at a time AccountancyCyprus One step N o 117DECEMBER2014 The Journal of the Institute of Certified Public Accountants of Cyprus

Transcription

1 N o 117DECEMBER2014 AccountancyCyprus One step at a time The Journal of the Institute of Certified Public Accountants of Cyprus ΠΕΡΙΟΔΙΚΟ ΤΑΧΥΔΡΟΜΙΚΟ ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ. 239 ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ ΑΔΕΙΑ ΑΡ. 133

2 President s Address Ioannis Charilaou President Institute of Certified Public Accountants of Cyprus Dear colleagues First of all I would like to wish everyone a happy New Year and I surely hope that 2015 will stand equivalent to our expectations for health, prosperity and happiness. Undoubtedly, 2014 was a very challenging year. Cyprus economy is still struggling to recover in the midst of the programme agreed with Troika. The developments in Ukraine and Russia affected the international business of the country, whilst local economic activity still remains at low flights. The banks still remain very careful with their monies and, at the same time, interest rates haven t exhibited the much desired drop, in order to refuel the economy with fresh money. The geopolitical developments around Cyprus also pose as a challenge, the outcome of which will most probably have an impact on the country will not be paved with rose pellets, on the contrary, it is estimated that it will also be a tough year for the economy and the society of Cyprus. To mitigate this risk, it is imperative for the government and the parliament to work together in order to rectify ill practices, rationalise the public service and make its activities more efficient and effective. It is also of supreme importance to prepare well for those changes that will hit out door, such as OECD developments (eg BEPS project), the Russian De-offshorisation law, enhanced anti-money laundering framework etc. As an Institute we did our best to assist the government in many areas, such as handling various taxation issues including the double tax treaties mechanism and the exchange of information with other tax authorities. We had serious input in the modernisation of the Registrar of Companies and in the drafting of many bills including, inter alia, the insolvency framework. We had met and cooperated with Troika during the past year in a number of occasions and we are in line with the action plan regarding the improvement of the anti-money laundering framework. In addition, we contribute a lot to the transposition of EU Directives and Regulations into Cyprus law. We have raised our voice both towards the officials, but also to the public in order to pass our messages, becoming thus more visible, always though within the professional standards we want the Institute to stand. Although we might have not been always successful in passing our views, I am confident that our messages were properly conveyed and will be sought after in the future. During 2014 we have kept intact all the existing supportive services to our members and additionally enriched the menu of the services offered in order to cover a wider span of their professional activities. Such support covers tax services, IFRS and auditing support, compliance services, training and other technical information, all at the minimum possible cost, whilst keeping our Institute fees and subscriptions at the same level for years now. The Institute absorbs a significant cost for offering many of the above services for free to its members. We have also invested in the technological upgrade of the Institute in order to provide better internet services and information. We have also enhanced the anti-money laundering mechanisms and developed a new AML monitoring tool, designed to encompass a risk based approach concept. As an Institute, we are committed to improve the quality and extent of services offered to our members and will definitely continue doing it. The Council is currently considering further benefits and services that will be made available to the members in Amidst these very challenging and demanding times, the Council, the management and the committees tried their best in order to present a constructive, useful and optimistic outlook. We have worked hard in order to meet the various deadlines and bring about various other duties, coupled with new obligations dictated by Troika and the MoU. During the year, the Institute appeared numerous times before the Parliament to discuss bills and proposed legislation, convened with government officials and various departments for on-going matters that relate to our profession and the economy in general and availed significant resources to this end. Dear colleagues, As I already mentioned, we have another difficult but challenging year ahead of us. Things will not be easy. We will work tirelessly and diligently in order to revive the distressed Cyprus economy. Cyprus is an international business centre and can thrive as a credible one, provided we are goal congruent and methodical, and adapt to the new conditions fast. In the horizon one can notice some positive signs, eg the recent stress test result of the systemic banks, the upgrading of the economy by international credit rating agencies and the current state of the implementation of the MoU. We have to build on these indications. We remain optimistic and we are certain that the resilience and pride of the Cypriot people shall overturn the situation sooner. Concluding, I would like to extend my warmest thanks to all the members that participate at the committees, the management and staff of the Institute and my colleagues at the Council for their hard work, commitment and unselfish contribution. Most importantly, I would like to thank all of you, the ICPAC members, for your understanding, support and contribution towards the goals, values and growth of our Institute. Once again, I wish you all the best for the New Year. ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER

3 Contents Contents December 2014 No. 117 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: 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 FEE Members Assembly elects Petr Kriz as President and Edelfried Schneider as Deputy -President for 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. Interview P.16 MARIOS CLERIDES, GENERAL MANAGER of the Cooperative Central Bank Economy P.20 Views of the Cyprus Chamber of Commerce and Industry on the economy as expressed during the Annual general meeting of 2014 P.22 The Return of Cyprus in the International Capital Markets A Historic Day P.24 Norway-type Fund for Natural Gas with Escrow Account for Turkish Cypriots P.26 The Way Forward: Work with the Troika - Aspire for Growth P.28 EU launches Investment Offensive to boost jobs and growth P.29 The Public Finances and the Reactivation of the Economy P.30 Laiki and the European Central Bank in the New York Times P.31 Skill set needed to make Cyprus a Strong Fund Jurisdiction P.32 Structural reform and the Cyprus economy P.34 Rethinking our economic Future P.36 The amendment of the Law containing foreclosures of mortgaged property is imperative P.38 Borrowing to spend and quality life P.40 Decisions of the Council of Ministers of the Republic of Cyprus and the power to promulgate them by publication P : What would it be like? P.43 Banks should handle their customers in a professional and humane manner P.44 Tax amnesty and real estate P.46 Corporate Governance Practices of Cyprus Companies listed in the Cyprus Stock Exchange Business P.50 Major changes in the energy markets P.51 Water Management: Mapping the Cost of Non-Europe P.52 Bureaucracy puts the brakes on investment We need simpler and clearer procedures,and to escape current mentalities P.53 EU energy policy towards 2030 P.54 Cyprus shipping chamber For 25 Years it Navigates Cyprus Worldwide, carrying messages of Social Solidarity P.56 European Cooperation Helps Public Authorities Support Corporate Social Responsibility P.57 Energy updates P.58 A critique to the formula used by the Ministry of Energy, Commerce, Industry and Tourism to estimate the reasonable level of petroleum products prices P.60 Cyprus Hydrocarbon Discoveries: Learning how to manage our newly discovered wealth for sustainable economic growth and social development P.62 Amendments to the trust r egulation regime consolidate Cyprus s attractiveness as an international business centre and trust jurisdiction P.64 The AIFMD and what it means to you P.66 Transparency in Corporate Reporting P.68 Retiring in peace? P.70 The different types of decisions of managers P.72 Reading People Like A Book: mastering the art of understanding people P.74 Intermarket Analysis A guide to investing P.76 Re-thinking approaches to business behaviour The Institute Council Auditing & Accounting P.78 IFRIC 21 Levies P.80 Significant changes in banks financial statements under new accounting standard Taxation P.82 Implementation of FATCA in Cyprus P.84 From eggs to BEPS THE EVOLUTION OF IMPOSING AND TAX COLECTION P.86 The Definitive Guide to Solving VAT Problems Fraud P.88 The Dawn of the 4th European Union (EU) Anti Money Laundering (AML) Directive P.90 Fraud is getting younger Real Estate P.92 Champions of Cyprus Property Investment IT P.94 Cloud Computing P.96 Digital Certificates How usefull are they? 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 Maria Pastellopoulou, FCCA Philippos Raptopoulos, FCCA *Marios Skandalis, FCCA, CFC, CFE *Demetris Taxitaris, ACA Elias (Liakos) Theodorou, FCA Demetris Vakis, FCA, BSc, CF 2 3

4 Institute News Council s Activities During the final quarter of 2014 the Council of the Institute convened three times and addressed various matters that were of significant interest to ICPAC and to the profession in general. It had been a particularly busy period and the main activities of the Institute included the following: ICPAC President at the IFAC annual general meeting in Rome The President of the Institute Mr Ioannis Charilaou attended the IFAC annual general meeting which took place on 7/11/2014 in Rome, representing ICPAC. Meetings with Officials The President, Council Members and the General Manager during the fourth quarter of 2014 held the following meetings with Government, political, business and other officials: On 3/10/2014 Council Members met with officials from the Ministry of Finance to discuss issues of economic progress and development. On 23/10/2014 a delegation from the Council, the Tax and VAT committees participated in a meeting with IMF and representatives from the Taxation Department to discuss the proposals for the set-up of the large tax payers unit. key decisions: To support the Ministry of Finance in the formulation of a revised tax framework. To this end the Council nominated its representatives to the specific team that was set-up by the Minister of Finance. The creation of a new committee, namely Chief Financial Officers Committee (CFOs) in order to cover the specific niche of the industry and of the professional activities of professional accountants. The new committee will be announced in January A delegation from the Institute, as appointed by the Council, participates in the team summoned by the Minister of Finance for the review of the current tax policy framework. The kick off meeting was on 3/11/2014 attended by the General Manager. The President of the Institute attended on 7/11/2014 the Annual General Meeting of the International Federation of Accountants in Rome. The General Manager with the Chairs of the Shipping Committee and Auditing Standards Committee met with the Deputy Director of the Department of Merchant Shipping to discuss upon specific matters for the submission of declarations under the tonnage tax regime. On 14/11/2014 the General Manager met with IMF representatives to discuss issues of the profession and of the economy of the country in general. The General Manager and the Chairs of the International Business Committee and Company Law Committee met with officials of the Ministry of Energy, Commerce, Industry and Tourism to discuss the current situation at the Department of the Registrar of Companies and be informed of the next measures that will be taken in order to enhance the efficiency of the department. On 17/11/2014 the General Manager and senior officers of the Institute had a teleconference with the Troika unit responsible for the quarterly assessment of the Institute on anti-money laundering procedures. The President and the General Manager of the Institute visited on 6/12/2013 the Attorney General to discuss issues of mutual interest. The General Manager on 9/12/14 met with the new ACCA Director for Europe Mr Andrew Leck, on his first visit to Cyprus. On 17/12/2014 the General Manager attended the Statutory General Assembly of the European Federation of Accountants (FEE) in Brussels. The General Manager met with ACCA officials in London in 18/12/2014 in order to discuss and finalise the new regulatory tool that will be introduced early in 2015 for the review of rules and regulations / anti money laundering procedures of the practising firms. Council s Decisions During the quarter, the Council took (inter alia) the following Due to the increasing concerns about the issues of auditors independence and networks, the Council appointed a subcommittee to thoroughly examine this issue. The subcommittee met a number of times and the concluding proposal will be delivered within the first quarter of In order to enhance better communication with the committees and to bring the council and the committees closer together, the Council has decided to invite at its meetings from November 2014 onwards a committee chairman to present the targets and work performed by the committee. Other important meetings and activities The Council of the Institute met with the newly appointed chairmen of the Institute committees on 29/10/2014. The President of the Institute held a press conference on 27/11/2014 on the occasion of the signing of the law concerning de-offshorization in Russia, explaining the details of the law and how this will affect Cyprus. The General Manager participated as a presenter in the Career Fair 2014, held on 29/11/2014, presenting ICPAC and the prospects of the accounting profession to prospect students. Institute officials participated in 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 the 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, as well as met with government officials to convey the Institute opinion on various pieces of legislation, such the Insolvency Framework. With the outgoing President of IFAC Mr Warren Allen New website For ICPAC The Institute proudly launched its new website in November The new site replaced the previous one and can offer much more information, assistance and service to the members and the public. It is endeavoured to be used as a useful tool for the members and students. The domain remains the same With the new IFAC President MS Olivia Kirtley 4 5

