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 The
consumer price index for December shows that Cyprus managed to scrape a slight
fall in the inflation rate in 2006, to 2.5% from 2.6% in 2005.
The Statistical Service reported that petrol prices, which increased by 8.1%,
had a significant impact on the inflation for 2006, while increases were also
recorded in the categories of food items (4.8%), housing and electricity (4.9%)
and education (4.7%). Decreases were recorded in the price indices of
communication, clothing and footwear.
A fall of petrol prices in the last four months of 2006, together with the
reduction of car prices since November 2006, had a favourable effect on keeping
inflation at 2.5% in 2006. In December alone, the Consumer Price Index for
December 2006 decreased by 0.06 units or 0.06% to 104.00 units compared to
104.06 in November 2006. The Statistical Service reported that this is mainly
owing to decreases in the prices of potatoes and electricity. Increases were
recorded in the prices of certain fresh vegetables.
The year-end inflation rate - the index in December 2006 compared to December
2005 - was 1.6%.
 It is a fact that UK companies can deduct interest payments against their
corporate tax bill. Some argue it hands an unfair advantage to foreign acquisitors to load UK subsidiaries with debt and offset profits.
For example, Nestle’s UK subsidiary, which has in recent years turned
over around £2bn and made hardly any taxable profit, certainly suggests
the UK may be missing out on something. But more importantly, the challenge of
the European Court of Justice has encouraged policymakers to discuss dropping
the advantage. If multi-nationals are to get huge rebates from the ECJ, they are
going to be denied interest relief to make up the shortfall, the argument goes.
Though critics say that the move would alienate multi-nationals, it might not be
such a bad idea to question whether the dogmatic defenses of ‘inward investment’
is healthy.
What about tax advantages for UK businesses and UK entrepreneurs? Why don’t they
ever get a look-in in those debates? Any move to limit the relief makes the
business models of a host of foreign purchasers, like BAA, as well as the huge
private equity industry, look much tougher.With the huge indebtedness of corporates beginning to pinch, the moves would
exacerbate corporate insolvency issues.
Offshore bank accounts, tax credits and general avoidance will dominate much of
HM Revenue & Customs’ agenda this year. But interest relief changes would
provoke a whole different order of tax row.
 As
obliged by the European Commission, Luxembourg has abolished the 1929 Holding
Companies Law as of 1/1/2007. The 1929 regime exempted other qualifying
companies from corporate income tax, withholding tax on its dividend payments
and certain other Luxembourg taxes. Existing public companies will enjoy the
said benefits for an additional 4 years as proposed by the EU Commission.
 Marfin
Popular Bank (MPB), backed by the Dubai Investment Fund (18% shareholding), one
of the largest funds in the world has announced that it is interested in
acquiring Bank of Piraeus of Greece and Bank of Cyprus. An offer has already
been made that is based the exchange of shares of the 2 banks with those of MPB
at a rate derived from the exchange share price. Mr. Vgenopoulos, CEO of Marfin
Popular Bank, announced that the merger of the 3 banks which are of about equal
size is expected to make the largest financial group in the South Eastern
Europe. In a sudden response, Piraeus Bank has made an offer to purchase Marfin
Popular Bank at a much lower price than negotiated at the Exchanges of Greece
and Cyprus in an effort to show to investors that its price is traded at a huge
premium due to its recent acquisitions. Bank of Cyprus has also rejected the bid
for its acquisition.
According to news sources, Dubai Investment Fund (London based), has decided to
take action to support its current investment and plans in MPB. One of the
options under investigation is the cash acquisition of Bank of Piraeus which
would amount to about 7billion Euros. This will also give Dubai Investment Fund
access to the Bank of Cyprus by obtaining the 8.2% share package currently held
by Piraeus Bank. Mr Vgenopoulos said to international correspondents that he
does not possess such information regarding the intentions of the Dubai
Investment Fund. However, in an announcement to the staff of MPB, Mr.
Vgenopoulos said that "the group and its major shareholders are committed to
creating the largest South East European bank" and "the strength of our
investment partners does not leave any room for worries but guarantees the
implementation of our vision".
While Bank of Piraeus awaits for the approval of its Offering Memorandum by the
Cyprus Stock Exchange, Mr. Salas, is expected to visit Cyprus on Tuesday to have
a round of discussions with the Commissioner of the Central Bank of Cyprus and
other officials including the Bank of Cyprus executives. During the same period
Mr. Vgenopoulos is expected to be in Cyprus as well.
Keefe, Bayette and Woods (KBW), financial services company announced that the
offer of Bank of Piraeus to MPB s unrealistic. It supports that the offer was
made as a tactical move and will not create any value for its shareholders. In
order to value MPB on the mean P/E ratio that deals have been made in Europe,
KBW says that MPB has to announce results 60% lower compared to those expected
by the executive committee.
