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1 N o 118MARCH2015 AccountancyCyprus Times call for coordinated collective responsibility The Journal of the Institute of Certified Public Accountants of Cyprus ΠΕΡΙΟΔΙΚΟ ΤΑΧΥΔΡΟΜΙΚΟ ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ. 239 ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ ΑΔΕΙΑ ΑΡ. 133

2 Deloitte Library Your source of information March 2015 No. 118 ISSN Editor Ninos Hadjirousos, FCA Deputy Editor T. Anastasiades, B.Sc., M.A. (Econ.) Editorial & Institute Offices 11 Byron Avenue, CY-1096 Nicosia P.O.Box Nicosia Cyprus Tel , Telefax URL: Contents Accountancy Cyprus is published quarterly by the Institute of Certified Public Accountants of Cyprus and is sent free to all members of the Institute as well as to a large number of other persons, companies and organizations. The Institute can accept no responsibility for the accuracy of contributed statements or articles appearing in this publication and any views or opinions expressed are not necessarily endorsed by the Institute, its Council or by the Editors. The Deloitte Library is an electronic platform that provides easy and efficient access to all of our firm s publications. The library provides users with: access to all our firm s updated publications focusing on key business and investment issues which are categorised by service and industry line the ability to download the publications both in pdf and ebook files firm s insights in different languages including English, Russian, Chinese and Greek Institute News P.4 Council s Activities P.6 Commitee s Activities P.11 New Members GM s corner P.12 Think n ahead Professional Briefing P.14 STUDENT SUCCESS CELEBRATED AT ANNUAL ICAEW GRADUATION EVENT Interview P.18 Mr. Karl Isaksson, Chairman, European Public Affairs Consultancies Association subscription and request for proposal features; it is compatible with mobile devices and operating systems general information about Deloitte Cyprus To access the Deloitte library visit SAVE THE DATE July 1, 2015 icpac annual general meeting ACCOUNTANCY CYPRUS VOLUME 118 MARCH

3 Contents YOUR BUSINESS IS THIS PRECIOUS TO US CHOOSE THE BEST INTERNATIONAL BUSINESS SOLUTIONS PARTNER IN CYPRUS Economy P.20 Cyprus Economy: Time to be Responsible P.21 The new economic governance for Europe is tough P.22 An auditor s view on the 315 billion euro Junker Plan* P.26 The Role of the Secretariat of the Council of Ministers of the Republic of Cyprus from 1960 until today Duties and Responsibilities P.30 Unlocking Funding for Europe s Growth European Commission consults on Capital Markets Union P.31 Mapping the Cost of Non-Europe Equal Pay for Equal Work P.32 The New Role of the State: Smaller and Stronger P.34 The Deficiencies and Weaknesses of the EU and the EMS P.36 Can there be contagion with the Greek crisis? P.37 Reforming the Civil Service P.38 Crime and Punishment in Cyprus P.39 Balancing between fiscal discipline and growth policies P.40 Cyprus must stick to the plan P.41 Public debt and fiscal and monetary policies P.43 The war of deflation P.44 Bailout plan: Trying to reason with the unreasonable P.46 Transfer pricing in light of the EU State aid rules P.47 Cypriot football club s finances: We are in the right direction, but still considerable work has to be done, since finances are precarious P.48 Cyprus banking sector: looking beyond the stress tests P.50 Corporate Governance and Equity Prices P.52 The Private Sector and the Football Pitches P.54 The Greek lesson... for Greeks and others P.55 Macroeconomy and Cypriot GDP P.56 Medical Tourism and Wellness Treatment in Cyprus P.58 Positive assessment of Cyprus Investors Summit 2015 P.60 The World in 2050: Will the shift in global economic power continue? 2 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 Business P.62 Liberalisation and privatisation of the electricity sector in EU P.64 Cyprus Shipping Industry: Can Do Better in 2015 P.66 Why executive coaching is your competitive edge P.68 The consequences of engaging in surface acting during customer aggressive P.70 Company bonus schemes A blessing or a curse P.71 Funding Opportunities for new and existing businesses P.72 Supporting entrepreneurship: explaining the new funding Schemes for the enhancement of Youth and Female entrepreneurship P KPMG Compensation and Benefits Survey Auditing & Accounting P.76 Enhancing the auditor s report P.78 Audit profession, what is the way forward? P.80 Audit efficiency: making ISAs fit for purpose by focussing on r elevance P.82 Moving to expected loss will mean huge demand for data The Institute Council President: Vice President: Secretary: *Ioannis Charilaou, FCCA, FAIA, MBA Nicos Chimarides, ACA, BSc *Demetris Halios, BSc(Acc), CPA, ΜΒΑ Members: Panicos Charalambous, FCCA Christis Christoforou, BA(Econ.), FCA, MBIM Christos Vasiliou, FCA, BA(Econ.), CF Pieris Markou, BA, FCA, CTA Stavros Pantzaris, B.Eng., FCA *Denotes member not in practice Taxation P.84 Cyprus and the new sense of offshore P.86 Operation Transparency: Preparing For The New Era Fraud P.88 Business Integrity Forum as strategic CSR P.90 Whistleblower Protection The Cyprus Case Real Estate P.92 Real Estate Prospects Year 2015 IT P.94 THE EXCEL WIZARD P.96 Key Technologies Trends CIO s must consider for 2015 Maria Pastellopoulou, FCCA Philippos Raptopoulos, FCCA *Marios Skandalis, FCCA, CFC, CFE *Demetris Taxitaris, ACA Elias (Liakos) Theodorou, FCA Demetris Vakis, FCA, BSc, CF tel ,

4 Institute News Council s Activities During the first quarter of 2015, the Council of the Institute convened three times and considered various matters that were of significant interest to ICPAC and to the profession in general. The main activities of the Institute included the following: Meetings with Officials The President, Council Members and the General Manager during the first quarter of 2015 held the following meetings with Government, political, business and other officials: On 15/1/2015 and 18/2/2015 the President, the Vice President and the General Manager met with the Public Oversight Board to discuss the issues that relate to the monitoring of the profession and mutual cooperation. The General Manager participated as a presenter in the EuropeFides conference, organised in Nicosia 23/1/2015. On 28/1/2015, 30/1/2015 and 2/2/2015 the Institute met with Troika. Apart from discussions on the economy of the country and specific topics, Troika carried out its quarterly assessment on the implementation of the AML Action Plan, which constitutes part of the Memorandum of Understanding. The Vice President of the Institute attended and addressed the graduation ceremony of the Institute of Chartered Accountants in England and Wales, which was carried out in Nicosia on 28/1/2015. On 28/1/2015 the President, Vice President and the General Manger held a meeting with the council of the Nicosia Chamber of Commerce and Industry. A delegation of the Institute led by the Vice President met with the new President of ICAEW Mr Arthur Bailey on 29/1/2015 and discussed matters that could enhance the bilateral cooperation. On 6/2/2015, the Chief Executive Officer of RSM International Ms Jean Stephens visited ICPAC and had a meeting with the General Manager. The Institute addressed a letter to the Minister of Energy, Commerce, Industry and Tourism on 9/2/2015, presenting its proposals for the attraction of foreign direct investments to Cyprus and actions that need to be taken to boost this task. The General Manager, accompanied by the Chairman and Vice chairman of the Public Sector Committee of the Institute, held a very useful meeting with the Undersecretary to the President of the Republic on 13/2/2015, where a number of issues concerning the reform of the public service were discussed. The General Manager attended the meeting of the Consultative Authority for anti-money laundering at MOKAS on 19/2/2015. On 25/2/2015, the General Manager with the representatives of the Auditing Standards Commitee met with the Commissioner of Insurances, and discussed matters of mutual interest. On 26/2/2015, the General Manager participated in a presentation organised by the Technological University of Cyprus and the Transparency International Cyprus, which covered the topic of Lobbying. On 13/3/2015, the General Manager and the Chairman and Vice chairman of the Public Sector Committee of the Institute met with the Chairman of the Fiscal Council, to explore any opportunities for cooperation. On 25/3/2015, Ms Lina Lemessiou, Senior Officer of the Institute, represented the Institute at the Members Assembly meeting at the European Federation of Accountants (FEE) in Brussels. On 25/3/2015, the Global Forum of Transparency and Exchange of Information of Tax Matters during its assessment of the country of the second phase of the peer review group, met with representatives of the Institute led by the Vice President and the General Manager. During the meeting, the Global Forum s delegation had the opportunity to assess ICPAC s procedures with respect to compliance and anti-money laundering measures. On 26/3/2015 the General Manager participated in a meeting of the Special Technical Committee on Anti-Money Laundering at the Central Bank of Cyprus. Council s Decisions In order to be able to better manage the ongoing and increasing responsibilities of the Institute, as well as administration of the new systems introduced, the Council decided the employment of Mr Andreas Lordos as the IT Officer of the Institute. The Council of the Institute decided to extend the spectrum of the services provided to its members, to cover issues regarding compliance, anti-money laundering, risk management and e-learning. This has been considered as necessary, since the current trend and major focus internationally is on the above subjects. To this end, the Council accepted the quotation from Vinci Works Ltd, a UK based company, which will provide via an electronic platform various tools to all the members of the Institute, including, webinars, a help desk for queries, e-learning facilities and counselling as to how to build up a proper compliance function and documents within each firm. This service will be made available to all members free of any charge, and where specific services should entail a cost element, that will be kept to the minimum. Other important meetings and activities The General Manager participated as a judge in the business game organised by the University of Cyprus and the ICAEW on 18/3/2015. Mr Christos Kyriakides attended meetings with other stakeholders for the treatment of the sanctions imposed by European Union on Russia due to the events in Ukraine. Ms Lina Lemessiou, Senior Officer of the Institute, participated in a number of workshops and meeting in Brussels regarding the Accounting Directive and Audit Policy Reform in the respective committees of FEE. During the quarter, Council members and the General Manager met with officials of the Ministry of Energy, Commerce, Industry and Tourism, the Ministry of Finance, the Public Oversight Board and other government bodies. The General Manager attended a number of meetings with the other competent authorities for regulating the administrative service providers and for anti-money laundering activities, to go over current matters of concern. During the quarter, ICPAC representatives appeared before Parliamentary Committees regarding a number of Laws and Bills, and met with government officials to convey the Institute opinion on various pieces of legislation. Extensive participation was needed in the discussion for the Insolvency Framework by the relevant committee of the Institute. The General Manager also attended a meeting of the parliamentary Committee of Commerce, for the discussion of the state of play for the attraction of foreign investors to Cyprus. New monitoring tool by the Institute The Council of the Institute, in its capacity as a competent authority for the providers of administrative services and for the anti-money laundering activities of its members, has introduced a new monitoring tool which focuses on Rules and Regulations / AML procedures. This new monitoring tool was developed as a result of the action plan with Troika and encompasses two stages: the off-site surveillance of the firms designed on a risked based approach, and the on-site surveillance, during which firms will be visited in order to assess their adherence to the relevant Rules, Regulations, Directives and Laws. The Rules and Regulations / AML monitoring programme will be applied on all firms licenced by ICPAC, irrespective of the type of the practising certificate held. ICPAC has outsourced the task of performing the on-site surveillance to the Association of Chartered certified Accountants (ACCA), to be run in parallel with the audit monitoring visits. 5th Nicosia Economic Congress The Institute, in cooperation with Gold magazine and IMH, organise for a fifth consecutive year the Nicosia Economic Congress, which will be held on 21 May 2015 at Hilton Park Hotel, Nicosia. This year s theme is the state and prospects of the Cyprus economy. A distinct panel of speakers from Cyprus and abroad will provide a thorough evaluation of the current situation and their opinion of the future prospects of the economy. As a result of the adoption of the above monitoring programme, the Council of the Institute has decided the termination of the Quality Checked (QC) monitoring programme. Hence, no more visits nor certificates will be issued regarding QC. Firms currently holding a Quality Checked certificate will be allowed to use the logos and the certificate for a period until 31/12/2018, where all certificates will be revoked and firms will be asked to remove the logos and any other reference from their headed paper, documents of websites. ICPAC launches a new committee: Chief Financial Officers committee The Council of the Institute decided during its meeting in January 2015 to appoint the members of the newly created committee of the Institute, namely the Chief Financial Officers committee (CFO). This new committee is targeted to consider issues relevant to the professionals of the industry business sectors, as well as of the economy in general. The composition of the committee is the following: Sofocles Tymvios - Chairman Savvas Garivaldinos Christos Tavellis Stavros Kattamis Melina Spyrou Nikias Paraskeva Marios Anastasiou Iacovos Stavrou Antonis Ioannou Christos Paraskevaides Stefanos Papadopoulos Paris Alexandrou George Koutsos Marios Christoforou Dinner with the Minister of Energy, Commerce, Industry and Tourism The Limassol-Paphos Coordinating Committee organised with particular success a dinner with speaker Mr George Lakkotrypis, Minister of Energy, Commerce, Industry and Tourism, on 26/2/2015 evening at Atlantica Miramare Hotel. The Minister provided the 200 participants with enlightening information on the energy prospects in Cyprus and the Eastern Mediterranean, which was the theme of his presentation. De-offshorisation law and BEPS update The Tax Committee in cooperation with the Education Committee of the Institute organised with great success the delivery of two seminars on 11 and 13/2/2015, in Limassol and Nicosia, respectively. During the presentations, the participants had the opportunity to obtain current information about the de-offshorisation law directly from Moscow, whilst they were informed of the changes that will be brought about by the Base Erosion and Profit Shifting project of OECD. 4 5

5 Institute News Committees Activities CORPORATE GOVERNANCE, INTERNAL AUDIT AND RISK MANAGEMENT COMMITTEE During the first quarter of 2015, the Committee continued its work on the new Directive issued to Credit Institutions on Governance and Management Arrangements, issued in July 2014, with the aim to provide guidance to ICPAC s members with reference to the three areas covered by the Committee. George Hadjineophytou Chairman INSOLVENCY COMMITTEE The committee during the past months met on numerous occasions. The main priority of our committee was to continue actively participating in the drafting of the Insolvency Laws. The subcommittees continued with the review of all the proposed draft laws and our suggestions and recommendations were put forward to the Ministry s of Finance Project Team and to Members of Parliament. Meetings were held with the Cyprus Bar Association, The Cyprus Banks Associations, with Registrar of Companies officials and the Troika Team and the views and recommendations of ICPAC were analysed and advocated for. The committee is currently reviewing the final drafts of the Insolvency Laws and is actively advocating so as to ensure that the laws will be functional and effective. Committee members are also participating in the discussions that are taking place at the House of Parliament and the views of ICPAC are clearly put forward. Once the Laws are approved by Parliament our committee in cooperation with the Educational Committee will proceed to organise seminars/workshops for informing ICPAC s members. I would like to take this opportunity to thank all the committee members for their hard work, commitment and dedication who under very tight deadlines ensured that the views of ICPAC are communicated to decision makers. Michalis Avraam Chairman PUBLIC SECTOR COMMITTEE During the first quarter of 2015, the Public Sector Committee held two meetings and carried out the following activities: 1. The Chairman and the Vice Chairman of the Committee together with the General Manager of ICPAC met with the Deputy Minister to the President and discussed a number of issues regarding the reform of the civil service as well as other issues that are of the interest of the Institute s members who work in the public and the wider public sector. 2. The Committee, in co-operation with the Education Committee, organized the implementation of two presentations regarding the «National Health Insurance System (NHIS) Economic and social reform of the heath sector» by Mr. Andreas Papaconstantinou of the Health Insurance Organisation (HIO). 3. The Committee was updated by Mr. Dimitris Mavrommatis of the Treasury of the Republic regarding the recent developments in relation to the European Public Sector Accounting Standards (EPSAS). 4. The Committee studied the proposed amendments to the legislation regarding pension benefits of public sector and wider public sector employees and submitted its comments to the Chairman of the Parliamentary Committee on Financial and Budgetary Affairs. 5. The Committee continued the discussion of several issues regarding the reform of the civil service. Spyros Spyrou Chairman Limassol-Paphos Coordinating Committee During the period from 1 January 2015 to 31 March 2015 the Limassol-Paphos coordinating committee has carried out the following activities: 1. On the 14th of January the committee attended and delivered a speech in relation to the Chartered Accountant Profession at the career s day event of Lyceum Ayios Spyridona in Limassol. 2. On the 16th of January the committee coordinated the seminar Income and Corporate Tax Basics. The seminar was held at St Raphael Resort in Limassol. 3. On the 26th of January the committee attended and delivered a speech in relation to the Chartered Accountant Profession at the career s day event of Katholiki High School in Limassol. 4. On the 28th of January the committee coordinated the seminar Recent Developments and Updates of IAS 18, IA32, IAS37, IAS39, IAS40 and IFRS 15. The seminar was held at Carob Mill in Limassol. 5. On the 5th of February the committee attended and delivered a speech in relation to the Chartered Accountant Profession at the career s day event of Tsirio High School in Limassol. 6. On the 11th of February the committee coordinated the seminar De-offshorization law and BEPS project. The seminar was held at Carob Mill in Limassol. 7. On the 19th of February the committee coordinated the seminar Capital Statement and practical solutions. The seminar was held at St Raphael Resort in Limassol. 8. On the 26th of February the committee organised a dinner with speech on the subject Energy Prospects in Cyprus and the Eastern Mediterranean at the Atlantica Miramare Hotel with guest speaker Mr George Lakkotripis,Minister of Energy. 9. On the 5th of March the committee coordinated the seminar Basics of Value Added Tax. The seminar was held at Carob Mill in Limassol. 10. On the 18th of March the committee coordinated the seminar Trading within EU: VIES, Intrastat, Mutual Assistance and MOSS. The seminar was held at Carob Mill in Limassol. Ioanna E. Nicolaides Chairman ECONOMIC CRIME AND FORENSIC ACCOUNTING (ECFA) COMMITTEE During the first quarter of 2015 the ECFA committee discussed extensively recently published economic crime and corruption cases in Cyprus. The Committee is examining and planning to suggest different and practical ways where ICPAC can play an important role to the parties involved in fighting against corruption. The ECFA committee suggested to the Educational committee and ICPAC different seminars regarding money laundering and fraud. Some of the topics suggested are fraud prevention and detection techniques, fraud risk assessment, bribery and corruption. The ECFA editorial committee issued volume 5 issue 3 of the e-bulletin. The e-bulletin was ed to the ECFA-SIG members comprising almost 200 members and is also published in the website of ICPAC. The main article in the issue covered the area of lobbying in Cyprus and its importance. Furthermore in the current issue of Accountancy Cyprus, two members of the ECFA committee have written an article relating to Whistleblower protection in Cyprus. The article, amongst other things, suggests that Cyprus is currently in a critical crossroad on its fight against corruption and a strong whistleblower law is now a must in the national efforts to fight corruption. Serghios Savvides Chairman Advisory Services Committee Our committee has started the implementation of its action plan by evaluating the different aspects of our target areas. A brief summary follows below. In relation to the subject of Ethics and Independence issues pertaining to advisory services a subcommittee has been formed which preliminarily identifies different sources and authorities that have relevant guidelines in force, for professionals offering advisory or consulting services. This evaluation shall be completed by the second quarter of We have also been discussing issues pertaining to Contracting and public procurement of advisory services. Our goal is to identify areas where members feel that the procedure for public procurement can be improved in order to discuss such issues with the relevant authorities. Other actions being planned include the setting up of meetings with relevant regulators and officials to discuss matters pertaining to the provision of advisory and consulting services within their respective scope such as the Cyprus Stock Exchange, Privatisations etc. These meetings will be planned and organised soon. Finally, we have also been in continuous communication with the Corporate Finance Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) with an aim to exchange ideas on how to improve the effectiveness of our Committee towards our members. Christophoros Anayiotos Chairman Larnaca Famagusta Coordinating Committee During the period from January 2015 to March 2015 the Larnaca Famagusta Coordinating Committee carried out the following activities: 1. On 12 March 2015 the committee had a meeting with Mr Kourouniade, the Commissioner of Income Tax in Larnaca and discussed the tax issues that the local audit firms have. Assistance was sought on these matters. The meeting was followed by lunch. Andri Andreou Chairwoman Administrative Services Committee The activities of the committee were presented to the Board of Directors of ICPAC on 16th December The Board approved the expanded terms of appointment of the committee shifting the primary focus from regulation matters to strategy and commercial issues in the light of significant changes in the industry. Further, they approved a closer cooperation with CFA in the form of two working groups for the: Formulation of a strategic plan for the industry, Identification of the regulatory differences between the three regulating bodies. The planned meetings for this work are on the 13th of March and 18th of March. Issues that were addressed by the committee in this quarter include: Issues arising from FATCA requirements OECD and BEPS issues CFC and de-offshorisation rules updates in Russia Lost clients and implementation on nominee directors 6 7

6 Institute News (Tax and VAT) Immigration permits Proposed foundations law Proposed amendments to Trusts law formulating change over procedure for the Administrative Services Providers. Andreas Athinodorou Chairman VAT Committee Since the last issue of Accountancy Cyprus, the VAT subcommittee of the Institute of Certified Public Accountants of Cyprus (IPAC) together with representatives of the Chamber of Commerce and Industry (CCCI), held a scheduled meeting with the Tax Commissioner Mr. Yiannakis Lazarou and other high ranking VAT officers. The meeting was focused on certain measures suggested in common by the VAT sub-committee of ICPAC and CCCI aiming at improving the liquidity as well as competitiveness of Cyprus established businesses. The first item on the meeting s agenda was a proposal to increase the currently applicable low threshold of to a much higher threshold regarding the cash accounting scheme which was introduced on 20 December The reasons for the requested increase were put forward and the Tax Commissioner promised to look at it positively. Next item on the agenda was the proposal to introduce in the VAT Act provisions giving the right to taxable persons the option to tax when leasing immovable property. The proposal was also supported by Cyprus land developers and builders associations. The introduction of option to tax measure is expected to attract foreign investors wishing to obtain a Cyprus citizenship status. Despite the initial reservations as to the high value of VAT refunds outflows, the Tax Commissioner nevertheless promised to examine the measure. Another suggestion put forward aiming at improving cash flow problems currently experienced by local traders dealing with importations of goods in the Republic is the extension from one month to four months in paying import VAT provided the importer is a qualified person and the relevant cash guarantee is given over the relief period. The Tax Commissioner suggested addressing the issue with the Director of Customs and Excise. The Tax Commissioner encouraged the VAT sub-committee to discuss with the Ministry of Foreign Affairs of the Republic the possibility of increasing the number of non-eu countries with which reciprocity agreements are already in place in relation to input VAT refunds. Apart from Israel and Switzerland, reciprocity agreements could also be concluded with Russia, Ukraine, India and Norway, as these countries have in place analogous VAT systems and with which significant business relations have been developed. The VAT sub-committee also addressed the importance of reducing the currently statutory waiting period of 12 months down to nine or even six months for a taxable person to be eligible to claim bad debt relief on outstanding debtors. The proposal was received positively by the Tax Commissioner who promised to look into it. Most of the above issues were also discussed during a meeting organized by CCCI held on 13/01/2015 at the presence of the Minister of Finance of the Republic. The Minister, who had already been briefed on these issues by the Tax Commissioner, seemed to understand the importance of the suggested measures placing more emphasis on the cash accounting scheme, the option to tax and the bad debt relief procedure. During the same meeting the expansion of the Tax Council s (εφοριακό συμβούλιο) duties to include VAT disputes was also brought up and the Minister suggested to the representatives of the VAT sub-committee to submit the VAT committee s suggestions for further examination. During a separate meeting with the Tax Commissioner held on 19 February 2015, the VAT sub-committee together with the fiduciary services sub-committee raised the issue of directors legal responsibilities. The outcome of this meeting is that directors, regardless of whether they are passively appointed or are not aware of or not taking part in any actions by other directors or officers of the Company they are still liable for any VAT liabilities. The Tax Commissioner argued that there is no special exemption in the legislation with regards to nominee directors, as a result of which they are treated as equally responsible for any VAT liability their clients are exposed to. On 2/2/2015 the VAT sub-committee addressed a letter to the Tax Commissioner and the Customs and Excise Department suggesting the need to amend the VAT and customs legislation regarding the use by taxable persons currency exchange rates between the ones issued by the Customs and Excise Department and the European Central Bank. The VAT sub-committee presented to the Tax Authorities its proposal for the introduction of an aircraft scheme similar to the one already applicable for pleasure boats. The proposal received the Tax Authorities positive vote and a relevant bill of law will soon be prepared. Christos Papamarkides Chairman The Auditing Standards Committee During the period from 12 December 2014 to 13 March 2015 the Auditing Standards Committee (the Committee ) it performed the following tasks: 1. The Committee is currently reviewing all the circulars issued by the Committee in prior years in order to assess whether there is requirement for revisions and update to the existing circulars. The aim is to prepare a reference table of all the circulars offering easy navigation and access to the members using the Institute s website. 2. The Committee is examining the revised and new International Standards on Auditing ( ISAs ) relating to the new Audit opinions effective for the accounting periods ending on or after 15 December 2016 (ISAs700, 701, 260, 570, 705 and 706). The aim is to issue promptly a revised booklet with the Audit opinions specimens based on the revised ISAs. 3. The Committee is examining the effect that the new legislation passed recently for ICIS and UCITS may have on the current Audit opinions, with the aim of issuing revised specimen Audit opinions for ICIS and UCITS. 4. A subcommittee was set up to inform the Committee about the changes on Solvency II and how this will affect the reporting that will be required from the auditor s by the Superintendent of Insurance Companies. A memo was prepared and sent to the General Manager of ICPAC informing him about the need to communicate formally with the Superintendent of Insurance companies in order to provide us with a clear guidance on the scope of the auditor s work as regards Solvency II. On 25 February 2015 a meeting with the Superintendent and the personnel of her department took place at the office of the Superintendent. It was agreed that the working group of the Superintendent office, assigned with the project of Solvency II reporting, will communicate and have meetings, if necessary, with the nominated subcommittee of Auditing Standards Committee and the Financial Services Committee in order to have our comments on the reporting format before any circulars are issued to the Insurance companies. ICPAC was represented by its General Manager, the chairman of the Auditing Standards Committee, a representative of the nominated subcommittee of the Auditing Committee and a representative of the Financial Services Committee. 5. The Committee, represented by its chairman, together with the management of ICPAC and the chairman of the Shipping working group, reached to an agreement with the Department of Merchant Shipping for the revision of the form MS TT 8D Declaration of Auditors of a Ship Manager Admitted to the Tonnage Tax System. The Tax Department accepted the revised MS TT 8D on 27 February 2015 and on 5 March 2015, ICPAC issued the circular 10/2015, to its members. Christos Tsissios Chairman CONSULTATIVE COMMITTEE FOR SMALL AND MEDIUM FIRMS During the first quarter of 2015 the Consultative Committee for Small and Medium Firms met three times. During the period, the Committee examined in detail the results of the survey/questionnaire that was prepared and circularised to all Small and Medium Practices in November A report has been compiled stating the results of the questionnaire together with some clarifications and commentaries for each question together with the Committee s summary of the key findings. The report has been already forwarded to ICPAC and the Council which will be used as an informative tool. The results of the questionnaire will be available to all ICPAC members shortly. The committee during this period addressed the Council with a request to examine the possibility for the introduction of a Provident fund for the members. Our request was accepted and ICPAC is now in the process of examining the different alternative solutions and options available for this request. The Committee is in the process of gathering information to enhance the new ICPAC website. A sub-committee is currently preparing a sample of engagement letters for the main services provided by Small and Medium firms other than audit services. Another sub-committee is the process of examining different alternative assurance work other than full scope audit that will be suggested to the Council for possible implementation in relation with small entities. During this quarter, the president of the Committee was invited by the Council to present the work and issues in relation with the committee. During this meeting the president expressed the current issues and concerns of the Small and Medium Practices being the examination of an alternative assurance work for small entities, the request for continued support services which can be enhanced to other areas and the introduction of a Provident fund for the members. The Council was positive with the Committee s requests and the president of Council instructed the members of Council to examine all issues. During the period under review the Committee received some queries from members which were discussed at the Committee s meetings for any possible action needed. Andys Karlettides Chairman STOCK EXCHANGE AND CAPITAL MARKETS COMMIT- TEE During the first quarter of 2015 the Stock Exchange and Capital Markets Committee met three times. The main issues discussed during those meetings were the following: (i) The document Continuous obligations of entities in the E.C.M. Market of the CSE (Non-Regulated Markets) has been updated by the respective sub-committee and is now due for discussion and approval by the Committee. (ii) The other two sub-committees continued the work on the updating of the documents Continuous obligations of listed entities in the CSE Regulated Markets and Continuous obligations of Alternative Funds and Alternative Investment Fund Managers. These two documents are due for submission to the Committee at the April meeting. (iii) A decision was taken so as to arrange for meetings with officials of both Cyprus Securities and Exchange Commission and Cyprus Stock Exchange so as to discuss current situation and issues affecting listed companies or Cyprus companies which could potentially be interested in listing their shares in the CSE or any other European Stock Exchange. Furthermore, on 10 March 2015 the Chairman of the Committee attended a meeting at the Commerce and Industry Committee of the Parliament representing ICPAC. The subject in question was a proposal to change the requirement for Cyprus listed companies to publish preliminary annual results within 2 months after the end of the financial year to 8 9