5 Institute News Committees Activities CORPORATE GOVERNANCE, INTERNAL AUDIT AND RISK MANAGEMENT COMMITTEE A new Committee was formed during the fourth quarter of 2014, with the election of Tryfonas Kyriacou and Marianna Neophytou to the positions of Vice Chairman and Secretary respectively. The action plan of the Committee for the twoyear period was agreed during the first meeting of the Committee and was submitted to the Institute s Council for approval. The Committee s members have significant experience in both the profession and industry, covering all three areas addressed by the Committee. This gives the Committee a good basis to focus on all three areas during the two-year period. The Committee will aim to provide relevant information to ICPAC s members on recent developments on Corporate Governance and Internal Audit and address the concept and issues associated with Risk Management. The Committee is currently looking at the new Directive to Credit Institutions on Governance and Management Arrangements and will aim to provide further guidance to ICPAC s members with reference to the three areas covered by the Committee. The article on the survey on Corporate Governance on listed companies in Cyprus, carried out and written by the previous Committee members, is included in this issue of Accountancy Cyprus. George Hadjineophytou Chairman Special Corporate Law Committee ICPAC s special Corporate Law Committee met twice since appointment in October The Committee was asked by ICPAC council to provide comments on the proposed changes to the Cyprus Partnership and Business Names Law (Cap.116). The Committee considered the proposed amendments and prepared a letter with its remarks and comments which was subsequently submitted to the Ministry of Industry, Commerce, Tourism & Energy (MICTE). Also in November, the committee chairman attended together with other ICPAC representatives a meeting with MICTE officials to discuss the progress made on the action undertaken by the Government for the simplification of the procedures relating to the operation of the Office of the Companies Registrar and Official Receiver. Petros C Petrakis Chairman ECONOMIC CRIME AND FORENSIC ACCOUNTING (ECFA) COMMITTEE The new ECFA committee was appointed by ICPAC in September 2014 and during the last quarter of the year the committee began immediately to publish the planned e-bulletin for December Thus the committee will publish the volume 5 issue 3 of the quarterly e-bulletin which will be sent to the members registered in the ECFA Special Interest Group (ECFA-SIG) and also from the new year it will be published in the new website of ICPAC. This new issue will address topics of all over the world and will also address the current money laundering issues in Cyprus. Furthermore in the current issue of Accountancy Cyprus, two members of the ECFA committee will write an article on fraud relating to younger people, a study conducted by KPMG in the UK. The article, amongst other things, suggests that the profile of fraudsters shifts from rogue senior executives to younger individuals seeking to fund extravagant lifestyles. The ECFA committee in cooperation with the Educational committee and ICPAC is planning to organize seminars regarding money laundering and fraud. Some of the topics suggested are fraud prevention and detection techniques, fraud risk assessment, bribery and corruption. Also the action plan of the committee for the period from 2014 to 2016 was agreed and submitted to the institute s council for approval. Serghios Savvides Chairman Limassol-Paphos Coordinating Committee During the period from 1 October 2014 to 31 December 2014 the Limassol-Paphos coordinating committee has carried out the following activities: 1. On the 16th of October the committee coordinated the seminar Recent changes to the Cyprus tax legislation. The seminar was held at Carob Mill in Limassol. 2. On the 4th of November the committee coordinated the seminar Immovable property tax and Capital Gains Tax. The seminar was held at Carob Mill in Limassol. 3. On the 6th of November the committee coordinated the seminar VAT reverse charge mechanism. The seminar was held at Carob Mill in Limassol. 4. On the 2nd of December the committee coordinated the seminar AML Risk Based Approach and the role and duties of the compliance officer. The seminar was held at Carob Mill in Limassol. 5. On the 12th of December the committee coordinated the seminar Audit monitoring visits and common deficiencies encountered. The seminar was held at Carob Mill in Limassol. 6. On the 13th of December the committee together with the radio station Kanali 6 coordinated a blood donation. 7. On the 16th of December the committee coordinated the seminar High quality and efficient small company audits. The seminar was held at Carob Mill in Limassol. 8. During the Christmas period the committee visited the Limassol Home for Children giving a donation of Ioanna E. Nicolaides Chairman Larnaca Famagusta Co-ordinating Committee During the period from 1 October 2014 to 31 December 2014 the Larnaca Famagusta Co-ordinating committee carried out the following activities: 1. On 28 November 2014 the committee together with the educational committee co-ordinated the seminar AML Risk Based Approach and the role and duties of compliance officer at Palm Beach Hotel. 2. During December the committee organised some events and will donate to charity foundations. The money was given by ICPAC. Andri Andreou Chairman Auditing Standards Committee The Auditing Standards Committee (the Committee ) was appointed on 1 October 2014 and had its first meeting on 20 October During the period from 1 October 2014 to 11 December 2014 it performed the following tasks: 1. During its first meeting, subcommittees were formed in order to follow up continuously subjects deriving from its action plan and terms of reference. The following tasks were assigned to the subcommittees: a. Review all the circulars issued by the Committee in prior years in order to assess whether there is requirement for revisions to the existing circulars. b. Continuous review of the current and future developments, changes or amendments in Auditing Standards and other relevant issues published on the website of IFAC with the main objective to present them to the Committee for discussion and issuance of relevant circulars to the members when this is deemed necessary. c. Review of the revised and new International Standards on Auditing ( ISAs ) relating to the new Audit opinion effective for the accounting periods ending on or after 31 December 2016 (ISAs700, 701, 260, 570, 705 and 706). The aim is to issue promptly a revised booklet with the Audit reports specimens based on the revised ISAs. d. To assess the need of issuing revised specimen letters of engagements in light of the forthcoming revised ISAs, which will be shorter than the existing and will include: i. a cover letter, ii. Details of the services to be provided to the client and the responsibilities of the client, iii. Terms of business and definitions. 2. Following relevant inquiries from the management of ICPAC, the Committee has examined and replied to ICPAC on the following matters: a. The need for consistency on wording in an audit report with an emphasis of matter paragraph, as to the ability of the Company to continue as a going concern. The reply of the Committee was based on ISA 570 Going Concern. b. The audit report regarding Auditor s duty of Care to Third parties (other than the shareholders as a body). 3. The Committee is examining the effect that the new legislation passed recently for ICIS and UCITS may have on the audit reports, with the aim of issuing specimen audit reports for ICIS and UCITS. 4. 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. A circular will be issued to the members once the consent of the Department of Taxation is obtained. Christos Tsissios Chairman PUBLIC SECTOR COMMITTEE During the fourth quarter of 2014, the Public Sector Committee held 3 meetings and carried out the following activities: 1. During the first meeting, Costas Galinis and Maria Papa were elected Vice Chairman and Secretary of the Committee, respectively. 2. The Committee formed its Action Plan for the period which was then submitted to the Council for approval. 3. The Committee prepared a comprehensive list with suggested seminars and training programmes to be implemented during the next two years and forwarded it to the Educational Committee for consideration. 4. The Committee issued an updated version of the manual which includes a summary of the key provisions for the main legislation concerning Payroll and Pensions in the Public and Wider Public Sector as well as Social Insurance, introduced in the context of the Memorandum of Understanding with Troika, and distributed it to all members of ICPAC. 5. The Committee met with the Chairman of the Parliamentary Committee on Development Plans and Public Expenditure Control. During the meeting a number of issues were 6 7

6 Institute News discussed that are of the interest of the Institute s members who work in the public and the wider public sector as well as ICPAC s actions in assisting the Government to address the effects of economic crisis. 6. The Committee studied the proposed legislation regarding State Owned Enterprises and submitted its comments to the Ministry of Finance. 7. The Committee started the discussion of several issues regarding the public sector reform and had a first look at the World Bank s study Cyprus at Crossroads: A Public Sector for the Post-Crisis Economy. Spyros Spyrou Chairman VAT Committee Under its new composition, the VAT sub-committee of the Institute of Certified Public Accounts of Cyprus (ICPAC) held its first meeting on September 17, Christos Papamarkides was appointed by ICPAC s board as chairman of the Committee and Harry Charalambous and Christos Christodoulou were appointed unopposed by the committee as the vice president and secretary respectively. During the first session various outstanding matters initially addressed in the previous Committee were discussed and the objectives and priorities of the new Committee were set. One of the issues the Committee considers of vital importance is to maintain and develop to the greatest possible degree the mutual cooperation with the officers of the recently unified Tax Department, including the Tax Commissioner, Assistant Tax Commissioner and the heads of all districts VAT offices. The collaboration of ICPAC with all stakeholders will help all interested parties in the drafting, interpretation and enforcement of the VAT Law. The involvement of other stakeholders such as CCCI, OEB and other bodies representing various professions and trades, it is also imperative. For this purpose the Committee has resolved, as a first step, to request a meeting with the Tax Commissioner and its officers before the end of The members of the Committee unanimously agreed that as a result of the current economic crisis all sectors of the economy are faced with, the competent government bodies must now focus on policymaking that will help all enterprises, whether they are of domestic or foreign interests, to be informed punctually and correctly in relation to proposed changes to the legislation so that they can operate in a stable economic environment with the least possible administrative cost. The public consultation of proposed laws and the interpretation of existing legislation are considered of utmost importance in the effort of achieving mutual understanding and cooperation between the state and business society. The rapid response to taxpayers requests whether these concern VAT audits, applications for refund of credit balances and clear replies to ruling requests will greatly help establishing the trust and confidence of taxpayers towards the tax authorities resulting in proper and timely fulfillment of their tax obligations and consequently improve the budget revenues. Having in mind that one of the main problems faced by Cypriot businesses is the limited availability of cash whether this results from reduced turnover or from bad debts or from the inability of financial institutions to provide financing, the Committee has considered certain proposals to be put forward for discussion initially with the Tax Commissioner and if necessary to be taken to a higher level. The below recommendations aim at increasing the liquidity of business and reducing their administrative costs: (a) Extension of payment of import VAT and duties from one month to a longer period e.g. three months (b) Reduction of the waiting time for claiming bad debt relief from 12 to 9 months (c) Introduction of option to tax on leasing of immovable property (d) Increase to the cash accounting threshold from to The Committee has scheduled a meeting with the Tax Commissioner in order to present the above proposals. A representative from CCCI will be invited to participate in this meeting. Christos Papamarkides Chairman EDUCATIONAL COMMITTEE During the fourth quarter of 2014, the Committee held three monthly meetings to discuss the organization of training seminars. As a result, the Committee has organized the following seven seminars during the aforementioned period. 1. Recent amendments of Tax Legislation: Totally, 579 participants have attended this seminar which has taken place in Nicosia and Limassol on 15th of October and on 16th of October respectively. 2. Immovable Property Tax and Capital Gains Tax: Overall, 272 participants have attended this seminar which has taken place in Nicosia and Limassol on 27th of October and on 4th of November respectively. 3. Application of Reverse Charge mechanism according to VAT legislation: In total, 353 participants have attended this seminar which has taken place in Nicosia and Limassol on 31th of October and on 6th of November respectively. 4. AML risk based approach and the role and duties of the compliance officer: Totally, 375 participants have attended this seminar which has taken place in Nicosia, Larnaca and Limassol on 26th of November, on 28th of November and on 2nd of December respectively. 5. Audit monitoring visits and common deficiencies encountered: Overall, 559 participants have attended this seminar which has taken place in Nicosia and Limassol on 5th of December and on 12th of December respectively. The seminar was free of charge. 6. Foreign Account Tax Compliance Act (FATCA): In sum, 270 participants have attended this seminar which has taken place only in Nicosia on 11th of December. The seminar was free of charge. 7. High quality and efficient small company audits: Totally, 390 participants have attended this seminar which has taken place in Nicosia and Limassol on 15th of December and on 16th of December respectively. In brief, participants have attended the 14 training events in all cities during the fourth quarter of In the meantime, the Committee is planning to organize, at least, the following seminars during the first quarter of 2015: 1. Income and Corporate Tax basics for trainees and juniors in Nicosia and Limassol on 15th of January and on 16th of January respectively. 2. IAS 32, 37, 39, 40 as well as IFRS 15 in Nicosia and Limassol on 27th of January and on 28th of January respectively. 3. Capital Statements in Nicosia and Limassol during February. 4. VIES, INTRASTAT, Mutual Assistance, and MOSS in Nicosia, Limassol and Larnaca during March. 5. The basic principles of the General Health Care scheme in Nicosia for the members of the Institute who are civil servants. 6. Tour Operators Margin Scheme (TOMS) in Nicosia and Limassol. Kostas G. Tsierkezos Chairman Advisory Services Committee The Advisory Services Committee is a newly established committee which instigates an enhanced role for ICPAC in its endeavour to support its members that offer advisory services. The primary objective of our new committee is to assess and monitor the developments relating to the provision of advisory services such as, but not limited to: Mergers & Acquisitions; Restructurings; Feasibility Studies; Due Diligence exercises; Valuations; and Information technology During our inaugural quarter of activity we have formulated and submitted our action plan. This constitutes a two-year plan covering a wide range of areas and issues that are fundamental to the provision of advisory services. Initially our plan is to identify any gaps and, where relevant, propose improvement. Our target areas of action include: Ethics and Independence issues pertaining to advisory services Contracting and public procurement of advisory services Legal framework concerning the provision of advisory services Technical issues The members of our committee, who have wholeheartedly responded to the call for this new initiative, and whom I personally thank, are already hands on to start producing results and make an impact in the development of this specialized line of services offered by our members. Christophoros Anayiotos Chairman Advisory Services Committee Quarter four of 2014 was the commencement of the second term in office of this committee, welcoming new members and revisiting our terms of appointment. On the first meeting of 13th October 2014, the committee decided to request the expansion of the terms of appointment to shift the primary focus from regulation matters to strategy and commercial issues in the light of significant changes in the industry. Five subcommittees were created within the committee and members were allocated in accordance with their preference and skills. The subcommittees and their primary objectives are as follows: 1. Strategy and Commercial Issues Assist in the formulation of a strategic plan for the industry and become part of the voice of the Administrative Services Providers (ASP) industry in Cyprus. 2. Law, Regulation and AML Assist in the creation of a level playing field within the three regulating bodies of the ASP profession and monitor upcoming changes in the legal and regulatory framework. 3. Communication and Education Identify and communicate with the training committee of ICPAC the educational needs of the members practising in the ASP profession. 4. Taxation and VAT Monitor changes in the taxation and VAT legislations in Cyprus and abroad that may be affecting the Cyprus ASP industry. 5. Government Agencies Establish and maintain communication lines with the relevant government departments and other industry bodies to ensure that relevant matters are communicated timely at the right level. The committee worked closely with the General Manager of ICPAC to promote its intention for a level playing field in the regulatory framework across the three regulators of the ASP profession. An initial meeting was held on 4th December 2014 between the committee and representatives of the Cyprus Fiduciary Association (CFA) and it was agreed to create two working groups for the: Formulation of a strategic plan for the industry, Identification of the regulatory differences between the three regulating bodies. Issues that were addressed by the committee in this quarter include: The new CFC and de-offshorisation rules in Russia, The CFC rules in Poland and Ukraine, Proposed changes in the partnership legislation, Issues with the Registrar of Companies, Tax and VAT liabilities on directors acting as nominees, and, Cyprus residence and citizenship matters The proposed action plan of the committee will be presented to the Board of Directors of ICPAC on 16th December Andreas Athinodorou Chairman 8 9