 Cyprus
GDP growth maintain forecast at 3.6% and 3.8% for 2007 and 2008 respectively. In
2007-08, tourism is likely to recover slowly, and real GDP growth in Cyprus will
continue to become largely by domestic demand. The construction sector will be
boosted by different projects (upgrade of airports and highways) and demand for
holiday homes. The construction of new marinas and golf courses could also begin
in 2008. Furthermore, financial services should get an extra boost as the
adoption of the Euro leads to a further fall of commercial lending rates and
expands opportunities for outward investment.
Regarding inflation Cyprus will not miss its inflation target for adopting the
Euro, as inflation is beginning to ease. It also expects that the easing of
international oil prices will lead to a fall of inflation rates in 2007-08.
Inflation expected (EU Harmonized CPI measure) at 2.0% for both 2007 and
2008. Interest rates, the Central Bank of Cyprus will probably keep rates
on hold, allowing the spread with the EU rates to fall to 75bps, given that ECB
is expected to raise its rates by another 25bps in March 2007. This means
that Cyprus rates will converge rapidly towards ECB rates after mid-2007 and as
previous experience suggests this will happen in the last two months before the
adoption of the Euro.
The Cyprus currency has consistently traded closed to, but stronger than the
central parity rate and it expects that this is the rate which is going to be
used when the irrevocable fixing of exchange rates takes place. This will imply
a mild depreciation from the current rate. In 2007-2008 the Euro is expected to
strengthen against the sterling but weaken against the dollar in 2007, after
appreciating strongly in 2007. Government targets with regard to the
budget are broadly realistic and while the budget deficit is expected to
increase in 2007, since it is a pre-election year, it expects the deficit to
remain below 2.0% of GDP in 2007-08. The 2006 public debt/GDP ratio to exceed
the 60% of GDP threshold, a large primary surplus will allow the ratio to fall
compared with 2005 and therefore probably meet the requirement that it is
falling rapidly enough towards that threshold. It also says that although the
sharp increase in euro-denominated borrowing is indicating higher external debt
forecast, Cyprus will continue to find easy access to finance. A current account
deficit of 5.6% of GDP in 2007, falling to 5.5% of GDP in 2008.
 Cypriot
Minister of Foreign Affairs George Lillikas signed on Wednesday 17/1/2007 in
Beirut an agreement for the Delimitation of the Exclusive Economic Zone between
the Republic of Cyprus and Lebanon. During his visit to Beirut the Cypriot
minister held talks with Lebanese officials on issues of mutual interest.
Thierry Breton, France's finance minister, has admitted that most French
taxpayers will be worse off for the first year of a new tax system. Under
the new system, the French would switch from being taxed on previous year's
earnings to a new system based on current earnings from the start of 2009.
French finance minister had said this would amount to a tax holiday in 2008, but admitted
yesterday that because wages increase by 3% to 4%, taxpayers would pay more in
2009 than under the existing system. There would be a small surplus compared to
what would have been collected under the traditional system. This excess would be used to help small companies adapt to the new
system.
However French president Jacques Chirac has proposed to cut down France's
corporation tax rate from 33% to 20% in an effort to spur the country's flagging
economy. If Chirac pushes ahead with the plan, there will be major implications for
the neighbor country of United Kingdom, which could be perceived as Europe's
business tax laggard.
 Cyprus
constitutes a good alternative solution for the transfer of headquarters of
Greek enterprises with
multinational activity.
As we do not see the developments with the eyes fixed on
yesterday, when the Greek enterprises had as basic and exclusive source of
income from the Greek market. In the
years to come, the situation is expected to change dramatically because the
majority of the income will be derived from markets other than the Greek.
Why would an enterprise maintain its headquarters in Greece? High taxation and
bureaucracy are expected to be the two major reasons driving multinationals to
rethink their presence in Greece.
In
this direction, Cyprus has a lot of comparative advantages. This development will have negative
consequences for the Greece's tax income, because it will mean
reduction of income. However, it will function favorably on the return of
shareholders of enterprises.
 The
European Commission is expected to undertake 3 new initiatives for the
harmonization of the direct taxation systems of the 27 members. However, many
Tax Consultants coming especially from the low tax members such as Cyprus and
Ireland see this move as any other past move that aims for the alleviation of
the tax advantages offered by these countries. Many companies of the larger EU
economies move their HQs in lower tax jurisdictions causing loss of direct tax
and jobs. France and Germany have been trying for many years to harmonize
taxation without any success though.