7 Institute News 4 months after the year end. This change is also in line with the requirements/suggestions of the EU Directive 2013/50 which should become effective legislation of Cyprus by November It was decided to wait for the relevant draft amendment of the law to be prepared by the Ministry of Finance and for the issue to be discussed again at the Commerce and Industry Committee. Panayiotis Peleties Chairman Shipping Committee During the last three months the shipping committee finalised all pending issues with form MSTT8D (declaration for shipmanagers) and issued a circular to the members of ICPAC. The new form is to be used for the years 2014 onwards. The 2014 form must be submitted by 28 February All outstanding returns for 2012 and 2013 should be submitted to the Department of Merchant Shipping using the old form the soonest. In an effort to align its efforts with the other bodies and the public sector, the committee had a meeting with the Department of Communication and Works and the Association of Shipowners. It has also set up sub committees one of which has been involved in comparing the Tonnage Tax regimes of Cyprus with other EU countries in an effort to identify differences in the legislation and practices and suggest improvements to the Cyprus tonnage tax regime. Cleo Papadopoulou Chairwoman TAXATION COMMITTEE The main activities of the Taxation Committee during the first quarter of 2015 were: 1. We have met with the Commissioner of Taxation for discussing the list of matters we had prepared and sent him which we believe render immediate handling by the Tax Department. As a first step, subcommittees are now discussing the Department s computerisation problems and improvements that could be made using the existing infrastructure. Other items on our list include: a) The understaffing of the Department. b) Matters relating to assessments. c) Matters relating to submission. d) Delays in issuing rulings. e) Transfer Pricing. f) Tax circulars. g) Trusts. h) Immovable property tax. i) Reorganisations. j) Capital gains tax on leases. k) Memos on immovable property. 2. Together with the Tax Department we are revisiting the current procedure in place for applying for tax residency certificates and are working on the issuance of a tax circular. 3. We have studied the European Directive 2015/121 dated that amends the Parent Subsidiary Directive (PSD) 2011/96 and evaluated the implications it could have on Cyprus. 4. We have together with the Educational Committee organized seminars on the Russian de-offshorization law and the recent developments of the Base Erosion and Profit Shifting (BEPS) project of OECD and how these developments affect Cyprus. 5. Members of our Committee have continued their participation in the team that has been set up by the Government to re-evaluate our Tax System for the purpose of recommending improvements to the Government. 6. We have continued providing technical support when needed in relation to: a. The examination by the European Commission of the tax ruling practice in Cyprus. b. The examination of our Intellectual Property Tax regime by the ECOFIN Code of Conduct Group assessing possible harmful tax practices. 7. Members of our committee have continued their involvement with DTT negotiations. Panicos Kaouris Chairman PUBLIC RELATIONS COMMITTEE During the first quarter of 2015, the Public Relations Committee formally held three meetings and carried out the following activities as per the approved action plan: Chinese dinner On 05 February 2015, the Committee organised a dinner at China Spice restaurant in Nicosia. A special price per person had been arranged which included a set menu and unlimited consumption of drinks especially for the members and friends of ICPAC. The participation for the event was considered satisfactory and members and their friends met up for an enjoyable night. Happy Hour Event at TUBO Cocktail Wine Bar On 12 March 2015, the Committee organised a Happy Hour Event at TUBO Cocktail Wine Bar in Nicosia. The participation for the event was considered satisfactory. All who attended had the chance to enjoy finger food and drinks at discounted prices especially for the members and friends of ICPAC. Theatrical Performance On 29 March 2015, a theatrical performance will be held especially for the children of the members and friends of ICPAC. The theatrical performance A Celebration at Al Nuris will take place at the Cyprus Theatre Organisation (THOC), in Nicosia provided free of charge by the ICPAC. Future Events The Committee has discussed and assessed the organisation of future events including various Happy Hour events, Wine Tasting event, Karting, Paintball, the Annual General Meeting and ICPAC s dance. Avgousta Papadopoulou Chairwoman New Members During the period January - March 2015 the following persons have been accepted as new Members of the Institute: 3905 Koula Kourklari ACCA 3906 Yiannakis Hadjimichael ACCA 3907 Yana Ioannou Kariagina ACCA 3908 Christina Theodoulou ACCA 3909 Philios Nicolaou ACCA 3910 Androula Panayi ACCA 3911 Elena Paraskevaidou ACCA 3912 Maria Papacharalambous ACCA 3913 Mikaella Kouma ACCA 3914 Demetris Troullis ACCA 3915 Charalambos Andreou ACCA 3916 Stavrini Christoforou ACCA 3917 Ioanna Leonidou ACCA 3918 Georgia Papakyriakou ACCA 3919 Kalliopi Antoniou ACCA 3920 Philippos Philippou ACCA 3921 Alexandra Philippou ACA 3922 Demetris Georgiou ACA 3923 Akos Marios Philippou ACA 3924 Soteris Kyriakou Article Elena Tapaki Article Fyntia Papadopoulou ACA 3927 Myrto Pachoumi ACA 3928 Sotia Demetriou ACA 3929 Savvia Stavrou ACA 3930 Antigoni Protopapa ACA 3931 Maria Christodoulou ACA 3932 Eleni Hadjiarapi ACA 3933 Kyprianos Christofides ACA 3934 Ieronymos Tougkoulos ACA 3935 Nicolas Mbakkallouris ACCA 3936 Kyriakos Eracleous ACCA 3937 Demetris Tsaggaris ACCA 3938 Andreas Paraskeva ACCA 3939 Alexis Dalitis ACCA 3940 Constantinos Loizou ACCA 3941 Andreas Nicolaou ACCA 3942 Charis Christodoulidou ACCA 3943 Charalambos-John Maratheftis ACCA 3944 Constantinos Constantinou ACCA 3945 Photos Michaelides ACCA 3946 Chrysanthos Chrystanhou ACCA 3947 Nicos Nicolaou ACCA 3948 Christiana Constantinou ACCA 3949 Polycarpos Mylordos ACCA 3950 Philippos Economou ACCA 3951 Pavlos Andreou ACCA 3952 Stella Kapetaniou ACCA 3953 Stella Socratous ACCA 3954 Irene Miltiadous ACCA 3955 Elena Tsoullofta ACCA 3956 Agapi Tryfonova ACCA 3957 Juan Carlos Aranibar Barreba ACCA 3958 Froso Koumi ACCA 3959 Maria Schiza ACCA 3960 Myria Constantinou ACCA 3961 Marianna Kyriakou ACCA 3962 Vasoulla Effe ACCA 3963 Despina Aresti ACCA 3964 Fani Kaikiti ACCA 3965 Nicoletta Nicolaou ACCA 3966 Panayiota Christofi ACCA 3967 Stella Mbenaki ACCA 3968 Andrienn Schweitzer ACCA 3969 Eracles Stylianou ACCA 3970 Ioannis Theoklitou ACA 3971 Chrystalla Petrou ACA 3972 Tatiana Koumidou ACA 3973 Kleanthis Antoniades ACA 3974 Andreas Sourouklis ACA 3975 Ortaza Sengoueira ACA 3976 Niki Theodorou ACA 3977 Charalambos Ioannou ACA 3978 Elena Leonidou ACA 3979 Charalambos Astreos ACA 3980 Nicolaos Strouthos ACCA 3981 Andreas Iacovou ACCA 3982 Theodoros Theodorou ACCA 3983 Nicoletta Eleftheriou ACCA 3984 Rodoula Eratosthenous ACCA 3985 Stella Socratous ACCA 3986 Andrzej Dmowski CPA Ireland 3987 George Stephanides FCCA Removals 199 Kypros Theophanous FCA 298 Marios T. Kyriakou ACCA 654 Agathoklis Tsiakkas ACA 1170 Christodoulos Christodoulou ACCA 1425 George Charalambous ACCA 1667 Simos Siokouros CPA-USA 1670 Kyriakos Vasiliou ACCA 1751 Pavlos Zamba ACA 1754 Panteli Kasapi ACCA 1784 Thekla Christoudia ACCA 1800 Stephanos Gavrielides CPA-USA 1822 Panayiotis Markezinis ACCA 1838 Eleni Sofocleous ACA 1865 Michael Pikis ACA 1892 George Fysentzou ACCA 1910 Antoaneta Rizova ACCA 2135 Kyriakos Nicolaou Michalos ACCA, ACA 2366 Myrto Aggelidou ACCA 2447 Marina Pieri ACCA 2512 Zoe Petrou ACCA 2618 Kyriakos Michael Vitsaiti ACCA 2679 Kyriaki Kkolou ACCA 2713 Andreas Morias ACCA 2836 Theodoros Petrou ACCA 2953 Marios Koumi ACCA 3017 Stephanos Ioannou ACCA 3026 George Constantinou ACCA 3174 Marios Shina ACCA 3177 Efremis Pavlou ACCA 3211 Yiota Chrysosotmou ACA 3238 Panayiotis Yiannakou ACCA 3312 Katerina Constantinidou ACCA 3321 George Tsaggarides ACA 3328 Myria Dorati ACA 3335 Tasos Yiangou ACCA 3453 Andreas E Kyriakou ACCA 3470 Sergey Lukashuk ACCA 3501 Maria Proestou ACCA 3548 Constantinos Komodromos ACCA 3576 Yianna Maria Loizou ACA 3647 Marios Christodoulou ACA 3648 Michalis Kythreotis ACA 3692 Christiana Pittashie ACCA 10 11

8 GM s corner: Think n ahead! Strategy, Coordination and Commitment needed for FDI to Cyprus By Kyriakos Iordanou General Manager of ICPAC Following our recent participation at a meeting with the Parliamentary Committee for Commerce, we have addressed a letter to the Minister of Energy, Commerce, Industry and Tourism citing our suggestions regarding the measures needed to foster foreign direct investments (FDI) to Cyprus. It is crucial to maintain the good reputation and credibility of the country as an international business centre, via which international investors and corporations may carry out their activities globally or seek business onshore. Our suggestions covered four areas. The first one, and by far the most important one, referred to the drafting of an official country strategy for FDI. With this exercise, the government will define and prioritise its targets and objectives, with an obvious focus on the economy sectors that yield or have the potential to produce the most significant contribution to the gross domestic product. Following that, the government will decide upon the tactics to be deployed in order to achieve the above objectives. Such a strategy should not be of a short-term life span, but should extend for a longer period, committing all political parties, technocrats, businesses and every stakeholder in the economy of Cyprus. Our second suggestion highlighted the necessity for the creation of an investor s manual, which would be used as a guide to all foreign investors that wish to approach Cyprus for their business activities. This guide should include ALL relevant information for an investor, eg how to set up a company in Cyprus, employ staff, acquire or rent property, calculate and pay taxes, register trusts and intellectual property, open and administer bank accounts, apply for licenses depending on the nature of the business, register a ship or a yacht, export to other countries and many more. In addition, this document should also explain the ongoing obligations of investors, such as the audit and reporting regime, the annual cost of maintaining a company as well as the mandatory filings to the Registrar of Companies, the various requirements under the legislation etc. This should be a well-structured and extensive enough document, which would be treated as the investors gospel! This is a crucial exercise which every country that respects itself as an international services jurisdiction should put in place. Being one, it is imperative that Cyprus provides all current and potential investors with all relevant information in a transparent and professional manner, avoiding any hidden surprises. All investors need to know beforehand the environment in which they will work, hence such a manual will boost Cyprus credibility and ranking versus competition. The drafting of the investor s manual calls for maximum cooperation between a wide range of ministries and government departments, together with all other relevant parties from the private sector. This is a collective effort requiring careful coordination and steering. Another very important aspect in boosting Cyprus attractiveness to investors is the continuous enrichment and diversification of the services provided in Cyprus, so as to maintain its competitive edge. There are two things that can be done here: firstly, and without any significant cost for to the government, is ratification of long outstanding bills. For instance, the bills for the cell companies, cross-border mergers with companies from third countries, leasing etc. The next alternative is to innovate and come up with new lines of services. Such services could be for the shipping, the oil and gas, tourism and funds industries. Focussing on these industries, could render Cyprus as a regional centre where large corporations could establish their base on the island and control their activities overseas. Finally, we reiterated the need to enhance the Cyprus Investment Promotion Agency (CIPA) both in terms of human and capital resources and allow this government organisation to lead the way for FDI. It was with great pleasure that we were informed that the Minister and the Undersecretary to the President exhibited serious interest to our proposals and asked for immediate consideration and action. It was also encouraging to hear that the Parliament has also expressed interest in our proposals. We mentioned repeatedly that Cyprus main revenues derive form the services industry. The above suggestions put forward by ICPAC are not nuclear physics, but are a set of reasonable steps that should have already been in place. In order to be successful, serious focus, cooperation, coordination and commitment are essential. Times call for action, not only by the government but by all the stakeholders. 12 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015

9 Professional Briefing STUDENT SUCCESS CELEBRATED AT ANNUAL ICAEW GRADUATION EVENT Over 450 people attended the most successful yet ICAEW Graduation event on 28 January at the Hilton Cyprus, Nicosia. The event, which celebrated the achievements of 190 ACA graduates and 8 prize winners, hosted not only students and their friends and families, but also representatives of local firms and tuition providers. Guest speeches were provided by ICAEW President Arthur Bailey, Nicos Syrimis, ICAEW Contact Member and Honorary Chairman of KPMG Cyprus, ICPAC Vice President ICPAC Nicos Chimarides, and Odysseus Tavros, deputy CEO of tuition provider Globaltraining. Arthur Bailey gave a keynote speech in which he congratulated all of the ACA graduate students on gaining a qualification that would offer them a passport to an exciting and rewarding career. He noted that their skills would DFK International EMEA region annual conference in Cyprus DFK International EMEA region held its annual conference in Limassol, Cyprus between 4 6 February 2015, where 50 firms from 30 countries participated with delegates. The current president of DFK International is Mr Demetris Demetriou, managing director of DFK Demetriou & Trapezaris Ltd, who hosted the event. IASB publishes proposals to clarify the way in which liabilities are classified The International Accounting Standards Board (IASB) today published for public comment the Exposure Draft Classification of Liabilities (Proposed amendments to IAS 1), which clarifies how entities classify debt, particularly when it is coming up for renewal. be vital for rebuilding prosperity in Cyprus, and praised the high calibre of the students, the quality of the tuition, and the commitment and support behind each student, whether from the firms sponsoring them or those looking after them at home. Noting some recent questions regarding the accountancy profession, he reaffirmed the need for Chartered Accountants to use their skills, knowledge and values to support the public benefit and ensure the profession is always helping to do the right thing. ICPAC Vice-President Nicos Chimarides, congratulated the new ACA graduates and encouraged them to grasp the opportunities ahead of them in an exciting and rewarding career as ICAEW Chartered Accountants. The successful graduates will now go on to complete their practical work experience requirements, at which point they will be able to become full ICAEW members and call themselves ICAEW Chartered Accountants. Anthony Assiotis & Co celebrates its 25th anniversary The firm celebrates Anthony Assiotis & Co celebrates its 25 years of service to the profession. The managing partner of the firm Mr Anthony Assiotis thanks both ICPAC and ACCA for the excellent cooperation of the past years and looks forward to new challenges. The Institute congratulates Anthony Assiotis & Co on their anniversary and wishes them the best for the future. The proposed amendments are designed to improve presentation in financial statements by clarifying the criteria for the classification of a liability as either current or noncurrent. The proposed amendments do this by: a. clarifying that the classification of a liability as either current or non-current is based on the entity s rights at the end of the reporting period; and b. making clear the link between the settlement of the liability and the outflow of resources from the entity. The proposals are open for public comment for 120 days. Comments on the proposed amendments should be sent to the IASB by 10 June The Exposure Draft can be accessed from the Open for comment section of the IFRS website. Statement in response to the European Commission s Green Paper on a Capital Markets Union The IFRS Foundation, which is responsible for the governance and oversight of the International Accounting Standards Board (IASB), supports the goal of the proposed Capital Markets Union (CMU) to increase the role that capital markets play in financing the European economy. A single set of financial reporting requirements can play a fundamental role in the creation of a CMU, providing comparable and transparent information that allows investors to make informed investment decisions without acting as an impediment to companies wishing to raise capital. Feedback to the European Commission s recent consultation on the use of International Financial Reporting Standards (IFRS) in the European Union has shown high levels of satisfaction among investors and companies. IFRS has also resulted in the financial reports of European companies being understood worldwide. However, as business models, practice and markets change, the IASB works to ensure that financial reporting continues to meet the needs of market participants and has a number of continuing initiatives to improve the usefulness of financial statements produced by all companies, such as its Disclosure Initiative. IASB sets out practical effects of bringing leases onto the balance sheet The International Accounting Standards Board (IASB) is in the process of finalising a new International Financial Reporting Standard (IFRS) that will require companies to bring leases onto the balance sheet. It has today published a document outlining the likely practical effects of the new Leases Standard, as well as details on the similarities and differences between the IASB s requirements and those of the US Financial Accounting Standards Board (FASB). Deliberations by the IASB on the new accounting model for leases will be completed this month and the final Standard is scheduled to be issued later this year. Responding to calls from stakeholders for further information on the possible effects of the new Standard, the IASB staff have developed a document comparing the new and current accounting requirements. The IASB and the FASB have been working jointly on the Leases project and have reached the same decisions in many areas, including requiring leases to be shown on the balance sheet, how to define a lease and how lease liabilities should be measured. However, there are some differences between the two Boards models and the document provides an overview of the likely practical effects of these differences. IFAC Global SMP Survey Identifies Key Challenges Facing SMPs Globally The biggest challenges facing small- and medium-sized accounting practices (SMPs) worldwide are complying with regulations and standards and attracting new clients, according to the 2014 IFAC Global SMP Survey. Conducted annually, the Global SMP Survey provides unique insights into the challenges and opportunities facing SMPs around the world. IFAC is committed to building the capacity of SMPs worldwide, and the findings from our SMP Survey are critical to that mission, commented IFAC CEO Fayezul Choudhury. Understanding the challenges that SMPs and their clients face, both on a regional and global scale, helps IFAC and our member organizations better serve this important constituency and accurately represent them in our interactions with regulators, standard setters, and policy makers. The key findings from the 2014 IFAC Global SMP Survey include: Challenges Facing SMPs Keeping up with regulations and standards (57%) and attracting new clients (58%) were identified as the two greatest challenges facing SMPs worldwide. Pressure to lower fees (51%), rising costs (50%), and differentiating from the competition (50%) were nearly tied as the next biggest challenges. Attracting new clients was found to be a key concern in the Middle East (80%), but much less of a concern in North America (33%) and Australasia/Oceania (36%). Regulatory concerns ranked highly at firms in Central and South America (68%), the Middle East (65%), and Europe (63%). Challenges Facing SME Clients Rising costs (67%) and economic uncertainty (66%) were identified as the top two challenges facing SME clients. This was especially apparent in the Middle East and Africa, where these challenges were ranked higher than any other region. Percentages in the above represent respondents rating these challenges as a high challenge or very high challenge. Performance and Outlook SMPs show promising economic growth, with 72% of firms maintaining or growing the previous year s practice fee revenues (31% reported that practice fee revenues stayed the same, 37% reported a moderate increase, and 4% reported a substantial increase). Australia/Oceania (63%), North America (56%), and Africa (55%) ranked as the top three regions reporting moderate to substantial growth in practice fee revenues. Tax (48%) and advisory/consulting services (50%) were projected to be the two biggest sources of revenue growth for the year ahead. (Percentages represent respondents rating these services as increase moderately or increase substantially. ) 14 15

10 Professional Briefing Upcoming Event - 3rd Africa Congress of Accountants One Continent, One Island, One Profession - Rising Africa, Partnering for Results. The 3rd Africa Congress of Accountants, held by the Pan African Federation of Accountants and the Mauritius Institute of Professional Accountants, will be held May 12-14, 2015 in Mauritius. Additional information is available on the Congress website. FEE responds to EFRAG Discussion Paper on Separate Financial Statements FEE has contributed to the discussion on separate financial statements that EFRAG started in cooperation with the relevant Italian, Dutch and Spanish standard setters. Hereby, they aim to influence the future standard setting of the IASB. The Discussion Paper considers how separate financial statements are used in Europe for economic decision making and analyses financial reporting issues that arise when preparing such financial statements under IFRS. Separate financial statements are those produced by a parent company where the investment is not consolidated but rather accounted at cost or under IAS 39/IFRS 9. Depending on local legal requirements, separate financial statements could be prepared under IFRS or local GAAP. As IFRS generally focusses on consolidated financial statements, a company may face uncertainty in dealing with accounting issues when applying IFRS to separate financial statements. FEE welcomes that EFRAG identifies different categories of users of the information that separate financial statements provide and sets out how they use this information. We do think that IFRS should be applied as similarly as possible in separate andconsolidated financial statements. However, we point out situations where this may not be appropriate or possible. In some cases, the need to apply IFRS differently may not depend on the difference between separate and consolidated financial statements, but rather on the difference between IFRSs. FEE responds to the OECD Discussion Drafts on the place of supply of business - to - consumer (B2C) services With this response, FEE contributes to the discussion on the place of supply for VAT\GST purposes for B2C supplies of services and intangibles raised in OECD discussion drafts. The discussion drafts were produced in the context of the OECD s ongoing work in developing Guidelines to address issues of double taxation and unintended nontaxation in the field of VAT. The drafts present a set of common principles for determining the place of taxation for B2C supplies of services and intangibles, in accordance with the destination principle. FEE supports the OECD s destination approach, which proposes that, in general, supplies of services to the end consumer should be charged to VAT\GST in the country that is the consumer s normal residence (as opposed to being charged in the country that is the supplier s normal residence). FEE also supports the proposal that where a service takes place face-to-face (i.e. when both supplier and consumer is present when the service is provided) then the place of supply should be the location where the service takes place. Finally, FEE welcomes the inclusion of a framework for assessing whether a specific rule is necessary when the aforementioned general rules do not produce the desired result (e.g. where the supply directly relates to fixed property). Whilst FEE supports the proposal for a simplified registration and compliance regime for reporting of VAT liabilities, we highlight situations where this may produce an undesirable result for the supplier and suggest that the guidelines should stipulate that the simplified regime is optional for the supplier and not mandatory. We ask for additional guidance to be provided on situations where, due to increased mobility of people across national borders, it may not always be simple to identify a consumer s normal residence. FEE Audit Conference June 2015, Brussels Tax Transparency Package The European Commission issued, on 18/3/2015, a package of measures to boost tax transparency. This is the first step in a programme to reform EU tax policy. The Commission s main proposal is that all Member States shall share information on the tax rulings they grant to multinational corporations, but it also includes other transparency initiatives. FEE Tax Day 29 April 2015, Brussels A unique opportunity to discuss with policy makers, business leaders and tax experts from all over Europe the issues that are driving the international debate on tax policy. Venue: European Economic and Social Committee, Van Maerlant building, 2, rue Van Maerlant, Brussels 16 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015

11 Interview Interview of Mr. Karl Isaksson, Chairman, European Public Affairs Consultancies Association To Tassos Anastasiades, Deputy Editor, Accountancy Cyprus Journal On the occasion of Mr. Karl Isakson, Chairman of the European Public Affairs Consultancies Association being in Cyprus for a lobbying Conference Organized by the Cyprus University of Technology and Transparency International - Cyprus held on 26/2/2015 in Nicosia, we had the opportunity to meet with him and had an interesting interview. of. The lobbyists, hopefully those affected, are well placed to inform about these, possibly unintended, consequences. What is the difference between lobbying and advocacy? I think lobbying and advocacy is the same thing. This business is full of fancy words and there are always efforts to come up with new expressions of what we do. However, at the end of the day, lobbyists try to influence policy and changing the words we use is not changing that fact. How does someone become a lobbyist? Anyone can call themselves a lobbyist, it is not in any way a protected profession. And I believe that a good definition is that everyone who is trying to influence policy, except the legislators themselves, are lobbyists. That means that the group of lobbyists is very diverse, ranging from public affairs professionals, representing consultancies, companies, trade associations or NGOs, to technical or legal experts who sit on expert groups. Plus many other actors. Could you give us an overview of lobbying in Brussels? I ve been in Brussels for over 15 years and my view is that it is a very open and transparent system, legislators and other decision-makers are open to input from stakeholders as they understand stakeholders provide necessary facts and information. new Juncker Commission and the rules that senior officials cannot meet with interests outside of the register, we ve seen additional sign up to it. Which is a good thing. Would you say that a legislation must be enforced or are voluntary schemes adequate in regulating lobbying activities? I do not think there is a generic answer to this, it very much depends on the political culture of the jurisdiction. We (EPACA) have in Brussels been in favour of a mandatory register in order to create a level-playing field for all interests. However, mandatory is not necessarily the same thing as legislation. I personally would not mind a legislation but I think it is close to impossible to pass it through the Council and Parliament. Furthermore, a legislation will raise the demands on the enforcement of the register immensely. Can you give us one bad example of lobbying that led to corruption? No, I don t have a single example. There are incidents labeled as lobby scandals but they most often do not include any lobbyists. The Sunday Times scandal a few years ago included clever journalists, who claimed to represent a lobby firm, who exposed less clever politicians susceptible to bribes. Corrupted politicians is very problematic but it would be deeply unfair to blame professional lobbyists like myself for their behavior. Mr. Isakkson, inter alia, informed us that in a democratic society those affected by any legislation should be able to communicate their views to those making the legislation. The legislators and the civil servants want to create good legislation and do what they think is best for their constituencies. But there are always consequences for their proposals that they have not thought of. This is where the lobbyists have a significant role to play, as they are well placed to inform about these possibly unintended consequences. To our question as to how does someone become a lobbyist Mr. Isakkson ansewrend that a good definition is that everyone who is trying to influence policy, except the legislators themselves, are lobbyists. That means that the group Corrupted politicians is very problematic but it would be deeply unfair to blame professional lobbyists like myself for their behavior. of lobbyists is very diverse, ranging from public affairs professionals, representing consultancies, companies, trade associations or NGOs, to technical or legal experts who sit on expert groups. Plus many other actors. The interview with Mr. Isaksson follows: Mr. Isaksson we would like to start our interview by asking you to give as a broad idea of lobbying and why it is important to the effective operation of democracy. For me, in a democratic society, it is imperative that those affected by legislation have the right to communicate their views with those making the legislation. And in a nutshell, this is what lobbying is. I believe that a vast majority of legislators and civil servants want to create good legislation and do what they think is best for their constituency, but there are always consequences of their proposals that they haven t thought How does the system work? Is it efficient? As stated, I think it for the most part works well. Legislation is improved and become more efficient because of this openness to input from those affected by the rules. The lobby work itself is made more efficient because of the willingness to meet. I think it should be stated that most actors involved in the process realize that at the end of the day, the legislators have the last word. A good legislator collects as much information as possible and in the end form his or her own opinion. Could you maybe elaborate on the use of the Voluntary Register and the Code of Conduct? The register has in many respects been a great success. There are over 7500 organisations registered which in itself is impressive. One of the most positive aspects with the EU register is that is encompassed all actors, be it consultancies, companies, NGOs or think-tanks. With the Lets finish on a positive note, can you provide us with a positive case of lobbying. I think we have been on a positive note all through this interview. I worked on a case a few years ago helping a client who sells contact lenses on the Internet. They had realized late in the legislative process on medical devises that their product was defined as a medical devise and that sales of these devises on the Internet was being restricted. We managed to meet a few key Members of the European Parliament to tell our story and asked if their intention was to make it more difficult to sell lenses over the Internet. No one had realized that this was a consequence of the proposed law and all agreed with my client that it is was not the intention. So the text was changed and we can still buy our contact lenses on the Internet

12 Economy Cyprus Economy: Time to be Responsible By Harris Georgiades, Minister of Finance It has been more than two years since the dramatic events of March 2013, when our country was at the bridge of economic and financial collapse. It was during the three-day holiday of Carnival, when banks were closed for the weekend and remained closed for 15 days. Laiki bank never opened again, and the economy of the country entered a very rough period. The causes of this unprecedented economic crisis have been discussed exhaustively. Although the crisis was the culmination of accumulated errors and omissions in time, any rational person would say that the effects could have been milder, if corrective measures were taken in a timely manner. Unfortunately, exacerbated populism, dogmatism and fear of taking the much needed measures, prevailed. In 2013, when we assumed office, we received what can only be described as economic chaos. Even with the situation at a knife-edge, populism and unsubstantiated statements was still very much predominant. Our Government had two choices: either to sign an agreement for financial support and an adjustment programme for Cyprus or face the economic collapse of the country. We chose the first and agreed on a Memorandum of Understanding which may not be the perfect tool, but it is the only path that can lead us to the goal of recovery and sustainable development. Cyprus, against all odds, stood on its feet. The successful implementation of the programme created a framework of stability and security. We managed to put a stop to the sliding of the economy, curb unemployment which was rapidly increasing over the last few years, stabilize the banking sector, achieve the consolidation of public finances and regain access to international markets. In short, we created all the necessary conditions for recovery and growth. Of course, the return to growth cannot be achieved Although the crisis was the culmination of accumulated errors and omissions in time, any rational person would say that the effects could have been milder, if corrective measures were taken in a timely manner. through empty statements and declarations. Sustainable development requires a series of reforms that we have to implement regardless of our MoU obligations. It requires cooperation, understanding, but also willingness to buck the system. Recently, behaviours by some people prove that we have not learned from our mistakes. There is a misuse of the stability that we have managed to regain in the last two years with a lot of efforts and sacrifices of the society itself. The rhetoric that followed the first Eurogroup two years ago, about national dignity and independence, seems to be repeated. The national dignity and the prospect of a country and its people is not safeguarded with slogans and aphorisms but with tough, brave but absolutely necessary decisions. The voices against the economic adjustment programme and derogatory comments for our creditors, are becoming louder. But we should keep in mind that it is this exact adjustment programme that kept the country standing. It is the implementation of the programme that ensures wages, pensions and social benefits. It is the implementation of the programme that offers the only prospect for disengagement from our lenders. February s Eurogroup of this year rang an alarm for Cyprus on the non-completion of our commitments. The credibility of the country, which is the cornerstone in the efforts for economic recovery began to nibble. Whatever we collectively built the last 2 years, risks to be sacrificed in the name of unbridled populism. The real patriotism has nothing to do with not empty words, but with a stance of responsibility towards society and the country. When the economy of the country is at stake, there is no room for political games. Within the Eurozone there are good and bad examples of adaptation to the crisis conditions. The Cyprus chose and implemented the good example. Lately we bear witness of a tendency to copy the bad instead of the good example. It is high time that we make a choice as to the path we wish to follow. Do we choose to be reliable responsible and pragmatic or do we choose the path of irresponsibility and slogans. We need to assume our responsibility towards society and above all towards history. The new economic governance for Europe is tough By Marios Mavrides Economist, member of parliament Those who don t like the Cyprus adjustment program, better take a look at the new economic governance of Europe that is in place today. Once they study the new economic framework that governs European counties, people will probably prefer that that Cyprus stay under the current program for many years to come. That is because countries that are under an adjustment program follow softer and more flexible rules than other countries, and they are given financial assistance until they become strong enough to survive on their own. The new European economic governance includes tough rules and surveillance systems regarding public finances and economic policies, as well as tough penalties for the countries that violate the rules. The new rules enhance and support the stability and growth pact which was in place, since the adoption of the euro as a common currency among the members of the Eurozone. The new rules are derived from a series of laws that were approved by the European summits and voted for by the European Parliament. Those include the European semester, the six pack, the two pack and the Treaty on Stability, Coordination and Governance. The European Semester sets the time schedule and the deadlines for the submission of fiscal and economic plans of each Eurozone member to the European Commission. That allows the Commission to review the budgetary and economic policies of each member state and issue recommendations. The commission has a mandate to ensure that each member state acts within the fiscal and economic framework, and that they take preventive and corrective measures, where is necessary. The Stability and Growth pact, calls for a budget deficit below 3% of Gross Domestic Product (GDP) and public debt below 60% of GDP. Member states of the Eurozone cannot exceed those limits, and when they do, they must quickly take corrective action. However, the way those rules were enforced before the crisis did not prevent the emergence of serious fiscal imbalances in some Member States. The Stability and Growth Pact has been reformed through the Six Pack (which became law in December 2011) and The new European economic governance includes tough rules and surveillance systems regarding public finances and economic policies, as well as tough penalties for the countries that violate the rules. the Two Pack (which entered into force in May 2013), and reinforced by the Treaty on Stability, Coordination and Governance (which entered into force in January 2013 in its 25 signatory countries). The new rules includes specific rules for member states to follow, in order to ensure better economic governance and prevention of another crisis like the one experienced recently. For example, when the debt exceeds the 60% limit, the member states should apply a mechanism which will correct it. The commission imposes penalties for the countries that violate the rules. As a general rule, public spending must not rise faster than medium-term potential GDP growth, unless it is matched by adequate revenues. Another important element of the new economic governance is the early warning tool. If there is a significant deviation from the medium-term target or the adjustment path towards it, the Commission addresses a warning to the Member State, to be endorsed by the Council and which can be made public. The situation is then monitored throughout the year, and if it is not rectified, the Commission can propose an interest-bearing deposit of 0.2% of GDP (euro area only), which must be approved by the Council. This can be returned to the Member State if it corrects the deviation. Finally, a very important prevention tool is the so called Macroeconomic Imbalances Procedure. This calls for a monitoring system of broader economic policies, to detect problems such as real estate bubbles, excessive increase in the money supply or a continuous decrease in competitiveness. The Macroeconomic Imbalance Procedure would have been lifesaving for Cyprus, which has experienced a stock market bubble, a real estate bubble, an excessive money supply growth and a gradual fall in competitiveness. The Cyprus experience is an ideal case study which can convince everyone of the significance of good economic governance in any economy