7 Institute News STOCK EXCHANGE AND CAPITAL MARKETS COMMITTEE In September 2014, following an Institute s Council decision, the Chairman and members of the Committee for were appointed. During the last quarter of 2014 the Stock Exchange and Capital Markets Committee met three times. The main activities of the Committee during this period were as follows: (i) The action plan for the years has been prepared and approved by the Committee s members. (ii) The Committee studied the Practical Guide to Markets in Financial Instruments Directive (MIFID II) and Markets in Financial Instruments Regulation (MIFIR) which was issued by CySEC. Following a discussion with CySEC officials, it was decided to wait for the issuance of more detailed guidance on the matter which would then be circulated to IP- CAC s members. (iii) Appointment of a sub-committee for updating the document Continuous obligations of listed entities in the CSE Regulated Markets. (iv) Appointment of a sub-committee for updating the document Continuous obligations of entities in the E.C.M. Market in the CSE (Non-Regulated Markets). (v) Appointment of a sub-committee for introducing the document Continuous obligations of Alternative Investment Funds and Alternative Investment Fund Managers. Panayiotis Peleties Chairman INSOLVENCY COMMITTEE The committee during the fourth quarter of 2014 met on numerous occasions. The main priority of our committee was to actively participate in the drafting of the Insolvency Laws. Subcommittees were formed and all the proposed draft laws were reviewed and our suggestions and recommendations were put forward to the Ministry s of Finance Project Team. 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 Examinership Law and the Insolvency Practitioners Law and an advocacy strategy is being developed to ensure that the laws will be functional and effective. 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 were communicated to decision makers. Michalis Avraam Chairman Shipping Committee The shipping committee is one of the three new committees set up by ICPAC this year. Its members represent both the industry and the profession. Its terms of reference include the cooperation with the government, other bodies and other committees of ICPAC for the promotion of Cyprus as a shipping centre. During the first three months of its creation the committee finalised its terms of reference and prepared a two year action plan. In November it had a meeting with the Cyprus Shipping Chamber to align the efforts of the private sector and a meeting with the Department of Merchant Shipping to discuss the pending issues with form MSTT8D (declaration for shipmanagers); the issues were resolved, a new wording agreed and a circular to the members of ICPAC will be sent, once the form has the approval of the tax department. Cleo Papadopoulou Chairwoman CONSULTATIVE COMMITTEE FOR SMALL AND MEDIUM FIRMS During the last quarter of 2014 the new Consultative Committee for Small and Medium Firms met three times. Initially the Committee decided on their action plan for the period , which was submitted to the Council for approval. One of the first issues that the Committee is examining is the possibility of an exemption threshold from statutory audit for small companies. The Committee is evaluating an alternative assurance work that can be used, instead of the full scope audit. The previous Committee members had compiled a survey addressing a number of issues of the practicing members, concentrating to Small and Medium firms. The survey was circularised to all Small and Medium Practices, in November A Sub-Committee is now examining the outcome of the survey which will be used to draw valuable conclusions for possible further actions by the committee and of an informative tool for the Institute. Two other Sub-Committees were formed during the above period, the first one has undertaken to examine the introduction of an electronic library for practicing members on the Institutes website and the second one, to assess the possibility of forming a professional provident fund or pension fund for its members. During the period under review the Committee received some queries from members of the Institute which were referred and discussed with the President and the General Manager of ICPAC. Andys Karlettides Chairman PUBLIC RELATIONS COMMITTEE During the fourth quarter of 2014, the Public Relations Committee formally held three meetings and carried out the following activities as per the approved action plan: Annual Sports Day Event On 19 October 2014, the Committee organised the annual Sports Day, which took place in October this year, rather than in May which is commonly carried out. The event was held at the premises of PASCAL Schools in Nicosia and it was fully subsidised by ICPAC. The participants competed individually or in teams in futsal, basketball, volleyball, tennis and table tennis. Throughout the event a doctor and two nurses were on duty. The children who also attended had fun in the bouncy castle provided for the needs of the day and all the participants enjoyed the food and drinks. The families and friends of members enjoyed a fun day and had a wonderful time. Happy Hour Event at Moondogs Bar & Grill On 13 November 2014, the Committee organised a Happy Hour Event at Moondogs Bar & Grill in Nicosia. The event was considered very successful, since a large number of members and friends of ICPAC attended, which gave them a chance to enjoy food and drinks at discounted prices especially for the members and friends of ICPAC. Happy Hour Event at Lost + Found Drinkery On the 11 December 2014, the Committee organised another Happy Hour Event at Lost + Found Drinkery in Nicosia. A high participation of members and friends of ICPAC marked the event, which featured cocktails at discounted prices especially for the members and friends of ICPAC and also food complimentary by ICPAC. Both Happy Hour Events were considered very successful and the Committee believes that Happy Hour events should be organised on a monthly basis. New Members During the period October - December 2014 the following persons have been accepted as new Members of the Institute: 3874 Georgios Pavlopoulos ACCA 3875 Evdokia Papadopoulou ACCA 3876 Alexis Constantinou ACCA 3877 Ioanna Theodoulou ACCA 3878 Sophia Gregoriou ACCA 3879 Stelios Savva ACCA 3880 Andronikos Georgiou ACCA 3881 Olga Galicheva ACCA 3882 Panos Yiannos Christodoulou ACA 3883 Andreas Souames ACA 3884 Nicolas Andreou ACA 3885 Nicolaos Manousakis ACA 3886 Costas Symeonides ACA 3887 Andreas Medris ACA 3888 Penelope Vasiliadou ACA 3889 Loukis Afxenti ACA 3890 Maria Papetta ACA 3891 Maria Michael ACA 3892 Constantinos Solomonides ACA 3893 Georgios Ioannou ACA DISCIPLINARY COMMITTEE DECISIONS During the quarter, the Disciplinary Committee of the Institute imposed sanctions on the following case: Case against Mr Demetris Papademetriou The Institute s Disciplinary Committee convened on 17 December 2014 to consider a complaint against Demetris Papademetriou, membership no The allegations that Mr Papademetriou faced were: 1. Violation of Regulation 1.107, professional ethics, paragraph 3(3)(d) regarding fundamental principles that require each member not to use the capacity as member for the furtherance of private interests of himself or of a person Christmas Charity Events On the 15 and 22 of December 2014, a representation of the Committee visited the Nicosia Youngsters Guesthouse and the Nicosia Girls Guesthouse and donated gifts on behalf of ICPAC. In particular, a PlayStation console, together with two games were delivered to the Youngsters Guesthouse and a Wii console, together with Debenhams vouchers were delivered to the Girls Guesthouse. Future Events The committee is currently working towards the planning of numerous events, which will soon be announced by ICPAC. These include, among others, Chinese night / dinner, Wine Tasting event, Movies day at K-Cineplex, Karting, Paintball, the Annual General Meeting and ICPAC s dance. On behalf of everyone in the PR Committee, we wish to all of you happy holidays and a prosperous New Year! Avgousta Papadopoulou Chairwoman 3894 Soteris Georgiou ACA 3895 Androulla Andreou ACCA 3896 Christos Christofi ACCA 3897 Michalis Loizou ACCA 3898 Anastasia Vasileva ACCA 3899 Andreas Kyriakou ACCA 3900 Aglaia Siakouta ACCA 3901 Marios Soteriou ACCA 3902 Photis Triaros ACCA 3903 Nicholas Georgiades ACCA 3904 Gabriella Szakolyi Koumi ACCA Removals 1946 Frantisek Dostalek KAC Czech 2512 Zoe Petrou ACCA Passed away 3239 Mari Siatarevian ACCA close to him. 2. Violation of Regulation 1.107, professional ethics, paragraph 3(3)(f) regarding fundamental principles that require each member not to provide inaccurate or misleading data and information to clients and third parties as well as to the institutional and authorised organs of the Institute. The Disciplinary Committee found Mr Papademetriou guilty for both of the above offences and imposed the following sanctions: (a) fine for the first offence (b) fine for the second offence (c) as expenses of the disciplinary process

8 GM s corner: Think n ahead! By Kyriakos Iordanou General Manager of ICPAC 12 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014 Just peek around the corner, it s coming!!! Recently we had two major developments that affect Cyprus, one was with the consent of the government and the other came externally. I refer of course to the signing of the FATCA agreement with the USA and to the law passed in Russia regarding the repatriation of Russian interest companies and their profits, known as de-offshorisation. Both of these acts aim at enhancing compliance and transparency for national tax residents in those countries, irrespective of where they may trade, do business or have financial assets and companies. It is not coincidence that the two global financial and business awes proceeded with such measures, causing concerns to all other countries. After all, they protect their own national interests. One should also have in mind the developments that are already visible in the international business horizon. G20, OECD and EU are also coming with stricter compliance and transparency measures. The Base Erosion and Profit Shifting project for instance and the Country-by-Country reporting are measures that will touch upon us, increasing the need advanced disclosures. The EU is also coming with a similar act like FATCA for the member states and the revised European Directive for Anti-Money Laundering will most probably provide for a public register of the ultimate beneficial owners of companies and funds. The voices calling for substance are becoming louder. In addition tax planning practices are under scrutiny as it is argued that aggressive tax planning leads to tax avoidance, making it thus a predicate offence. So, the state of play is changing, no more secrecy and anonymity. Compliance will be mandatory for business, professionals, regulators and governments. What is the take away for Cyprus? Inescapably, Cyprus also falls in the loop of the international developments as it is a destination for international business. The bet however is what we do in order to mitigate for such a potential adverse effect, and how we create comparative advantages versus other jurisdictions. In my opinion, the professionals should realise and comprehend the upcoming changes. They need firstly to proceed to proper keeping of their clients files and follow the KYC and Customer Due Diligence procedures religiously. They need to advise their clients of the need to demonstrate substance and real presence on the island. This, of course, requires open mind and proper training. On the other hand, the government needs to take immediate actions and proceed to legislative measures to tackle the issues raised. To start with, the concepts of tax residence and beneficial owner need to be clearly defined and explained. In addition, other government departments should engage into an immediate expedition to identify all other factors that are involved with the ease of doing business on the island and significantly improve them, by streamlining procedures and facilitating those who will still continue or will select to use Cyprus as their base for carrying out their international business. Although the new developments will most probably drug along a number of difficulties, possible increase in overheads and call for more diligence and care, this is a one way path. All of the stakeholders mentioned above have to put together minds, resources and willingness to work for the common cause. Should we fail to do so, then I am afraid to say that our worries will be just a few, as the international business inevitably will also be!!! So, let s refrain from imitating the sympathetic ostrich, and peek around the corner, to see what is coming. There is no need to wait for the postman to knock on our doors!!! YOUR BUSINESS IS THIS PRECIOUS TO US CHOOSE THE BEST INTERNATIONAL BUSINESS SOLUTIONS PARTNER IN CYPRUS abacus@abacus.com.cy, tel ,

