity and attractiveness of our fiscal policies (including corporate tax and VAT) and expand further our double tax treaty network in a way that will facilitate companies operating in the region including the Arab countries and Africa to locate their regional or administrative headquarters in Cyprus. Additionally, the government needs to speed up the process it has already started, to cut the red tape, remove bottlenecks and streamline the various licensing processes for foreign reputable investors through improved coordination between the various regulatory authorities. Provided we succeed to implement most of the above we can be confident that Cyprus has a great potential to become regional energy hub. Additionally, if we progress the solution of the Cyprus problem the position of Cyprus as a regional hub will be enhanced even further.
There are currently no specific tax laws relating to hydrocarbon exploration and production. Is this testament to a lack of legal and regulatory framework, or is it part of a deliberate policy to draw in outside investments to create those preferential conditions you were referring to earlier?
It is a fact that there are currently no specific tax and VAT laws on hydrocarbon exploration and production activities in Cyprus. The general income tax laws in force are applicable and therefore companies resident in Cyprus are subject to 12.5% Corporate Income Tax on their taxable profits. However, special provisions are included in the model PSC (Production Sharing Contract) which provide that the applicable corporate tax shall be deemed to be included in the Republic’s share of profit oil & gas and the portion of available oil & gas which the contractor is entitled to will be net of corporate tax. No changes in the existing legislation are expected, but clarifying circulars guiding the companies operating in this industry are expected to be issued at some stage.
Regarding VAT laws, given the absence of Oil & Gas industry specific VAT legislation in Cyprus, Cyprus has generally adopted the main rules of the EU VAT regulations and its VAT system is largely harmonized with that of the E.U. Deloitte has worked closely with the VAT authorities in formulating local VAT policies for the newly formed Oil & Gas Industry in Cyprus, following best EU practices, and has requested the issue of specific circulars and has obtained rulings on behalf of its clients.
To what extent do you envisage the discovery of hydrocarbons could become a catalyst for promoting a solution for the Cyprus problem?
The discovery of hydrocarbons has added a new significant dimension to the Cyprus problem. The circumstances now offer possibly the best opportunity for peace that we may have for a long time and we do hope and believe that logic will prevail and the hydrocarbon factor will provide a positive push towards resolving this long outstanding problem for the common benefit of the Cyprus people.
What are you, at Deloitte, doing to prepare yourself for providing further services to this nascent oil and gas industry in Cyprus?
In Cyprus, we were involved in the Oil & Gas industry from the very beginning. We are the only professional services firm with actual, on the ground experience in all facets of the Oil & Gas industry in Cyprus for the past six years. As a result of this unique experience and intensive internal training in the Oil & Gas industry schools we have built a very knowledgeable team of professionals, from all service lines, specializing in the Oil & Gas industry. It is not a coincidence that in recent years we have been providing the major industry players, including all the operators on the island, with a wide spectrum of professional compliance and advisory services in the areas of Tax (corporate & personal), VAT, Human Capital, Consulting, Payroll and other back-office support functions.
Our Global Oil & Gas practice which comprises of 3000 specialists across all sectors of the industry is focused in anticipating and validating changes and developing new strategies for tomorrow’s complex issues. Through our ongoing research in our “Centers of Excellence” throughout the world, we enable our people to deliver to our clients, new solutions and proven services, offering value that goes beyond the seamless delivery of high quantity services. At the same time we continually invest in the expansion of our scope of specialized services which spans the entire spectrum of corporate functions, analytical price forecasting, economic modeling, geological analysis and reservoir audits, wellhead planning and operations and deep sea platform and equipment decommissioning, to name a few. Combining our global network expertise with our pragmatic local execution capabilities and with our client’s specific needs in mind we deliver professional services, perspectives and solutions that best suit their business goals and ambitions.
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