13 Economy An auditor s view on the 315 billion euro Junker Plan* The European Court of Auditors (ECA) aims to contribute to the success of the Juncker Plan through its opinion 4/2015 on the proposed Regulation i. An investment plan for Europe (the Juncker Plan) ate 240 billion euro in long-term investments. The remaining part of the EFSI will support investments by SMEs and mid-companies, relying on the European Investment Fund (EIF, part of the EIB-Group), leading to investments of 75 billion euro see Graph 2 below. The Juncker Plan and Cyprus The absence of geographical national envelopes within the EU will provide for greater attractiveness and lower risk in the aggregate of supported projects than it would be possible in single Member States iv. The intervention logic supporting the investment plan is that Europe has plenty of investment needs and economically viable projects in search of funding. The challenge is to put savings and financial liquidity to productive use in order to support sustainable jobs and growth in Europe ii. The investment plan should not weigh on national public finances or create new debt. The European Commission expects, when the plan is implemented in full, to create 1 to 1,3 million new jobs over the coming three years. Graph 2 The European Fund for Strategic Investments By Lazaros S. Lazarou **, ECA Member responsible for the opinion on the Juncker Plan proposed Regulation The focus of this additional investment should be in the areas of infrastructure, notably broadband and energy networks, as well as transport infrastructure in industrial centres; education, research and innovation; and renewable energy and energy efficiency. A significant amount should be channelled towards projects that can help the younger generation back to work. (Jean-Claude Juncker, President of the European Commission, 15 July 2014). Graph 1 The Investment Plan for Europe Source: COM(2014)903 final of 26 November 2014 The investment plan is built around three main strands (see Graph 1): - The creation of a new European Fund for Strategic Investments (EFSI) to mobilise over the next three years ( ) at least 315 billion euro of additional (mainly long-term) investment; - The establishment of a project pipeline coupled with an assistance programme to channel investments where they are most needed; - A roadmap to make Europe more attractive for investment and remove regulatory bottlenecks. Following this plan and its endorsement by the European Council iii, the European Commission introduced a proposal on the EFSI Regulation (the Proposal) iv. The EFSI addresses the first two elements of the investment plan. The new European Fund for Strategic Investments The EFSI activities will be performed by the European Investment Bank (EIB) under a guarantee of 16 billion euro provided by the European Commission, funded from the EU Budget. The EIB will contribute at least 5 billion euro. The Proposal provides that the EFSI could reach an overall multiplier effect of 1:15 in real investment. This is explained by the Proposal as the EFSI will offer an initial risk bearing capacity that will allow it to provide extra financing and attract more investors to join. Therefore, the European Commission and the EIB expect to participate in financing projects, together with other investors (Member States directly or through National Promotional Banks and private investors) to a total amount of 315 billion euro. Three quarters of the EFSI will be used to gener- Source: European Commission/ European Investment Bank fact sheet 2 on Juncker Plan v In addition, if Member States decide to make contributions to the EFSI, the European Commission has indicated that it will take a favourable position towards such contributions in the context of its assessment of public finances. In its opinion, the ECA draws attention to the possible impact on public finances (see: A summary of the ECA S opinion on the Juncker Plan proposed Regulation (ECA opinion no 4/2015)). As announced by the time of writing this article, European Commission Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness, would visit Cyprus to promote the investment plan for Europe and discuss it with government, students and local businesses. For the programming period , 858 million euro will be allocated to Cyprus from the European Structural and Investment Funds (see Graph 3 below). Areas such as environment, SMEs support and network infrastructure, which have a high allocation of funds as per the partnership agreement between the European Commission and Cyprus, are also covered in the Juncker Plan. As such, Cyprus has to take all the necessary steps for setting up a pipeline of eligible projects so as to attract maximum funding and boost growth in the priority areas of its real economy. In this respect, the absence of geographical envelopes in the Juncker Plan points to EU-wide competition for funding at project level, which can serve as an opportunity for Cyprus. ECA s opinion on the Proposal The Proposal significantly changes spending for competitiveness and introduces a new fund and other new bodies, such as the European Investment Advisory Hub. The ECA decided to issue an opinion on the Proposal, in view of the importance of the EFSI and the potential implications for the discharge authorities (the European Parliament and the Council). The ECA adopted the opinioni on 12 March 2015 so as to have an impact on the stakeholders decision making process. There are high expectations from the European Commission s initiative. Aiming to contribute to the success of this initiative, in its opinion the ECA draws attention to the following areas: - Governance and legislative framework; - Accountability and external audit arrangements; and - Financial liabilities for public finances. (see: A summary of the ECA S opinion on the Juncker Plan proposed Regulation (ECA opinion 4/2015)) 22 23

14 Economy Graph 3 EU funding for investment in Cyprus Source: Adopted Partnership Agreement between the European Commission and the Republic of Cyprus vi A summary of the ECA s opinion on the Juncker Plan proposed Regulation (ECA opinion 4/2015) Governance and legislative framework. The draft Regulation leaves to a future agreement between the European Commission and the EIB a number of essential aspects, such as the establishment of EFSI as a separate guarantee facility within EIB accounts, its governance and internal audit arrangements as well as the performance assessment of its interventions. The Court considers that these essential elements of the initiative should remain in the hands of the Legislator and be dealt with in the Regulation itself. Furthermore, the unexplained exclusion of the application of the Financial Regulation s provisions on financial instruments in favour of EIB s own rules risks creating legislative loopholes. Accountability and external audit arrangements. The European Commission will be responsible for the management of the EU guarantee only. The actual financing activities guaranteed by EU funds will be delegated to the EIB and reported on the basis of its own standards. Such framework will inevitably have repercussions on the effectiveness of the EU budget discharge procedure. Moreover, the draft Regulation (Article 14) provides that the Court has the right to audit the EU guarantee and the payments and recoveries under it that are attributable to the general budget of the Union. The Court observes that its audit mandate is set by the Treaty on the Functioning of the European Union, according to which the Court enjoys unrestricted access to any document or information it considers necessary to carry out its task (Article 287(3) TFEU, second sub-paragraph). Therefore, Article 14 of the draft Regulation should be replaced by the following text: The external audit of the activities undertaken in accordance with the EFSI Regulation is carried out by the European Court of Auditors in accordance with Article 287 TFEU. Financial liabilities for public finances. Most of EFSI s financial risks may have to be covered by the EU budget. The main financial liability is represented by the EU guarantee (up to 16 billion). In addition, the EU budget will be liable for the yearly costs of up to 20 million related to the European Investment Advisory Hub (until 31 December 2020). Finally, the EU budget will be liable to pay unspecified additional costs when the EIB provides funding to the EIF on behalf of EFSI. However, EFSI projects may be at the source of further national public debt. This will be notably the case when Member States contribution will be provided by borrowing the necessary funds. In this respect, the option of providing counter-guarantees to EFSI will only postpone a potential risk to contracting new debt. Finally, projects guaranteed by EFSI may need additional public funding beyond the completion of the project (due to maintenance, for example). The full text of the opinion is available on ECA s website: i. Note Mission of the European Court of Auditors, the EU`s independent external auditor The European Court of Auditors mission is to contribute to improving EU financial management, promote accountability and transparency, and act as the independent guardian of the financial interests of the citizens of the Union. The ECA s role as the EU s independent external auditor is to check that EU funds are correctly accounted for, are raised and spent in accordance with the relevant rules and regulations and have achieved value for money. i ECA opinion 4/2015 on the Juncker Plan proposed Regulation, ii COM(2014)903 final of 26 November iii EUCO 237/14, iv COM(2015)10 final of 13 January 2015, v COM/ EIB factsheet 2 vi Partnership Agreement between the European Commission and the Republic of Cyprus - July vii Within multi-annual financial framework heading 1a amounts are shifted from the Connecting Europe Facitily and Horizion 2020 to the EU guarantee for the European Fund for Strategic Investments. 24 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015

15 Economy The Role of the Secretariat of the Council of Ministers of the Republic of Cyprus from 1960 until today Duties and Responsibilities By Theodosis A. Tsiolas Secretary to the Council of Ministers In examining thoroughly the occasional references to the institution and the operation of the Secretariat of the Council of Ministers of the Republic of Cyprus which are published in the national press, one can identify that the information available in these references is incomplete or partial and that no single source of information is available which describes in its totality the wider framework of the Secretariat. This identified weakness acted as an incentive for writing this article, which aims to describe the complete framework, to the extent that this is possible, of the role and mission of the Secretariat of the Council of Ministers. Historically, the Council of Ministers Secretariat is first mentioned at the time of the establishment of the Republic of Cyprus and, in particular, is referred to in the Constitution of the Republic. The essential role of the Council of Ministers Secretariat is defined in specific articles of the Constitution and is no other than the service of the executive power, the function of which is also determined by the Constitution of the Republic, in parallel with the remaining two other functions, the legislative and the judicial. Consequently, the Council of Ministers Secretariat serves, primarily, the Council of Ministers, which is the collective body of the state, comprising the Ministers who are its members and chaired by the President of the Republic1. In accordance with Article 54 of the Constitution, the executive power is assigned to the Council of Ministers: the Article further stipulates that subject to the executive power expressly reserved, under Articles 47, 48 and 49, to the President and the Vice- President of the Republic, acting either separately or jointly, the Council of Ministers shall exercise executive power in all matters other than those which, under the express provisions of this Constitution, are within the competence of a Communal Chamber. The same Article states that the executive power exercised by the Council of Ministers includes: the overall management and governing of the Republic; the management of general policy; foreign affairs as set out in Article 50; defense and security, including questions thereof as set out in Article 50; the co-ordination and supervision of all public services; the supervision and disposition of property belonging to the Republic in accordance with the provisions of the Constitution and the law; the consideration of Bills to be introduced to the House of Representatives by a Minister; making of any order or regulation for the carrying into effect of any law as provided by such law and consideration of the Budget of the Republic to be introduced to the House of Representatives. The convening of meetings of the Council of Ministers is, according to Article 55 of the Constitution, the responsibility of the President of the Republic, who on his own motion or on being asked by the Vice- President1 of the Republic in due time for a specific subject, in accordance with Article 56 of the Constitution, establishes the agenda for any meeting of the Council and even at his discretion, decides which agenda is to be communicated to all concerned parties prior to such meeting being held. The President and the Vice- President1 of the Republic are not members of the Council of Ministers, despite the fact that they preside over it, and, consequently, the Decisions of the Council are taken by the Members of the Council, namely the Ministers of the eleven Ministries. However, if the Decision relates to foreign affairs or to the defense and security of the Republic, as these are explained in Article 50 of the Constitution, the President or the Vice- President1 of the Republic, or both, have, in accordance with subsection (3) of Article 57 of the Constitution, the right to veto the Decision. This right may be exercised within a period of four days from the date upon which the Decision was forwarded to their respective offices. Within this operational framework of the executive power and for the purpose of meeting its targets, as described briefly in the aforementioned Articles of the Constitution, the Constitution provides in Article 60 that there shall be a joint Secretariat of the Council of Ministers headed by two Secretaries, one belonging to the Greek Community and the other belonging to the Turkish Community. Furthermore, the same Article determines the powers of the Secretary and his i Following the withdrawal of the Turkish Cypriots from the Government, as well as from other constitutional posts and positions they were holding, the Doctrine of Necessity was enforced in order to correct the constitutional irregularity created. A provision contained in the Doctrine states that, so long as the position of Vice President is vacant, the executive power is carried out solemnly by the President of the Republic. duties to the Council of Ministers Secretariat. The Secretary is the head of the Office of the Council of Ministers and, in accordance with any instructions as may be given by the Council of Ministers, attends its meetings and keeps minutes thereof and conveys the Decisions of the Council to the appropriate administrative organ, authority or person. The competent authority for the Council of Ministers Secretariat is the Council of Ministers and the Secretary acts according to Council s directions to complete all work involved in its mission. Hence, the reference in Article 2 (d) of the Public Service Law, provides that competent authority means the Council of Ministers for the Accountant General of the Republic, the General Managers of the Ministries, the General Director of Planning Office and the Secretary to the Council of Ministers and also for the Secretariat s personnel, but for these employees usually acting through the Secretary to the Council of Ministers. The Head of the Office of the Council of Ministers Secretariat is a public officer, appointed by the Council of Ministers, and holds the title of Secretary to the Council of Ministers. The first Secretaries to the Council of Ministers were the Greek Cypriot Takis E. Markantonis and the Turkish Cypriot Ali Vehid, who served in this position from until and from until respectively. Following the withdrawal of Turkish Cypriots from the Government in 1964, the Secretariat is currently headed by a public officer from the Greek Cypriot community. It is worth noting that, in the past, there have been instances where the Secretary was appointed by the Public Service Commission (PSC) and enjoyed the same status as a Permanent Secretary of a Ministry and that, additionally, there also existed the post of Assistant Secretary to the Council of Ministers. However, these posts were abolished in the Budget of Since then, the Secretary s duties are assigned by the Council of Ministers to a serving public officer. The last Secretary appointed by the Public Service Commission was Mr. George Achillides, who retired on Furthermore, it is noted that, according to the Protocol of the Republic of Cyprus Law of 1996, the position of the Council of Ministers Secretary ranks above that of the Accountant General of the Republic and immediately below those of the Permanent Secretary of the House of Representatives and the Permanent Secretaries of the Ministries and the Directorate General for European Programmes, Coordination and Development. It has nowadays become clear that no other person, except the President and the Ministers, should be present at the meetings of the Council of Ministers when issues are discussed and Decisions are taken. However, case law of the Supreme Court has established that beyond the Secretary to the Council of Ministers only the presence of a secretary for the purpose of keeping the minutes is permitted. Therefore, the presence of any person other than the President and the Ministers, the Secretary to the Council of Ministers and the secretary affects the lawful composition of the Council and the validity of any Decisions taken by the Council since, in accordance with the provisions of the General Principles of Administrative Law Act 1999, a condition for any administrative act to be valid is the lawful composition of the body taking the decision. It is worth mentioning that this issue has been brought up by the Council of Ministers and is one upon which the opinion of the Attorney General has been sought. The Attorney General expressed the opinion that during the meetings of the Council no person other than the President and the Ministers should be present in instances where the Council of Ministers acts as an administrative body, the Decisions of which are subject to judicial review. As further noted by the Attorney General, the specific Decisions are executable administrative acts whereby the will of the Council of the Ministers is expressed and these acts are intended to produce legal effect on individuals. In these cases, immediate implementation through official channels is required. In this case, it should particularly be noted that the lawful composition of the Council of Ministers during its meetings is crucial and is a necessary precondition for the recognition of Decisions taken by the Council as valid administrative acts. However, the participation of other persons in the meetings of the Council of Ministers is not forbidden in any case where the Council convenes pursuant to Article 54 of the Constitution or, as stated by the Attorney General of the Republic, in managing national issues or other topics of general importance, especially when these are beyond judicial review. Additionally, according to the Attorney General, the same shall apply in issues/decisions characterized as government acts as these are derived from the case law. Therefore, the publication of the Council of Ministers Decisions presupposes its lawful composition. In accordance with Article 57 of the Constitution, the Council decides in each session which Decisions are to be published in the Official Gazette

16 Economy Within the above framework of operation, the Secretariat of the Council of Ministers is responsible for preparing the Agenda and forwarding the items of the Agenda for each meeting of the Council to the President of the Republic and the Members of the Council of Ministers. Before an item is included in the Agenda, a thorough process of checks concerning the legality of the issue is enforced as a precursor to the final stage of the submission of topics to the Council for discussion and necessary decision taking. In this direction, the Secretariat of the Council of Ministers aims for the establishment and the observance of the proper procedures and processes necessary to manage all issues that arise before each meeting of the Council, issuing, at times and with the approval the Council of Ministers as the competent authority, relevant circulars for the purpose of compliance with relevant provisions and procedures proposed, so as to ensure the proper functioning of the Council of Ministers. Indeed, there have been instances, at least during the present governance of President Nikos Anastasiades, when the Secretariat of the Council of Ministers has addressed several relevant issues that regulate the procedures and methods of management. Illustrative examples of such actions are: differentiation in the method of preparation of the agenda in order to create classified or non-classified parts, regarding which it should be further noted that this has been adopted following the instructions of the President of the Republic; the management of issues related to the handling of personal and sensitive data; clarification of the procedures of document management; the explanation and definition of the essential procedural requirements and, generally, the provision of proper guidance to the Ministries. Furthermore, and despite the fact that the publication or not of the Decisions of the Council of Ministers is a power vested in the Council of Ministers by Article 57(4) of the Constitution, the Secretariat of the Council of Ministers submits, after careful study of the legislative framework, certain recommendations to the Council, aiming to achieve a better regulatory framework for the wider issue of the publication of the Decisions of the Council of Ministers. Given, therefore, the approval of the Council of Ministers the Secretariat regulates, by following the appropriate procedures, the publication of Decisions taken by the Council of Ministers so that, ultimately, their publication does not conflict with the provisions of any legislation or create constitutional or other legal complications. Consequently, the role of the Council of Ministers Secretariat is not just limited to the publication of Decisions taken by the Council as the Constitution explicitly requires but, of course, includes the parallel protection of both classified information and personal or sensitive data as well as the protection of the interests of defense and security of the Republic, constitutional order, public order, public health, public morals, the reputation and rights of any person or persons, rights and freedoms as guaranteed by the Constitution of the Republic and the relationships of the Republic with other states. Certainly, all the aforementioned describes the multifaceted and active role of the Secretariat of the Council of Ministers in assisting the mission of the executive authority carried out through the meetings and the Decisions of the Council of Ministers without, however, falling outside constitutional boundaries or going beyond the scope of its operation. It is in that direction that the Secretariat of the Council of Ministers has successfully achieved, in accordance with the instructions of the President of the Republic, the replacement of handwritten and traditional procedures and is now functioning in a new technological environment, with the adoption of electronic meetings within the Council. Adoption of new computerised procedures means that almost all relevant materials needed for the Meetings of the Council of Ministers are distributed through the system without the need for the printing of documents, thereby allowing each Member of the Council to have direct access to them, by electronic means, 24 hours a day, seven days a week. Moreover, multiple benefits and savings have accrued following the implementation of this system, such as annual savings of around 2 million sheets of paper, savings on ink and on printer maintenance costs, fewer staff required to handle the documents, time saving and greater ease in handling the oversized archives, etc. While the aforementioned description offers insight to the reader into the context in which the Secretariat operates and functions, in accordance, of course, with constitutional provisions, the Constitution does not exclude or restrict the assignment to the Council of Ministers Secretariat or to the Secretary to the Council of Ministers of any additional responsibilities beyond those expressly set out in the Constitution. This is why additional responsibilities were assigned to the Council of Ministers Secretariat during the first two months of the current gover- nance, deriving from Council of Ministers Decisions, which, in any case, are consistent with the programme and the goals of the President of the Republic, and the current governance, for greater and more effective involvement of the Secretariat Council of Ministers in the implementation of the government s programme. Regarding the above, the Council of Ministers decided to authorise the Secretary to the Council of Ministers to submit a quarterly Memo, with information relating to the monitoring of the implementation of Decisions taken by the Council over that period, the obligations of the competent authorities arising from the implementation of these Decisions and any outstanding issues. Subsequently, the Council of Ministers authorised the participation of the Secretary to the Council of Ministers, or of his representative, in the meetings of the Ministerial Committee for the Monitoring of the Memorandum, which is responsible for the implementation of the Memorandum of Understanding and for resolving any problems or delays in the implementation of the measures provided in the Memorandum, as well as to the Memorandum Monitoring Unit which, up to , had a coordinating role for monitoring the whole implementation of the Memorandum. Furthermore, the political and legal position that the operational limits of the Secretariat and the Secretary to the Council of Ministers can be extended beyond the constitutional framework, is further supported by referring to another Decision of the Council of Ministers, whereby the Council decided on the secondment of the Secretary to the Council of Ministers to the Presidency for the parallel execution of specific duties. In this capacity, the Secretary to the Council of Ministers is not strictly limited to his constitutional powers but, without negating or limiting his duties as Secretary to the Council, can provide other forms of support, administrative and / or technocratic, to the Presidency of the Republic and, through his own participation in various social activities, enhance and strengthen his active contribution to the achievement of government objectives. In any case, it is to be noted that this enhanced role also applies in other European countries, where the aim of supporting the work of the Head of State is achieved in a more efficient and institutionalized way. Indeed, many examples show the existence and operation of a cabinet, run by both public servants and by political advisors, within the President s or the Prime Minister s Office. In such cases, the role of the respective Secretariat is multiple and complex and aims to support the overall work of government. Certainly, in such cases, the Secretariat is usually the facilitating link between the President / Prime Minister and their Ministries. Stemming from experience of other European countries Ministerial Secretariats, as has been discussed before, the Council of Ministers, at its Meeting on 3rd March, 2015, decided that operations referring to the monitoring and coordination of the overall work of government will be undertaken, as from , by the Secretariat of the Council of Ministers, under the supervision of the newly established Presidency Unit and under the political authority of the Under Secretary to the President. In addition, the Council of Ministers decided to assign to the Secretary to the Council of Ministers, as from , the monitoring, in consultation with the newly established Presidency Unit, of the work of several Ministerial and/or other Committees, as these were defined by Council of Ministers Decisions on matters relating to government policy, and to authorize the participation of the Secretary to the Council of Ministers, or of his representative, in these Committees. Furthermore, the Council of Ministers authorised the Secretary to the Council of Ministers to develop, in collaboration with the Presidency Unit and the Under Secretary to the President, the appropriate and necessary procedures for monitoring the implementation of the overall work of government, including the monitoring of the work of Ministerial and / or other Committees. It is clear from the examples observed of other countries, that the Secretariats of the Council of Ministers of other European countries have roles and responsibilities different from the existing operational status of the Secretariat of the Council of Ministers of the Republic of Cyprus. However, the adoption and operation of best operating practices modeled upon the role of the Secretariats of the Council of Ministers of other European countries could provide multiple benefits to the aims of every government in the effective and qualitative accomplishment of its mission. As has been well demonstrated in practice, the current operating status and the upgraded role of the Secretariat, after the assignment of additional responsibilities and duties to both the Secretariat and the Secretary to the Council of Ministers, indicate with certainty that they can efficiently and effectively contribute to a positive outcome of the multifaceted efforts of the current government to carry out its mission

17 Economy Unlocking Funding for Europe s Growth European Commission consults on Capital Markets Union By George Markopouliotis* Free movement of capital is one of the four fundamental freedoms of the European Union. It is enshrined in the Treaty of Rome and it is at the heart of the single market. But fifty years on, we still don t have a fully functioning single market for capital. In many parts of Europe, companies are still struggling to get funding to expand further. They often lean heavily on banks for their funding needs and far less on capital markets. In other parts of the world, the opposite is true. This reliance on banks makes the European economy more vulnerable when bank lending tightens, as happened during the financial crisis. The crisis has also meant that the degree of financial market integration across the EU has fallen. Banks and investors are increasingly retreating to home markets. Our capital markets remain fragmented, largely along national lines. This is what we need to fix. The European Commission recently launched its landmark project to unlock funding for Europe s businesses and to boost growth in the EU s 28 Member States with the creation of a true single market for capital. The Capital Markets Union (CMU) aims to break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance. Capital Markets Union is about increasing the size of the pie so that everyone benefits: investors big and small banks, capital markets and, most importantly, businesses. It is about giving more choices to companies on where and how they want to get financing. It is certainly not about pushing banks aside, it is about complementing the role of banks. Europe s banking system will continue to play a pivotal role in Europe s economy. Clearing obstacles, boosting growth and jobs With the CMU, the Commission also wants to clear obstacles that are preventing those who need financing from reaching investors and make the system for channelling those funds the investment chain as efficient as possible, thus helping to create more jobs by supporting large and small businesses. Just take one example on venture capital. The US venture capital market is about five times bigger in the US than it is in the EU. If European venture capital markets were as developed here as they are in the US, companies would have been able to tap into an additional 90 billion euros of available funding between 2008 and More than 4,000 venture capital deals would also have been struck. To kick-start a debate across the EU over the possible measures needed to create a true single market for capital, the Commission has launched a three-month consultation round. We are seeking feedback from the European Parliament and the Council, other EU institutions, national parliaments, businesses, the financial sector and all those interested. Following the public consultation, the Commission will adopt an Action Plan this summer setting out its roadmap and timeline for putting in place the building blocks of a Capital Markets Union by It is a long-term project and an ambitious one. We will need to work hard on difficult, sometimes long-standing issues, such as securities laws, investment restrictions, tax treatments of debt and equity, insolvency regimes. But we are not shy of big objectives: we want all companies to be able to access the funding they need from across the EU; for SMEs to be able to raise finance as easily as large companies; for people who are saving for their future and retirement to be able to benefit from a wide range of affordable investment opportunities; and for investors to come from all over the world to invest in the EU because they know our capital markets are safe, stable and efficient. Consultation page All stakeholders and interested parties are invited to submit their contributions by 13 May 2015 here: *George Markopouliotis is the Head of the European Commission representation in Cyprus Mapping the Cost of Non-Europe Equal Pay for Equal Work By Alexandra Attalides Acting Head European Parliament Office in Cyprus In the past months we introduced a long-term project in progress undertaken by the European Parliament (EP) for identifying and analysing the cost of non-europe, that is the economic benefits of undertaking and the collective economic cost of not undertaking policy actions at European level in specific sectors. The potential benefits as identified in this project could only be realised over time and may be measured in terms of additional GDP generated, of savings in public or other expenditure. Gender Pay Gap (GPG) The present article explores the potential efficiency gains for the EU collectively from the promotion of the equal pay for equal work principle. While being introduced first with the Treaty of Rome in 1950, the wages equality principle has yet to be fully realised in the EU. The 2012 data indicate a 16.2% gap in the average payment of male and female employees in EU-28, with Cyprus following the same trend. The impact of the GPG is high for the economic and employment status of women as it results in lower pensions, higher risk of poverty in old age and a highly segregated labour market. Key proposition There is important evidence that closing the GPG is not only desirable in its own right, but has a positive effect on economic growth. Work was undertaken on the potential economic gain from a proposed revision of Directive 2006/54/EC on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation. The minimum and maximum levels of impact of such legislative action on reducing the GPG were assessed to lie between one and three per cent. A European Added Value Assessment on the application of the principle of equal pay for equal work of equal value found that each 1.0 per cent reduction in the gender pay gap would result in an increase in GDP of 0.1 per cent. On this basis, it follows that a GDP gain of approximately 17 billion euro per year could be envisaged. This estimate does not take into account the heterogeneous situation across the Member States in terms of GPG, given that some Member States have already partly implemented some of the EP s recommendations, and that others might choose to drag their feet in compliance. This is why for the purposes of the project of mapping the costs of non-europe, a more cautious figure of 13 billion euro has been retained, which in any case is considerably high. European Parliament s position in this field In May 2012, the EP adopted a resolution based on a legislative initiative report on equal pay, calling on the European Commission to review Directive 2006/54/EC before February 2013, specifically in respect of definitions, work evaluation and job classification, equality bodies and legal remedies, prevention and discrimination, sanctions, gender mainstreaming. In its response, the Commission indicated that it did not intend to review the directive to address the specific causes of the current gender pay gap within the timeframe specified, but would instead draw up a report reviewing the practical implementation of the directive at national level. The EP s Committee on Women s Rights and Gender Equality asked for a European Added Value Assessment to be prepared as a follow-up and to provide additional justification for the legislative initiative report. The EP has also called for a revision of the Council Directive concerning the Framework Agreement on part-time work, with the aim of closing the gender pay gap, and for a proposal on collective redress with the possible inclusion of collective redress against violations of the equal pay principle

18 Economy The New Role of the State: Smaller and Stronger By Theodore Panayotou Cyprus International Institute of Management * The core activities of the state are the defence of the country, the maintenance of the law and order, the guarantee of property rights, the enforcement of contracts, the maintenance of competition, the correction of market failures, the alleviation of poverty and macroeconomic and financial stability. Many states, including ours, have been unsatisfied with this limited but pivotal role and gradually extended themselves into activities in which they has neither a clear role nor a comparative advantage. The spread of the state and its limited resources too thin resulted in the dereliction of attention to its core activities (World Development Report 1997) or as Vito Tanzi of the IMF argued the state has been doing more and more and doing it less and less well and this had negative implications for the working of the market. It is not only that the state bit too much to be effective or that it left the important undone to do the less important. It is also that it has distorted incentives and markets, created a skewed playing field, encouraged crony capitalism, patron-client relationships between citizens and political parties, rent-seeking and corruption and ultimately reduced the competitiveness of the economy and the welfare of the people. When the state sees itself as the solution to most problems, the state itself becomes the problem. What we need is a smaller and stronger state. The results of the 55-year history of the Cyprus state point to all the signs of a state that failed on its core activities. On the defence front, the state has been unable to defend its territorial integrity, having lost over a third of its territory, and is now unable to deter violations of its Exclusive Economic Zone. On the law and order front, it has done better for a while but now, with open borders and a multicultural population, a growing feeling of insecurity is taking hold among the citizenry and visitors alike. As to the guaranteeing of property rights and enforcement of contracts, the state has not done well (property titles and judicial decisions take years) and in many cases the state has been itself a major violator of property rights and contracts. The pre-eu era was characterized by monopolies and oligopolies which were justified on the basis of the smallness of the market and the need for protection of infant industries but, even with the country s entry into the EU and the Eurozone and the increased openness of the economy, oligopolies and cartels, ranging from fuel imports to banking, continue to thrive; the Commission for the Protection of Competition has been the least successful among the EU-imposed institutions. Even the macroeconomic and financial stability which has been the single indisputable accomplishment of the state came down crashing and, with it, the veneer of prosperity, when the state failed to control its spending and to ensure the integrity of the financial institutions and the Central Bank. The delay and ultimate abdication of the role of the state in taking measures to avert the economic and financial disaster has led to the collapse of the country s thriving financial system, the loss of many people s lifetime savings and a quarter of the country s wealth. Only if the state had managed to avert the banking disaster, the pervasive corruption and its own mismanagement of public finances, it would have made a real contribution to economic and social welfare. The failures of the market, far from being corrected, have been exacerbated by allowing crony capitalism and corruption to flourish. Despite supposedly competitive, impartial and unimpeachable public tendering procedures, bribes and kickbacks have been pervasive especially within the state enterprises and local governments. The role of the state needs to be clearly defined and effectively executed. When the state sees itself as the solution to most problems, the state itself becomes the problem. What we need is a smaller and stronger state. As Paul Valery said if the state is week we may perish. Political parties and politicians prefer a bigger and weaker state, with more extensive and complex regulations loosely enforced, because this give them a bigger role and more opportunities to manipulate the state in their favour; a bigger and weaker state allows them to do favours for their constituents and, in turn, win their favour in the ballot box. With the steadily expanding role of the state and the piling up of regulations and bureaucratic procedures, we lost side of the forest for the trees. Selective reforms of public administration and elimination or consolidation of a few government units here and there would not bring the desired results. We need to rethink the new role of the state in a world of rapidly advancing technology, instant communication, free-flowing information, capital and labour mobility, globalization and global competition. In the new world the old structures would not do. The state should focus first and foremost on its core activities (outlined in the introduction) leaving the rest to the private sector operating under clearly defined and strictly enforced rules of the game, intelligent regulation and supervision. In this new world, the state must play a stronger and more intelligent regulatory role leaving the provision of infrastructure and services (traditionally provided by public utilities, or state institutions as in health and education) to a properly and effectively regulated private sector. We need more and better supervision and less provision. We need intelligent regulation which is enabling not disabling. We need simplification and streamlining of procedures, elimination of red tape and bureaucracy, and the adoption of up-to-date technology. A few examples will suffice: A big part of the expanded role of the state was based on the idea that certain services (e.g. electricity and telephony) are natural monopolies which are better provided by a state than a private monopoly. Technological advances have reduced the genuine monopoly part (distribution infrastructure) and open the rest (production) to competition, and hence reduced the state s role in provision and increase it in regulation. The information revolution have made information widely available and instantly accessible, and hence reduced the role of the state in the The results of the 55-year history of the Cyprus state point to all the signs of a state that failed on its core activities. provision and diffusion of information for better functioning of markets. Another traditional role of the government that needs rethinking is its role in income distribution. Markets are good at allocating resources, but are not good at distributing income fairly, thus creating a role for the state. However, the conventional unfocused and untargeted policies such as price controls, general subsidies and free health and education are very costly, create perverse incentives and tend to benefit more the middle class than the poor. Economic growth, job creation and interventions targeted at the truly poor are more efficient and effective treatments of poverty. Picking winners and promoting them with government support is another popular but misguided role for the state. The assumption is that the state knows better than the private sector how markets work, how investors think, what customers want, and what people need most. This is, of course, rarely the case. The chances are that the wrong industries are selected which rarely outgrow the state support and establish a genuine competitive position in global markets. The state should, instead, promote the general competitiveness of the economy by reducing the cost of doing business across the board through intelligent regulation, the removal of bureaucratic obstacles, the simplification of the approval processes, the establishment of clear and fair rules of the game, the strengthening of institutions, the provision of infrastructure and the openness of the economy. This approach would attract the right kind of investors in the right industries to serve the right markets resulting in faster recovery and growth. * Dr. Theodore Panayotou, 2007 NOBEL Peace Prize Contributor, is Professor of Economics and Ethics and Director of the Cyprus International Institute of Management (CIIM), Visiting Professor at Tel Aviv University and Member of the Cyprus President s Council of the National Economy