9 Professional Briefing FEE Members Assembly elects Petr Kriz as President and Edelfried Schneider as Deputy-President for Brussels, 17 December 2014 The 47 member organisations of FEE (Federation of European Accountants) appointed Petr Kriz as President and Edelfried Schneider as Deputy-President for a two-year term. We must strive to regain trust in the accountancy profession and emphasise the valuable contribution that accountants and auditors make to the economy, according to Petr Kriz. Current European developments and technological progress present a unique opportunity to achieve this objective. Fostering relationships with our members and stakeholders and listening to their needs will guide FEE in this process. Olivier Boutellis-Taft, FEE CEO commented: I am very grateful to outgoing President Kilesse for contributing to the continued development of FEE. The new leadership brings the perfect balance of professional and geographical backgrounds to help steer FEE through the ongoing changes affecting the profession. Petr Kriz (a member of the Chamber of Auditors of the Czech Republic, KACR and the Association of Chartered Certified Accountants, ACCA) served as Deputy President of FEE in and he has chaired the Banks Working Party since Petr has long-term experience in leading audits and financial reporting advisory projects of Czech and international banks and central banks. He is a Partner with PricewaterhouseCoopers in Prague. Edelfried Schneider (a member of the Institute of Public Auditors in Germany, IDW) is the managing director of HLB Germany GmbH. With extensive experience in providing tax advice and audit services to SME clients, Edelfried will greatly contribute to reinforcing FEE s strategic coverage of SME and SMP issues and further strengthen FEE s work on tax policy. The FEE Members Assembly expressed its sincere appreciation to outgoing President André Kilesse for his dedication to FEE and the accountancy profession. The Members Assembly also elected two new members to the FEE Board: Alessandro Solidoro representing Italy and Jorge Herreros on behalf of Spain. About FEE FEE (Federation of European Accountants) is an international non-profit organisation based in Brussels that represents 47 institutes of professional accountants and auditors from 36 European countries, including all of the 28 EU member states. FEE has a combined membership of more than 800,000 professional accountants, working in different capacities in public practice, small and large accountancy firms, businesses of all sizes, government and education all of whom contribute to a more efficient, transparent and sustainable European economy. IFRS Foundation launches eifrs Professional The IFRS Foundation today completed a major programme of reforms to its suite of online IFRS resources with the launch of a new flagship product, known as eifrs Professional. eifrs Professional has been developed from the ground up to provide IFRS professionals with immediate online access to authoritative, annotated versions of IFRS and supporting materials. Subscribers to the eifrs Professional service benefit from: A new and unique Standards Comparison tool that allows users to view changes to a Standard between current, prior and subsequent years. An entirely new user interface, with access to all IFRS content in less than three clicks. A powerful new search facility with sophisticated filtering options. Access to the IFRS Foundation s Education resources, including annotated notes to the Standards, executive briefing materials and the IFRS Pocket Guide. Full access to the IFRS Foundation s vast archive of IFRS content, available in multiple languages and spanning nearly four decades. To find out more about eifrs, or to watch a video walkthrough of the new functionality of eifrs Professional, please visit the eifrs homepage. In addition to the launch of eifrs Professional, the IFRS Foundation is also making available new versions of the other components of its eifrs suite of online resources. eifrs Basic provides users with limited access to the basic IFRS Standards, while eifrs Comprehensive includes a subscription to eifrs Professional as well as offline, print editions of the Standards and other materials. Existing subscribers to eifrs will automatically be upgraded to eifrs Professional. IASB launches Investors in Financial Reporting programme with support from leading members of the global investment community The International Accounting Standards Board (IASB) today announced the launch of its Investors in Financial Reporting programme. Created with the support of some of the world s leading asset managers and owners, the programme is designed to foster greater investor participation in the development of International Financial Reporting Standards (IFRS). IFRS is required for use by more than 100 countries. The IASB, as the public interest body responsible for IFRS, consults extensively with investors and other stakeholders around the world to ensure that its Standards provide high quality financial information. The Investors in Financial Reporting programme has been developed to further extend investor participation by specifically encouraging greater involvement from the buy-side community. Investor Advocate to Lead the IAASB s Consultative Advisory Group Matthew Waldron has been appointed as the incoming Chair of the Consultative Advisory Group (CAG) to the International Auditing and Assurance Standards Board(IAASB), effective April 1, His appointment, which has been approved by the Public IFAC ANNOUNCES ELECTION OF NEW PRESIDENT, OLIVIA KIRTLEY OF THE UNITED STATES Rachel Grimes of Australia Elected Deputy President; Board Members Elected and New Members Admitted (Rome, Italy, November 7, 2014) The International Federation of Accountants (IFAC ), the global organization for the accountancy profession, today announced the election of its President, Olivia Kirtley of the United States, for a twoyear term ending in November Ms. Kirtley is the first female President of IFAC, as well as the first from business and industry rather than public accounting. The IFAC Council also announced the election of Rachel Grimes of Australia as Deputy President, a position previously held by Ms. Kirtley. This is an exciting time for IFAC with challenges and opportunities for the profession at every level, Ms. Kirtley said. As President, I look forward to engaging with member bodies and our many stakeholders as we seek ways to advance the impact and value of our profession, and in serving the public interest. Ms. Kirtley, a Certified Public Accountant and Chartered Global Management Accountant, is a non-executive director of US Bancorp, Papa John s International, and ResCare, Inc. She began her career with an international accounting firm, followed by 20 years of executive management positions with a publicly traded global manufacturer and subsequent joint venture of Emerson Electric Co. and Robert Bosch GmbH. She is a former Chair of the American Institute of Certified Public Accountants (AICPA) and the AICPA Board of Examiners. Ms. Kirtley is a recognized advocate for strong corporate governance and was named by the National Association of Corporate Directors (NACD) Directorship 100 as one of the top corporate directors and governance professionals in the US. First elected to the IFAC Board in 2007, Ms. Kirtley became Deputy President in November She has chaired the Planning and Finance Committee, Constitution Review Working Group, and a task force for enhancing service to professional accountants in business, in addition to being a member of the Nominating Committee, Regulatory Liaison Group, and the independent Task Force on Rebuilding Public Confidence in Financial Reporting. Ms. Grimes is CFO Technology at Westpac, a multinational financial services firm; she previously served as Director of Mergers and Acquisitions. She has more than 24 years of experience across the financial services sector, at Westpac/ Interest Oversight Board,* follows his election by members of the IAASB CAG.** As Chair, Mr. Waldron will lead the IAASB CAG an independent body comprising regulators, preparers, international investor and user groups, and other stakeholders with an interest in international auditing and assurance in providing strategic and technical advice in the public interest to the IAASB. Mr. Waldron will play a key role in ensuring that the CAG s views are heard and considered in the IAASB s deliberations. BT Financial Group as well as at PwC. A member of Chartered Accountants ANZ and CPA Australia, Ms. Grimes has served the Australian accounting profession over a significant period. She was elected to the Board of the Institute of Chartered Accountants Australia in 2006 and was appointed President in Ms. Grimes became a member of the IFAC Board in November As Deputy President, she will chair the Planning and Finance Committee; previously she was a member of this committee, as well as the former Governance and Audit Committee. Commenting on the leadership transition, outgoing IFAC President Warren Allen said, As I hand over the presidency to Olivia, I know that I will be leaving IFAC in the most capable of hands. She has been a great source of support for me during my term, and was a leader on key initiatives that have enhanced and will sustain the accountancy profession and help to transform IFAC into a more responsive and sustainable organization. Rachel s experience in the financial services industry, focusing on acquisitions, accounting processes, and technology, and the need for global policies that enhance transparency, together with her experience as a volunteer leader of a major member body, will be an asset in the Deputy President s role, Mr. Allen added. New Board Members Elected The IFAC Council also elected five new members to the IFAC Board: Raphael Ding (Hong Kong), Richard Petty (Australia), Kumar Raghu (India), Shinji Someha (Japan), and Joy Thomas (Canada). The IFAC Council also re-elected Ahmadi Hadibroto (Indonesia) and Masum Turker (Turkey). These members add to the diversity of the IFAC Board in gender, geography, and professional experience. IFAC Admits New Members The IFAC Council admitted three new associates: the Chamber of Authorized Auditors of Republic of Serbia, the Indonesian Institute of Public Accountants, and the Non Profit Audit Association Sodruzhestvo of Russia. Two existing associates were admitted as members: the Association of National Accountants of Nigeria and the Institute of Certified Management Accountants of Sri Lanka. Additionally, IFAC admitted the Dutch Institute of Management Accountants as a member. For a full listing of IFAC members, see the membership section of IFAC s website

10 Interview Interview of MARIOS CLERIDES, GENERAL MANAGER of the Cooperative Central Bank To Hadjirousos, Editor and Tassos Anastasiades, Deputy Editor, Accountancy Cyprus, Journal In an interview we had with Mr. Marios Clrerides, General Manager of the Cooperative Central Bank we have been informed, inter alia, that the results of the stress tests of the Cypriot Banks were satisfactory, especially if we take into account that the stress tests came soon after a major negative shock to the banking system, with the collapse of Laiki, the haircut of Bank of Cyprus depositors and Cyprus in a serious recession. In response to our question whether the banks can now expand credit to the private sector to stimulate economic recovery Mr Clerides replied that the stress tests have given comfort to banks regarding their capital situation and can act as a catalyst for consumer confidence to trust the banks again with their money thus improving bank liquidity. It doesn t however solve the issue of nonavailability of good, bankable projects to lend to. With regard to our question as to whether the recent fall in the Eurozone core inflation may justify a decision by the ECB to introduce quantitative easing, by buying government bonds, Mr Clerides stated that the famous quantitative easing must be tried but he is not sure if it is going to work. What we need is governments in healthy economies to instigate a fiscal stimulus and not expect all the adjustment burden to be borne by problematic countries. He added, however, that quantitative easing is not adequate and that structural reforms are also needed to ensure long term growth. Fiscal easing can only provide an immediate boost, but long term recovery The results of the Cypriot Banks were quite good, especially if we take into account that the stress tests came soon after a major negative shock to the banking system... needs also structural reforms. To our question as to how they propose to deal with the non-performing loans in terms of their restructuring and resolution, he answered with a human face on those that fell on bad times and with harshness on those that abused the system. We will try to make borrowers viable by extending the duration of the loans and reducing their instalments, giving them grace period in instalments to overcome temporary cash problems, etc. The interview with Mr. Clerides follows: Mr. Clerides, we would like to start our interview by asking for your views with regard to the significance of stress-testing of 130 systemic banks of the Eurozone. It is very significant, as it is the first step towards Eurozone central supervision of its systematically important banks. This is, in turn, another step towards European integration. What are your comments with regard to the results of the stress tests for the Cyprus systemic banks? The results of the Cypriot Banks were quite good, especially if we take into account that the stress tests came soon after a major negative shock to the banking system, with the collapse of Laiki, the haircut of Bank of Cyprus depositors and Cyprus in a serious recession. To what extent the generally good results of the stress testing of the Cyprus systemic Banks, including the Cooperative Central Bank, lead both to the expansion of credit to the private sector and the decrease of interest rates, thus stimulating economic recovery? The expansion of credit to the private sector by the banks depends on three factors: their capital position, their liquidity and the availability of good bankable projects to finance. The stress tests have given comfort to banks about their capital situation and can act as a catalyst for consumer confidence to trust the banks again with their money thus improving bank liquidity. It doesn t however solve the issue of non-availability of good, bankable projects to lend to. What about the stress tests results for the large banks of the other Eurozone states? They were in line with expectations, revealing some weaknesses in banks of Southern Europe, where the economies have more problems than in countries in Northern Europe. However the Eurozone banks have been stress tested before without any convincing results. What are your comments? Stress tests are one of many tools to check the health of banks. They should be viewed always in this context; and not be allowed to supersede human judgment. Helping the needy, supporting local communities, being fair to clients has always been in the Coop DNA and will continue. Do you believe that the banking Union should have been introduced in parallel with the monetary Union? Yes, but also the Maastricht criteria should have been enforced more rigorously and not politically, and they should have been more wide ranging to include competitiveness indicators and institutional analysis. For example, are the institutions of the country Government / Parliament capable of sticking to the fiscal discipline that needed to be followed? What are your comments about the foreclosure laws and procedure? A necessary modernization of our legal system. I am not sure that the process we set for disposal is the best. Do you think that Cyprus may benefit by adopting the policies followed by Ireland for exiting the crisis? If we can afford the Irish Nama (the name of the Irish bad bank which took over the problematic assets of Irish banks) we should proceed with it, adapting it to Cyprus situation to cover also Retail NPL s. To what extent you believe that the recent fall in the Eurozone core inflation may justify a decision by ECB to act boldly by buying long term government bonds besides buying private sector covered bonds? The famous quantitative easing must be tried but I am not sure it is going to work. What we need is governments in healthy economies to instigate a fiscal stimulus and not expect all the adjustment burden to be borne by problematic countries. On the other hand there is a view that even if the ECB engages in quantitative easing, i.e. buying Government bonds, it will not help significantly the recovery unless governments proceed with economic structural reform measures. Can we have your views on this issue? My answer to the previous question is relevant. Structural reforms are also needed to ensure long term growth. The fiscal easing I mentioned can only provide an immediate boost, but long term recovery needs also the structural reforms. To what extent do you believe that an Asset Quality Review was necessary before undertaking the stress test (comprehensive assessment) of the 130 systemic banks of the Eurozone? The AQR was basically designed to test whether 16 17