Step 1: Initiation of the process. Laszlo Kovacs, EU Tax Commissioner
said that the first step would be member states to accept the process of
harmonization and join for discussions. Member states would be expected to
review current national laws and make sure that they do not conflict with EU
laws. Mr. Kovacs carries on arguing that SMEs currently face high barriers
operating within the EU and this could be alleviated through better coordination
of taxation of member states.
Step 2: Set-off losses among group. The EU Commission will also study the
consolidation of profits in view of the recent Cadbury Schweppes vs UK Tax
Office case. The case found in favour of Cadbury Schweppes establishing illegal
the current tax rules in UK (see Decembers article). Mr. Kovacs said that today
almost all companies can set off losses within a group operating in the same EU
member state. This is not true to large extent if they operate in different EU
member states. According to Mr. Kovacs, SMEs are expected to benefit most by
applying this ECJ ruling.
Step 3: Exit taxation. Many member states apply exit taxation to any
individual transferring his permanent residence or part of his assets in another
country or another member of EU. Usually, in these cases, the tax imposed is the
Capital Gains tax on the estimated profit as if the property was sold on the day
of transfer, profit being the current market price minus acquisition costs. This
matter has been once again at the ECJ which always rules against such taxation.
Mr. Kovacs ha called on the member states to coordinate their efforts to stop
national taxation procedures that are against the EU laws. It should be noted
that many EU citizens transfer their permanent residence in lower tax
jurisdictions which causes loss of tax income of EU high tax states. For
example, Scandinavian ship owners have transferred their residence in Cyprus.
 The
enormous
liquidity of Greek ship-owners led the 2006 to historical record of all seasons
regarding
investments to the shipping industry.
According to the first elements of big
agencies in Greece until the end of year have been definitive agreements of 17billion dollars on the manufacture of 330
ships, in their overwhelming
majority tanker.
If in the 17 billion dollars, the capital is added that has been invested
by a lot of companies for the purchase of second hand ships, then the total of
Greek investments in the shipping for 2006 is shaped in the 25,7 billions
dollars. Until November naval contracts of 15,7 billions of
dollars had been confirmed on the manufacture of 297 ships of total capacity of 25,7 millions of
tons.
The forecasts of ship-owners for the future developments in shipping industry led
them in investing in tankers. From the 297 ships that were ordered until the
November, 219 of them were tankers of total capacity of 21 millions tons. In
distance, bulk carrier follow, ships of transport of dry cargo, with
the total capacity of new orders calculated at 4,7 millions tons. Also
ship construction contracts were signed by the beginning of year for 12 LPG of capacity of
328.000 cubic meters and for 15 ships of transport of containers totaling 84.700 teu. The
above
elements prove that the Greek ship-owners were also exceptionally active
in December in the signing of ship construction contracts.
The record of the year 2003 with regard to the shipbuilding of ships (203) has approached the
year of 2006. The historical record in 2006 with investments of 17 billions of
dollars in new ships are attributed by the brokers at first in the impressive
liquidity of the Greek ship-owners and in the forecasts that the shipping industry maintain very good levels for the next
years.
The huge liquidity led many London companies as well as many relatively new
groups to the shipping market, back to the ship yards of the Coast Miaouli.
 Investors
have entered this year in a buoyant mood. After global equities returned 18% in
2006 many stock markets have started 2007 either at record highs or close to
them.
Two factors have accelerated investors optimism. The first one is the vague
notion of liquidity. Investors have felt sufficiently flush with cash to buy
high-risk assets, such as bonds or commodity futures. Credit has been plentiful
for those who need to borrow. The second factor is corporate profits which have
risen faster and for longer than anyone expected a few years ago. Companies have
used their cash to buy back shares, supporting stock market and the high level
of profitability has reduced defaults, helping bonds. The trends are clearest in
the private-equity industry which has over $300 billion of cash ready to spend.
Liquidity explains why this business has so much cash and companies fat profits
explain why private-equity houses are so keen to buy them.
So are we having another bubble as the one popped in 2000? Not yet. The
share prices have been pushed higher by rising profits rather than higher rates
as result many analysts think shares are still undervalued. Nor has the market
accompanied by any mania among retail investors. therefore it is not difficult
someone to imagine that financial markets will stay buoyant for a while.
Investors will be very reluctant to sell shares if they believe takeovers are
imminent. American economy may be hit by a collapse in the housing market.
When investors are most complacent is also the moment of greater danger. In a
survey conducted in December showed that investors were expecting slightly
slower growth in GDP and the profits this year but were not worried about either
recession or inflation. In the meantime strategists found out that not a single
pundit was predicting that American shares would fall this year.
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