19 Economy The Deficiencies and Weaknesses of the EU and the EMS By Dr Iacovos Aristidou Ex Minister Ex Director General Planning Bureau I have referred again before to the deficiencies and weaknesses that this grandiose undertaking for a peaceful unification of Europe, which some visionary leaders conceived in the 1950 s, has displayed so far. It was not an easy task in view of Europe s history, a long series of conflicts and wars among its nations and even internal struggles in various countries. It was not easy, not only because of historical reasons, but also because of differences in size and the level of development of each Country. Here we will limit ourselves only to economic matters and especially how the efforts to create a unified European market worked against the less developed Members and in favour of the more developed ones. I am afraid that, unless additional mechanisms to help Member-Countries facing problems of adjustment to the new set up are put in place, first the EMS will break down and the EU itself will not become a viable economic and hence political entity. In what follows I will deal, as examples, with some matters which have to do with Cyprus and which we face ever since the harmonization with the European acquis communautaire has started. The EU system has not paid and it is not paying attention to the specific needs or weaknesses of Member-States. In the case of Cyprus, for instance, I consider it unacceptable that halfoccupied Cyprus with its huge problems caused by the invasion and the displacement of so many people from their homes and businesses should have continued contributing to the EU budget more that it receives, i.e. to be a net contributor until today. I also would like to refer to the fact that ever since its accession Cyprus is obliged to accept, especially after the enlargement, all EU workers wishing to work here without considering the small size of the labour market and the unemployment situation in Cyprus, as it happened in the case of Malta. It is about time we should raise these issues with our partners in the EU and asked for appropriate changes. The mechanisms and criteria adopted by the EU ever since its establishment were cut and tailored to fit basically the rich Members. Especially now in the period of economic crisis they have benefited and continue to benefit these Countries, whereas not only they do not serve the idea of unification but on the contrary push towards the opposite direction, disintegration. The abrupt and unqualified abolition of all restrictions regarding movement of people, products and capital at the beginning of the 1990 s and a little later the adoption by most countries of the euro favoured simply the exporting and rich European Countries. What happened to the less developed Countries reminded me of what the Prime Minister of Greece Constantinos Karamanlis said at the beginning of the 1980 s when Greece acceded to the European Economic Community: I ve thrown you into the sea and whoever knows how to swim will be saved. At the end only the developed Countries of the North and some amphi-dexterous individuals and companies knew how to swim in these waters. The transition from the EEC to the EU at the beginning of the 1990 s coincided with the UN Agreement for the liberalization of international trade. I don t know whether this was just incidental. The developed Countries took advantage of these openings in two ways: they increased their exports and at the same time they solved another of their problems, the lack of cheap labour to continue or increase their production in the labour intensive sectors. In many cases firms from these countries either established branches in developing countries or sold their technology to them, something that allowed them, among other, to concentrate on research and development at home. Despite the efforts to transfer some Cypriot industrial activities to nearby countries where labour cost was not more than20% of that in Cyprus at the time, the task was not completed because of lack of support and the limitations imposed by the EEC. In addition, in order to facilitate their exporting activities, especially to the less developed European countries, the developed European countries set in motion their financial mechanisms with attractive terms, increasing, thus, the dependence of these countries on them and leading them to huge debts. In many cases indeed their large companies have used illegal practices such as briberies under the counter for the supply of military and other equipment. It is not surprising that the Southern European Countries at the time of the crisis were found with enormous debts which started the tsunami of austerity. No signs of helping them to reactivate their economies were displayed by the EU so as to avoid going deeper and deeper to more desperate situations. Only very recently some EU Officials started talking about the need for reactivation and growth!... I ve thrown you into the sea and whoever knows how to swim will be saved... Unfortunately, the EU/EMS institutions did not react again decisively. The protection that supposedly was to be provided in case a Member- Country deviated from the rules of the game was not provided. It was only in the case of the developed Countries (Germany, France) that they were allowed to exceed the Maastricht norms. Various relevant EU Committees are acting like a court ready to punish those deviating from the rules and not to serve the idea of unification. This happened in March 2013 in the case of the Cyprus banks when the shareholders and depositors were forced to shoulder the mistakes of the supervising Authorities here and in Frankfurt. Another recent example is the closure of the Cyprus Airways by the European Committee on Competition. They closed down a very crucial entity for Cyprus, an Island depending so much on air transport for tourism, exports and imports. They have not taken into consideration the special circumstances under which Cyprus Airways was working: The very costly and destructive flying restrictions imposed upon them by Turkey ever since the invasion and the fact that the company had started from zero in 1974 having lost the main part of its fleet and other assets. As for their bad management, which we all condemn, there could have been an emergency programme for restructuring and improvements as it happened with the Government and its finances. Nobody ever thought of closing down the Government! The delayed antidotes that both the EU (ESM, Junker s investment plan) and the European Central Bank (ELA/QE) are working out to help the Member-Countries, that for various reasons fall behind, should have been helpful and not punitive for their people. The aim should have been the reactivation of the economy of the Countries and, with concrete plans, the rectification of all causes that lead to this bad situation, including the functioning of the EU and the EMU themselves

20 Economy Can there be contagion with the Greek crisis? One question that has hovered around the global media recently, but has remained I believe unanswered, is what will be the likely outcome of a Grexit to the rest of the Eurozone countries as well as the rest of the world, i.e. will there be a contagion effect to other Eurozone members as well as other parts of the world? This is obviously a hypothetical but also difficult question to answer. By Dr. George Theocharides Associate Professor of Finance Director of MSc Financial Services Cyprus International Institute of Management (CIIM) On the one hand, the Germans are arguing that now (unlike earlier years) the Eurozone is now shielded against any possible Grexit, with the introduction of the European Stability Mechanism (ESM) as well as the banking union. On the other hand, others are arguing (including myself) that such an outcome will be hard to contain and will exert tremendous pressure on the Eurozone member states (as well as other, unrelated parts of the globe). Famous economic historian Barry Eichengreen at the University of California at Berkeley has recently warned that if Greece leaves the euro: In the short run, it would be Lehman Brothers squared. Thus, the purpose of this short article is to explain how such a crisis can be propagated to other countries or regions of the world. Definition of contagion Before looking the channels of propagation, let s first define what we mean by contagion. This is the transmission (or spillover) of a financial shock from one economy to others, and we have a number of such examples in recent history the Mexican crisis in 1994 ( tequila crisis ), the East Asian crisis in 1997 ( Asian flu ), the Russian default in 1998 ( Russian virus ), and, last but not least, the Great Recession of that originated from the US and propagated to other regions of the world. Methods of transmission A number of models (or mechanisms) have been developed and tested that explain how a financial (economic) shock can be transmitted. Some of these are rational, others are irrational. Below are some of these theories: As the newly-appointed Greek Finance Minister has stated recently on BBC about the euro, you can check out anytime you like, but you can never leave! 1. Fundamental linkages countries affected face similar problems and furthermore they are interconnected through trade and capital flow linkages. 2. Asymmetric information investors and market participants might have incomplete or asymmetric (some know more than others) information about the underlying reasons why a certain crisis occurs, and leads them to take certain actions, such as withdrawal from other countries or regions of the globe fearing that these economies might face similar problems. 3. Portfolio rebalancing after an initial shock in one market, investors reassess the risk of their portfolio and rebalance it which could lead to exiting from other related, or even unrelated markets. 4. Correlated liquidity shocks following the initial shock in one market it can lead to decreased levels of liquidity in several other markets, i.e. drying up of liquidity. 5. Herding channel an irrational model where investors follow the herd, or mimic the actions of others leading to a bigger crisis. The case of the Greek crisis I believe that a number (if not all) of the above channels of propagation of a crisis could be at work, in case of a Greek exit from the Eurozone. First, there are countries in the Eurozone area that face similar problems (although not to the same extent) with Greece (e.g. Italy). Furthermore, surely there exists trade and capital flow linkages between Eurozone member countries. In terms of the asymmetric information channel, after a Grexit investors would start fearing that such an event could happen also to other countries in the Eurozone area. This could lead to sharp devaluations of the euro, bank runs, capital restrictions, and large increases in sovereign spreads, even for countries that are considered to have strong economies (e.g. Germany). The same effect could happen because of rebalancing of portfolios, correlated liquidity shocks, or because of herding behavior. This could shock not just European markets and economies, but other, unrelated regions of the globe (Asian or North American markets). Thus, it is to the best interest of everyone for Greece to remain in the Eurozone area (and the EU) even if both sides (Greece vs. its lenders) have to make big compromises on their initial positions. As the newly-appointed Greek Finance Minister has stated recently on BBC about the euro, you can check out anytime you like, but you can never leave! Reforming the Civil Service By Michael Pilikos Director General of the Cyprus Employers & Industrialists Federation (OEB) In 2013 our government invited experts from the World Bank and the British National School of Government International (NSGI) to provide an objective assessment of human resource management policies, institutions and practices with proposals to improve the effectiveness, efficiency, and responsiveness of the public sector to deliver better services to its citizens. Their report, titled Cyprus at Crossroads: A Public Sector for the Post Crisis Economy, makes an interesting read while their major findings and recommendations were presented in early February this year and are available at According to the experts from the World Bank, the pay of public servants is not linked to their performance, the current wage bill of the civil service is not sustainable and the salary structure does not deliver value for money. That is a polite way of saying that we cannot afford our civil service as it is and that taxpayers overpay for the services they receive. With regard to the civil service s performance appraisal and promotion system, NSGI notes that 98% of civil servants are ranked as Excellent in performing their duties and therefore merit and performance are ruled out as determinants for career advancement. These findings shocked no one and just confirmed what we all knew. Whenever the Cyprus Employers and Industrialists Federation (OEB) criticised the ills of our civil service, and this happened often, we were lambasted by the vested interests within and outside the civil service that benefited from the status quo. Our substantiated arguments were met not with counter-arguments, but with populist slogans. Facts and numbers seem to completely escape the attention of our critics, who prefer attacking our person than our arguments. This is understandable. It is easier to label someone as enemy of the workers than to argue against the unpalatable truth that we have the most expensive civil service in the Eurozone and the second most expensive in the entire EU (in terms of employee compensation spending as a percentage of GDP). It is easier to label someone as enemy of the people than to explain that due to the high public wage bill as a share of total government expenditure (the highest in the EU), there is less money available for other expenditures, investments, social transfers and social provisions. But again, it s not as if the unemployed or struggling businesses suffer hardships and need support these days. A number of suggestions to help reform the civil service were also presented by the foreign experts that were generally in the right direction. Their suggestions include, in broad terms, the reformation of the combined salary scales system and annual increments, the revision of the pay structure and the introduction of an open, accountable, meritocratic and performance-driven system of appraisals and career advancement. OEB will closely monitor the reform process and contribute to its implementation in a constructive, substantiated and unprejudiced manner, though I am concerned that the gradual improvement of the economy may hinder the whole process. The evidence in favour of a substantial civil service reform is overwhelming. The current wage structure is sustained at the expense of the rest of the economy, whereas the unfair system of appraisals that emphasises seniority over ability, merit and performance penalises those ambitious and highly productive civil servants who had the misfortune of being hired too late. The true cost of this dysfunctional system, both in terms of money and lost productivity, is borne by the taxpayer. Today we have a golden opportunity to make a positive change for our country. The civil service has a crucial role to play in maintaining an efficient and operational economy as well as helping maintain social cohesion and the high standards of living that we have grown accustomed to. The longer we postpone civil service reform, the longer it will take for the economy to recover. Now is the time for every stakeholder to show its true colours and prove if they are friends or enemies of the people

21 Economy Balancing between fiscal discipline and growth policies Crime and Punishment in Cyprus By Dr. Jim Leontiades Cyprus International Institute of Management A good business environment requires a strong legal and judicial system. The growing number of scandals here raise concerns about the effectiveness of justice in Cyprus. Is it possible that in this small, inward looking and interrelated society that no one knew what was going on within the Paphos Municipality? Or that such knowledge was limited to a small group who distributed bags of money among themselves? No one really believes that. A more likely explanation is that we have become so accustomed to such behavior as part of the expected pattern of life on the island that it occasions neither surprise nor outrage. News of similar investigations appear almost daily. TEPAK university and its exorbitant payments for buildings rented and not used, new buildings paid for but not built. Nicosia tax authorities apparently reducing taxes to whoever they felt deserved it. Here and in the Dromolaxia scandal concerning land purchases by the CYTA pension fund, it is not small operators short of cash that are involved but highly placed public servants who already had high paying jobs. Surely, it is not enough that penalties are awarded to those found guilty. The refund of any money obtained illegally should also be required. Slow Justice Major transgressions which are addressed quickly in other countries seem to linger within the Cypriot judicial process for years. The Helios aircraft disaster in Greece occurred in August, The case was brought to court four years later, after innumerable expense paid trips between Athens and Cyprus of those investigating the incident. The trial lasted three more years before the Cypriot court acquitted the four defendants of all charges (the Greek courts took 5 months to convict and sentence four Helios defendants to 10 years in jail). Cypriot justice is swift if someone robs a newsstand or grocery store. In such cases the police and the courts are models of judicial rigor and efficiency. Not so when it comes to events such as the recent financial crisis which has put the entire country in bankruptcy and where the issues involve political figures or those in the upper strata of Cypriot society. Justice here has not only been turtle slow but results have been virtually nil. Responsibility for the Financial Crisis The search for those responsible for the financial crisis got off to what seemed like a promising start. The government was quick to appoint a commission headed by three judges to hold an independent, open and fully transparent investigation into the financial crisis. After months of investigation and public testimony televised for all to see, the commission published its report. The summary of the Commission of inquiry s report placed the major guilt for the crisis on the previous President of the Republic and the political parties which supported his government. The report was promptly brushed aside to be replaced by a far from transparent, internal government investigation whose results are still to see the light of day. This elicited little comment, possibly because citizens have seen it all before. The findings of the government s own commission investigating the Mari disaster were similarly dismissed. Here again, an open and transparent investigation which identified political figures was rejected and replaced by an internal government inquiry. Today, the current search for the guilty parties behind the financial crisis continues. The focus is now on bankers. No doubt it is entirely a coincidence that this deflects blame away from the politicians and political parties which the government s own commission of inquiry found to be the main culprits. The president was right when he described his job of dealing with such scandals as one of cleaning the Augean stables. The Cypriot judicial system should be the Hercules leading the cleanup but it seems to be more a part of the problem than a part of the solution. By Tassos Yiasemides, Board Member, KPMG Limited and Georgia Mouskou, Advisor II, KPMG Limited It is a fact that Cyprus financial indications are improving and that a budgetary surplus has been achieved in 2014, while public debt, after the change in the statistical method of its calculation stands at 105% of GDP. However, what currently remains as one of the most important problems is the need to reduce non-performing loans and the need for deleveraging, due to the over-indebtedness of businesses and households. In relation to Greece, many problems arise due to the size of public debt, which, despite the fact that the country has been under an Economic Adjustment Programme for the past five years, this has not been reduced. Moreover, the adopted measures have caused social unrest on numerous occasions, with unemployment having reached high levels. The quest for Europe now is to create conditions for growth. The U.S.A. has chosen a different path to deal with the financial crisis by injecting additional liquidity in the market, via quantitative easing programmes of the Federal Reserve and programmes enhancing public and government spending/investment. The European Central Bank has recently announced a similar policy of quantitative easing and its implementation has started in March However, to enhance the efficiency of this policy, it should be combined with the application of important growth policies contained in the Juncker package. This is crucial so as to ensure that the increased liquidity is given to productive units of the economy, which will have a multiplier effect and will create new employment opportunities. In a constantly changing economic and political environment, economies should demonstrate flexibility and adopt reforms, which will allow them to maintain their attractiveness. Enhancing competitiveness, productivity and the quality of the end product or services will facilitate an economy s return to positive growth rates. The key characteristics that should govern implemented policies are fiscal consolidation, structural reforms and granting of incentives and financing to boost growth. Nonetheless, in implementing such policies a balance must be struck. Excessive increase of taxation, as well as salary reductions deprive the market of liquidity and, consequently, restrict consumption, while they may also cause social unrest. However, this does not mean that reckless policies of increasing expenditure should be allowed, especially if they will not be beneficial for the economy and will merely create deficits. The impact of improved financial indicators in the real economy and the citizens is not direct. For instance, the Greek government supports that the goals set for the budget surplus are so high that are in essence depriving much-needed capital from the economy, which could be allocated to investment and consumption. This does not, however, mean that the reform programme of the country aiming at correcting imbalances and structural problems should be terminated. With an economy suffering a loss of about 20% of its GDP within five years, even low positive growth rates it cannot be considered as a return to stability. On the other hand, there is also the example of Ireland, which managed to exit its Economic Adjustment Programme and is now one of the fastest growing economies of Europe. Cyprus remains the second member state of the EU in terms of percentage of private debt in terms of GDP, exceeding 200%. This has, on the one hand, caused problems in relation to repayment of loans and, on the other hand, has limited the possibility for granting new loans. The interest rate reductions will allow for some breathing space for consumers and companies, since reduction of instalments is expected for those loans that are connected with the basic interest rate. However, the need for deleveraging is great and the efforts for attracting foreign investment in the country should be enhanced. Beyond motives that should be offered towards this end, it is equally important to promote such reforms that will facilitate entrepreneurship, eliminating any unnecessary red tape and bureaucratic obstacles

22 Economy Cyprus must stick to the plan The Cypriot economy s path towards recovery was put in jeopardy during the last few months of 2014 but more recent developments hold promise for a return to a positive trajectory. By Sofronis Clerides Associate Professor of Economics University of Cyprus The damage was primarily due to exogenous developments. Foremost among them was the economic crisis in Russia (highlighted by the collapse of the ruble), and the imposition of EU sanctions against Russian interests. In addition, a deterioration of the climate in Greece that led to rising Greek bond yields last fall also affected Cypriot bonds at the time. Domestically, the impasse over the foreclosure law and the consequent delay in the Troika s evaluation of the Memorandum of Understanding (MoU) contributed to the climate of uncertainty. As a result of these developments, the improvement in the Cypriot GDP growth rate reversed itself slightly in the second half of The year closed with a -2.3% growth rate, compared to -5.4% in Fortunately, the climate reversed itself again in January due to the European Central Bank s announcement of its Quantitative Easing program (QE). This important development had an immediate impact, leading to a depreciation of the euro and a drop in European bond yields. Cyprus stands to gain from both of these developments. Actual implementation of the program starting March 9 led to further declines in both the value of the euro and bond yields. The yield of the Cypriot 10-year bond dropped below 4%, to its lowest point since Growth prospects in the euro area are looking more favorable, something that will also benefit Cyprus. On the domestic front, there finally seems to be light at the end of the tunnel on the controversial issue of the foreclosure law. The political parties appear to be converging and barring any unforeseen surprises the law should be passed before the end of March. This will open the door to an evaluation by the Troika in April. A positive A positive evaluation by the Troika in April will allow Cyprus to participate in the QE program. evaluation will allow Cyprus to participate in the QE program. Given these developments, the outlook for a return by Cyprus to international markets within 2015 currently seems very positive. The major downside risk to the economy now comes yet again from Greece. The newly elected Greek government has adopted a confrontational stance towards its European partners. This has led to a rapid deterioration in the country s position: tax revenues have declined, deposit withdrawals have increased significantly and talk of Grexit has returned. Greece s tough stance caused some excitement in Cyprus and there were suggestions that it should adopt a similarly confrontational approach. These voices have fortunately died down since the Eurogroup decision of February 20th, which showed that Greece s approach was not paying off. Nonetheless, the situation in Greece must be monitored closely. The links between the economies of Greece and Cyprus are not as close as they used to be, but Greece remains an important trading partner and subsidiaries of Greek banks operate in Cyprus. Yet the most important risks to Cyprus of continuing tension in Greece and even a Greek exit from the euro are not economic but political. Many outsiders view Greece and Cyprus as similar. If Greece heads towards the exit, some might be tempted to think that Cyprus will follow along. Cyprus must fight this perception and convince the outside world that, despite the similarities, Cyprus is not Greece. There is one surefire way of achieving this: stick to the plan of sound fiscal management and timely completion of the MoU. Public debt and fiscal and monetary policies By Tassos Anastasiades, Economist Deputy Editor, Accountancy Cyprus & Former Director, Ministry of Finance Fiscal policy refers to the increase or decrease of public expenditure and/or taxation thus affecting consumption and investment demand so as to achieve full employment without inflationary pressures. With conventional monetary policy the interest rates are raised or reduced so as to affect again consumption and investment demand. In cases of danger for recession the interest rates are reduced and are raised when there is danger of inflationary pressures. But in to-days economic environment conventional monetary policy is ineffective in achieving its targets. While interest rates are reduced almost to zero yet there is no willingness to borrow neither by consumers nor by investors. This is the phenomenon of liquidity trap. Consumers do not borrow both because they face the serious problem of repaying their existing loans and because of the possibility of deflation (falling prices) they are expecting further fall in prices and thus they are postponing their purchases. Also the investors are facing both the problem of repaying their existing loans and inadequate demand in the market and thus they are not interested to get into more credit. Also a study carried out in the USA has shown that a more significant factor from the availability of ample liquidity with low interest rates for undertaking investment activities is the increase in profits. Thus if profits are reduced investments are also reduced. Significant factors are also lower taxation, less bureaucracy and less onerous regulation. Thus starting with Japan a decade ago nonconventional monetary policies, such as quantitative easing, have been introduced. By quantitative easing the Central Bank buys mainly government bonds by the issue of new money so as to give a push to the increase of demand and economic growth and also to the avoidance of deflation. The Central Bank of Japan was followed by the USA Federal Reserve and later by the Bank of England. Recently the European Central Bank has also decided to introduce quantitative easing by which it will buy bonds amounting to 60 billion monthly until September The policy of quantitative easing has not been successful in Japan to raise prices, defeat deflation, or to lead to economic growth. However it has been successful in the USA and the UK which achieved growth rates of 2,7% and 2,8% respectively. Cyprus may participate in this programme of quantitative easing provided it fulfils its obligations emanating from the loan agreement (memorandum) signed with Troika. Cyprus in entitled to an amount of 500 million. The programme of quantitative easing has started on the 9th March

23 Economy Thus because monetary policy in most developed countries has failed to achieve its desirable goals, fiscal policy must be used. This entails the increase of public expenditure for executing public infrastructure projects and the reduction of taxation so that demand may rise thus leading to the increase of consumption and investment expenditure. But with fiscal policy the public debt rises and as professors Kenneth Rogoff and Carmen Reinhast of Harvard University, a public debt higher than 90% of GNP leads to significant decrease of economic growth. This is because the rating agencies downgrade the country s credit rating and can borrow only at a mush higher interest rate. Also any fiscal surplus is used for debt repayment. It is noted that the public debt of Cyprus has reached 107% of GNP while private debt is a horrendous 350% of GNP, one of the highest in the eurozone. In another study carried out by professors Michael Ash and Robert Pollin of the MIT it is argued that when the public debt reaches above 90% of GNP, growth does not stop abruptly but it slows down. But the pace at which public expenditure is reduced should be different for the countries which introduce structural reform measures and more time should be given to reduce public deficits and public debt. This is because such structural reform measures will lead to improved competitiveness and thus to higher tax revenue in the future. This is the reason why the European Commission has allowed France to extend the deadline for bringing its budget under the EU s limited of 3% of GNP by two years from 2015 to It may noted that Jean-Claude Juncker, the Commission President has recently unveiled guidelines offering more budget flexibility for states introducing reform measures. Also it is argued by some economics that while public current expenditure should be financed by current revenue, ie taxation, investment expenditure can be financed by borrowing because they refer to a long-term period and also because such investment will lead to the improved competitiveness of the country s economy and thus to higher production. In the recent half-yearly report of the IMF it is stated that at least for the developed countries the expenditure for infrastructural projects can significantly raise the growth rate as a result of increasing demand in the short run and by increasing production in the long-run. When investment is financed by borrowing such borrowing should not lead to the increase of interest rates. This is because such expenditure will lead to the crowding out of private investment. Good results are more significant in countries with marginal growth rate, interest rates are low, there is unemployment while there is also no significant demand for loans. Under such conditions an increase in public expenditure of one percentage of GNP will increase the country s GNP by 1.5 percentage points in the first year and by three percentage points in the 4th year. In contrast in a rapidly developing economy the effects of raising public expenditure are negative in the first year and only marginally positive in the 4th year. This in because private investment is adversely affected (crowded out). Consequently by the decision of the ECB to introduce as from 9 March 2015 quantitative easing by buying bonds amounting to 60 billion monthly until September 2016 it is a chance to finance infrastructural projects so as to increase demand and employment in the short-run and production and economic growth in the long-ran. But as the European Commission and the IMF state the execution of infrastructural projects should be accompanied by economic reform measures with the objective of raising the competitiveness of the country. It may finally be stated that Cyprus cannot compete in the international environment if it continues in the way it lived before the introduction of the economic reform measures provided in the memorandum signed with Troika. As for example for wages and salaries to be rising at a higher rate than the increase in productivity, as it was the norm in the last 20 years. Many economists believe that the problems faced by the eurozone states in the South are mainly the result of higher wage rises than the rise in productivity. The war of deflation By Frixos Kyprianou Director MK KYPRIANOU LTD The ECB president, Mario Draghi, recently announced that the bank s Governing Council had been forced to resort to the unconventional measure of QE, otherwise known as quantitive easing, or in less sophisticated language as money printing, in an attempt to fight deflation and foster growth. The measures include the printing of an additional 60 billion that is billions, not millions - every month until September The basic idea is that the ECB will lend this money to the banks and the banks will lend the money to customers who the ECB hopes will make good use of it. Hopefully after all this printing the EU will finally get some growth and improvement in the unemployment figures. Finally, as a consequence spending should increase pushing up inflation to the 2% target set by the ECB. Within the circles of the banking and political elite deflation is a horrendous bogeyman that must be killed at all costs, hence the printing. In theory at least, people spend now because if they spend later things will be more expensive. If deflation sets in the opposite is likely to occur. If people expect things to be cheaper later on they will hold onto their cash and defer purchases so as to pay less. According to the economic theorists this eventually creates a deflationary spiral that is impossible to stop until prices really collapse. By definition deflation reduces government income, increases unemployment and increases the financial burden on people, businesses and countries that are heavily in debt. In effect loans have to be repaid with money that is becoming more expensive as time goes by. On the other hand, deflation is a heavenly situation for people that hold cash (assuming of course they have a safe place to keep it ). I am of the opinion that the new measures announced will not have any positive effect in EU growth and despite QE deflation will nevertheless occur. Where I believe the ECB is wrong about its estimates is that they are based on the expectation of persuading consumers to take on further credit, which is something that people do not really want any more. Most Europeans are already in debt up to their necks, and in many cases deeper. The current trend within the EU is for salaries to stagnate or drop, making the servicing of debts a huge task. Under such situation how can the ECB convince responsible people to borrow more? They have a product that will simply not sell. Perhaps worse, if this new credit is taken by people who cannot or do not intend to repay, we will have a new banking collapse waiting for us in a few years time. Considering whether QE can provide solutions to current economic problems one can also have a look to Japan for answers. They have been printing money like crazy for the last twenty years but deflation persists. In economic terms this is a clear case of liquidity trap where there is no demand for money. As counter argument to the above, some people will point towards the US QE program. The experience of QE in the United States is that very little money has actually filtered into the real economy. Theoretically they have achieved some very healthy growth rates and managed to reduce unemployment to around 6%. This is the picture the politicians like to present, but it is far from the complete picture. The real story behind the numbers is that most of the new jobs are what are known as McJobs - low paying jobs with no guaranteed hours or income that people cannot rely on to support them and their families. As a result the state is still required to provide assistance to these employees in the form of food stamps. Also statistics show that real wages adjusted for inflation have overall been going down the last few years with more and more people needing government hand outs to survive. For the average person there has been no benefit from the QE. The beneficiaries of QE in the US (and in Britain as well) are not consumers or businessmen wanting to create a new enterprise. The beneficiaries have been the hedge fund managers that were borrowing at little cost and investing heavily in bonds or stocks. The end result is a massive bubble in the stock and bond markets that, when it bursts, as it inevitably will, will make 2008 look like a walk in the park. In any case and irrespective of what is going to happen in the European economy, the truth is that despite of all the sophisticated terms that are being used to give central bankers some scientific aura, the entire printing saga is no more than a lot of hot air with unknown adverse consequences. From the moment the money supply is not backed by any real assets and it only depends on the printing presses, whether this is called QE or whatever else, money becomes a tool that can be subject to abuse by politicians and bankers, who are not known for their ability to resist temptation. Whenever there is abuse of whatever nature, it never ends well

24 Economy Bailout plan: Trying to reason with the unreasonable By George Mouskides General Manager, FOX Smart Estate Agency Licensed Estate Agent, US Certified Public Accountant Foolishness is alive and well in Cyprus and it seems most of us are catching the disease. Can anyone add substance to the terms promemorandum and anti-memorandum? Why on earth do political parties try so hard to split us into these two groups? Why are some political parties, especially AKEL, and labour unions antimemorandum? It is understandable for people to be split into those wishing a loan (from Troika i.e. European commission, European Central Bank and the International Monetary Fund), and those opposed to such financing. This is a clear choice. Another clear-cut option to take or leave is to keep the euro ( ), as our currency or go back to the pound, ( ). Foolishness is alive and well in Cyprus and it seems most of us are catching the disease. For better or worse For better or worse, our country decided to get a loan from Troika and stick to the euro. The memorandum is simply the agreement we co-signed with our lenders and includes the interest rate, the re-payment period and many other conditions, which we have to observe so that we can repay our debt. These other conditions have been set because Cyprus as well as our lenders believe that we did not keep our finances in order, wasting money left and right, (public sector inefficiency, tax evasion, etc). These other conditions are in place in the memorandum to offer solutions to various structural problems in the economy and stabilize state finances so that when the bail-out is completed, we can function again as an independent, democratic country without the need of more bailout schemes from Troika. Until that happens we have to stick to the memorandum not because the Troika orders us to, but because it is the right thing to do for our economy and people. Austerity without growth Many will argue that the memorandum/ bailout plan enforces strict austerity measures and prohibits growth. On the contrary, it provides for so- cial justice by cutting down on tax evasion and waste of funds which can be directed towards helping those in need in the form of pensions or other forms of help to the public. Money saved by a more competent state can be used to promote the growth of the economy. It is true that up to now the government has not taken tough measures to put its house in order and has not invested in growth. A lot remains to be done to ensure a healthier, more productive economy. Who are those opposed to the bailout plan? They are mainly those who stand to gain from money wasted and the inefficiency of the public sector. Deep down they know that their paycheck and pensions do not reflect their contribution or the state s abilities to pay but are not willing to part with their super privileges. I am not referring to civil servants with low income but to the privileged ones who do not wish to give anything up. It is quite absurd that they are falsely suggesting that the existing inefficient and wasteful system is promoting social justice just to secure the continuation of the opposite social injustice. March 2013 We have to remember that in March 2013 we went bankrupt. Only Cypriots are to blame for the bankruptcy governments, political parties, privileged individuals, voters - and we all know it. Nobody was willing to give us a loan at the time except the Troika, giving us a last chance to put a short leash on overspending and put the house in order. It appears that we ve learned little from mistakes of the past. Do the opponents of the memorandum propose that the state should follow the bad example of the Cyprus Airways? In other words, not to take the much required corrective measures and allow our country to go bust? Can we not agree, even at this late stage, on a formula and start functioning in a rational way? We only have to copy the examples of other European nations which employ better management practices resulting in fewer problems. Why are some political parties and labour unions the most vocal in the anti-bailout camp? The main reason is that they seek to protect absurd and unjust vested interests which are bound to suffer if the right measures to curb the waste of money are adopted. Once again, we are not proponents of cutting wages and benefits for the middle to low income strata. Have you ever heard the unions for example, to suggest the reduction of specific benefits of the privileged? Or specific measures to improve the efficiency of the civil service? Another clear-cut option to take or leave is to keep the euro ( ), as our currency or go back to the pound, ( ). Corrective measures Some of the successful measures taken by other countries are included in the memorandum. Instead of recognizing the need of adoption of these measures we are seeking to make a speedy exit. I agree that some conditions of the plan can be adjusted. For example, I would suggest a longer repayment period at a lower interest rate, something which we need to discuss again with the Troika. What is absurd is trying to rid ourselves of the conditions of the rescue plan which aim to improve our economy, just to protect certain individuals who stand to profit from non-implementation and maintaining the status quo. Unfortunately, it seems that the privileged have the power to get their way with political parties, labour unions and the media. They try to convince us it s bright and sunny while it s pitch dark and we re on the brink of agreeing with them. What we are witnessing is the theatre of the absurd. Something needs to change in the Cypriot society before it is too late