11 Interview A necessary modernization of our legal system. I am not sure that the process we set for disposal is the best. there was under provision for bad loans in some banks. If we read it literally doing it, should be an insult to the accountants and national country supervisors of these banks. If we read it realistically, bad loans provisioning has always an element of subjectivity and hence applying a common benchmark does ensure fairness. What is the common equity ratio of the Cooperative Central Bank? Are you confident about this ratio for the Co-operative Central Bank? The Core Tier-1 ratio of the Cooperative Central Bank was 13,4% (September 2014). Under the baseline scenarios of the recent stress tests, the ratio increases to 14,07% at the end of the 2016, while under the extreme scenario it ends up at 9,32%, above the 8% minimum required. So we are quite confident about our capital needs. the system. We will try to make borrowers viable by extending the duration of the loans and reducing their instalments, giving them grace period in instalments to overcome temporary cash problems, etc. Could you brief us about the corporate social responsibility policy of the Cooperative Central Bank? Helping the needy, supporting local communities, being fair to clients has always been in the Coop DNA and will continue. Finally can we have your personal assessment as to when Cyprus will exit recession and achieve a positive growth rate? 2015 seems to be the year when we will exit recession. The key question is not this, but how strong will the recovery be and, related to it, which sectors will lead it. My prediction is for a very weak recovery. How do you propose to deal with the non-performing loans in terms of their restructuring and resolution? With a human face on those that fell on bad times and with harshness on those that abused 18 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

12 Economy Views of the Cyprus Chamber of Commerce and Industry on the economy as expressed during the Annual general meeting of 2014 Regarding the developing economic situation in 2014 and the prospects for 2015 the Cyprus Chamber of Commerce and Industry would like to express its concern at the continuing adverse international economic outlook. At the same time there is worrying political upheaval in the Middle East region, such as the provocations by the Turkish government through the sending of the Turkish research ship in the exclusive economic zone of Cyprus, together with the extremely violent actions of the Islamic jihadists. By Phidias Pilides President Cyprus Chamber of Commerce & Industry Unfortunately, the economic outlook of the EU and the Eurozone also remain unpredictable meaning that the prospects for the Cyprus economy in 2015 are uncertain. However, the CCCI s believes that there is hope about the future of the economy. The business community believes that now, after withstanding the shock of the Eurogroup decisions and the banking collapse and despite the unprecedented decline in production and the creation of massive unemployment, we can remain optimistic and plan for growth. Some hopeful signs have emerged from the revision of GDP on the basis of the new national accounts methodology adopted by Eurostat. This has meant that GDP has been upwardly revised and as a consequence public debt as a ratio to GDP is now at a more manageable 105%. At the same time the rate of decline of GDP has been further reduced in 2014 and a positive rate of growth of GDP is expected for The improved performance of the economy has been the result of the strict implementation of the provisions of the Troika memorandum and particularly of the policies of containment of public sector expenditures. As a result there has been an upgrading of the Cyprus economy by the international rating agencies. Developments in the banking sector also give grounds for further hope as large amounts of foreign capital have been attracted by the banks, enabling them to successfully pass the EU wide stress tests. At the same time a further vote of confidence in the Cypriot banking sector comes from the fact that the four systemic banks of Cyprus will be directly supervised by the European Central Bank. However, the business community would like to emphasize that the good messages from the public and banking sectors are not yet reflected in the real economy. The rate of unemployment continues to be high especially among those aged 20 to 24. Hence, the Cyprus Chamber would like to send the government and the rest of the political establishment the urgent message for the need to adopt the measures that would enable the economy to resume growth. For this the Chamber has the following priority proposals: First, there is an urgent need to find a solution for the restructuring of the banking sector. More specifically we would like to see the passing of the essential legislation which will allow the banks to deal with non-performing loans. The business community would also like to see the fall of lending rates, the reduction of the tax on interest earnings, the simplification of bank lending documents, the channeling of the funds made available by EBRD to SMEs, the reduction of banking operating costs, including salary levels, and the readjustment of banking working hours. Second, there should be further liberalization of the business environment with a view to attracting foreign direct investments in the face of continuing liquidity shortages and the inability of the public sector to implement infrastructural projects. It is also essential for the government to proceed with PPI initiatives with international strategic partners. Hence the Chamber would like to urge the government to organise more visits by the President of the Republic, with the active participation of the business community to important foreign destinations to ensure that foreign investors receive the message from Cyprus. We further believe that the government should immediately proceed with the establishment of the casino and the facilitation of the implementation of private sector projects such as marinas, golf courses and the promotion of shipping and health tourism. Thirdly we would like further action in the public sector despite the progress in the implementation of expenditure reduction. The private sector would like to see further measures being implemented to reduce bureaucracy and ensuring that public services fulfil their mission in providing efficient and low cost services. If procedures are not simplified the attractiveness of Cyprus as a foreign investment destination would remain limited. Hence CCCI suggests that a new approach be adopted so that foreign investors have to deal with only one special task force ensuring the effective coordination takes place of all government agencies involved in granting the required licences. It is also proposed that more departments adopt e-government as a way of providing services to the public together with a new evaluation system of civil servants and the wider implementation of staff interchangeability. Fourth priority would be privatization. This represents a major policy initiative and the government should proceed with the privatization of The final message of the business community is clear. We look to the future. Telecommunications, Ports, Cyprus Airways and Electricity. For this the government should adopt internationally accepted norms and procedures to ensure openness and transparency. Privatization will bring additional funding and could be beneficial by reducing costs and improving efficiency. Fifth proposal concerns the adoption of a new approach in order to ensure the full exploitation of all the natural advantages of Cyprus, such as the strategic location, high quality human resources, full EU and Eurozone membership and good infrastructure. To this list we now envisage to add the natural gas resources and their potential for the future. We fully support the government in its approach in building the strategic alliances with neighbouring countries. We believe that the energy resources can become a basic ingredient for the future development of the Cyprus economy. But we must warn that for energy to become the blessing we believe the government should proceed to finalise the study for establishing a fund on the lines of the Norwegian example which would ensure the prudent management of natural resources. Sixth priority would be the radical reform of local government, which is inefficient and costly aiming to reduce the number of municipalities and the consolidation of their services. Finally, this plan of action should include the following: the strengthening of the competitiveness of tourism, through a new sectoral plan of action, more effort to secure EU structural funds for the manufacturing sector, further government effort to gradually change the attitudes of organised labour and political groups, provide a new approach for the solution to the issue of insolvency, strong action by the government in the pursuit of the thorough administration of justice in a strong and fair manner to inspire confidence. We would also recommend to the government a rethinking on the national health scheme with a view to renegotiate with troika in order to postpone its implementation until more appropriate times. The final message of the business community is clear. We look to the future. We have spelt out our policy priorities which if implemented will ensure that the future of the country will be bright and could resume growth sooner than later

13 Economy The Return of Cyprus in the International Capital Markets A Historic Day Three years after its exclusion from the international capital markets in May 2011, Cyprus has managed to return to the international capital markets by formally issuing a five-year bond. The interest for investment far exceeded actual expectations as it reached a staggering 2 billion, four times compared to 500 million which was the initial estimate. By Michael Pilikos Director General of the Cyprus Employers & Industrialists Federation (OEB) What led to this triumphant return is a combination of facts: the strict implementation of the Memorandum, the relatively good performance of the economy, the positive credits by Troika and the good assessment reports of the global rating corporations. The years long effort was an absolute success and was made possible through the painstaking efforts and sacrifices made by the people and the business community. Combined with the successful return of Cyprus in the capital markets, it is expected to bring significant benefits for the economy. The return of Cyprus in the capital markets following Ireland, Portugal and Greece, marks another step towards the stabilization of the economy and the banking system and especially in the recovery of the lost confidence. The 750 million raised by issuing the five-year bond, will be allocated to domestic debt that matures shortly, which costs more if we consider that the borrowing interest rate is 4.75% as compared to 5.15% which is that of the current debt. Therefore, there is a significant benefit for the public finances which results not only in a reduction of the interest payments but also in the existing debt which approaches 19 billion. Of course, on one hand we see the debt to be reduced by domestic borrowing, but simultaneously to be increased by foreign borrowing. At the end, we must not forget that the debt will be repaid by local taxpayers and companies. The recovery of the international market confidence would act positively to revive domestic market and especially business activities. The successful adoption of the five-year bond, besides helping restore liquidity and the capital adequacy of the economy, confers a direct benefit to the banking sector in helping them boost their liquidity. The money raised will be used for the repayment of the government bond issued by the Bank of Cyprus in the context of restructuring. Furthermore, it is also an indicator in the right direction for all the banks in giving them the chance to examine the possibility to strengthen their capital base, as it is done by the Bank of Cyprus. It is certain that the return of Cyprus in the international markets strengthens the prospect of foreign investors to participate as shareholders in the Cyprus banks. I believe that the recovery of the international market confidence would act positively to revive domestic market and especially business activities. It is with no doubt another step towards the consistent presence of Cyprus in the capital markets and its consistent capability to finance its needs Therefore, I believe that this positive impact will be reflected in further assessments of the economy by the credit rating corporations. The economic situation of our country is now considered to be more promising and this would act as a catalyst in encouraging both local and foreign investors to look for investment opportunities. If we also add to this positive development the discovery of natural gas, then future prospects of our economy are even greater. Of course, this fact should in no way be considered as a termination of the difficult consolidation and reform programme. On the contrary, we must extend our efforts required for reforms, structural changes and fiscal consolidation as our target is a healthy economy with good prospects and growth. 22 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