25 Economy Transfer pricing in light of the EU State aid rules The process of abolishing the economic borders and establishing the common internal market, has contributed to the expansion of multinational corporations and the growth of cross-border transactions between associated companies. Dr. Panayiotis Agisilaou Managing Director Trojan Economics Despite the benefits, the globalization of markets enabled multinational corporations, and more generally companies within the same group, to contrive ways to minimize their tax base and thus avoid taxation. A tool which is increasingly used to achieve this is transfer pricing, which refers to the terms and conditions surrounding intra-group transactions. Such transactions may involve sales or purchases of products (intermediate and final) and services, intangible assets (e.g. intellectual property rights and loyalties) and loans between companies of the same group, which operate in different tax jurisdictions. Effectively, Prudent group of companies can strategically exploit transfer pricing in order to allocate taxable profits from one company of the group to another, taking into account the tax status or asymmetries of the States in which the companies are established or taxed. The most critical parameter in relation to intragroup transactions is the price at which the transactions take place, known as the transfer price. When the value of the transaction is based on market prices, i.e. the prices that are formed in a market with free competition between independent companies, then no serious issues can emerge. However, when the transaction value is determined on the basis of an administrative decision by a competent tax authority of an EU Member State, then thorny issues can arise in relation to competition, and particularly infringements of the State aid rules. The main concern is that transaction prices which do not reflect market conditions may provide, in a selective manner, tax benefits to a specific company visà-vis other competing companies with a different organizational structure. It should be highlighted that although the European Commission has no direct authority over national tax systems, it may, nevertheless, investigate whether specific tax regimes, including decisions of the competent tax authorities of the Member States, constitute State aid within the meaning of article 107 of the Treaty on the Functioning of the European Union. The said article declares that State aid, in whatever form, which influences a State s budget, either by increasing its expenses or lowering its revenues, are incompatible with the internal market provided that they distort or threaten to distort competition and affect the trade between EU Member States. Hence, to the extent that the decision of a tax authority, in relation to the estimation of transfer prices concerning intra-group transactions, provide an economic advantage, namely results in a lower tax that would otherwise be paid, a case of State aid rules violation may be established. The accepted international standard regarding the calculation of transfer prices is the arm s length principle, which is defined in article 9 of the OECD Model Tax Convention. According to this principle, the commercial and financial transactions between associated companies should not differ from those that would apply between comparable independent companies under market conditions. The European Court of Justice has ruled that when the method for calculating the transfer prices does not meet the arm s length principle, the tax base of the company in question erodes, compared to that which would apply when the said principle is fulfilled. As a result, the practice of transfer pricing may provide a selective advantage to the specific group of companies. It should be noted that the meaning of selective advantage includes not only positive benefits, but also measures which, in any form, mitigate a company s budget. In view of the above, the recent announcements by the European Commission in relation to the opening of in-depth investigations against Ireland, the Netherlands and Luxembourg, pertaining to their agreements with Apple, Starbucks, Fiat Finance and Trade and Amazon, respectively, regarding transfer pricing issues, is of particular importance, both in terms of ensuring a level playing field between different tax jurisdictions and restraining tax-avoidance as well. Transfer pricing has become increasingly a hot topic for the European Commission and the State aid law practitioners, and it seems that it will dominate EU wide tax policy debates, including the on-going discussions for the adoption of a uniform tax rate. Cypriot football club s finances: We are in the right direction, but still considerable work has to be done, since finances are precarious This article is based on the data presented and discussed by UEFA officials on Club Licensing and Financial Fair Play (Mr Giancarlo Dapoto, Club Licensing Manager, UEFA and Mr Philippe Rasmussen, Finacial Fair Play Manager, UEFA) in Nicosia on 22nd of January The main purpose of this presentation was to show the current status of Cypriot football clubs in terms of their financial sustainability and future development. By Christos Antoniou Senior Manager, Audit, KPMG LIMITED Member of Larnaca-Famagusta Coordinating Committee of ICPAC The main principle of the Financial Fair Play (FFP) is to ensure that the clubs cannot repeatedly spend more than their generated revenues. In this way UEFA wants to protect the long-term viability and sustainability of European football. This proactive measure has already achieved some positive results. For example, out of the 729 top division clubs in Europe, UEFA refused to grant a license to 108 clubs in Even those clubs that have qualified to European competitions, lost their position (27 clubs for the last 3 years) since they did not comply with the imposed financial criteria. The statistics show that for the last season 10 top European clubs have been punished with heavy financial penalties because they did not compy with the FFP criteria. As it was highlighted by the presenters, in 2013 top division clubs revenue has increased by 6%, whereas wage growth slowed down to 4.3% (the lowest rate of growth in the last decade). The significant output is that by introducing the FFP, aggregate losses have been halved in the first 2 years of its successful implemenation. During the presentation, UEFA officials went on to analyse the football finances and the economic reality of Cypriot clubs. A positive remark is that to date, UEFA has not refused entry to European competitions to any Cypriot football club. The Revenue of Cypriot football clubs in 2013 was 54m. The wage-to-revenue ratio was 62%, which made it just below the European average ratio. They admitted that a few years ago, Cyprus was ranked 1st in terms of legal proceedings submitted to UEFA by footballers and coaching staff. There was poor cost control and imbalance between revenue and expenses. Moreover, a going concern qualification was expressed by almost all the auditors on the ability of our football clubs to continue as a going concern. However, the last couple of years the financial position has been substantially improved mostly due to the reduction in the budgets of our clubs, tight control on the FFP and success in European competitions. The wage-to-revenue ratio has been significantly reduced to a viable level of 62% in 2013 and 58% in For the first time in recent years, the aggregate results of Cypriot clubs showed a profit ( 3m profit in 2014 as opposed to 17m losses in 2010). They stated that a few years ago Cyprus was the 2nd worst country in Europe in terms of negative equity. This is because in 2012 total assets were 58m compared to 85m of total liabilities, giving a 27m negative equity. However, after 5 years of balance sheet deficits, the first noticeable improvement appeared in In 2014 the total liabilities have been reduced substantially to 70m and comparing it to 56m total assets, our clubs negative equity was reduced to 14m. This improvement in 2014 meant that we have upgraded our position in the rating of negative equity and we have moved seven places up in the relevant ranking (compared to the 2nd worst place that we used to stand on). The picture of Cypriot football regarding the clubs finances keeps on improving. A lot of hard work still has to be done, but certainly we are on the correct track. The presentation of the UEFA officials showed the first tangible positive signs for Cypriot clubs from the implementation of the FFP. Mr Dapoto s concluding words of the presentation were encouraging: you are in the right direction, but still considerable work has to be done, since finances are precarious

26 Economy Cyprus banking sector: looking beyond the stress tests By Christoforos Evlavis Assistant Manager Financial Risk Management KPMG Limited The announcement of the European Banking Authority s (EBA) Stress testing results (also referred to as the Comprehensive Assessment ) has produced mixed responses amongst the European financial industry. Many welcome the results as an important first step towards a more integrated and eventually safer European banking sector under the supervision of the European Central Bank s Single Supervisory Mechanism (SSM). Conversely, the skeptics argue that similar stress tests had been performed by EBA and the European Central Bank (ECB) in the past (this is the third stress test performed by the EBA) without being able to identify the capital shortfalls of European banks. The ECB and EBA respond that things are different this time around. The traditional stress test which is part of the Comprehensive Assessment is similar to what has been carried out before with mixed success (the aim of the stress tests is to model what happens to a bank under different stress scenarios, such as a significant reduction in house prices, checking that it remains solvent). However, there is also a new element in the current assessment that differentiates it from past exercises. Using external auditors, the ECB has also simultaneously carried out a comprehensive audit of the participating banks assets, what is called the Asset Quality Review (AQR), in order to identify cases where their assets have not been appropriately valued. In the case of banks the most important asset class is their loan book, the value of which depends on the borrower s ability to repay the loan and/or on the value of the collateral securing the loan (e.g. in the case of a housing loan this would be the mortgage on the house). Through the AQR the EBA and ECB aimed to reveal problematic loans which were previously hidden in the banks balance sheets before performing the stress tests. The ECB has staked a lot on this Comprehensive Assessment of the European Banking sector, and it is thus important to understand what its objectives are and also what is the importance of achieving those objectives to the various stakeholders of the banking sector in Cyprus. The objectives of the ECB appear to be primarily aimed at: a) Enhancing the harmonization of the European banking sector (e.g. by using a common definition for Non Performing Loans) and providing a better visibility of European banks credit quality; b) Cleaning up the system before taking over as a supervisor; c) Ensuring that the European banking sector is fit to work as a transmission mechanism for ECB s monetary policy; d) Strengthening the perception of ECB as the most credible financial institution in Europe. The above are key pre-requisites, which will allow the establishment of the Single Supervisory Mechanism that in turn is a key step towards the creation of a banking union. So how will the achievement of the above objectives and the subsequent establishment of the SSM potentially benefit the different stakeholders of the banking sector in Cyprus? Depositors The first group of stakeholders who are likely to benefit from the new regime is depositors, both through the improved visibility of each bank s credit quality resulting from the Comprehensive Assessment and due to the fact that Cypriot Banks will now be under the direct supervision of the ECB. Both these factors will increase confidence and reduce uncertainty amongst depositors who will now have more reliable and accurate information and be in a better position make informed decisions as to where to place their funds. This is particularly important for depositors in Cyprus whose confidence in the banking sector was shattered as a result of the events of the past eighteen months. Borrowers Benefits to the borrowers from the results of the Comprehensive Assessment and the subsequent supervision of Cypriot banks under the SSM are likely to be threefold. Firstly, the improved liquidity that is likely to result from the improvement in depositor confidence will probably allow to banks to increase liquidity in the real economy through the provision of more loans. This is particularly important as increased liquidity provided by the banks will help speed up the recovery of the real economy. Secondly, reduced liquidity pressure from deposit outflows will probably lead to a reduction in banks deposit interest rates and in turn a reduction in lending interest rates, thus reducing the cost for borrowers. Finally, the harmonization of banking definitions and regulations such as the definition of Non Performing loans and the direct supervision by the SSN will likely enhance the quality of the loan acceptance and loan monitoring processes used by Cypriot banks, thus protecting borrowers from unsustainable levels of debt, Taxpayer The direct benefit for the Cypriot taxpayers is that the Comprehensive Assessment has not resulted in any additional capital needs for the Cypriot banking system which need to be covered by the government. This has allowed the Cyprus government to avoid making use of the additional EUR 1bn of funds earmarked by Troika to cover any capital needs of the banking system. Potential use of these funds would have increased the public debt and could have had a negative impact on taxpayers in Cyprus. Moreover, the Comprehensive Assessment and the subsequent direct supervision of Cypriot Banks by the SSM will also help protect Cypriot taxpayers from future banking crises. In the future, failing banks supervised by the SSM will be managed by the Single Resolution Mechanism (SRM) of the ECB, which will be financed by the banking sector and will aim to ensure their orderly resolution with minimal costs for taxpayers and to the real economy. Shareholders and Investors Finally, shareholders and investors are likely to benefit from the improved financial information and better visibility on the credit quality of Cypriot banks resulting from the Comprehensive Assessment, as this will allow them to make better informed decisions and more effectively monitor the performance of the bank s management. Challenges still lie ahead The Comprehensive Assessment was just the first step of the roadmap towards a European Banking Union. The extent to which the potential benefits of the Comprehensive Assessment and the subsequent supervision of Cypriot Banks by the SSM will materialize still remains to be seen. It is however important that the Cyprus Banking Sector takes advantage of the opportunity provided by the new regime to make the necessary cultural, structural and organisational changes to the banking sector in order to ensure that the benefits to the various stakeholders are maximized

27 Economy Corporate Governance and Equity Prices Antypas Asfour, CFA, CMT, PRM * In the previous issue of Accountancy Cyprus (N. 117), the Corporate Governance, Internal Audit and Risk Management Committee (herein, the Committee) of the Institute of Certified Public Accountants of Cyprus published an article containing the results of a survey aimed to identify major corporate governance practices employed by companies listed on the Cyprus Stock Exchange. This was a truly valiant effort, especially given the crisis period in which the study was conducted, as research on corporate governance practices in Cyprus is limited to say the least. The conclusions from the study indicate, as expected, weaknesses in various facets of corporate governance, which in fact may be larger than what is presented at face value. The use of self-reported questionnaires as a methodological tool may give rise to certain biases, such as social desirability bias with firms responding what is socially accepted of them, and selection bias through non-responder bias as firms who choose not to reply are more likely to have a poor corporate governance track record. Thus it is safe to assume that, at best, the picture is what was presented following the study, with a rather high probability that the situation is worse than reported. Consequently, I second the Committee s opinion that constant improvements and adherence to corporate governance policies and practices are required in order to lay the foundations for a stronger, more robust, and more transparent economy and stock market. The burden of this change, however, does not only reside on firms but also on other stakeholders such as regulators, shareholders, and the government. All these parties need to comprehend that better corporate governance practices ultimately reduce the risk for investors as the aim of corporate governance principles is to mitigate the principalagent problem by aligning the interests of managers and directors with those of the shareholders. In fact, solid corporate governance foundations can do more than just alleviate risk, potentially adding value to a firm. This potential, which has led to a debate in the finance literature, was identified following a seminal paper by Gompers, Ishii and Metrick (2003) (herein, GIM), who find that firms with stronger shareholder rights outperformed firms with weak shareholder rights. Moreover, a value-weighted (equal-weighted) hedge portfolio, long firms with strongest rights and short those with weakest would have generated an abnormal return of 8.5% (5.4%) per annum over the sample period from 1990 to 1999, after adjusting for portfolio factor exposures using Carhart s four-factor model. This correlation between levels of corporate takeover defences and stock returns is partially validated by Cremers and Nair (2005), who extend the sample period to 2001, thus incorporating both a bull and a bear market in their study. Core, Guay and Rusticus (2006), however, find that firms with weak shareholder rights in fact outperformed those with strong rights in the four years following the GIM sample period (from 2000 to 2003). This finding is even more peculiar given the attention on governance scandals such as Enron, WorldCom and Marconi during this period. Cremers and Nair (2005) also report conflicting findings when the Governance Index cut-offs at the extremes are loosened by one provision to permit ample firms to meet the criteria in order to investigate how external governance interacts with shareholder activism. They conclude, however, that internal governance complements external governance, demonstrating that a portfolio that buys firms with the highest level of takeover vulnerability and shorts those with the lowest level will generate annualised alpha of 10 to 15% when blockholder ownership is also high. Bebchuk, Cohen, and Ferrell (2009), though, also produce salient results when investigating the correlation between Institutional Investors Research Center (IRRC) provisions and stockholder returns. Utilising a developed en- trenchment index, incorporating a selective set of six IRRC provisions, they find that a portfolio which went long firms with the lowest possible entrenchment index score of 0 and short sold high index scores of 5 and 6, would have yielded significant annualised alpha of 14.8% (7.4%) for the value-weighted (equal-weighted) portfolio. Evidence outside the US is less conflicting, with the relationship between governance and firm value seeming stronger in countries with less developed governance standards. Chueng et al. (2011), who develop an index based on the OECD principles, find that improvements in governance practices lead to statistically significant increases in Tobin s Q in the subsequent period for large Hong Kong listed companies. Correspondingly, firms that experienced an index declination generally witnessed a fall in subsequent Tobin s Q. Klapper and Love (2004) and Morey et al. (2009) share similar findings from their study of 14 and 21 emerging markets respectively, since they identify a significant positive relationship between governance levels and valuation. Moreover, using monthly firm-level governance ratings, which enable a time-series analysis, Morey et al. (2009) are able to limit endogeneity issues, showing that changes in governance ratings lead to changes in firm value. Evidence by Braga-Alves and Shastri (2011) from the emerging Brazilian market shows a positive statistical relationship between a constructed index of proxies for six good governance practices and market value, but no significant relationship between the index and operating performance. As previously mentioned, evidence on the impact of corporate governance on Cyprus Stock Exchange firms is limited, partly due to the market s infancy, since it was established in Despite its infancy, though, the market has already experienced a crash in 2000, partly due to an inexistent corporate governance framework (Krambia-Kapardis and Psaros, 2006). Following this collapse, a Corporate Governance Code was developed, however, Krambia-Kapardis and Psaros (2006) show that the vast majority of firms did not comply with any aspects of the Code, though it is highlighted that the situation is improving, which seems to be the case based on the Committee s recent survey. In recent years, there is emergent research on the impact of corporate governance mechanisms to firm value and market returns during the Great Recession. Cornett et al. (2009) find weakening corporate governance during the period leading up to and including the crisis. Moreover, similar to aforementioned pre-crisis studies that found a relationship between corporate governance and equity prices, Cornett et al. (2009) conclude that corporate governance practices and 2008 market returns are significantly related. Likewise, Mc- Namara et al. (2011) posit that firms with better governance exhibit better accounting and market performance during the crisis. It should thus be evident for firms in Cyprus that improving their corporate governance standards is not just a public relations or investor relations initiative. Structuring competent, independent and diverse Boards of Directors, following appropriate procedures, and having the necessary reports, controls and committees in place can help to insulate a firm in times of crisis. This value preservation, and proactiveness in terms of the corporate governance principles employed can only be seen in a positive light by shareholders enabling a firm to emerge stronger when others have failed. References -Bebchuk, L., Cohen, A. and Ferrell, A., What Matters in Corporate Governance?, Review of Financial Studies 22, Braga-Alves, M.V., and Shastri, K., Corporate Governance, Valuation, and Performance: Evidence from a Voluntary Market Reform in Brazil, Financial Management 40, Cheung, Y.L., Connelly, J.T., Jiang, P. and Limpaphayom, P., Does Corporate Governance Predict Future Performance? Evidence from Hong Kong, Financial Management 40, Core J., Guay W. and Rusticus T., Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors Expectations, Journal of Finance 61, Cornett, M.M., McNutt, J.J. and Tehranian, H., The Financial Crisis, Internal Corporate Governance, and the Performance of Publicly- Traded U.S. Bank Holding Companies. -Cremers, K.J.M. and Nair, V.B., Governance Mechanisms and Equity Prices. Journal of Finance 60, Gompers, P., Joy I., and Metrick, A., Corporate Governance and Equity Prices, Quarterly Journal of Economics 118, Klapper, L.F. and Love, I., Corporate Governance, Investor Protection, and Performance in Emerging Markets, Journal of Corporate Finance 10(5), Krambia-Kapardis, M. and Psaros, J., The Implementation of Corporate Governance Principles in an Emerging Economy: A Critique of the Situation in Cyprus, Corporate Governance: An International Review 14, McNamara, R., Alderman, H., Duncan, K.R. and Kelly, S.M., Performance of Family Firms During the Global Financial Crisis: Does Governance Matter?. -Morey, M., Gottesman, A., Baker, E. and Godridge, B., Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set, Journal of Banking & Finance 33(2), * Antypas Asfour Portfolio Management Officer at FxPro Financial Services Limited / Performance Management, Business Ethics and Strategy Lecturer at the Cyprus Institute of Marketing 50 51

28 Economy The Private Sector and the Football Pitches By Alexis Tsielepis, BSc, FCA Director & Head of Taxation, Costas Tsielepis & Co Ltd * The party is over The band has packed it up, the lights have been turned off and the bar has closed. It is high time for those governmental and semi-governmental workers, who for years now have been systematically dancing and singing, to get off the table, say goodnight and pay the bill. So that they can awaken the next day feeling fresh and invigorated so they may serve the state; those who should, those who are worthy and those who are necessary. Finally, the beginning of the end of the involvement of political parties in semi-governmental and soon governmental organisations, of cronyism, nepotism, apathy, corruption and wilful stagnation, is nearing. The end is approaching to the criminal and decades-long feasting with golden spoons for certain public servants and golden ladles for certain high-ranking officials. Under normal circumstances, the above should neither insult nor offend anyone. On the contrary, there should be no one who does not recognise, even in a low tone voice, the destructive regime that has prevailed for decades over the governmental and semi-governmental sector. There is no one who will admit that the status quo allows them to think freely, to develop and evolve. How demeaning and depressing it must be for a discerning person to allow the system to determine his or her lifelong ambitions. And how disheartening it must be for a government job to determine the course of an entire lifetime. Take the recent example of banking institutions. Preference for the specific working hours remuneration package was well-known. Bank employees, however, learnt literally overnight that job security, and the regime which governed their sector, was nothing more than a fragile utopia. At least the public sector still has the time to implement the necessary significant changes required. The reader should not interpret my opinion as a complete dismissal of the work of the governmental and semi-governmental sector. It is an assessment, which at the same time serves as a wake-up call. Now, a window of opportunity has opened to those who seek it, to excel, to compete, to produce and prevail, so that they can determine their own destiny. It is not easy to change a way of life. It is, however, a de facto requirement and no one knows this better than the one in five of our compatriots who are now unemployed. Those who do not embrace change, who do not seek challenges, who are afraid of meritocracy and who oppose an end to complacency, have no place in the workforce of Cyprus, at least in their current capacity. And those who oppose privatisations are simply aware of their inadequacies and know that a face off on equal terms will prove humbling, to say the least. Welcome to the reality of the private sector Crash-landing in the reality of the private sector was unavoidable. Public servants are fully aware of the private sector s methods of operation, its difficulties, challenges and idiosyncrasies, as well as its potential. Up to now, a line-up of hardcore governmental and semi-governmental officials faced the private sector from a safe distance, mocking it, disrespecting it, and even looking down at it. In the course of my recent appointment as Vice Chair of a semi-governmental organisation, I have first-hand experience of the semi-governmental status quo. The governmental sector is no different. Overpopulation, provocative salaries and benefits, ludicrous terms of employment, outdated work methods, unbearable pensions and perennial medical insurance for the whole family. Unfortunately, any professional conscience or attempt at productivity by the competent is discouraged by the incompetent. So as not to trouble the waters. The private sector should be allowed to play ball The role of the public sector and the state machine is to maintain the Republic s football pitches so that the private sector can come out and play. Traditionally and in actuality, the public sector is incompetent, incapable and ineffective in playing ball. It is sorely lacking in physical conditioning, speed, skill, teamwork, tactics and motivation. It has neither the players nor the coaches nor the managers who can collectively, methodically and competitively face any team that challenges them. State-owned Cyprus Airways and its sidekick, Eurocypria, both failed. They failed since they could not play a good game when they were forced to face international teams on equal terms. They were decimated and miraculously continued to exist for as long as they did. The inefficiencies were protected by the unions, and the unions were protected by the politicians. If the state was afforded the chance to bankroll the company even further, they would surely continue to do this. Blatant mismanagement, political favours, corruption, commissions under the table, timeless capriciousness and a ridiculously high cost of operations led to overpopulation, high airfare tickets, uncompetitiveness and eventually, death. The state proved how capable it is in organising conventions via the International Conference Centre and trade exhibitions via the Cyprus State Fairs Authority (CSFA), and in maintaining hotels like the Philoxenia in Nicosia. The demise of the CSFA and the Philoxenia bore testimony to that. These organisations cannot and do not know how to play ball, nor is it their role to do so. The top-heavy, oversized and undemocratic state is incapable of properly exploiting the potential of CYTA in such a competitive telecommunications global market and it cannot offer port services in an industry which looks for speed, competitive prices and ground-breaking services in order to prefer us. Especially where port workers are concerned, their survival has been shielded by threats and strikes, as well as legislation approved by the Members of Parliament themselves who, in so doing, have acted in favour of a provocative yet invincible work group and not the entirety of the Cypriot people that elects and supports them. It is insulting to us all for the state to brag that it offers noteworthy entertainment and reliable information though the supernumerary, extremely unionist, backwards and perpetually loss-making Cyprus Broadcasting Corporation (RIK) at the expense of the Cypriot taxpayer. The state cannot, via the politically-affiliated EAC, discourage private energy providers out of fear of inevitable changes to the Authority s working regime, which results in the economic strangulation of the country s citizens, businesses and industry due to unrealistic and unbearable electricity prices. Trade unions continuously emphasize the EAC s contribution to government coffers as an argument to keep it stateowned. The contribution is indeed extremely important since electricity prices are currently the most expensive in the EU! Where the state is called to regulate an industry, it fails miserably. The regulation of the energy sector is a prime example. The regulatory authority looked at formulas for setting electricity prices, rather than encourage new sustainable sources of energy from new players or even encourage the existing monopoly to move away from its outdated method of producing expensive electricity using mazut. It is the public sector s job to improve the pitches The state should have maintained and improved the football pitches with determination, perseverance, appropriate legislation and preventive actions. It did not even manage to do that. It blew up its main power station and remained idle in the face of urging for alternative and more environmentallyfriendly energy sources, resulting in the consumer paying millions in fines. Its energy policy is based on a distant and faint hope called natural gas. The job of the Department of the Registrar of Companies, for example, is to, at some point, be able to upgrade and correctly and effectively maintain its services so that the private sector may continue the match, which is currently at half-time. The recently-unified Department of Taxation, made up of the Inland Revenue Department and the VAT Service, needs to evolve, to extricate itself from past practices and to become more commercially-oriented. It must be rid of old schools of thought and ensconced bureaucrats. The same goes for the Cyprus Tourism Organisation, the Central Bank, the Public Works Department, the Civil Registry, Town Planning, Immigration, the Water Board and so on. The private sector is the only hope of survival Anything good, prudent, meritocratic, progressive and profitable that has happened to this country has come from the private sector, in spite of a few isolated and unfortunate irregularities. Corporate, tax and legal services, tourism, the hotel industry, the pharmaceutical industry, private telecommunications, realistic foreign investments and many others are all the product of the tireless efforts, foresight and business acumen of the private sector. The illusory reality of Cyprus has been exposed and irrevocably overturned. The Paphos sewerage fiasco, the criminal charges against public figures in the Dromolaxia scandal, tax evasion by ultra-prominent public figures, and the list goes on. Yet these are only the tip of the iceberg. What have we not heard about, yet? Nepotism, politicocracy, greed, corruption, the never-ending feast, the decline of consciences and, finally, being hostage to our lenders have led to our downright humiliation. No-one should henceforth be allowed to trip-up the private sector for fear of an assault in their penalty area. The time has come for yellow and red cards. Let the private sector play ball. It is our only hope of returning some day to the first division. * Alexis Tsielepis is a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and a member of the Institute of Certified Public Accountants of Cyprus (ICPAC)

29 Economy The Greek lesson... for Greeks and others By Dr. Ioannis Violaris Economist We have recently experienced the dramatic effort of the newly elected Greek government to persuade the Troika that the austerity and other medicines prescribed to Greece have not brought about the expected treatment and in fact they have worsened the patient s condition. Yet, the Troika doctors have insisted that their treatment was the correct one and that it had to continue. The discussions between the Greek officials and those of Troika were not exclusively on economic grounds. In fact if they were focused on economic grounds it is certain than no decent economist would have prescribed to an economy in depression austerity, and the other non-expansionary measures, in the first place. The discussions were to a large extent political as well. The EU, even the Eurozone, are not merely economic entities even though we tend to see them as such. They are entities that aim, at least in theory, to promote prosperity to the people of their member states, but at the same time they work, at a rather slow pace admittedly, to build a political union, which eventually will strengthen and become more dominant in the Global political arena. It is for this reason that Greece s cry for a more logical and humane approach had faced such an intense resistance. It is also for this exact reason that other countries cries, such as those of Portugal, Spain, Ireland and Cyprus, have not had much success either. The EU, even though it is already more than 50 years old hasn t as yet achieved the political union that its forefathers have dreamed of. The main reason for that is the strength of the nationalistic interests that hasn t as yet been tamed by the European identity. Therefore, when Greece, or for that matter other countries facing similar problems, request a different treatment, the EU, Eurozone and other officials, are reluctant to even examine it. As, if they do, they believe it will take them out of track from their main central goal, that of eventually achieving complete economic and political union. The newly elected government of Greece was elected in the first place by convincing the majority of the Greek voters that it would take a different road. That is why it has insisted so intensely in being given some grace time to come up with an alternative formula, at least for part of the previously agreed memorandum. Its request was logical but the first lesson to be drawn is that if you intend to fight you prepare your weapons beforehand. We were surprised that the new Greek government seemed to have requested the grace time so as to prepare alternative suggestions. These had to be ready before the elections results. The second lesson to be drawn is that the EU and other officials must not underestimate peoples will. The Greek people have proven, with their reactions to the stubbornness of most of their EU partners, that they were even wiling to proceed with a Grexit instead of undermining their national integrity. The third lesson to be drawn is that if the EU and other officials do indeed care about people s prosperity and in constructing a European political and economic federation, they must learn to listen to what the people have to say. Unfortunately we know it as well, first hand, that the Troika seems to be deaf. No matter what the people say, they insist on the implementation of their plans, as if they are indisputable. Moreover, it seems their primary intention is to save the banking system, as they believe that only through a sound banking system, prosperity would come. A sound banking system is indeed needed, yet not at the expense of the people s interests, especially when the people during this 2008 economic crisis, have found themselves in a difficult position mainly due to the mistakes of certain bankers. We suggest therefore that more unity and sensitivity characterizes Europe and the officials we have chosen to lead us. This, perhaps, is the best lesson of all. Macroeconomy and Cypriot GDP Based on figures issued by the Ministry of Finance, it could be argued that at least in comparison to 2013, there was improvement of the Cyprus GDP during the past year. By Kyriacos Angelides Business Associations Coordinator Cyprus Employers & Industrialists Federation (OEB) More precisely, the Ministry of Finance, based on forecasts, is expecting the GDP to be slightly positive ( %) for 2015, whilst for 2013 first semester was -3.5% and for first semester of %. Overall, the GDP decrease for 2013 was -5.4% (significantly lower than Troika s forecasts that was -8.7%), contrary to public statements by some politicians here in Cyprus, who argued that economic recession would be similar to that of 1974 after the tragic events of the Turkish invasion. However, the above macroeconomic figures do not generate optimism in business community and households, since still there is discontent about the performance of Cypriot economy. For example, the construction sector which affects a lot of professions - such as architects, civil engineers, land developers, etc - is facing serious problems with a record in low on sales of new projects. Thus. Ministry of Finance technocrats should introduce incentives to boost the construction sector in order to generate significant amounts of public revenues through VAT and other related taxes. Adoption of tax incentives (i.e VAT decrease for real estate or decrease of transfer fees) along with more encouragement for third country citizens to acquire Cypriot citizenship when purchasing a flat or house, could definitely boost construction sector like in Greece, Spain and Portugal for holiday houses. Furthermore, a measure that will help the construction sector is the elimination of bureaucracy for licensing (title deeds) for construction and renewable energy projects through the introduction of a one-stop-shop similar to the Citizen Services Centers that truly offer services in a fast and efficient way. On the other hand, one other figure that is considered to be positive by the Ministry of Finance, is the 5.9% increase of tourist arrivals. This figure though, could be more positive if we could solve the seasonality problem, by adopting an open skies policy in a way that more airlines can use Cyprus as an all year destination, offering cheaper air tickets. On the whole, it could be concluded that still there is a long way to go for unemployment, increase of tourist arrivals and improvement of construction sector, despite Cyprus s GDP strength to remain on manageable levels over the last 2 years, after eurogroup s decision for Cyprus economy in March After the successful European stress tests by our three major banks (Bank of Cyprus, Hellenic Bank, COOP), more positive signs can be expected for the Cypriot economy, that will have no relation with uncontrolled overlending that took place in Cyprus in the past