14 Economy Norway-type Fund for Natural Gas with Escrow Account for Turkish Cypriots By Theodore Panayotou Cyprus International Institute of Management * Despite the Government s determination not to give in, Turkey s threats and actions within Cyprus Exclusive Economic Zone concerning the exploitation of natural gas can potentially result in an experience similar to that of S-300, when we were forced to pay the cost of a defence system without ever enjoying its benefits. As the ancient Greeks used to say, Necessity forces even the hand of gods. But this is not inevitable if the Government and the Parliament act instantly to create a special fund for depositing the proceeds from the exploitation of natural gas, with the share of Turkish Cypriots (20-30%) going into a special escrow account in the fund to be released to the Turkish Cypriots, with interest, only upon the solution of the Cyprus problem. The simple statement that the Turkish Cypriots will begin to benefit when the Cyprus problem is solved is not enough and creates the suspicion that we stall the solution of the Cyprus problem to usurp their share. This is a totally unfounded claim on the part of the Turkey which finds a fertile ground among some foreign policymakers and in a part of the international public opinion. The creation of a fund to guarantee the share of Turkish Cypriots would create an ever-increasing financial incentive for Turkish Cypriots to seek understanding and a solution to the Cyprus problem sooner rather than later. I made this proposal three years ago and several times thereafter as a voluntary action on our part to pre-empt Turkey s claims on resources that belong to all the Cypriots and only the Cypriots regardless of ethnicity. Such an action would help to defuse the crisis with Turkey without any retreat on our part. If not, we will be pre-empting Turkey s arguments and pretexts and prove that its real motives are not the economic interests of Turkish Cypriots, * 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. He taught Economics for 25 years at Harvard University, served as Senior Economist at the Rockefeller Foundation and advised Presidents and Premiers in 15 countries including China, Mexico, Russia and the USA. He has published over 100 books, monographs and peer-review articles on economics and business and served as consultant to companies, governments, the UN and the World Bank. Contact: theo@ciim.ac.cy but its own geopolitical expansionism. It will also demonstrate in a practical way to our partners in the European Union and the UN, our good intentions towards our Turkish Cypriot compatriots and our sincere desire for a just solution and peaceful coexistence. Best of all, it would be a resounding testament that we consider Cyprus as an indivisible entity whose wealth belongs to all Cypriots, irrespective of whether the wealth is found in the south or north. Any other approach would cast shadows of partition. The benefits of such an action would not only be political. It would also be economic. By establishing such a fund we will be escaping the resource curse, the paradox that countries with abundant non-renewable natural resources such as oil and natural gas tend to have lower levels of social development and economic growth than countries with fewer natural resources. This is due to several reasons such as the reduction of the competitiveness of other sectors of the economy, volatility in government revenue due to price volatility of fossil fuels, mismanagement, inefficiency, and corruption caused by the easy wealth. There is abundant evidence that the income from the exploitation of natural resources reduces the pressure and the incentive to develop a knowledge-based economy and promote entrepreneurship and innovation while it retards the rationalization of public finances and the practicing of sound macroeconomic management. This has been the experience of Venezuela and several Arab and other countries, rich in mineral wealth, which literally have wiped out their development prospects with the inevitable distortions and the complacency that the easy wealth has created. The money collected this fund should not be spent on the running costs of the state but be invested in long-term investments such as research and innovation, renewable energy and the infrastructure needed to increase the productivity and competitiveness of the economy, just as Norway, Australia, New Zealand, Kuwait, Alberta in Canada and Alaska in the U.S. have done. These forward-looking countries and states have been saving all or part of their revenues from oil and other natural resources in special longterm investment funds such as the Fund of Future Generations of Kuwait, the Pension Fund of Norway, and the Heritage Fund of Alberta. And why not Cyprus Heritage Fund or even better the Cyprus Fund of Future Generations? Only the income from these investments is being used for recurrent expenditures. The simple statement that the Turkish Cypriots will begin to benefit when the Cyprus problem is solved is not enough and creates the suspicion that we stall the solution of the Cyprus problem to usurp their share. This is Israel s approach to the discovery and exploitation of hydrocarbons in its EEZ. But, unlike Israel with its prudent fiscal policies, and strong technological base for efficient use of natural gas revenues, Cyprus faces a serious risk of waste distortion of economic priorities. In Cyprus, in particular, revenues from natural gas risk being wasted to maintain an inflated and wasteful public sector and to increase social benefits and subsidies to organized interest groups, pressures that our political system finds very difficult if not impossible to resist. Our national interest requires of us to urgently establish by law the Cyprus Future Generations Fund with clear provisions to secure the interests of all Cypriots, whether they live in the free or the occupied areas, whether they live in the present or in the future. We should not wait for a hot episode to take initiatives in the right direction to defuse the crisis, because then they may not count the same as when they are done voluntarily as a practical expression of goodwill. Likewise, we should not wait for the revenue from natural gas to begin flowing into the state coffers to take measures to protect our economy and the interests of our children from the resource curse. Then we would not need research committees to investigate and to convey responsibilities. The government and the House will bear full responsibility

15 Economy The Way Forward: Work with the Troika - Aspire for Growth By Michalis Sarris Former Minister of Finance Mostly due to the pragmatism and resilience of Cypriots, some twenty months after the severe blow of the bail-in of bank depositors, economic activity is showing increasing signs of stability. Although the shock has caused significant damage, the impact has not been as devastating as many had feared. The international business sector may not be growing, but it has not collapsed either, tourism performance has been impressive and Cyprus still enjoys a relatively high standard of living. Consumer and business confidence is slowly beginning to return. The severity of the crisis, however, has left a legacy that will continue to burden the economy for many years to come. With growth prospects modest at best, unemployment remains high and significant job creation will likely not begin any time soon. While the repair of the banking system has made considerable progress, it is being held back by non-performing loans, which are also keeping lending rates from converging towards the lower EU averages. High household and enterprise debt burden will tend to discourage consumption and limit the effective demand for investment financing. Meanwhile, the need to continue reducing the budget deficit will call for politically demanding choices among competing public expenditure priorities, such as those on the public sector wage bill, health and growth-supporting investments. These choices must be such as to support structural reform of public expenditure so as to put the public finances on a sustainable path, while favoring growth-enhancing public spending. The growth prospects of the Cypriot economy will continue to be affected by external economic conditions, particularly in the Eurozone, which currently remain uncertain. In the short-term, the political crisis and economic slow-down in Russia will impact negatively the economy. But the key to the return to sustainable positive economic growth is to implement without hesitation or delay the structural reform program, at a minimum as agreed with the Troika, and, if The challenge, is to implement an aggressive structural reform program to maximize growth prospects. we can master the necessary political courage, go further. This means completing urgently the privatization agenda, reducing the bureaucratic impediments to private sector initiatives while combating corruption, improving the efficiency of the public sector, liberalizing markets and professions, pursuing active labor market policies such as flex-time, apprenticeships and on the job training, restructuring education to improve the quality of outcomes and achieve a better fit with labor market requirements, and reforming labor unions and political parties. These reforms should encourage private sector investment, including foreign direct investment, an essential element of the new growth paradigm. While the key elements of the reform agenda and their importance for creating the conditions for the resumption of growth are clear, there is also a paradoxical consensus across the full range of the political party landscape and most mass communication media that the Troika is responsible for the problems of the Cyprus economy and that we should, therefore, get rid of it as soon as possible. In reality, Cyprus surrendered its economic sovereignty, through the March 2013 bail-in/bail-out, because of a homegrown deadly combination of banking and fiscal irresponsibility, which had already led to serious domestic and external imbalances. In five short years between 2007 and 2012, through unprecedented fiscal laxity, the best fiscal performer in the Eurozone was transformed into one of the worst, and Cypriot government debt rose sharply from 48% to 75% of GDP. In parallel, poor bank corporate governance, largely unchecked by the Central Bank because of the widespread and ECB supported philosophy of light-touch bank supervision, led to a huge bank credit expansion, high-risk investments and a large external current account deficit. To complete this negative picture, rising money wages, without productivity or quality improvements, led to a significant erosion of external competitiveness. An adjustment program to address these challenges was urgently needed and was put in place together with the Troika after long and harmful delays. The first objective of the Troika program, which was to eliminate the large government budget and external account deficits indicative of a country living beyond its means, has been largely achieved ahead of the expected timeline. Significant spending cuts in most expenditure categories and tax revenue increases are pointing the public finances towards a primary surplus while, mostly through a decline in imports together with a modest increase in exports, the external balance is substantially improved. Competitiveness has also improved through a reduction in unit labor costs in the private sector, but the reduction in money wages in this sector has probably reached its limits and any further improvements in competitiveness will have to come from productivity gains. This correction of past sins has contributed to the increase in unemployment and to hardship in many households and enterprises, but Cyprus overall standard of living even in 2013, the worst year of the crisis, as measured by GDP continues to be about twice as high as it was in the year In the narrative against the Troika it is often forgotten that Troika financing has allowed Cyprus to continue to have a budget deficit and pay its bills through Without this facility the adjustment would have been much more abrupt and painful and the economy would have contracted much more sharply. None of these early successes in correcting the imbalances, which brought about the crisis in the first place, will have been worthwhile, unless the necessary structural reforms are implemented so that the country can aspire to sustainable recovery and, eventually, economic growth. But for this to happen the reform program has to be owned by the political establishment and society at large. For now, this is not the case. This can be partly explained by the fact that much of the political leadership s energy is spent on the blame game as to who is responsible for the crisis instead of explaining why the proposed measures are for the benefit of the vast majority of the Cypriot society. Also in refusing to take responsibility for policy mistakes and past excesses, it is easier and more convenient to absolve the local voting population and to blame the foreigners who are imposing conditions and as such they are an easy target. The people of the Troika themselves could have done a better job in explaining the rationale of the proposed reform program, through a more active engagement with civil society. But if the reform program agreed with the Troika is for the benefit of the majority of the Cypriot people, the question still remains why In the short-term, the political crisis and economic slow-down in Russia will impact negatively the economy. all political parties are against the agreement with the Troika and want the program to end as quickly as possible. This is particularly puzzling for those parties towards the left of the political spectrum, which should be defending the interests of the less privileged people and the truly working classes. Indeed, progressive political parties and mass-media should be calling for an even tougher adjustment program. The reason that this is not happening is that the measures in the agreement with the Troika are against the privileged classes which are benefiting from distortions and are supported by state spending. Specifically, these privileged classes include people working for, or more generally benefiting from spending by, the public sector and state enterprises and those benefiting from monopolistic or corrupt practices. Their exaggerated incomes deny substantial resources from, and reduce the standard of living, of the more numerous but less privileged citizens. The privileged groups are strongly represented in all political parties which, in turn, champion their interests. Escaping from this stronghold to implement a far-reaching reform agenda along the lines of the program agreed with the Troika is essential for liberating the Cyprus economy from its unproductive elements and allowing it to find its way back to growth and realize its full potential. This would lead to lower unemployment, rising productivity and growing wages, and make possible a strong social welfare system, high quality education and health services, all of which should be the agenda of all political parties, from left to right, irrespective of their ideological differences. Economic growth in the Eurozone, including Cyprus, is likely to be lower for several years to come than during the period prior to the crisis. The challenge, therefore, is to implement an aggressive structural reform program to maximize growth prospects. This is particularly important because of the heavy debt burden and high unemployment. The choice is clear and it is ours. And if we chose the road to reform we could be a candidate to benefit from possible EU initiatives to alleviate the debt burden for successful program countries

16 Economy EU launches Investment Offensive to boost jobs and growth Since the global economic and financial crisis, the EU has been suffering from low levels of investment. Compared to the 2007 peak, investments have dropped by around 430 billion, with five Member States (France, the United Kingdom, Greece, Italy and Spain) accounting for around 75% of the drop. Given the ample liquidity in the world s money markets and corporate bank accounts, these figures imply that the private investors lack confidence, credibility and trust. By Georgios Markopouliotis Head of the European Commission Representation in Cyprus This is why the European Commission recently presented an Investment Plan for Europe: a package of measures to unlock public and private investments in the real economy of at least 315 billion over the next three years ( ). The Investment Plan consists of three strands: (1) mobilising investment finance without creating new public debt; (2) supporting projects and investments in key areas such as infrastructure, education, research and innovation and (3) removing sector-specific and other financial and non-financial barriers to investment. 1. Mobilising additional finance for investment A new European Fund for Strategic Investments (EFSI) will be set up in partnership with the European Investment Bank (EIB). It will be built on a guarantee of 16 billion from the EU budget, combined with 5 billion committed by the EIB. Based on prudent estimates from historical experience, the multiplier effect of the Fund will be 1:15. In other words, for every public euro that is mobilised through the Fund, 15 of total investment, that would not have happened otherwise, is generated. The Fund will mobilise 315 billion in additional public and private investment without creating new debt and our goal is for it be functional by mid-2015, adding billion to EU GDP over the next three years and creating up to 1.3 million new jobs. 2. A credible project pipeline to channel the money where it is needed The Investment Plan will enable finance to reach the real economy through the creation of a transparent pipeline identifying viable projects at EU level. The new Fund will support strategic investments in infrastructure, notably broadband and energy networks, transport in industrial centres, as well as education, R&D, renewable energy and energy efficiency. A joint Commission-EIB Task Force is expected to provide a first list of possible investment projects in the course of December to start building a transparent European pipeline of projects. It will also support risk finance for SME and mid-cap companies across Europe. The fund will help them to overcome capital shortages by providing higher amounts of direct equity and additional guarantees for SME loans. 3. A Road Map to tackle barriers to investment The Investment Plan will contain a Road Map to remove sector specific regulations that hamper investment. To improve the business environment and financing conditions, the plan will focus on measures in the financial sector, for example the creation of a Capital Markets Union, to provide an enhanced supply of capital to SMEs and long term projects. Priority will be given to removing the significant regulatory and non-regulatory barriers which remain across all the important infrastructure sectors, including energy, telecoms, digital and transport, as well as barriers in services and product markets If Europe invests more, Europe will be more prosperous and create more jobs it s as simple as that. The Investment Plan we are putting forward is an ambitious and new way of boosting investment without creating new debt. We are turning a corner, completing fiscal responsibility and structural reform with innovative investment plans and instruments. This plan will send a message to the people of Europe and to the rest of the world: Europe is back in business. The Public Finances and the Reactivation of the Economy By Dr Iacovos Aristidou Ex Minister Ex Director General Planning Bureau Every now and then we hear about a decision or a thought for the imposition of additional burdens or curtailment of expenditure by the Government, regarding in particular the services provided. This tendency is in accord with the general philosophy of austerity imposed by Troika and the Euro group in order to combat the present economic crisis. This method reminds me of the myth of Muezzin (Hotza) and his donkey. I hope the Cyprus economy will not end up as his patient four- footed sympathetic animal! I have already suggested that in parallel with the implementation of the Memorandum emphasis should be given to growth or restarting of the economy, as the otherwise sympathetic Minister of Finance used to call the reactivation of the economy. On another occasion I spoke about an effort to increase the denominator of the fraction of public deficit and public debt ratios, i.e. the GDP. Whereas we were encouraged that Troika at last was convinced of the need to push for the reactivation of the economy and asked for the preparation of an Emergency Plan, there was nothing on this in the last Memorandum nor did it ask to be informed on any progress made by the relevant Committee under the Vice Minister by the President. It should be noted that the Vice Minister has also undertaken the duties of the Commissioner for the restructuring of the Civil Service. How is he going to fulfill all these tasks? My suggestion in this regard was to utilize the entire services of the Planning Bureau for the Plan and the Department of Personnel for the restructuring of the Civil Service. There is no need to create additional services for these tasks. In addition to the reactivation of the economy, which will bring not only general benefits to the Country but revenues to the Government as well, the Minister of Finance should set in his priorities other sources of revenues as well, which will not burden further the already heavily squeezed purse of ordinary citizens. Why there should have been such a delay with regard to the appointment of the Director of the strengthened Department of Inland Revenue? The filling of the post should have taken place immediately to enable the Department to contribute more towards the collection of taxes due as well as the more systematic promotion of other plans to secure more revenues for the Government. It is on this last issue that I would like to make some suggestions for consideration by the competent Services of both the Ministry of Finance and the Government. I am wondering whether it is the time we should repeat the experiment of tax amnesty of 2003/2004? The Government of late Glafkos Clerides, as well as that of Demetris Christofias later, left behind a large public debt, despite the worthy efforts of the last Minister of Finance Takis Clerides. As the Cyprus accession to the EMU at that time was impeded by the bad situation of its public finances, the Government of late Tassos Papadopoulos accepted the suggestion of the Council of Economic Advisors for the introduction of temporary tax amnesty for all those repatriating their capital from abroad or they did not declare for tax purposes. The sums collected from a very small percentage of tax imposed, some hundred millions of pounds, covered fully the public deficit, reduced public debt to manageable levels and opened the way to introducing the euro. I don t know what is the situation right now? However, my impression is that under the existing regime of free capital movement and the existing international economic turmoil since 2008, as well as the prevailing rewarding opportunities for placement of money abroad, today there must be a lot of Cypriot money abroad. Its repatriation with the above method would strengthen not only public finances but would be a source of liquidity for the banking system necessary for the badly needed financing of the economy in general. Isn t it the time now to promote more systematically town planning amnesty, which started in 2011 with a revision of relevant legislation to protect the individual s rights to acquire at last title deeds, a situation which undermines the good name of the Cypriot real estate market abroad? In addition to the benefits for public finances, the speeding up of this process would help the reactivation of the construction sector and enhance employment. Instead of the continuous conflict with the Organizations of the Public Servants and the Government shouldn t there be a dialogue at the ignored Personnel Committees for changes in certain basic issues regarding the wider Civil Service, which would also help fulfilling the obligations undertaken for structural changes? Personally I would have started with the salary scales for first appointment to the Civil Service etc where there are no possessed rights or agreed obligations. These scales should be reduced to the corresponding levels of the market. Their attractiveness will depend on the opportunities for promotion of the good civil servants to be created. I would then continue discussing the issue regarding the inclusion of all civil servants to the earnings-related scheme, which should be improved also, the prolongation of the retirement age, the change or increase of the time of work, the adoption of interchangeability for all civil servants, old and new etc. Such measures would lead not only in savings of expenditure but also in the accumulation of a lot of money in funds under the control of the Government. The early introduction of the General Health Scheme would have the same result. The Fund to be created should be set under the control of the Government

17 Economy Skill set needed to make Cyprus a Strong Fund Jurisdiction Despite the current financial crisis and recession that we are experiencing, one industry that stands out, is resilient, and is growing is the Financial Services. Despite the reputational damage that we suffered following the events of March 2013, many of the benefits that made Cyprus an attractive investment destination are still there and not lost. What are these benefits? Laiki and the European Central Bank in the New York Times By Dr. Jim Leontiades Cyprus International Institute of Management The bankruptcy and accumulated debts of the Laiki Bank were a key element of the Cyprus financial crisis. A recent article ( To Restore Confidence in Economy, A Test of Europe s Bank s, October 17) in the New York Times discuses the stress tests to be implemented by Eurozone banks. In this connection the article also looks into the minutes of the European Central Bank (ECB) relative to the crisis in Cyprus and the decisions which brought about the demise of Laiki. The ECB had been supplying financial aid in the form of Emergency Liquidity Assistance (ELA) to keep Laiki afloat since It continued supply ELA right up to the March 2013 negotiations between Cyprus and the Eurogroup. By that time the accumulated debt of Laiki to the European Central Bank had reached a level of 9.4 billion Euros. This level of debt was equal to more than 50% of the country s GDP, a level of debt which is probably unique in the developed world and which many would say was indicative of poor bank regulation. The ECB has repeatedly disclaimed responsibility for the ELA decision. In the New York Times article the ECB s ofen stated view is noted, to the effect that : such aid (ELA) is the responsibility of national central banks. This is the position repeatedly mentioned by the ECB, particularly when the more embarrassing details of the bungled rescue are discussed. However, the official journal of the European Union treaties states: The national central banks are an integral part of the ECSB and shall act in accordance with the guidelines and instructions of the ECB (Consolidated Version of the Treaty on European Union, Protocol no.4, article 14.3, Official Journal of the European Union, 26 October 2012). Still referring to the powers of the national central banks, The New York Times quotes the ECB as stating: the (ECB) central bank s governing council retains veto power. Was Laiki Solvent? In early 2012 the ELA debt of Laiki was still manageable. Had the bank been declared insolvent and folded at that time, as many believe should have been the case, the subsequent bail-in by the Eurogroup, might have been avoided. But it has long been maintained by the then governor of the Cyprus Central Bank, Panicos Demetriades that Laiki was solvent and hence eligible for ELA. The New York Times article indicaes that the minutes of the ECB show that Mr. Weidmann, head of Germany s Bundesbank and a member of the ECB governing council was opposed to extending ELA to Laiki, stating at a December 2012 meeting of the ECB council that: It was not the governing council s job to keep afloat banks that were awaiting recapitalization and were not currently solvent. Conclusions We may conclude that firstly, at least one member of the ECB s governing council felt that Laiki was not solvent at the time the decision was made to extend ELA and, Secondly, the the Europan Central Bank must assume responsibility for the decision to continue giving ELA funds to Laiki beyond any limit which might qualify as prudential bank management. The impact of the ECB s actions have resulted in a loss of confidence in banks which goes well beyond Cyprus. Deposits have been steadily falling across the Eurozone for some time. The ECB s Own figues show a steady decline in Eurozone deposits. The New York Times cites the statement of an ECB offcila to the effect that the ECB has changed its procedures so that winding down banks will now be the subject of a less disruptive Process. We can only hope so but it is too late for Cyprus. By Dr. George Theocharides Associate Professor of Finance Director of MSc Financial Services Cyprus International Institute of Management (CIIM) The strategic location, the fact that we are an EUmember state and thus fully aligned with the EU legislative framework in regards to financial supervision, highly-skilled and educated workforce providing financial and professional services, as well as a benevolent tax system (despite the recent enforced increase, still the lowest corporate tax rate in the EU at 12.5%, zero capital gains tax, and no withholding tax on dividends and interest distributed, as well as double tax treaties with around 50 countries). An exciting and promising area within the financial services spectrum is the funds industry. Significant progress to develop and promote the sector has been made on this front in recent years from the various parties involved (the regulators and the government authorities, as well as the private sector). However, more needs to be done and one important area we should improve that could provide us with a competitive advantage is to make sure industry participants and service providers have the necessary skill set in order to make Cyprus a strong funds jurisdiction. If we want to administer but also manage these funds that could register with our Securities and Exchange Commission (CySEC), general but also specialized knowledge is paramount for industry participants. To my mind, they should have a clear understanding of the principles of finance the concept of the time value of money, risk and return, the structure of the global fund industry and industry participants, the various asset classes, the way risk is measured and managed, and the valuation of different types of securities, among others. Another area that they should study relates to the concept of ethics in financial services. This has been increasingly important these days across the globe, given the recent financial crises that we have experienced. They should also command basic knowledge of economics (at the micro and macro level), the understanding and use of statistical techniques (that includes the ability to use computer programmes to analyze data), as well as the main accounting principles (reading financial statements, and constructing the relevant financial ratios). Beyond these basic concepts, they should possess more specialized knowledge. One area relates to the field of portfolio/asset/wealth management. They should understand how a portfolio of various asset classes and securities is constructed, and how its performance is measured. Another area relates to the administration and structuring of the fund, as well as issues related to compliance requirements, anti-money laundering regulations, financial reporting, taxation and legal procedures. In terms of qualifications, market participants should obtain the relevant licenses from CySEC (currently there are two exams offered the basic and the advanced). These licenses are for individuals engaged in the reception, transmission, and execution of client orders, but also for those that deal on a proprietary basis, manage portfolios, offer investment advice, underwrite financial instruments, and perform the activities of collective portfolio management and risk management for collective investment schemes (either UCITS or AIFs). Academic qualifications are important, such as relevant Undergraduate and Postgraduate degrees. At CIIM, we recently introduced a Masters in Financial Services that aims to address the specific needs of the industry and provide candidates with the skill set necessary to succeed in their careers. Apart from academic degrees, it s also important to have professional qualifications. The Certificates offered by the Chartered Institute of Securities and Investments (CISI) are such appropriate qualifications. CISI is the largest and most widely respected professional body for those who work in the securities and investment industry in the UK but also in a growing number of financial centres globally. They offer specialized certificates in numerous fields in finance (wealth/investment management, collective investment scheme administration, risk management, among others). Another excellent professional qualification is the Chartered Financial Analyst (CFA) credential, probably the most respected and recognized investment designation in the world. To become a CFA Charterholder, candidates need to complete the three levels of the programme (exams) plus they will need to have four years of qualified investment work experience. The CFA Society of Cyprus, although still small, is growing fast in numbers and I believe is another professional body that can play a vital role in promoting the fund industry in Cyprus. The Executive Education Department of CIIM, offers preparatory seminars for a number of CISI Certificates (Risk in Financial Services, Global Securities, Wealth and Investment Management), the CFA Levels I and II, a specialized course on Fund Management, as well as an Advanced Certificate in Fund Administration (awarded in association with the University of Manchester Business School and CLT International)