30 Economy Medical Tourism and Wellness Treatment in Cyprus Why choose Cyprus, among other destinations for your rehabilitation or post-surgery treatment? Medical tourism is a fast developing industry that combines medical and wellness treatment with a vacation. Cyprus is uniquely positioned at the crossroads between Europe, Asia, Africa and the Middle East. Cyprus is a modern country, member of the European Union since 2004, with its European culture and civilization that is stretching back to antiquity, has more to offer than all year around sunshine, alluring beaches, vineyards, historical sites and family oriented culture of the generally open-hearted and communicative people. By Maria Zavrou Board Member KPMG Limited The main advantages of Cyprus as a medical tourism destination Health Care in Cyprus is of a very high standard and is recognized by the World Health Organization as being of the same level as developed countries such as the UK and the US. Cyprus attracts 2,4 million tourists every year, an increasing number of which are medical tourists. One of Cyprus greatest assets is its human capital. Most of the island s doctors and physicians were trained at world recognized medical schools mostly in Germany, Sweden, UK and US, thus providing a valuable range of knowledge, experience and innovation. The English language is widely spoken throughout the island and a large number also speak Russian, German, Italian, French and Arabic. Also, our spas provide holistic wellness using the broadest range of popular techniques for the mind, body and soul including mineral spas and hypnotherapy centers. Moreover, Cyprus has a unique variety of 674 healing herbs that can offer you an amazing experience during a local treatment. The main advantages of Cyprus as a Medical Tourism destination are: Human capital and personal contact Modern, well-equipped technologically-sophisticated hospitals and clinics; there are 6 state general hospitals and approximately 80 private hospitals and clinics Hygiene, patient safety and security is of a very high standard (a number of our hospitals have managed to gain international accreditation whilst some others are in the process of doing so) Perfect telecommunication and transportation infrastructure with regular flights from Europe, Middle East and Africa Confidentiality English language is widely spoken Ideal weather conditions for post treatment recuperation. Very little pollution, the Cypriot shores are blessed with clear, warm waters with over 300 days of sunshine Highly educated, qualified doctors Value for money; extremely cost effective Quality No waiting lists Cypriot traditional hospitality Medical treatments in Cyprus All kinds of treatments are available in Cyprus. Based on statistics, the most popular medical treatments of interest to international travelers are the following: Check-ups/diagnostic tests Dentistry and plastic surgery Wellness treatments Phototherapy In Vitro Fertilization (IVF) Cosmetic Surgery Cardiology Neurosurgery Orthopedic surgery Climatotherapy treatment (people suffering from Asthma and Seasonal affective Disorder). The implementation of the European Directive for Cross Border Health Care in 2014 allows free movement of 450 million patients across the EU and a healthier competition under the umbrella of our National Health Service which is to be implemented in full by Cyprus attracts 2,4 million tourists every year, an increasing number of which are medical tourists. Health Care in Cyprus is of a very high standard and is recognized by the World Health Organization as being of the same level as developed countries such as the UK and the US. Tourism Awards The sustainable Destinations Global Top 100, an initiative of TravelMole.com, VISION on Sustainable Tourism, Totem Tourism and Green Destinations awarded Limassol and Paphos in December 2014, with prestigious tourism awards. The basic selection criteria included the cleanliness of seawater, biodiversity of the regions and environment, socio-economic status, cultural heritage, lack of air pollution, low noise levels and quality of tourist information. Limassol has been chosen as one of the 10 Travelers Choice Destinations on the Rise, regarding accommodation, gastronomy and activities in the area. The Paphos district was awarded a gold medal for the quality of its coasts, and selected as one of the top 20 most clean, green and in harmony with nature, sustainable tourist destinations. Cyprus has been one of the world s best loved holiday and retirement destinations and is now one of the countries leading the drive to open up medical tourism and wellness treatment

31 Economy Positive assessment of Cyprus Investors Summit 2015 World ranking investment funds in direct contact with Cypriot businessmen By Cyprus Investment Promotion Agency The Cyprus Investors Summit 2015 organised by the Cyprus Investment Promotion Agency in Limassol on 9-10 February has been described as very successful. During the Summit, 18 large private sector development projects were presented to leading officials from some 40 world-ranking investment funds, companies, banks and other international organisations. Cypriot businessmen were given the opportunity to showcase their projects, hold direct contacts with foreign investors and arrange on-site visits to the actual projects. Foreign investors expressed their satisfaction with CIPA s excellent organisation of the Summit and its initiative to host, together with the government, such a high level meeting. They also voiced their certainty that the economy of Cyprus was on the right path and belief that the country s many advantages make it attractive for foreign investors....cipa s mission is to promote Cyprus as an attractive investment destination and the organisation of the Summit contributed significantly in this direction... CIPA chairman Christodoulos Angastiniotis said the the Summit was significant in promoting large development projects to interested investors. The contacts of the 40 institutional investors with Cypriot businessmen showed there is room for deals to be reached in the near future. There appears to be serious interest and we hope that it will lead to concrete results. the government for their flawless cooperation as well as all other bodies involved in the organisation of the Summit. Addressing the official dinner of the Summit, President of Republic Nicos Anastasiades underlined that the Cyprus economy has turned the page and assured that implementation of the government s economic programme remains on track. More specifically, Anastasiades said the presence of institutional investors demonstrated the importance of the Summit, the first of its kind held in Cyprus, and congratulated CIPA on its initiative. He added that the government attached importance to improving the business environment, noting that to this end, the government has formulated a comprehensive development reform strategy aiming at cutting red tape and simplifying procedures and regulations. Other speakers at the Summit were Energy, Commerce, Industry and Tourism Minister George Lakkotrypis, Finance Minister Harris Georgiades, Central Bank Governor Chrystalla Georghadji, Bank of Cyprus CEO John Hourican, CIPA Chairman Christodoulos Angastiniotis, Commissioner for Privatisations Constantinos Herodotou, Bank of Cyprus Director of Wealth, Asset Management and Brokerage Costas Argyrides and CIFA chairman Angelos Gregoriades. The Summit attracted the attention of international mass media. The main sponsor was the Bank of Cyprus and the gold sponsor was the law firm L Papaphilippou & Co LLC. CIPA s mission is to promote Cyprus as an attractive investment destination and the organisation of the Summit contributed significantly in this direction, as it brought Cypriot businessmen in direct contact with world ranking institutional investors, Angastiniotis added. He stressed that economic recovery requires foreign investments and we must continue to contribute to this in a positive way. Angastiniotis thanked 58 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015

32 Economy The World in 2050: Will the shift in global economic power continue? By PwC Cyprus The global economic power shift away from the established advanced economies in North America, Western Europe and Japan will continue over the next 35 years despite a projected slowdown in Chinese growth after around This is one of the key findings from the latest report from PwC economists on The World in 2050: Will the shift in global economic power continue? This presents long-term projections of potential GDP growth up to 2050 for 32 of the largest economies in the world, covering 84% of total global GDP. The report indicates that the world economy is projected to grow at an average of just over 3% per annum from doubling in size by 2037 and nearly tripling by But there s likely to be a slowdown in global growth after 2020, as the rate of expansion in China and some other major emerging economies moderates to a more sustainable long-term rate, and as working age population growth slows in many large economies. The report also contains projections based on GDP at market exchange rates, without this relative price adjustment. On that basis, China is projected to overtake the US in around 2028, while India would clearly be the third largest economy in the world in 2050, but still some way behind the US. Aside from China and India, other highlights from PwC s projections are: Emerging economies like Indonesia, Brazil and Mexico have the potential to be larger than the UK and France by 2030, with Indonesia possibly rising as high as 4th place in the world rankings by 2050 if it can sustain growth-friendly policies. Nigeria, Vietnam and the Philippines are notable risers in the global GDP rankings in the long term, reflecting relatively high projected average growth rates of around % per annum over the period to Malaysia is also projected to grow at around 4% per annum on average in the period to 2050, which is higher than China s projected average growth rate of around 3.5% per annum over this period, and an impressive performance for what is already a middle income country. Colombia is also an economy that PwC projects to grow at a relatively healthy long term rate of around 4% per annum over the period to 2050, noticeably faster than its larger Southern American neighbours like Brazil and Argentina. Japanese growth is projected to be the slowest of all 32 countries covered in total terms, driven in part by a steadily declining population; as a result Japan is projected to fall from 4th to 7th place in the global GDP rankings over the period to European economies tend to slide down the rankings, with growth rates in the major Eurozone economies projected to average only around 1.5-2% per annum to Poland is projected to have the highest average growth rate of the large EU economies, and also to outperform Russia in terms of long-run growth. PwC also estimates what its projections would mean for shares of global GDP at PPPs (assuming the smaller countries not covered in the model grow on average as a group at the same rate as the 32 large economies covered by the study): China s share of world GDP is projected to flatten off at around 20% from the mid-2020s onwards as its growth rate reverts to the global mean. The US s share declines gradually from around 17% now to around 14% by 2050, while India s potentially doubles from around 7% now to be more or less neck and neck with the US by the middle of the century in PPP terms. The EU s overall share of world GDP is projected to decline from around 17.5% now to only around 12% by 2050, assuming that total EU GDP grows at the same rate as the aggregate for the largest seven EU economies covered by the study. These projections assume, however, that emerging markets will follow broadly growth-friendly policies. In practice, not all may do so and therefore not all of these economies will fulfil the potential indicated by the PwC growth projections, although some could also exceed the projections if they can accelerate their investment rates and institutional reforms. How should businesses approach emerging markets? The PwC analysis has a number of high-level messages for businesses looking to develop their emerging market strategies, including: It may be difficult to sustain the growth rates of the 2000 to 2012 period in the major emerging markets, given the combination of economic bottlenecks and institutional deficiencies. Some slowdown should be factored into business plans and investment appraisals. Emerging markets vary greatly in their institutional strengths and weaknesses, which need to be carefully assessed. There could also be major differences in institutional strengths between industry sectors within countries. Deep local knowledge that is updated in real time is critical to manage businesses successfully in an emerging market environment. Having the right local partners to navigate you through local political, legal and regulatory systems is also critical. Identifying and promoting local talent who understand local business and social cultures better than any outsider will also be an increasing source of comparative advantage. For large companies making strategic investments in frontier markets like sub-saharan Africa, part of their contribution could be to try to improve the local institutional framework. This could involve offering appropriate technical assistance and advice to local governments in areas like corporate governance, fiscal policy and intellectual property rights protection. It could also involve investing in social and economic infrastructure (e.g. schools, roads, railways, power and water networks) where these are vital to a company s longer term success in a region. Finally, don t forget mature markets in North America and Europe. These will remain very significant players in the global economy for decades to come even if their growth rates average only around 2%. PwC s analysis shows, for example, that average income levels per person (at PPPs) in 2050 will still only be around 40% of average US levels in China and around a quarter of US levels in India. Advanced economies will also, generally speaking, still be easier and lower risk places to do business given their political and institutional strengths

33 Business foreign investment in all the segments of the energy business, other European markets have remained dominated by single enterprises, often former state-owned utilities. Liberalisation and privatisation of the electricity sector in EU By Dr. Andreas Poullikkas Cyprus University of Technology Part A Since mid-1990s, the EU Commission has advanced a programme for the creation of a liberalised market in energy (electricity and gas) across the EU, which facilitates commercial and household customers to buy power from the cheapest provider. Regulation would be replaced with competitive forces to deliver consumer choice while driving prices lower. According to the revised EU directives, in fully liberalised markets, energy producers would be able to sell electricity and gas across national borders, increasing competition and lowering energy prices in the process. This was to force incumbent energy utilities to become more efficient, encourage new entrants and investment and boost economic growth Historically, electricity industry operated as natural monopoly owning electricity grids whilst pricing, investment, return on capital and many other aspects of their business were regulated by governments. across the entire region. More recently, the debate on energy objectives of the European Commission has grown to include (a) security of supply, (b) greenhouse gas reduction, and (c) sustainable production and consumption. To facilitate these objectives the EU recognised the need to improve the quality of networks and the connectivity between such networks. Given the historic association between national grids and networks and national suppliers, improving connectivity between national grids and networks was viewed as a facilitator to building a wider market, as the more end-consumers are reached, the greater the extent of competition between potential suppliers. In addition, economies of scale and efficiencies of modern networks with enhanced connectivity between national grids could help deliver objectives around energy security and climate change. Setting the stage How did the plans made in Brussels progress over time? Against those upbeat aspirations, although the UK and Scandinavian countries opened their electricity markets and allowed competition and For example, the Electricite de France (EDF) dominates 87% of France s electricity market, whilst in Germany, RWE and E.ON control between them 80% of the domestic energy market. Promoting competition in such concentrated markets has been difficult, especially given the reluctance of their national governments to accept that the expected benefits of private investment and competition could materialise in the energy sector. Because of declining long run average cost curves in generation, increasing returns to scale meant bigger was better but lack of competition required regulation. Historically, electricity industry operated as natural monopoly owning electricity grids whilst pricing, investment, return on capital and many other aspects of their business were regulated by governments. It was argued in some quarters that national champions had an important role in securing European energy supply as long as the anti-competitive aspects of dominant players could be tempered through fair and equal third-party access (TPA) and cross-boarder connectivity. Thus, in order to open up the vertically integrated structures found within national boundaries, According to the revised EU directives, in fully liberalised markets, energy producers would be able to sell electricity and gas across national borders, increasing competition and lowering energy prices in the process. the EU Commission initiated various measures to promote equal and fair TPA to these grids so that owners or operators of networks would not abuse their natural monopoly and inhibit fair and equal access by other energy suppliers and thus foster competition. As progress in achieving fair and equal TPA was slow, the EU Commission promoted new energy directives and regulations for both electricity and gas in 2003, requiring vertically integrated incumbents to unbundle/separate the operation of the transmission from other parts of their energy business and thus facilitate TPA. In 2007, the Commission took these measures further by promoting ownership unbundling (OU), according to which incumbent utilities had to separate not only the operation but also the ownership of their various energy businesses. Integrated utilities were to be split into legally independent: (a) generation, (b) transmission and (c) distribution companies, so that access to networks could not be used to protect the competitive position of incumbents. It was argued, for the full benefits of competition to manifest, the business of selling energy needed to be separated from the business of producing and transmitting it. Part B of this article will be published in the next Accountancy issue. Dr. Andreas Poullikkas holds a B.Eng. degree in mechanical engineering, an M.Phil. degree in nuclear safety and turbomachinery, a Ph.D. degree in numerical analysis and a D.Tech. higher doctorate degree in energy policy and energy systems optimization from Loughborough University of Technology, U.K. His present employment is with the Cyprus University of Technology where he holds the post of Associate Professor of Power Systems and Chair of the Department of Electrical Engineering, Computer Engineering and Informatics. He is also, the Chairman of the Cyprus Energy Policy Council (appointment by the President of Cyprus) and a Member of the Board of Directors of the Natural Gas Public Company (DEFA), Cyprus (appointment by the Cyprus Government). He is a member of various national and European committees related to energy policy issues. He is the developer of various algorithms and software for the technical, economic and environmental analysis of power systems, desalination technologies and renewable energy systems

34 Business We have over 700 offices around the world, so you don t have to leave yours. Cyprus Shipping Industry: Can Do Better in 2015 By Thomas A. Kazakos, Director General Cyprus Shipping Chamber Following an analysis of the positive and negative elements of Cyprus Shipping during 2014, it can be stated that Shipping remained as one of the most important blood donors of the Cyprus Economy, with substantial prospects for further growth. Based on official statistics issued by the Central Bank of Cyprus and the Statistical Services, the contribution of the Shipping sector to the Cyprus Economy is even higher that what was originally expected. This high level of financial contribution, becomes even more important, if one considers that during the last five years at least, the freight rates remain internationally too low. In addition, despite the substantial haircut of the deposits of several shipping companies in Cyprus had suffered as a result of the recent banking crisis, the Shipping Industry remains faithful to Cyprus and the Cyprus Register, something which constitutes a long-standing vote of confidence for Cyprus as a Shipping/Business Center. In the aftermath of these unprecedented for Cyprus financial developments, it is very gratifying to note that the overall Shipping operational and taxation infrastructure in Cyprus remains intact and the Cyprus Flag Administration, through its Department of Merchant Shipping, is working normally and without any interruptions and restrictions. This is just an example of the strength of the Shipping Taxation System upon which we must build the future of Cyprus Shipping. Furthermore, despite the intense international competition that it has to deal with on a daily basis, domestic Shipping, continues to employ around 4500 highly qualified shore personnel and seafarers....cyprus will be able to create a positive impetus towards the medium and long-term further development of its Shipping Industry without additional spending 64 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 This high value worth and substantial contribution as foreign and local direct investment into Cyprus Economy from Shipping, can be maintained and enhanced even more, provided that the specific measures that the Shipping Chamber continues to lobby for will be implemented. These include the setting of a clear National Shipping Policy, the appointment of a Director of the Department of Merchant Shipping (DMS), the promotion of Cyprus Shipping abroad and the implementation of the decision by the Government for the upgrading of the Maritime Administration through the creation of an Under-Secretary for Shipping position. Now more than ever before, Cyprus requires a modern and even more efficient Maritime Administration to deal with Shipping and soon with the offshore sector that will be developed in view of Cyprus s future maritime transport needs of our hydrocarbons. Such policy will also fit in well, with the EU Integrated Maritime Policy and the spirit of the Limassol Declaration which was successfully concluded during the Cyprus EU Presidency in Only through such measures, Cyprus will be able to create a positive impetus towards the medium and long-term further development of its Shipping Industry without additional spending. Undoubtedly, Shipping is a special and very important Industry, which not only contributes to the Economy and Society, but also really enhances the political entity of our country. The prospects for further development of Shipping (in relation with the emerging Energy Industry or not) remain very tangible. Looking ahead and provided that specific measures are implemented, the Cyprus Shipping Industry can do better in Can you help me expand internationally? Anywhere and everywhere? And I don t even have to leave the country? RSM Cyprus is a member of RSM - a worldwide audit, tax and advisory network with over 700 offices in over 100 countries. Who better to help you realise your international ambitions. Connected for success. To find out more connect to RSM Cyprus Kennedy Business Center, Kennedy Avenue, 1087 Nicosia, Cyprus T F E NICOSIA ATHENS THESSALONIKI TIRANA Absolutely. We re very well connected. Not unless you re planning a holiday. RSM Cyprus is a member of the RSM network. Each member of the RSM network is an independent accounting and advisory firm each of which practices in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number ) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM International Association, 2013.

35 Business Why executive coaching is your competitive edge By Demetris Stylianides, DipLC, CTM,CL,FAIA, FCCA, CPA, International NLP Trainer Executive development is a critical aspect of all organizations and often one that is most overlooked. People come to coaching for several reasons: They could be stuck and can t think of what else to do in order to move the organization forward; there may not be anyone at their level that they can have confidential conversations with, or they believe if they were to change or improve something within themselves, the greater organization would benefit. Maybe they are ready to do something different but are not sure what that something is. Perhaps they are looking for change, a different perspective, or have important goals to reach. Executive coaching focuses on helping individuals go from where they are, to where they want themselves and their company to be. Whatever the reason, distinct from other forms of training, coaching focuses on a specific way of learning for the executive. It is believed that the more an individual is involved in identifying problems, in working out and applying solutions for them and in reviewing results, the more complete and the more long-lasting the learning is. This form of self-improvement tends to bring about learning with a deeper understanding than learning that is taught. Given the right circumstances, one-onone interaction with an objective third party, who is not tied to the organization or other executive or company influences, can provide a focus that other forms of organizational support cannot. Coaching develops the leader in real time within the context of their current job while allowing them to maintain their day-to-day responsibilities. Unlike therapy, which goes into depth about various issues usually dealing with the past and consulting which generally results in giving the client answers, coaching is more action-oriented and focuses primarily on the present and future. Coaching focuses on what the client wants and utilizes a process through the one-on-one coaching sessions to enable the client to self-discover, learn and determine their own answers. It is the client who determines the goals and commits to their goal, while allowing the coach to help hold them accountable. Why should you hire an Executive Coach? In today s demanding business environment (cost pressures leading to flatter organizations, executive managers with more direct reports, speed to market as a competitive advantage with time pressure, etc.) executives have limited opportunity to devote time and energy to their own development as leaders. Most executives struggle to fulfil the responsibilities of their positions and are too busy and too stressed to step back and learn from their experiences or to implement changes to satisfy best management practices. The reasons for choosing coaching go beyond the need to correct or resolve problem behaviours or poor performance issues. Executive coaching is also chosen to develop executive-level skills, developmental and growth needs which impact the entire organization. In a study, respondents identified a variety of reasons for hiring executive coaches. The reasons cited below include both problem solving and developmental emphases. They could also be described as change-oriented, with an emphasis on supplementing and refocusing the participant s skills, or growth-oriented, with an emphasis on accelerating the learning curve for high-potential or recently promoted executives. The percentage of respondents citing that particular reason is shown in brackets: To develop the leadership skills of high-potential individuals (86%). To improve the odds that newly promoted managers would be successful (64%). To develop management and leadership skills among their technical people (59%). To correct behavioural problems at the management level (70%). To help leaders resolve interpersonal conflicts among employees (59%). The Process Each coaching engagement begins with a discovery session of some sort. This is the time where the potential client and coach have a conversation to determine and discuss several items which may include: What the client is looking for in the coaching relationship What the coaching relationship is and isn t The style of the coach and how that resonates with the client Rules of engagement and protocol The coach s credentials relative to the client s needs Timing and logistics of the coaching How success for coaching will be measured Agreement to move forward What makes a difference to coaching outcomes? Everyone involved in the coaching process wants to know which factors will improve the likelihood of achieving positive outcomes. There are several attributes that make a difference in coaching outcomes, some of which are listed below. Organizations must be in favour of and agree to provide resources to support the executive coaching, and recognize that it requires a long-term investment in order for the coaching and change to succeed. Executives need follow-on coaching and reinforcement in order to sustain changes in behaviour. In addition, professionals development should be kept separate from performance because the high level of trust and openness required for development would be compromised if these two essential processes are mixed. The coaching-style preference is also a factor for coaching success. The coach and the executive are agreeing to enter into a relationship therefore style preferences and compatibility can impact the outcomes. It is important that the coach and the client agree on how the client prefers to receive help, what they want to focus or work on, and when they want to receive it. Coachability, in my opinion, is the number-one success factor to consider. The reason is that no matter how experienced or effective the coach might be, no change of the executive (coachee) will occur if the executive does not want to change, recognize the need to change, or does not take responsibility for the change needed. The executive needs to be open to feedback, willing to use the feedback to commit to change, and be willing to be held accountable to the commitment. Competence of the coach is the fourth important factor that is often mentioned to determine success in the coaching arrangement. At a minimum coaches should be creditable, educated and certified. They should have a coaching process that includes helping the client set an action plan in order to change behaviour as well as a process to measure change. The International Coaches Federation estimates that over 10,000 people call themselves coaches, yet not all are effective. The coach should have a philosophy of coaching for sustainable change; in other words, the coaching commitment should be transformational and not transactional. Coaching is great in theory Coaching, however, appears to be difficult to do well or do consistently. Although the large majority of managers like to coach, employees say they would like to receive more coaching. Employees often have to ask for the coaching they do get and, most disappointing, they don t always benefit from the coaching they receive. Our research indicates that less than 25% of employees who receive regular coaching realize a significant impact on their performance or satisfaction. What gets in the way of coaching? Lack of confidence is an obstacle, according to the senior manager of employee relations we spoke to. Managers get stuck in the rut of thinking that employees prefer to be left alone, and since many don t feel comfortable with the conversation anyway, they have coaching conversations only if the employee initiates them or only at performance review time. Overemphasis on systems to assess and manage the talent in lieu of coaching conversations is another common concern. Talent management tools that identify and catalogue skill sets help ensure that the right people are in the right place at the right time to meet business needs. Yet our research indicates that the talent doesn t necessarily want to be managed or moved like chess pieces without regard to their career aspirations or personal needs. What makes a difference in coaching? Leaders in HR and the line agree that organizations need to put teeth into their employee development processes. Executives who evaluate the performance of their direct reports not just on results but also on how well they develop their people, build an expectation for management excellence. Too many managers are tasked with and rewarded for so much individual-contributor work that it is not realistic to expect they will prioritize coaching to the top of their to-do lists. Most organizations believe that once someone reaches executive or senior status in the organization, they should inherently be able to act under pressure, inspire and implement ideas, keep their skills sharp and current, and have all the answers. In actuality, they can eventually get there on their own but the engagement of a qualified executive coach will exponentially increase not only the time it takes for the executive to get there but also the ability for the executive and the company to sustain the change. Coaching can be your competitive edge! 66 67

36 Business The consequences of engaging in surface acting during customer aggressive behaviour (PART1) By Aspasia Simillidou Theodosiou PhD (candidate), MSc, BSc Human Resources Consultant / Lecturer INTRODUCTION Emotional Labour and its impact in employees have received considerable attention in the recent decades. The term emotional labour has been first described by Hochschild (1983:7) as the management of feeling to create a publicly observable facial and bodily display. We talked about emotional labor in a previous article. This article will deal with the negative effects of using only surface acting when dealing with aggressive customers. It will be separated in two parts, first part will be discussed in this issue and the next part on the next one. ENGAGING IN EMOTIONAL LABOR WHEN INTERACTING WITH AGGRESSIVE CUSTOMERS There is a considerable attention in the literature regarding aggressive customers behaviour and its impact on emotional labour. The behaviours and consequences on both service providers and customers have been greatly discussed. The very demanding role of service providers has increased the need of regulating emotions in the last decades (Goussinsky 2011). Service providers are being asked to display certain emotions and organisations are nowadays more demanding on these issues, due to the increased need for survival in the highly competitive environment. Anger provoking events have increased this need of emotion regulation; especially since employees are now facing an increase in demanding and angry customers (Grandey, 2000). Harris and Reynolds (2003) have found that almost 82% of service providers working in the hospitality industry have been subjected to their customers aggressive behaviour in the last year. It is clearly stated that aggressive behaviour is very usual among customers in the hospitality industry and this is mainly due to the increased demands of those that are spending money for leisure. Goussinsky (2011) states that even though people need to engage in emotional labour as part of their duties when interacting with customers, doing that during facing aggression has been very challenging. Both studies concluded that customer service representatives face customer aggressiveness to a great extent on a daily basis. This means that while customer service providers need to engage in emotional labour, they are also facing customer aggressiveness and they need to deal with it. This makes it even more difficult for them to deal with both the consequences of engaging in emotional labour and thus dealing with aggressiveness. As it has been identified in the previoud article, customer service providers will either shape their feelings (deep acting) or suppress their true emotions (surface acting), in order for them to be able to display the desired emotions. To what extent do customer service providers engage in either deep or surface acting when dealing with customer aggressiveness? The answer lies on many factors which are discussed in this section. The role of emotions It has been identified in the literature that emotions are contagious (Huang & Dai, 2010). The author states in his article that when people are interacting with happy customers they really face no difficulties to display the desired emotions that organisations are asking them to display. On the contrary, when people are facing aggressiveness they cannot display positive emotions and they feel negative which affects the customer interaction outcome. Customer service representatives feel pleased and satisfied when facing happy customers and they have a feeling of dissatisfaction and unhappiness when facing aggressive customers (Gardner, 1985). Many researchers have concluded that emotions are contagious; Barsade (2002) as well as Bechtoldt et al., (2011) conclude that when customer service representatives are facing aggressiveness they find it very challenging to change their emotional state and impose positive feelings. This is mainly due to the fact that emotions are contagious and they are very easily being transferred from one person to another through interaction (either face to face or through the phone). Bakker et al., (2005), while investigating contagious emotions between nurses, have found that negative emotions are easier to be transferred than positive ones. An example provided in this article is stress; this is an emotion that can be easily transmitted to the people around you, colleagues or customers. Stress or other negative emotions cannot be merely transmitted through interaction and communication with people that are affected with this emotion, but also through body language (Appelbaum & Roy-Girard, 2007). So a negative emotion can be easily adopted and passed on to employees. On the contrary, such employees may pass on the negative emotions to their colleagues. Therefore, through these existing findings, it can be concluded that people share negative emotions between them as well as the negative consequences that come through such emotions. Service providers engage in surface acting when interacting with aggressive customers (Grandey 2000). Since people tend to feel what other people feel around them, they find it difficult to engage in deep acting when handling customer complaints and anger (Huang, Dai 2010). When service providers interact with customers in good moods, they find it very easy to display the feelings that are imposed by organisations and they engage in deep acting subconsciously. They impose the real feelings that their happy customers make them feel; this is what makes deep acting a more usual strategy when interacting with satisfied customers. On the other hand, when service providers face customer aggressiveness, they tend to feel angry and dissatisfied. This is mainly supported through the theory of contagious emotions that has been explained above. Therefore, customer service representatives tend to engage in surface acting through alienating the negative feelings being caused by the angry customers. They suppress these feelings so that they will be able to display the right feelings and behaviours. The role of affective events theory Affective Events Theory (AET), suggests that all events in the workplace directly affect employees in terms of their emotional reactions, feelings and therefore behaviours (Weiss & Cropanzano 1996). Various authors based their research of engaging in emotional labour, while interacting with aggressive customers on that theory. Rupp and Spencer (2006) concluded that people that are unfairly treated, experience great levels of dissatisfaction and unhappiness in the workplace environment. Unfair treatment in this aspect involves both customer and colleagues anger and any other interaction that people felt was bad. Adding to that, Grandey et al., (2010) concluded that any bad interaction with customers imposed negative feelings and therefore negative behaviours. This was also based on the Affective Events Theory. On the contrary, since it is not accepted by organisations to express those negative feelings during customer interactions, service providers tend to hide them. Calabrese (2000), building on the Affective Events Theory, states that during any negative interaction in their workplace such as anger or sarcasm, people tend to hide their true feelings in order to impose behaviours that will be organisationally appropriate. Due to Huang and Dai (2010), the more negative feelings people have during an interaction with angry customers, the more they will be engaging in emotional labour through surface acting. The important conclusion of the above studies is the fact that customer mood stage directly affects employees and on the contrary the way they engage in emotional labour. Grandey et al., (2004) supports the above findings by the results derived during her research on the consequences of customer aggression on employees. She says that service representatives tend to engage in surface acting when they feel stressed because of customer aggression. Since the existing literature review findings concluded that service providers engage mostly in surface acting during facing angry customers, this article will further discuss the consequences. Engaging in both surface and deep acting affects employees on different ways. Employees will be greatly affected when they engage in emotional labour while interacting with aggressive customers. In the last two decades, attention has focussed on the impact of customer aggressiveness. In the previous years, more attention was given on customers and how they are affected, but more recent literature came to the conclusion that how employees feel is equally important. Also, the literature was focussing more on the consequences of co workers or supervisors aggressive behaviours. It has been found that this type of aggressive behaviour affects employees feelings and productivity negatively (Appelbaum & Roy-Girard 2007). So a number of authors started questioning if the same happens during customers aggressive behaviours. To be continued on the next issue 68 69

37 Business Company bonus schemes A blessing or a curse The word bonus derives from the Latin word bonus which means good By Demetris Ergatoudes* Bonus schemes Bonus schemes provide an award, usually in the form of a lump sum payment, which is additional to basic salary and is related in some way to the performance of the individual or group of individuals receiving the bonus. Bonus schemes should be distinguished form profit-sharing schemes, which share out a proportion of profits to all or most staff on the basis of a formula or management decision which is seldom related to individual performance, although the profit share is usually paid in proportion of salary. Aims of bonus schemes The principal aim of a bonus scheme is to provide an incentive and a reward for effort and achievement. Executive bonus schemes linked to company profits can also aim to make senior managers feel that their personal prosperity is linked to the performance of their company or unit. Bonus schemes are supplementary to basic salary and are most appropriate where they apply to entrepreneurial types such as chief executives, marketing officials and sales staff who, it is assumed, will strive for material reward, and whose results upon which their bonus depends can be clearly linked to their personal efforts and achievements. Bonus schemes criteria When assessing whether or not a bonus scheme is appropriate, the following criteria should be used: The amount of the award received after tax should be sufficiently high to encourage staff to accept exacting targets and standards of performance. Standard bonus should not be less than 10% of the base salary and, if an effective incentive is wanted, the standard bonus should be around 20% to 30% of salary. The incentive should be related to quantitative criteria over which the individual has a substantial measure of control. The scheme should be sensitive enough to ensure that rewards are proportionate to achievements. The individual should be able to calculate the reward he can get for a given level of achievement. The formula of calculating the bonus and the conditions under which it is paid should be clearly defined. Constraints should be built into the scheme which ensure that staff cannot receive inflated onuses which may not reflect their own efforts. The scheme should contain provisions for a regular review, say, every two or three years, which could result in it being changed or discontinued. The scheme should be easy to administer and understand, and it should be tailored to meet the requirements of the company. Executive bonus schemes There are innumerable formulae of executive bonus schemes, and each company should adopt one which suits its own circumstances. The simplest formula is for a percentage out of net profits before tax to be paid pro rata to executive s basic salary. In some schemes, dividend payments and provisions for reserves are deducted from net profits before the distribution of bonuses and there is usually an upper limit to the amount of bonus that can be paid. These schemes are crude but provide a direct incentive as long as results are directly influenced by the actions of the executives in the scheme. They can get out of hand unless an upper limit is strictly applied, and their emphasis on profits may make some executives seek short term gains at the expense of the longer term development of the company. Other schemes are based on a formula which measures company performance. Bonuses are paid when a target figure is attained and increased further as the target figure is exceeded. The increase of bonus may be on a straight-line basis, i.e. directly proportionate to the improvement in results. Alternatively, it may be geared either by decreasing the rate of bonus the more the target is exceeded, which is generally regarded as poor practice, or by increasing the rate, which could be an expensive device. A straight-line progression is to be preferred. The formula in some schemes is directly applied to the executive s salary. In other schemes, a percentage of profits on an increasing scale is released into a bonus pool which is distributed in proportion to salary. *Demetris Ergatoudes is a retired (2006) Senior Manager of Popular Bank and fellow to the Chartered Institute of Bankers, London. Funding Opportunities for new and existing businesses By Christina Themistocleous Assistant Manager Financial Advisory Services, Grants & Incentives Deloitte Limited The government of Cyprus has planned nine new funding schemes that target new and existing businesses. The schemes, which will be managed by the Ministry of Energy, Commerce, Industry and Tourism have a total budget of 75 million euro and will aim to enhance Cyprus entrepreneurship and business competitiveness, both in the international and the local market. Three of these schemes have already been published and are currently open for the submission of applications: the Scheme for the Enhancement of Women Entrepreneurship, the Scheme for the Enhancement of Youth Entrepreneurship and the Scheme for Strengthening Business Innovation Development of Innovative Products, Services and Processes. The rest of the schemes are expected to target small and medium sized businesses of the wine sector, manufacturing and services, processing and marketing of agricultural products and business clusters. The three grant schemes which have been announced are briefly described below: Scheme for the Enhancement of Women Entrepreneurship The aim of the Scheme is to develop, support and encourage entrepreneurship by women who based on their knowledge expertise and talent, will establish a new enterprise. The scheme covers new enterprises of the manufacturing, service or tourism sector and e-commerce. Emphasis is given on the development of new technologies, use of innovative methods of production and promotion of products and services, development of environmental friendly products and generally in modern entrepreneurial practices aiming at the creation of a dynamic and competitive unit. Eligible candidates are women who fall in the age range of 18 to 55 years old, are either unemployed, employees or freelance professionals, or had no any previous business activity in any sector, for a period of 6 months before submission date of their proposal. The scheme motivates successful applicants by offering them a grant, as a percentage (50%) on the approved budget. The maximum grant amount is 70,000 for enterprises in the manufacturing sector and 50,000 for all other activities. The call closing date is on the 11th of May Scheme for the Enhancement of Youth Entrepreneurship The aim of the Scheme is to develop, support and encourage entrepreneurship by young people who based on their knowledge expertise and talent, will establish a new enterprise. The scheme covers new enterprises of the manufacturing, service or tourism sector, and e-commerce. Emphasis is given on the development of new technologies, use of innovative methods of production and promotion of products and services, development of environmental friendly products and generally in modern entrepreneurial practices aiming at the creation of a dynamic and competitive unit. Eligible candidates can be young men and women who fall in the age range of 20 to 40 years old, are either unemployed, employees or freelance professionals, or had no any previous business activity in any sector, for a period of 6 months before the submission date of their proposal. The scheme motivates successful applicants by offering them a grant, as a percentage (50%) on the approved budget. The maximum amount of grant is 70,000 for enterprises of the manufacturing sector, and 50,000 for all other activities. The call closing date is on the 11th of May Scheme for Strengthening Business Innovation Development of Innovative Products, Services and Processes The Business Innovation Grants scheme aims to support and strengthen existing, startup and other companies investing in research and innovation to develop competitive innovative products and services which they plan to market and / or innovative processes and procedures in the production of their products. The Grant scheme also aims at supporting startups who intend to develop innovative products, services and processes to market and promote cooperation between enterprises. The project results will be attracting private investment in research, development and innovation as a contribution to the costs of developing innovative products / services and processes as well as investment funds after the end of the projects. The products or services should be developed by the companies themselves. Particular emphasis is placed on developing products and services that may be protected by patents or industrial designs and to be competitive internationally. The call closing date is on the 16/03/2015. For more information you can visit the website of the Executive Agency for Small and Medium Enterprises or the portal of the Directorate General European Programmes, Coordination and Development at

38 Business Supporting entrepreneurship: explaining the new funding Schemes for the enhancement of Youth and Female entrepreneurship Division of maximum limits for eligible cost categories for both Schemes By Irene Demetriou Rotsides, Business Development Manager, Andreas Neocleous & Co LLC Bolton Consultancy It is a widely acknowledged fact that during times of financial turmoil, people experience two types of crisis: a depression crisis, feeling unable to correspond to the new realities of austerity and a creativity crisis which spurs a need for change, innovation and competitiveness. The emergence of creativity during times of national and international financial hardship is a trend of the younger generations, which, having not much to lose, are willing to take the risk and concentrate their efforts in a new venture or business idea. The problem lies in safeguarding sufficient funds to fulfill one s idea without being exposed to unnecessary borrowing. It appears that the new funding schemes for the enhancement of youth and female entrepreneurship as announced by the Ministry of Energy, Commerce, Industry and Tourism may be the golden thread in securing funding for highly creative ideas. The Ministry has recently announced a total of nine funding schemes worth 75 million in an effort to re-generate the economy and boost liquidity. The new funding schemes will be co-financed by the European Structural Funds during the programming period. Scheme for the enhancement of Youth Entrepreneurship The Scheme aims to develop, support and promote entrepreneurship among youth (20 to 40 years old) who wish to become entrepreneurially active in a financial activity of their choice. The Scheme supports business ideas at a maximum funding rate of 50%. This means that while the Ministry will provide 50% of the total project cost, the remaining 50% must be contributed by the applicant. Eligible costs cover costs on equipment, renovation of buildings/office spaces, vocational training, promotion and marketing and working capital. It should be noted that the maximum funding amount for production sectors is while the maximum funding for projects related to e-commerce, services and tourism can go up to This means that for the former category the total project budget cannot add up to more than while for the latter categories, the total project budget can go up to Eligible applicants must be unemployed at the time of application or have an employee status. Applicants which have been involved in entrepreneurial activity at least 6 months prior to the application will be rejected. The Scheme defines entrepreneurial activity as being self-employed or participating in a company with shares over 25%. Applicants who work on a per-project basis for others or provide third party services through subcontracting and submit social security contributions as self-employed are not considered as having entrepreneurial activity and are therefore eligible to participate. Once an application is approved, successful applicants can be either registered as self-employed or register a company or partnership. In the latter case, shareholders of the company or partnership must be registered as employees of the company or partnership and remain as such for at least three years following the completion of the project. The same obligation also extends to applicants who will be registered as self-employed. One important parameter of the Scheme relates to eligible costs. Costs carried out prior to the application submission date will not be funded. This means that any invoices or payment receipts with date prior to the submission date will not be considered as eligible and the cost will not be reimbursed. How can I secure the remaining 50% of the total project budget? If the applicant cannot provide the remaining 50% of the budget through their own funds, banking institutions will provide loans in order to cover for the applicant s own contribution. In such an event, it is vital that the applicant provides a bank letter verifying that the loan to fund the business plan has been approved. Scheme for the Enhancement of Female Entrepreneurship This Scheme is addressed solely to women between 18 and 55 years of age. Particular emphasis is given to projects which relate to new technologies, the use of innovative process and production methods, the development of entrepreneurship in the environmental sector and generally in the promotion of modern entrepreneurial activities aiming at the creation of viable, dynamic and competitive Small-Medium Enterprises (SMEs). The criteria for application and the maximum funding amounts are the same as in the Scheme for the Enhancement of Youth Entrepreneurship explained above. The Ministry will monitor the progress of each funded project through the applicant s submission of Interim and Final Progress Reports. The Interim Report will have to be submitted in the first running year of the project with at least 30% of the total project actions implemented. Similarly, the Final Progress Report will have to be submitted once the project has been concluded and no later than 24 months following the successful acceptance letter by the Ministry. It must also be noted that funding is received in three main phases. Phase A includes the signing of the Agreement for Public Funding which is accompanied by a deposit covering up to 40% of the approved public funding. Phase B begins once expenditures have been noted and the project progress lies between the 30-60% thresholds. This phase is accompanied by another batch of funding which corresponds to the approved eligible costs minus the deposit. Lastly, Phase C refers to the completion of the project and the beginning of entrepreneurial activity. During this phase, the remaining funding of eligible costs is released. It must be noted however that in order for Phase A to materialise, the applicant must submit a written request and a bank guarantee corresponding to the total value of the deposit. It must also be noted that the total project budget (public funding and own contribution) must be over Both Schemes have various other requirements which the applicant must be aware of prior to proceeding with either of the two Schemes. It is, therefore, advised that before submitting an application, the applicant has: - Thoroughly read the guides of the Scheme, which are freely available on the Ministry s website - Completed a coherent and sound business plan, with all main elements such as a SWOT analysis, a profit forecast, a high-level description of the idea, a short market research etc. - Properly completed and prepared all the application documents, including appendices. How do I know if my idea is a good idea? There is no clear answer in determining whether an idea is a good and potentially profitable business venture. With the rapid advancements of technology, it appears that even the craziest ideas may offer a fertile ground for success. There is no rule or safety net in determining the long-term success of an idea; certainly there are many stories of entrepreneurs who were ridiculed for their crazy and unrealistic business ambitions and went on to become very successful or stories of people being discouraged from a venture, only to discover that someone else beat them to it. Nevertheless, if one must identify certain steps in building and preparing a sound business idea, these would be: - Conduct a business plan. You will need it anyway to submit an application for the above Schemes, to secure a bank loan or other types of funding, to approach potential investors or to sell your company in the future. - Make sure you identify your market and know your competitors. Many people believe they have come up with an innovative business idea only to discover that there are about a few hundred other businesses similar to theirs once they do a thorough internet search. - Make sure your business is feasible with or without national funding. An issue often faced by applicants of funding schemes, is the inability of enterprises to become self-sufficient, by relying heavily on national or European funding. Even though someone may argue that without funding, the idea will not materialise, it is essential that you have access to the entire project budget one way or another. Approvals by Ministries may take some time and through your final evaluation, you may in fact not be approved for the total funding amount you originally planned. Schemes, like the ones mentioned above, are helpful aids to kick-start your dream but ideally, you should be able to initiate your business dealings anyhow. *The above article provides a summary of the two Schemes currently opened and does not include all information present in the Guides. Potential applicants are advised to visit the Ministry s website and read the Guide and supplementary documents with attention or contact a business consultant experienced in the field of national funding applications to assist them further

39 Business 2014 KPMG Compensation and Benefits Survey Chart 2: By Mr. Marios Papalazarou Associate, People & Change Services KPMG Limited and Ms. Elli Foulli, Assistant Manager, People & Change Services KPMG Limited In today s economy, an effective reward system is not only an essential component for a company s ability to recruit, retain and increase the motivation of the right people but also an essential component for the company s ability to survive the impact of the latest economic crisis. KPMG s People and Change Services recognized the need for the existence of an external benchmarking tool back in 2008, hence conducting their Compensation and Benefits Survey. Specifically, the department successfully published the 2014 KPMG Compensation and Benefits Report, for the fourth time running. KPMG s Compensation and Benefits Report provides an actual and fair reflection of the Cyprus market trends, in terms of the existing compensation and benefits packages and offers a variety of useful information, providing companies with insight on how to design their compensation strategy with a competitive edge. Due to the exceptional quality of the Survey s sample and fieldwork methodology, along with the applicability of its findings, the specific Report is one of the most valuable tools for the formulation of a company s compensation and benefits strategy and has, today, been established as the best known and most comprehensive Survey in Cyprus. More specifically, the 2014 KPMG Compensation and Benefits Report presents compensation and benefits policies data of 90 prominent companies with the majority being companies of Cypriot ownership. The diversity of the Survey s sample, in terms of the participating companies activity, sector, company turnover and number of employees, further enhances the representation of the Cyprus market. The information refers to 181 positions (104 generic positions and 77 industry specific positions) and presents data from 6522 professionals. Out of the 181 positions which have been examined in this year s survey, the following apply only to specific industries: Private Hospitals Fiduciary Services Higher Academic Institutions Law Firms Coffee Shops Retail Hotel and Tourism Construction and Development Additionally, in analyzing the compensation and benefits policies, attention was also drawn on practices and/or changes that have been applied by the participating companies, as measures to the impact of the economic events of March Any modifications and alterations in the companies ownership, number of employees, changes in salary packages, total employers costs, benefits provided to the employees etc. were investigated. These respective trends are documented in the General Report. Part C of the report mainly consists of diagrams and charts representing the trends of the participating companies in relation to their compensation and benefits policies. Indicatively, the below charts present information related to the provident fund benefit and more specifically, the percentage of participating companies per activity providing such a benefit (Chart 1). Chart 2 presents the actions taken in regards to the provident fund contribution by the participating companies. Chart 3: Aiming in providing companies with valuable information in terms of both quality and quantity, each position analyzed in the Report is presented by using an Individual Position Reporting Table (IPRT). Each IPRT presents detailed information regarding the remuneration data of each position, allowing comparisons to take place based on a series of parameters, such as the individual s job match, company activity etc. Furthermore, the IPRT s present information regarding both the base salary and total compensation for each position, along with the percentage of individuals in the same position within the market who earn benefits such as a company credit card, provident fund etc. Finally, the 2014 IPRT s were further enhanced with information relating to the percentage of individuals holding the same position within the market, whose remuneration package was influenced by salary review practices, such as increases or decreases from the 1st of January 2013 until the date of data collection within the last quarter of The chart below (Chart 3) provides an indication of the average total gross compensation of the first line management positions, analyzed in the 2014 KPMG Compensation and Benefits Survey. Chart 1: 74 75

40 Auditing & Accounting Enhancing the auditor s report Over the course of many years, auditors have provided a binary pass/fail opinion on a company s financial statements. Either the financial statements fairly present the company s financial position and operations in accordance with applicable accounting standards, or they do not. While the traditional approach remains valuable, many believe it is no longer enough. Auditors have more insights to share, and investors are eager to hear them. And several regulators and standard setters have responded with measures that would require auditors to say more. By Gabriel Onisiforou Board member, Ernst & Young Cyprus Ltd On 15 January 2015, the International Auditing and Assurance Standards Board (IAASB) released its new and revised Auditor Reporting standards, designed to significantly enhance auditor s reports for investors and other users of financial statements - effective for audits of financial statements for periods ending on or after December 15, The most notable enhancement is the new requirement for auditors of listed entities financial statements to communicate Key Audit Matters - those matters that the auditor views as most significant, with an explanation of how they were addressed in the audit. The IAASB has also taken steps to increase the auditor s focus on going concern matters, including disclosures in the financial statements, and add more transparency in the auditor s report about the auditor s work. The European Union adopted its new auditor reporting requirements as part of the recent audit reform legislation in June The legislation will be transposed into national laws by June 2016 and it will be effective for 30 June 2017 fiscal year-end audits. The EU approach is similar in some respects to the IAASB s. The United Kingdom adopted a new, principles-based standard in 2013, and UK auditors issued their first reports under the new standard earlier this year. Investors and other stakeholders have been generally positive about the new reports, which have varied in length and detail. The US Public Company Accounting Oversight Board (PCAOB) issued an initial proposal to enhance auditor reporting in 2013 and has indicated it intends to issue a re-proposal by March The PCAOB had proposed that the auditor be required to report on critical audit matters, which are similar but not identical to the IAASB s key audit matters. Critical audit matters, according to the PCAOB s definition, would represent the areas in the audit of the financial statements of most significant auditor difficulty. IAASB - Summary of the new and revised ISAs relating to audit report, applicable for 2016 y/e ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements is supplemented by topic-specific requirements in the following standards: In summary, the significant changes to the auditor s report are as follows: All entities Opinion first Followed by Basis for Opinion in all cases (even if unmodified opinion) Affirmative statement of auditor s independence and fulfillment of relevant ethical responsibilities Going concern o Description of management and auditor responsibilities o Separate dedicated section to material uncertainty, when exists Expanded description (in the body of the report or in an appendix) of auditor responsibilities, including key features of an audit, including fraud, internal control, accounting policies and estimates, evaluating the overall presentation, structure and content of the financial statements and disclosures, group audits, and communications with TCWG. Listed entities (and voluntarily all entities) - Communicate KAMs: Areas of higher assessed risks of material misstatement, including significant risk Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates of high uncertainty The effect on the audit of significant events or transactions that occurred during the period In most cases, KAMs will relate to significant or complex matters disclosed in the financial statements. Examples of KAMs might include valuation of goodwill and other long-term assets, valuation of financial instruments, difficult or unique aspects of revenue recognition, or accounting for significant acquisitions. EU Audit reforms These were adopted in June 2014, as part of broad audit reform legislation. Member States implementation will follow by June 2016 and they will be applicable in fiscal years ending 30 June The EU Audit Directive (2014/56/EU amending 2006/43/EC the so called 8 th directive ) that applies to all companies does not result in major changes to the audit report. However for Public Interest Entities (PIEs), the EU Audit Regulation (537/2014) will result in major changes to their audit reports. PIEs are defined in the EU legislation as companies with securities admitted to trading on a regulated market Auditors have more insights to share, and investors are eager to hear them. And several regulators and standard setters have responded with measures that would require auditors to say more. in the EU/EEA, private credit institutions and insurance undertakings. According to the Regulation, audit reports of PIEs should, in addition to the standard requirements in the Directive, also include amongst other things: The date of appointment and the body who appointed the auditor A description of the most significant assessed risks of material misstatement, including those due to fraud, a summary of the auditor s response to those risks and where relevant, key observations arising with respect to those risks Explanation to what extent the statutory audit was considered capable of detecting irregularities, including fraud Confirmation that the audit opinion is consistent with the additional report to the audit committee Declaration that the prohibited non-audit services referred to in the Regulation were not provided and that the auditor remained independent of the audited entity Indication of any non-audit services, if not disclosed in the financial statements Expected effects on auditor s reports issued in Cyprus As per the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013, audits should be conducted in accordance with ISAs as adopted by the European Commission. With the implementation of the new amendments to the law that will harmonise Cyprus with the newly enacted EU Audit Directive and Regulation, it is expected that Cyprus (similar to other EU countries that use the ISAs in maintaining national auditing standards) will need to pair ISAs and EU requirements to come up with a combined result to address auditor reporting

41 Auditing & Accounting Audit profession, what is the way forward? With the global financial recession far from being over, the question emerges on what does the future hold for the audit services sector? By John C. Nicolaou, Board Member, KPMG Limited To understand this better one needs to examine all the events and challenges of the past years whilst at the same time to evaluate known future changes and their impact to the audit profession. On a global level the harsh reality is that the perceived value of the audit services has been diminishing for a number of years. Upper management and directors do not see audit services providing any real value to their business. They rather perceive audit services as a necessary burden. This has led to a number of organizations often switching auditors as an effort to reduce audit fees. Furthermore, even though fraud is not the objective of an audit, still company directors and general public are often disappointed when a fraud case is surfaced and was not previously identified by the auditors. Going forward it is important for the audit profession to find ways to increase the perceived value of services offered. Better market specialization can certainly help, and so can promotion of advisory services that can assist organizations meet their targets. In a small country like Cyprus, market specialization is more difficult to achieve, since the vast majority of organizations are SMEs. Furthermore, for auditors servicing international companies it is certainly more difficult to fully understand the business environment and activities of their clients when not being physically present in the countries the clients operate. Similar to other professions, technology is expected to have a significant impact in the audit profession throughout the forthcoming years. Advancement in auditing software will facilitate the integration with client s accounting software and ERP systems enabling the auditors to audit the entire population of accounts and transactions. By effective usage of technology, the auditors will in turn be required to spend much less time in testing accounts and transactions, but rather recording and analyzing results. Furthermore, it is expected that future generations of auditors will be required to have enhanced knowledge of technology and applications. It is thus anticipated that audit firms will be forced to employ a higher number of Information Technology professionals and less number of accounting professionals since the audits will be much more technology driven. Offshoring and shared service centers have been used for a number of years in many organizations and industries and it is slowly expected to have an impact in the audit sector as well. In a global business environment it is not unusual for organizations to shift production and other services to other 78 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 countries and jurisdictions that offer lower costs. In addition to the main advantage of lower costs, such organizations can offer 24hour services, by employing staff on the other side of the globe and thereby always having an employee working on the job. In the audit sector that would mean sending information electronically to a service center abroad during the day or overnight and receiving the results during the same day or the next morning. An obvious obstacle for audit firms would be client confidentiality, however with appropriate policies, procedures and effective trainings appropriate solutions can be found and applied. Implementing the aforementioned services will lead to a less number of junior staff required within audit firms, since testing will be carried out offshore and larger number of more senior staff to review the work done. Another benefit of using offshoring and shared service centers would be the ability of audit firms to employ less full time staff, whilst at the same time have higher capacity during busy seasons. Certainly, both offshoring and shared service centers would be much easier to implement in large multinational audit firms, however in the longer run developments and opportunities are expected to impact smaller firms as well. The EU audit reform legislation adopted in April 2014 is expected to have a significant impact not only in EU countries, but also internationally. The new legislation is expected to be implemented in June 2016 and would require mandatory audit firm rotation and restrictions on provision of non-audit services, among other. The mandatory rotation would necessitate audit firms to acquire further specializations in areas that perhaps did not have the opportunity to specialize previously. Furthermore, technically competent employees in specialized areas will be in high demand in order to be able to provide quality services for new clients. Even though the EU legislation is applied only to EU countries, in reality many other countries will be indirectly affected as well if they have subsidiaries in the EU. For example, if a US Company has a subsidiary in the EU, it would be forced to rotate the auditor in the EU and then decide whether to rotate the auditor in the US as well, or be burdened by having two different audit firms along with other inefficiencies this might lead to. Certainly the audit profession is currently going through important changes. It will be very interesting to see how these changes affect the profession in the long run and what other opportunities will arise. Audit firms and professionals need to remain alert during this period of change and at the same time sustain flexibility in implementation of new ways of thinking.

42 Audit & Accounting Audit efficiency: making ISAs fit for purpose by focussing on relevance By John Selwood, Audit and Assurance faculty Practitioner Services Committee and Christiana Diola, Services and Technical Manager, Europe region All auditors want to perform more efficiently on audits, and particularly on smaller audits. Striving for an efficient small ISA audit is a worthy and achievable goal and with the right investment in an audit, including the right level of upfront planning, audit quality can drive audit efficiency. This is not a new idea. The Faculty has consistently promoted the efficient smaller audit and Making Audit Pay 1 we made clear our belief that the most efficient and profitable audit practices produce high quality audits by investing in them. It is a common misconception that improving audit quality costs money without any corresponding improvement to efficiency, and that auditors can only be more profitable if they simply cut costs. So how do we manage to achieve high quality, efficiency and profitability on smaller entity ISA audits? Can we carry out a high-quality, focussed, proportionate, ISA-compliant audit and make money on it? We think yes. We believe that there are a number of critical elements in achieving this goal. 1. We believe that ISAs are scalable to smaller audits and that each audit should be tailored Many ISA requirements do not apply to smaller and less complex audits. With the right upfront investment, auditors can ensure they carry out only the necessary audit work to achieve an effective outcome, i.e. to reach an audit opinion having only followed those ISAs and ISA requirement that are relevant, and having identified the significant risks which require appropriate response by collecting sufficient appropriate audit evidence. However, some auditors struggle to scale the ISAs because they do not invest in individual audits, take a one size fits all approach and do not tailor the audit approach from job to job in an attempt at containing or cutting costs. This almost always results in unnecessary work in unnecessary areas as well as insufficient work in critical areas and some critical areas being missed altogether. This is neither efficient nor effective 1 See the July/August 2012 edition of Audit & Beyond and can be positively counter-productive, in that more costs are incurred instead of less, when remedial work has to be done. 2. Senior involvement is a must There are a number of actions that can be taken to boost audit efficiency. Scaling the ISAs and tailoring the approach an individual audit often involves increased participation of senior team members in the planning procedures and risk assessment, investment in training, communications and industry-specific knowledge for the audit team, and targeted documentation by reducing reliance on checklists and minimising unnecessary documentation, particularly duplicated documentation. Using the staff with the lowest charge-out rate is sometimes a false economy. Such staff are not likely to have the knowledge and experience to recognise significant risks, even in areas which seem to be straightforward. Senior involvement and guidance from the outset in establishing key areas of focus and targeted work programmes are more likely to result in real efficiency and effectiveness gains. Just as importantly, experienced auditors can identify what is irrelevant and their knowledge of ISA requirements that do not apply to simpler audits means that they are less likely to be distracted. For example, many smaller entities are less likely to have complex accounting estimates for auditors to evaluate under ISA 540 (Revised and Redrafted) Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, and are less likely to outsource material functions to service organisations, rendering irrel- evant ISA 402 Audit Considerations Relating To An Entity Using A Service Organisation. 3. Investment in training and strong team communications To efficiently comply with and document compliance with the requirements of ISAs, auditors need to know their ISAs. There is no short-cut to audit quality and profitability. Audit team members with a poor knowledge of the ISAs will be highly reliant on checklists and standard programmes. They are more likely to get side-tracked and waste time. Checklists and programmes are designed to remind auditors what to do, not to do away with the need for auditors to know the ISAs. They should be used as an aide-memoir, not as a reference book. Ensuring staff are trained in the latest auditing, accounting and ethical standards is critical. This training is as much classroom as it is on-thejob. But even this might not be sufficient to ensure an efficient and targeted audit. The staff on the audit need to have the right industry information, and a full and strong understanding of where the risks lie, what can go wrong with the numbers, and of industry practices which might have a direct impact on the published results. Strong team communications are fundamental to audit efficiency: staff require guidance, support and supervision, and an open line of communication. Junior staff need to understand the business and where things might go wrong from the outset if they are to stand a chance of detecting non-routine transactions which might raise suspicions or require the collection of further audit evidence. At the same time, communications ensure that fieldwork is targeted and no time is wasted in insignificant areas. An audit team without strong leadership and clear direction can easily get side-tracked by the inconsequential whilst failing to address what is central. 4. Documentation, documentation, documentation Audit Documentation is always important. It is the key factor in demonstrating compliance and quality. Producing succinct and clear documentation significantly contributes to efficiency as well as audit quality. Although there are clear benefits to pre-prepared audit packs, completing checklists for every individual ISA can be timeconsuming and a distraction from the important task of concentrating on the significant risks of misstatement and the appropriate response. So how do we manage to achieve high quality, efficiency and profitability on smaller entity ISA audits? It might be that simple narrative notes are sufficient to cover the requirements of ISAs and ensure a strategically focussed and effective outcome. And in a very simple audit, efficiency might be achieved by combining the planning and completion elements of audit documentation, as many of the requirements are similar: analytical procedures and going concern considerations are requirements both at the planning and the completion stage, for example. At the same time, simple documentation of the pertinent and relevant audit issues in the financial statements can avoid cumbersome and time-consuming checklists, programmes and questionnaires, when considering legal and regulatory issues relevant to an audit, for example. A checklist covering every possible requirement of ISA 250 Consideration Of Laws And Regulations In An Audit Of Financial Statements can act as a helpful aide-memoire, but it is only those considerations pertinent to the business and financial statement risks which require documentation and an auditor response. Checklists certainly don t replace a well-trained thinking auditor. Similarly, the review stage of the audit needs to be targeted both in terms of coverage and documentation. Paragraph A13 of ISA 230 Audit Documentation states that the requirement in ISA 220 Quality Control for an Audit of Financial Statements on quality control for auditors to review the work performed, does not imply a need for each specific working paper to include evidence of review. The review of the audit file by the audit partner should be focused on the key areas that have an impact on the audit report and the accounts. Maintaining perspective and scaling ISAs to fit smaller entity audits is possible provided that - to mix a few metaphors - audit teams avoid going on to auto-pilot which can be time consuming, and can lead the audit off-piste regarding which risks are significant. Many auditors have seen this in practice where time has been wasted and important points have been missed, proving the point that lower audit quality and inefficiency can coexist, as can high audit quality and efficiency. This article features in ICAEW s International Accounting and Auditing Service and has been arranged for all ICPAC members together with resources on international standards in auditing and financial reporting at icaew.com/icpac 80 81

43 Auditing & Accounting Moving to expected loss will mean huge demand for data By Says Philippa Kelly, ICAEW Financial Services Assurance manager On 1 January 2018 the new international financial reporting standard for financial instruments (IFRS 9), will come into force replacing the old standard, IAS39. There has been a lot of debate on the effects that the new standard will have, mostly thanks to the fact that it will mean replacing an incurred loss model for loan-loss provisioning with an expected loss model. The arguments surrounding this paradigmatic shift are well-rehearsed, but what is not in doubt is that the effects will be most acutely felt by banks on their loan portfolios. Accordingly, in advance of the standard coming into force, banks are gearing up for some The fact is that even before an entity decides the best way to use their available data for loan loss provisioning, the entity will have to establish a data taxonomy. 82 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 highly complex implementation projects. What has yet to be discussed in depth is the difficulties this will present for those banks in terms of data. There has been little in terms of guidance on how to measure expected credit losses issued to accompany the principles based standard. The fact is that it will mean collecting and collating a tremendous amount of data, often from outside of the finance function, then ensuring its quality and integrity, and then, finally, deciding what to do on the basis of it. The challenges that this presents should not be underestimated. What can we understand from the standard? It tells us that information must be reasonable and supportable, but; entities are not expected to incur undue cost or effort to obtain it (Information currently available for financial reporting purposes will be considered to fall within this) and currently available data (for example macro-economic data) should be used to adjust historical data in order to make it relevant. Therefore, in order to make the information presented as relevant as possible, data which is currently outside the scope of historical statutory audit requirements will be required. The good news is that, for banks, there are a number of potential existing data sources available. However, they are by no means of equal scope, quality, or reliability to financial reporting data. The original purpose for which data has been collected will naturally influence how it is reported and controlled. For example, data forbearance data used within the business may be useful, but is liable to be patchy. Risk Limit data is also available, but may become quickly out dated and is hard to compare where judgement is used, for example by relationship managers in charge of a corporate debt portfolio. Risk data used for regulatory purposes such as Lifetime Probability of Default (PDs) may be relevant, but in many jurisdictions the basis of calculation is may be different to what meaningful for the accounting standard. There are also challenges in calculating PDs for, say, long-term loans such as mortgages. The fact is that even before an entity decides the best way to use their available data for loan loss provisioning, the entity will have to establish a data taxonomy. There will have to be a data dictionary, a hierarchy of how important it is, and the meta data that describes its content and context. Moreover, there will have to be a mechanism for assessing the quality and reliability of the new information sources. It would defeat the purpose of the exercise if information that did not come There has been little in terms of guidance on how to measure expected credit losses issued to accompany the principles based standard. from a strictly controlled environment was able to affect financial reporting which has well established and robust control processes. Data is only be one part of the challenge of the expected loss model but it is a critical one since data must be collected, structured and organised before implementation can seriously begin. January 2018 is starting to look very close indeed. It may be that there are other industry sectors which banks can look to for inspiration. The insurance industry, for example, already has to calculate behavioural lifetime information, and it could well be that there are lessons that could be learned, and approaches that can be adapted and adopted. Ultimately management will benefit from stronger data mechanisms which can improve reporting and increase transparency. The business as a whole may be able to better understand its dynamics and perform better in future.

44 Taxation Cyprus and the new sense of offshore By Olga Chervinskaya Senior Manager International Tax Services Ernst & Young Cyprus Limited In the past and prior to joining the European Union Cyprus was called an offshore jurisdiction meaning a country that had zero or low tax rate or provided special tax regimes for international business companies. While Cyprus still offers beneficial tax environment for international investors based on internationally accepted tax practices, since recently the word offshore has a new meaning while referring to Cyprus. And this meaning lies in the area of oil and gas operations. Cyprus offshore in this sense is a common reference to an oil and/or natural gas underwater area situated outside Cyprus shore as well as to hydrocarbon activities carried out in this area. In connection with Cyprus offshore we often hear the terms like territorial sea / waters, continental shelf and Exclusive Economic Zone ( EEZ ). These terms are defined by the UN Convention on the Law of the Sea ratified by Cyprus in 1988 ( the Convention ). Territorial sea is referred to as an adjacent belt of sea the breadth of which can be established by a state up to a limit not exceeding 12 nautical miles, measured from its state baseline. Territorial sea is a sovereign territory of the relevant state and this sovereignty extends to the air space over the territorial sea and, which is important while talking about oil and gas, to its bed and subsoil. The continental shelf is an underwater landmass which extends from a continent, resulting in an area of quite shallow water. It can be determined in two ways: 1. the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or shelf sovereign rights for the purpose of exploring it and exploiting its natural resources. The EEZ is an area beyond and adjacent to the territorial sea, subject to the specific legal regime. A state has sovereign rights in its EEZ for the purpose of, amongst others, exploring and exploiting, conserving and managing the natural resources, ether living or non-living, of the waters superjacent to the seabed and of the seabed and its subsoil. The exclusive economic zone shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured. Since the determination of the above areas is not always straight forward and may be challenged by the neighbouring countries this often becomes the subject of bilateral international agreements. So far Cyprus has signed the Delimitation of the EEZ Agreement with Egypt. Similar agreements have been signed on a Ministerial level with Lebanon and Israel. In addition, Cyprus and Egypt have signed a Framework Agreement concerning the development of cross-median line hydrocarbon resources and a more detailed Unitisation Agreement. The Cypriot domestic tax legislation does not include the definition of the above explained areas, even though there is such definition in other domestic laws. Current version of the Cyprus Income Tax Law ( ITL ) defines Cyprus as the Republic of Cyprus whereas some conventions for the avoidance of double taxation ( double tax treaties ) newly concluded by Cyprus include more sophisticated definition of the Republic s territory. For example, the recently concluded double tax treaty with Norway (entered into force 1 January 2015) defines Cyprus also in geographical sense and specifically includes territorial sea, continental shelf and EEZ. Global experience, local approach in the Funds Industry KPMG provides comprehensive audit, risk advisory, tax and regulatory services to fund managers in setting up and operating through Cyprus. Our clients look to us for leadership and guidance in areas such as: fund set-up and structuring; regulatory interpretation and support; proactive tax advice; investment acquisitions and due diligence; fund liquidation, re-domiciliation and/or restructuring. Our local practice is at the forefront of industry issues, working closely with the industry and its representatives and actively participating in the firm s global product development programmes. The combination of a strong local practice, with significant professional and industry experience, along with the global reach of KPMG International fund services network places us in an optimal position to provide added value service to our clients as they address the industry challenges, and guide them in grasping opportunities. For more information please contact: Christos Vasiliou Board Member Primary Contact T: E: 2015 KPMG Limited, a Cyprus limited liability company and member of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 2. a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured (in case the outer edge of the continental margin does not extend up to that distance). The coastal state exercises over the continental Let s hope that the oil and gas offshore era will establish Cyprus as an international energy centre which will bring more benefits to the country economy in addition to the benefits of Cyprus being an international business centre. 84 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 It is important to broaden the definition of the Republic for tax purposes to specifically contain the offshore areas in order to extend the tax jurisdiction of Cyprus over the hydrocarbon activities taking place offshore Cyprus. Under current tax practice, the Cypriot tax authorities interpret the definition of Cyprus to include territorial sea, EEZ and continental shelf and, thus, treat the hydrocarbon activities that may be undertaken by a non-resident company in these areas as taxable in Cyprus on the basis of Article 5(2)(a) of the ITL that allows Cyprus to tax income from a permanent establishment situated in the Republic. It should be noted that international treaties (e.g. the Convention, the delimitation agreements) do not on their own give taxation rights to Cyprus. Marie-Helene Angelides Senior Associate Regulatory & Compliance T: E: kpmg.com.cy

45 Taxation Operation Transparency: Preparing For The New Era By Antonis Dimitriou Tax Associate at Ernst & Young Bringing the system up-todate In most countries around the world, the tax systems that are in place are far outdated. They don t fit for the purpose of today s economy. Most of these systems where set up in an era where manufacturing was at the center of the stage. Since then, the world has moved towards a service economy in which technology and intellectual property are in the limelight. Therefore, tax systems need to keep pace with where the economic picture is and where is heading. Consumers need information to make correct purchasing decisions based on creditworthiness, while investors require information to assess opportunities and tax positions in order to make accurate investment decisions. These are some of the challenges that have to be addressed effectively. Actions taken Tax transparency is not a new trend. It has started during the 1990s as authorities required greater disclosure from taxpayers. The first big step was made in 2002 when the OECD issued the Agreement of Exchange of Information on Tax Matters Revealing sensitive financial and commercial information publicly may result into companies losing competitiveness as rivals may duplicate strategies used. Either through mandatory requirements or voluntarily, tax transparency is coming a tax leader in a famous multinational mining corporation has stated. Certainly, transparency has become one of the hottest topics around these days. Quite reasonably so as the public s confidence in businesses and governments has decreased dramatically over the last few years, creating a lack of trust in the world s big leaders. This lack of trust -which comes in the aftermath of the financial crisis- continues to grow exponentially as we watch big international corporations moving their tax around in order to minimise it. Despite the fact that this is perfectly legal, morally it feels wrong, many argue. as a response to the 1998 OECD Report Harmful Tax Competition: An Emerging Global Issue. The purpose of the Agreement was to promote the international co-operation in tax matters through effective exchange of information. However, following the 2008 financial crisis, more action needed to be taken. As a result, Dodd-Frank Consumer Protection Act was signed during 2010 in the US in order to improve accountability and transparency in the financial sector as an attempt to prevent any recurrence of events that would lead to a new financial crisis. In Europe on the other hand, the Financial Conduct Authority (FCA) issued in 2013 a fourth amended to the Capital Requirement Directive (CRD IV) in order to minimize the negative effects of failing firms and demanding public disclosure of certain tax information. The UK Government announced at Autumn Statement 2014 that it is in the process of introducing the Diverted Profit Tax, taking effect from This measure will introduce a new tax which will be imposed on enterprises with business activities in the UK which enter into arrangements in order to divert profits, thus avoiding a UK taxable presence. All-around collaboration Things are changing and those who don t realise it promptly and take proactive action will experience difficulties. Ten years ago, bank secrecy was a must; in ten years it will become a myth. The in- creased desire of regulators and governments to battle tax avoidance has started gaining ground. Countries have started collaboration around the sharing of tax information, with the OECD being the conductor of this mutual effort. The Common Reporting Standard (CRS) which was issued in 2014, calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. More than 65 jurisdictions have already committed for implementation, with more than 40 of them engaged in early adoption of automatic information exchanges as early as The use of tax havens and offshore financial centers will soon become a once upon a time.. bedtime financial story. And while CRD IV focuses on financial institutions, the OECD goes a step forward and announces its Base Erosion and Profit Shifting (BEPS) Action Plan. This Plan aims to confront the arrangements that achieve minimal or even no taxation at all, because profits were shifted away from the jurisdictions where these profits had been created. Due to the gaps in the interaction of different tax systems and also because of the bilateral tax treaties, income from cross-border activities may go untaxed anywhere. Considering Reputation As tax planning arrangements are at the center of media attention nowadays, leaders have to act proactively since the scrutiny will only intensify in the near future as a result of the above initiatives to battle tax avoidance. Corporate leaders need to realise that many things are at stake; the most important one being reputation. Failure to communicate effectively their tax affairs -either these are tax policies, strategies or contributions- reputational risk is imminent and this is not towards their company s advantage. Activists and NGOs who are able to attract a grandiose media attention, require businesses to pay their fair share of tax. However, tax avoidance strategies are an essential tool of lowering the burden of a company which in turn contributes towards profit maximisation. Nonetheless, an adverse public perception has the power to create a devastating damage in returns. Therefore, leaders must think new strategies related to their business which will impact favourably the brand of their company. Either through mandatory requirements or voluntarily, tax transparency is coming... Transparency has its difficulties Transparency is by no means a panacea. Revealing sensitive financial and commercial information publicly may result into companies losing competitiveness as rivals may duplicate strategies used. In addition, because of the complexity that the tax information has by nature, misinterpretations and misunderstandings may harness a company s image out of the blue. Furthermore, transparency will require a further level of detail which as a result will increase the associated costs. Above all, is the difficulty to strike the right balance in deciding the correct level of information to disclose and the most appropriate way to do so. It s all up to governments and corporations Policy makers and legislators will have to apply good judgement in order to achieve the optimal balance between the expected benefits of such enhanced transparency and the associated increase in the respective compliance costs. They need to understand that there are various stakeholder groups with different perspectives and goals. Businesses are another player in the financial chessboard and with the most significant role in the game: to reverse the situation and restore trust and build confidence. A big weapon that they hold in their arsenal is transparency. That is, to communicate with all stakeholders -and not only the shareholders- their tax affairs. On the one hand they should strive for full compliance and disclosure to the tax authorities. On the other, they have to be cautious against publicising excessive information. At the end of the day the outcome behind the whole tax reform and transparency is one and quite simple: very soon even the farthest rocky island on earth will not be a safe option to hide from the tax collector

46 Fraud Business Integrity Forum as strategic CSR By Iphigenia Pavlou, Head of BIF at Transparency International Cyprus and Christina Neophytidou, CSR Officer at Transparency International Cyprus Executives have always been concerned about negative PR from corruption, but they are increasingly becoming aware of the additional costs and risks they face, including: Operational costs. Corruption adds additional expense throughout the corporate value chain and can lead to costly operational disruptions Legal risks. Corporations face substantial consequences if they engage in corrupt business conduct, including large fines and disqualification from future government procurement Competitive risks. Companies can also be at a competitive disadvantage if they refuse to pay bribes. Companies that adhere to strict principles against corruption can find themselves losing business to less ethical competitors who are willing to pay to influence the procurement process. In addition to having tangible business consequences, corruption exacts significant costs on society. Redirecting large sums of money contributes to increased poverty and income inequality and discourages foreign direct investment in poor countries where it is needed most. The effects include: Reduced government services, particularly for the disadvantaged. Studies indicate that in some countries corruption adds as much as 25 percent to the cost of public procurement. This diversion of resources results in lower quality services, which also become more expensive and often unaffordable for the poorest citizens. Constraints on foreign direct investment. Investors typically avoid environments in which corruption increases the cost of business and undermines the rule of law. Decreased trust in government. In societies where bribery persists and corrupt officials are not held accountable, citizens lose faith in their government. A lack of public trust undermines the rule of law, which can lead to increased crime, reduced safety, and further instability. 88 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 Corruption is increasingly been understood as a broader and systemic problem which includes acts of fraud, bribery, money laundering, embezzlement, nepotism or state capture. It has been defined as the misuse of entrusted power for private gain and represents a critical business issue for companies and a significant social issue around the world. Indeed, corruption poses a real business threat to companies. Given that corrupt practices are placing a tremendous obstacle for sustainable economic development, a new set of responsibilities have emerged for companies. Companies are nowadays realizing that although they are a significant part of the problem, they could also benefit measurably from progress toward solutions particularly in terms of reduced costs, greater operational efficiency, and improved reputation. More specifically, by joining the fight against corruption, companies can minimize costs and risks associate with corruption incidents, tackle inefficiencies, protect reputations and encourage good governance worldwide. Therefore, the anti-corruption field offers a major opportunity for strategic corporate social responsibility (CSR) programs to tackle an issue that is inherently linked with both corporate and societal interests. Indeed, companies today are bolstering their principles and policies of transparency, ethics and risk management, not just for legal compliance, but as an ethical and necessary part of good management. This, enables them to combine their corporate responsibility commitments with rigorous corruption prevention as part of their overall policy to manage their activities in a responsible manner. As a necessary part of good management, responsible business conduct can help companies advance their management systems, attract a new range of investors, increase morale, and induce better supervision of supply-chain management. In addition, by joining the fight against corruption, companies can minimize costs and risks associate with corruption incidents, tackle inefficiencies, protect reputations and encourage good governance worldwide. Having acknowledged that companies involvement in fighting corruption is essential, Transparency International - Cyprus (TI-C) has set up the Business Integrity Forum (BIF), which aims to bring under one roof companies that strive to operate in an ethical, transparent and accountable manner and thus wish to become a role model for other business actors. By sharing knowledge and ideas regarding transparent business practices, organizations can expand their views on how to increase integrity at all levels. Thus, companies that will achieve to become members of the Forum, will essentially guarantee their commitment to operating with high standards of integrity and transparency as part of their anti-bribery and corruption policy. As a result, by becoming a member of the BIF and by supporting the fight against corruption, member companies will be able to actively promote their social responsibilities by demonstrating their commitment to integrity, setting thus the example for profitable and ethical operations. In addition, members of the BIF get to enjoy a number of benefits such as the use of the BIF logo, participation in round tables, seminar training etc. For more information regarding the benefits of participation to the Business Integrity Forum, please visit our webside at:

47 Fraud Whistleblower Protection The Cyprus Case By Demetra Demetriou Senior Financial Officer, Member of the Economic Crime and Forensic Accounting Committee of ICPAC and Yiannis Pettemerides Registered Auditor and Forensic Fraud Examiner, Member of the Economic Crime and Forensic Accounting Committee of ICPAC Corruption and the Whistleblower as a Line of Defence From a small bribe paid to a police officer to cancel a speeding ticket, to the millions of Euros bribe paid to a senior government official to advance the interests of a business owner, the effects are always the same. In the political sphere, corruption impedes democracy and the rule of law where public institutions may lose their legitimacy and gain the contempt and discredit from society. In the economic sphere, it hinders economic development and prosperity for the whole society leading to violation of their human rights. In the last Global Corruption Perception Index for 2014, published by Transparency International, Cyprus has been ranked 31st (together with Botswana) and following a downward adverse trend over the last years. According to a press release issued by Transparency International Cyprus, Cyprus slipped to the 31st position due to three main reasons: (1) corruption in relations of political parties with the business environment, (2) the lack of regulations and will for setting up substantive prevention regulations, tracking and penalizing corruption, and (3) the economic crisis which favours corruption. In the last Eurobarometer for 2014, published by European Commission, the trust in Cypriot institutions was one of the lowest amongst all the other European Union member countries, where 91% of Cypriots do not trust the political parties, 77% do not trust the parliament, 72% do not trust the government, 70% do not trust the legal system and 60% do not trust the police. Three global scientific studies (PricewaterhouseCoopers 2008, Association of Certified Fraud Examiners 2008, Ethics Resource Centre 2007) have objectively proven that whistleblowers are the most effective in detecting corruption. All three studies have identified that whistleblowers were responsible for 45% of any corruption cases identified, with only 3% being identified from law enforcement officers. The importance of whistleblowers and their protection has also been recognized by all 28 European Union countries. Despite that, only 4 of them have legal frameworks in place for whistleblower protection that are considered to be advanced: Luxemburg, Romania, Slovenia and United Kingdom. Of the remaining 24 countries (including Cyprus), they either have partial legal protections for whistleblowers that come forward to report wrongdoing or they completely fail to adequately protect whistleblowers (Transparency International Report 2013). By disclosing information about such misdeeds, whistleblowers have helped save countless lives and billions of Euros in public funds, while preventing emerging scandals and disasters from worsening. However, whistleblowers often take on high personal risk and instead of hailed as heroes they usually end up as martyrs as they may be fired, sued, blackmailed, blacklisted, intimidated, harassed, arrested, threatened or in extreme cases assaulted or killed. The Current Whistleblower Protection Legal Framework in Cyprus The government of Cyprus has made some progress over the years in the fight against corruption, and one of them is the amendment to its Criminal Code in 2012, which provides the Criminal Law Convention on Corruption. However, Cyprus does not have a stand-alone legislation to shield whistleblowers from retaliation, although it has a range of laws that ostensibly provides some protection for employees in the public and private sectors, which step forward and report wrongdoings. Whistleblowers in public and private sectors who believe that are protected could discover, after they blow the whistle, that they actually have no legal recourse. Legal protections for government employees are more clearly defined than those in the private sector. Public servants are legally bound to report wrongdoings, and are protected from any type of discipline by the Public Service Law. Barring urgent circumstances, government employees must make their disclosures in writing, seemingly reducing opportunities to maintain confidentiality. The 2013 Code of Ethics for Public Officials though, obliged public officials to report, not necessarily in writing, to their supervisory authorities any act of corruption which comes to their knowledge. The Labour Law requires objective grounds for dismissal of officials and the Civil Service Law provides for imprisonment or a pecuniary penalty for those who impose an unjustified punishment on a whistleblower for reporting corruption. However, the provisions do not cover protection after the disclosure or cases when supervisors fail to follow up, or are themselves part of the problem. In the private sector, the Unfair Dismissal Law offers vague guidance on protecting company employees from unfair treatment. If an employee reports a felony violation, this theoretically would outweigh internal company regulations; company s employees, however, must take care not to violate company regulations. The Required Developments of the Whistleblower Protection Legal Framework in Cyprus The UK is considered to have one of the most comprehensive whistleblower protection laws in the world, the 1998 Public Interest Disclosure Act, having adopted a single disclosure regime for both private and public sector whistleblowing protection. Under this law, whistleblowers are able to disclose a very broad range of crimes and wrongdoing and can be legally protected from retaliation. In case they are fired, the employer must prove that the act of whistleblowing was not a factor in the dismissal, and employees can be compensated, including the aggravated damages and injury to feelings; the highest award to date is GBP 5 million. Transparency International has issued a detailed guidance for law makers in establishing effective whistleblower legislation (Transparency International Report 2014). This guidance aim is to offer best practices for law makers to protect whistleblowers and support whistleblowers in the public interest. Any law should seek to incorporate the following frameworks as a minimum: Guiding Definition: on defining what whistleblowing is; Guiding Principle: on defining the overall objective being on protecting individuals and disclosures by having accessible and reliable channels to report wrongdoing, having robust protection from all forms of retaliation and having mechanisms for disclosures that promote reforms that correct legislative, policy or procedural inadequacies and prevent future wrongdoing; Scope of Application: on offering broad definition of whistleblowing, broad definition of whistleblower, threshold for whistleblower protection; Protection: on protection from retribution, preservation of confidentiality, burden of proof on the...whistleblowers often take on high personal risk and instead of hailed as heroes they usually end up as martyrs as they may be fired, sued, blackmailed, blacklisted, intimidated, harassed, arrested, threatened or in extreme cases assaulted or killed. employer, knowingly false disclosures not protected, waiver of liability, right to refuse participation in wrongdoing, preservation of rights, anonymity, personal protection; Disclosures Protection: on reporting within the workplace, reporting on regulators and authorities, reporting to external parties, disclosure and advice tools, national security and official secrets; Relief and Participation: on full range of remedies, fair hearing, whistleblower participation, rewards system; Legislative Structure, Operation and Review: on dedicated legislation, publication of data, involvement of multiple actors, whistleblower training; Enforcement: on whistleblower complaints authority, penalties for retaliation and interference, follow-up and reforms. However, the law itself cannot be considered on its own as a powerful tool to whistleblowing as the whistleblowers carry high professional and personal risks. To encourage whistleblowing, a reward system, including monetary rewards, could be included as part of the whistleblower protection mechanism. The Anti- Corruption and Civil Rights Commission of Korea for example, provide monetary rewards for whistleblowers up to USD 2 million, if their report has contributed directly to recovering or increasing revenues or reducing expenditures for public agencies. Whistleblowers and Regaining the Fight against Corruption Many serious scandals and disasters that have struck Cyprus in recent years (Cyprus Stock Exchange collapse, Helios Airways flight crash, Mari Naval Base explosion, Dromoloxia and SAPA scandals, Banking Sector and whole Cyprus Economy collapse) might have been prevented or lessened if an adequate whistleblower legal framework was in place. The lack of a stand-alone whistleblower law in Cyprus is not due to an oversight. Political leaders are aware of European and international pressure to implement such a law but have chosen not to do so (Transparency International Report 2014). Cyprus is currently in a critical crossroad on its fight against corruption and a strong whistleblower law is now a must in the national efforts to fight corruption

48 Real Estate Real Estate Prospects Year 2015 The Cyprus Real Estate market comprises of the local and foreign demand whose interest is showing a reducing interest. YEAR LOCALS FOREIGNERS By Antonis Loizou F.R.I.C.S. Antonis Loizou & Associates Ltd Real Estate Valuers & Estate Agents It is evident the difference and the trend especially considering that the year , 50% of the total sales (35.912) referred to foreign demand. For someone to predict with some sort of certainty the future, he must be either a newcomer in the industry or to give predictions based on own interest e.g. developers. No one knows dear readers the future, since the future depends on many factors concerning the local as well as the international economies, especially that of Russia s. The Local Market Local interest remains at a low level and it is mainly directed towards apartments (70%), houses (20%), building plots (5%) and others (by 5%). Interest is based on the reduced prices to which in most cases refer to sales prices of buildings below contractor s building cost. As prices (2015) exist at the moment, the cost of a new building is more expensive than resales prices which as we report is below building cost. To the whole negative situation the non availability of finance, the uncertain economic future and the lack of trust towards deposits (now a good percentage is kept in safe boxes, at home etc) is a negative consideration as is the high interest rates at the level of 6%-7% (notwithstanding the fact that they are expected to be reduced by 1%-1½% within the year 2015) are serious drawbacks. All these and bearing in mind the possible increase in unemployment, especially that referring to the younger generation who contributed in the demand of the real estate market is an added consideration. Due to the prevailing circumstances the local market is directing its interest towards rentals which show an increasing interest, but at very low/discounted rentals. On the other hand we note an improvement in demand both from locals as well as foreign (see table above) and this is a positive sign, but it is very early to deduce any concrete results. The Foreign Market The reduced foreign demand is shown on the above table. Foreign demand comprises nowadays of Chinese, Libanese, Libyan and to an extent and at the high end the Russians and so far Ukrainians. These two last nationalities however are now in trouble, both due to the political situation, the devaluation of the Rubble and the deoffshorization of Russia, the questions raised by the Ukrainian Government on the double taxation treaty in addition. To this the improvement of the Cyprus economy be it slight and the expected better airways connection with European and other countries must be taken positively into account (see Cyprus Airways closing down). General We do not have enough space to analyse other parameters but we submit for your consideration also the following: - We are not the only ones with knocked down real estate prices. There are better deals in Spain, Portugal and Greece. Property values in Cyprus, regarding, foreign demand, are considered to be high (in addition to the lack of finance, title problems etc) but we have other competitive factors on our side. - Published/asking price are not always those that are concluded. All prices are subject to discounts depending on how much the vendor/ landlord is in need for cash. - We await the development of the forced sales procedures and how this will affect the market. Large scale forced sales will affect property val- ues negatively, especially if the offered properties have finance facilities and clean title to match. We read reports regarding sale of loans etc to foreign investors, something which we doubt if it will materialise in future since if the existing owners cannot sell how on earth can an incoming buyer succeed? Even if such purchases as concluded at 50% of the market value, why not make a 40% discount to the existing borrowers if they can afford to pay off the rest? - Opportunities Opportunities for buyers will most likely increase in the year 2015, but only just for good quality properties since most worthy properties were sold over the last couple of years. Interest is still available for the Famagusta region (apartments), Nicosia (apartments) and for a apartments in residential areas within the towns, whereas on/near the beach properties will be affected the least. - There are always the high end investors mainly from abroad (for income producing properties) whose interest so far is expressed for grade A office buildings, let on a long term grade A tenants for at least mid term (8-12 years) showing a return on the acquisition price of ±6% p.a. - Demand for office rentals of good quality is forthcoming for Nicosia and Limassol and low quality offices have a very low demand with next to nothing rental levels. - We have the gas opportunity and the related to it industries, but the prevailing situation with Turkey and the last disappointing gas find has cooled off some interest. Due to the prevailing circumstances the local market is directing its interest towards rentals which show an increasing interest, but at very low/discounted rentals. - Near/on the beach units will remain at the top end of demand, for mainly units having a price of depending always on the location, quality and facilities provided, whereas purchase prices of around 1.0 mil. will remain constant. What is noticeable is the very low interest for building plots/fields, whereas agricultural fields have practically no interest. What is also worth noting is that whereas the European Central Bank lends commercial banks on ½%, the latter lends to its clients for 6%-7% and this notwithstanding the Cyprus Central Bank urges to reduce interest rates (very recent announcements indicate an 1% reduction). At the same time the non compliance to the Central Bank road map on non performing loans is very disappointing. So, the whole situation is flue and it depends how and when local and international circumstances change over the immediate future

49 ΙΤ THE EXCEL WIZARD Question: How far can conditional formatting go? Challenges require skill, strength and determination. Wizard: Microsoft has an impressive 93% share in the productivity suite market via its Office package. Despite this comfortable positioning, however, it keeps improving its products in many areas. One such area combines conditional formatting with database filtering and sorting capabilities in Excel By Stratos Panayides BA(Econ), ACA Training Consultant at AKTINA Take the following example of a list of insurance policies, where advanced conditional formatting has been used to signal when a policy is due for renewal. If the renewal date has gone by the colour is red, if it falls within the next 10 days it is orange, if it falls within 10 and 20 days from now it is light green and if it is due more than 20 days it is dark green. Column C calculates the difference between each policy s renewal date and today. Cell C1 may contain the TODAY() function, so that every time you open your file the date is automatically updated. The formulas utilising the AND function refer to column C and colouring is applied onto column A. You will notice that, although this feature is designated as being formatting, it may well accommodate strong elements of formulas and functions: Question: How can conditional formatting be combined with filtering and sorting? Wizard: Once you are done with formulas, this is the easy part: For filtering, you just right click Filter by Color Red on the Insured arrow: Specialists in International Tax Planning and Structuring, Accountancy and Audit. Offices in Lefkosia and Lemesos. Associates worldwide. Advisers to clients all over the world. For sorting, you may use the the Sort On Cell Color option in the Sort command. Audit Tax Advisory 94 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 Horwath DSP Limited Member Crowe Horwath International 8 Stassinos Avenue, 1st Floor, Photiades Business Center, 1060 Nicosia, Cyprus, P.O.Box 22545, 1522 Nicosia, Cyprus Main , Fax ,

50 IT Key Technologies Trends CIO s must consider for 2015 By George Agathangelou* IBS R&D has identified 5 key trends that will drive technology adaptation and uses across business in During 2014, I found many companies trying to be up-to-date with technology but it was very difficult for them to figure out what strategy to follow. However, the below will help you to have something of a guideline as to what to follow in Business unit IT spending makes its mark Most businesses in Cyprus with more than 40 employees, central IT departments control IT services, which make decisions on the type of applications required to run the business. In the era of technology evolution, competitive forces are driving businesses to accelerate the implementation of emerging digital technologies, to enhance engagement with customers and deliver greater insight about these customers. These emerging technology solutions focus around mobility, social networking and customer analytics are increasingly driven by line of business executives outside the traditional IT department. Additionally, in response to the broader community trends to be more connected, employees are combining mobile devices with cloud services and applications to bring their own IT to the workplace and rely less on corporate IT. This phenomenon of by-passing IT is known as credit card IT or shadow IT and, like BYO-IT, can help or hinder a business in managing its information effectively. Service-centric delivery paves the way for ITaaS With lines of business having more control over their technology spending, together with mobile and cloud applications providing more immediate access to IT services, how does the traditional inhouse IT department keep up with this change? To help ensure their continued relevance during this shift, CIOs can look at transforming IT operations to be more of a partner to the business, a service-centric delivery capability instead of being focused just on managing discrete projects. IT-as-a-Service, or ITaaS, is a broad term used to describe servicesfocused IT delivery where a business s lines of business (for example, a fleet of ships) are treated as customers and the use and cost of services consumed is accounted for as it would be with an external supplier. In the ITaaS world, IT professionals typically work on discrete applications and act as enablers of disparate sources of technology. These applications are important to the business and can be viewed as applications of differentiation and value creation for the business. The Shift to Cloud continues Cloud computing is an area of business IT that has received a lot of attention in recent years. The development of more advanced virtual server and storage provisioning software, combined with higher speed networks, gives businesses the option of running infrastructure services on-demand in the cloud. Cloud computing promises to reduce much of the burden of manually installing and configuring servers, storage and software, and it enables businesses to shift IT capital investments in favor of operating expenses. Wearable technology moves into business Today s smart devices, like iphones, ipads, and Android powered smartphones and tablets have changed the way we do business. No longer are they tools just used for voice communications. Smartphones and tablets provide portable computing capabilities that can dramatically change a business s workflow. This change in the client devices people access is widely known as the post-pc era. Communication becomes collaboration Businesses continue to utilise mobile and fixed-line voice calls for employee communication. However, advancements in cloud and software technology allow more than just voice calls. The term unified communications UC has been used to describe the integration of real-time communication services such as instant messaging, presence information, telephony (including IP telephony), video conferencing, call control and speech recognition. The more prolific UC is in the workplace, the better staff collaboration and productivity will be. The uptake of cloud UC is an exciting trend, but for many businesses a need for on-premises systems will force them into a hybrid approach. Investment Advisory Research and Analysis Valuations Financial Advisory Fund Manager Selection and Monitoring Specialised in Pension Funds, Provident Funds, Insurance Companies, Investment Funds and Corporates * George Agathangelou. Professional Services Director, BSc CIT, MSc, IBSAC Intelligent Business Solutions Ltd 96 ACCOUNTANCY CYPRUS VOLUME 118 MARCH 2015 Symmetria F.S. Ltd is regulated by the Cyprus Securities and Exchange Commission (CIF 228/14) / / 4, Dorieon Street, 1101 Nicosia - Cyprus / Tel.:

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