18 Economy Structural reform and the Cyprus economy By Tassos Anastasiades, Economist Deputy Editor, Accountancy Cyprus & Former Director, Ministry of Finance Competitiveness is the ability of a country to compete effectively in the foreign markets and domestically with imported goods and services. The basic factors contributing to a country s competitiveness are (1) structural reform measures; (2) the introduction of new products and services; (3) an efficient and and cost effective civil service; and (4) low wage cost per unit of production. The last two factors help to bring about higher productivity in each of the private and the public sectors. Even though structural reform, a cost effective civil service, and high productivity are crucial to competitiveness, when the Minister of Finance, Mr. Haris Georgiades recently stated that the economic reforms included in the Memorandum of Understanding with Troika will not be terminated, even after the country will no longer be monitored by the Troika, there was an immediate negative reaction by political leaders, trade unionists and irrelevant journalists. All these groups consider the continuation of the economic reforms in the Memorandum as inconceivable. It is instructive to note that countries which exited the Memorandum, like Ireland have stated that they will continue with the same policies since such policies increased both the productivity and the competitiveness of the economy which resulted in higher production and exports and of course employment. As a result, Irish exports are now increasing at the fastest rate in the EU. Ireland which exited the Memorandum at the end of 2013 is expected to achieve a growth rate of 3.6% in 2015 as compared to 1.1% for Germany. It is also important to note that the Greek economy expanded at 0.7% in the third quarter of 2014 much higher than rates of growth of 0.1% for Germany and 0.3% for France, and the highest rate of growth in the EU. Greece which normally was the laggard with regard to growth, is expected to achieve a growth rate of 2.9% in 2015 after achieving the highest growth rate in It is for somebody to wonder where our economy will go again if we abandon the measures included in the Memorandum and we return to our spendthrift way of living before the signing of the memorandum. the EU in Structural reform is not something that is done once and for all but it is a continuous process as developments occur in the international and generally globalized economy to which Cyprus belongs. By partially implementing the economic reforms contained in the Memorandum and the relatively good performance of the economy resulting in a positive evaluation by Troika, Cyprus has managed to return to the international capital markets by issuing five-year bonds; the initial expectation was for 500 million offering, but the interest from the international capital markets was much higher, at about 2 billion. Also as economic analysts state the Greeks have been convinced by the problems created by economic laxity, extreme bureaucracy and corruption and thus have adopted a new economic model, in the same way that the hyper-inflation in the 1920 s was instrumental in changing the mentality in Germany and the 1930 s depression was important in shaping America s way of thinking. The minister for the reform of the civil service in Greece, with the objective of reducing the wage bill and generally the size of the service, Mr. Kyriacos Mitsotakis, has stated that the structural reform programme agreed with Troika is only the beginning of the process and that Greece will have to introduce its own memorandum. Before the partial implementation of the Memorandum of Understanding with Troika, Cyprus was living beyond its means. Wages and salaries were rising at a higher rate than productivity, something which led to the undermining of competitiveness. In Cyprus there were two annual wage increases: due to the collective bargaining and due to the wage indexation, the so-called ATA. In the wider public sector there was a third salary increase, the so-called annual increment. In parallel, both the Government and the households as well as the enterprises were living with loans freely provided by the banks, which were very lightly supervised by Central Bank. Thus the prevailing economic welfare was fictitious and therefore unsustainable in the middle and long run. As a result of our reduced competitiveness in the last twenty years we had continuous current account deficits. The deficit in 2008 at 15.6% of GDP was huge, in 2009 it was 10.71% and in % Cyprus was financing these current account deficits by loans which at some stage we had to repay. It may be noted that the public debt, was 8 billion in 2008 until at the end of 2012 it went up to 16 billion, an amount equal to the GDP of the country. In parallel private loans also increased to the level of 280% of GDP while the non-performing loans reached almost 50% of the total private loans. It is for somebody to wonder where our economy will go again if we abandon the measures included in the Memorandum, which promote economic reform, and we return to our spendthrift way of living before the signing of the memorandum with Troika. Those who argue for abandoning the Memorandum measures should state whether they would be willing to sanction pay rises higher than the rise in productivity (as was the case before) while the wage bill in the civil service to rise alarmingly. It may be noted that the public expenditure in the civil service has reached a level equal to 16.2% of GDP in relation 10% average in the EU, 6.3% in Ireland and 5.6% in Luxembourg, a country which is both competitive with the Cyprus services sector and smaller than Cyprus. Among the measures which are promoted by the Memorandum is the setting up of a general health scheme, so-called GESY so that health problems of the citizens of Cyprus will be treated effectively, while privatization of state companies like CYTA, EAC and the Posts Authority have as their objective the improvement both of the quality of the services provided and of prices. The merging of municipalities and reforming the civil service is also being introduced. Another element being introduced is the rise in the pensionable age so as to make sure that the old age pension scheme will not collapse as a result of the rising life expectation. Another social measure which is being promoted and which seriously affects social expenditure is the targeting of social benefits. For example what is the rationale for rich and with high incomes families with many children to receive child benefits? The same applies for women with high personal incomes who receive the so-called social pension. In parallel one has to justify the policy by which both rich and poor citizens have free access to public universities without even a token fee, for example 3000, in relation to 22,000 which is the annual cost for each student, while at the same time offering scholarships for poor Before the partial implementation of the Memorandum of Understanding with Troika, Cyprus was living beyond its means. students. This is especially because university graduates are expected to earn high incomes during their working age at the expense of those who have not been fortunate enough to attend university. Also, university graduates are more mobile, and therefore could take the country s investment in them out of the country, without any compensation to the government. In a recent report by OECD it is stated that the decrease of wages and salaries in Ireland, Greece and Spain which led to improvement in competitiveness helped in avoiding a rise in unemployment. Ministers of Finance of the G20 have stated that the introduction of structural reform measures could raise world production by two percentage points in the next five years. Also in a recent speech by Mario Draghi, chairman of the European Central Bank underlined the significance of introducing structural reform measures for the purpose of increasing productivities. But as stated above certain irresponsible politicians and irrelevant journalists as well as trade union leaders are recommending the termination of the Memorandum economic measures and the return to the way of life before the signing of the Memorandum with Troika. But the Minister of Finance Mr. Harris Georgiades and responsible economists, political leaders and journalists are envisaging the continuation of structural reform in parallel with measures to raise demand such the execution of infrastructural projects. The return to the way of life we were having before the crisis struck is certain to lead to a new catastrophe

19 Economy Rethinking our economic Future By Savia Orphanidou Economist Adjusting to the new framework of the Memorandum of Understanding (MOU), which was agreed between Cyprus and Troika, has not been easy, neither for the key players in power (Government, House of Representatives, Political System, Civil Service), nor for the Cypriot citizens. It has been, and still is, a hard and long struggle for all stakeholders involved to adjust to the new way of decision-making, to manage the fundamental changes imposed by the MOU and to make the necessary sacrifices for the survival and the stabilization of the Cyprus economy. In this context, the proposal by a number of political parties in the opposition for a fundamental renegotiation of the MOU can be regarded as unrealistic and outdated, for a number of reasons outlined below: Firstly, our economy has shown a remarkable improvement since the tragic events of March 2013, which has led to a series of upgrades of the Cyprus rating by credit rating agencies during the past year. This is of course due to the austerity measures and the structural and banking reform measures that inevitably have been imposed on the Cypriot citizens, but mainly due to the prudent fiscal policy of the Government, agreed with Troika in the context of the MOU, that lead to a positive macroeconomic outlook of the Cyprus economy and to the gradual achievement of fiscal consolidation. More specifically, recession for 2014 will be less severe than initially anticipated, around less than 3% of GDP, with a projection of modest growth of 0.4% in 2015 and of 1.5% in Unemployment is still at very high levels of 16%, but with a downward trend for the first time in six years. Fiscal deficit will be less than 2% in 2014, with a projection of a gradual decrease in the next couple of years, whereas, public debt, due to recent adjustments and the less than initially needed financial assistance from Troika, is estimated at sustainable levels of 105% in The Government remains committed to achieving the primary fiscal surplus target of 4% of GDP by 2018, nevertheless, marginal primary surplus is expected to be achieved earlier than anticipated, in Therefore, any thoughts of renegotiating the main fiscal policy targets of the MOU, will definitely put at risk all the efforts made so far to place the Cyprus economy back on track and out of the crisis. 34 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014 Secondly, our banking system, due to the positive results of the stress tests carried out by ECB on our systemic banks, demonstrates signs of stabilization and improvement for the first time since the bail in. Our systemic banks have been sufficiently recapitalized, mostly through foreign investment, and are determined to use all tools at their disposal to address the major challenge of our banking system, the increasing rate of non-performing loans. In this context, the potential financing from organizations such as EIB and EBRD are considered as significant steps towards the right direction. In addition, the initiative undertaken by the ECB President Mario Draghi to buy junk-rated Cypriot bank loans, is considered equally significant, both for the support that will be provided to our systemic financial institutions, and for facilitating credit provision to the broader economy, especially to small-medium enterprises. There is only one condition for Cyprus in order to benefit from this initiative, and that is to continue its firm implementation of the MOU. Any actions that will lead to a deviation from this position, will instantly jeopardize the future of the Cyprus economy. Thirdly, it must be made clear that any intention to fundamentally change the bulk issues of the MOU is out of reason. For a start, Troika will never agree to changes that will essentially affect the main principles of the MOU. Mainly though, it is because a large number of structural changes that are included in the MOU are to the benefit of our economy and our people, and should have taken place on our own initiative, long before the economic crisis ever reached our door. Structural changes such as the implementation of a National Health System, a Privatisation program, a Public Administration Reform, a Growth Strategy and a comprehensive Welfare Reform ensuring a guaranteed minimum income for all those in need, are fundamental changes that will boost our economy, enhance our competitiveness and improve the quality of life for our citizens. This fact has been admitted by the majority of the society, which realizes the realities and the reasons for our economic distress. For the reasons outlined above, our main focus should not be on renegotiating the MOU, but on rethinking our way to the future. We should welcome and facilitate all structural changes that are currently under implementation because for the first time in modern history of Cyprus, we are really making a change. This is the only one to restore confidence in our economy, in our financial sector, but mainly, in ourselves.

20 Economy The amendment of the Law containing foreclosures of mortgaged property is imperative By Lenia Georgiadou Economic analyst The Law on transfer and mortgage of immovable property has a life of over half a century. The changes that have come about ever since, make its amendment imperative. Unfortunately and in this case there has been delay. Economic adjustment and the required structural reforms must be carried out in a period of normal weather and not in the times of storm. It has been known for a long time now that the provisions of the Law containing foreclosure and the related applicable procedures for the seizure and sale of mortgaged property were problematic. Unfortunately nothing was done in good times. So in today s difficult circumstances, we have in front of us the urgent need to take decisions on this matter. There are reservations and strong reaction from political parties, reflecting mainly concerns on the following: a) the protection of the house (primary residence) of borrowers, which has been mortgaged for a loan, especially of borrowers belonging to vulnerable groups, b) the concern for massive sales, which will result in sharp and sudden drop in the price of properties. These concerns are reasonable. However to what extent there is a real danger and what are the consequences, if we do not proceed with the amendment of the Law. The reaction of the political parties and the prospect of not passing the required amendments put at risk the legal and institutional framework for the enforcement of financial contracts, which is essential for the effective management of NPLs. The ever increasing NPLs are today one of the biggest challenges for Cyprus. The passing of the Law is essential for removing the existing hurdles. Nowadays, the Land Department is involved in the sale of mortgaged property. This Government Department has the responsibility for the valuation of the property and also for the auction sale. The procedure is cumbersome, ineffective and time consuming. The decisions of the Land Department are often challenged in Court as a result of which, it may take years for the sale to be completed. If the required amendments are not introduced, Credit Institutions (CIs) may face the need for additional capital requirements. Therefore a compromise solution should be found.the CIs should be given instruments, which should help maximize recovery rates for NPLs. Impediments which encourage borrowers, who have the financial means and are in a position to repay their loans, not to fulfill their obligations intentionally, should be removed. There are many cases where loans are not repaid intentionally (known as strategic defaults) The loans are assets belonging to CIs and are funded from depositors money.it is from the repayment of the loans that depositors and other creditors (for example stock holders) or others who provide liquidity to CIs get their money back on maturity. On the other hand, the Government should ensure that the family house of borrowers in the low income bracket as well as other vulnerable groups are not in danger of being subject to foreclosure. In this respect, concerning primary residence, some protection is already provided. The Central Bank, under its Directive for the management of arrears, requires CIs to set up suitable structures and to apply effective procedures for viable restructuring of the loans of borrowers, who face financial difficulties. The Code of Conduct attached to the Directive, refers to the rights and obligations of the CIs and borrowers. In the case where a borrower does not agree with the proposed restructuring, he may apply to the Complaints Committee, which every Credit Institution is required to set up, as an independent unit to re-examine the matter. Even if under this mechanism, there is no acceptable solution, the possibility to recourse to mediation, through applying to the Office of the Financial Ombudsman of the Republic, is available. The recent amendment of the Law on the Financial Ombudsman gives this Institution the role to help for fair debt restructuring. It provides that a borrower may have recourse to mediation services, on two conditions: a) the loan does not exceed 350,000 (initial value) and b) the loan is secured through a mortgage on the primary residence of the borrower Even more, in the case of the family house i.e. the house which is necessary for a family to live in, protection is provided under the provisions of the Civil Law and procedures (Περί Πολιτικής Δικονομίας Νομοθεσία), provided there is a Court decision.in such cases, the Government should provide legal assistance to borrowers belonging to vulnerable groups, so that they can apply to Court in order to have this protection. We may add that loans of people belonging to the vulnerable groups come to a small proportion of the loan portfolio of CIs. It is well known where huge loans were issued by banks and certainly it was not to low income people. Even if CIs, by some means of inconsiderate decisions, turn to foreclosures of primary houses belonging to vulnerable groups, it is obvious that they will miss their target of improving and rendering their balance sheets healthy.it is logical to concentrate first and foremost on loan restructurings. Foreclosures and selling properties will be the last resort measure.this is also noted in the updated version of the Memorandum signed with Troika. No doubt there are delays in restructuring. However restructuring is not an easy task. A long time is required, even in the cases of cooperating borrowers. All information and documents, prescribed under the Central Bank Directive, which are by no means negligible in size and content, should be collected and evaluated, There are also cases, where borrowers are willing to cooperate for restructuring,but they are unwilling to go into the trouble or move at a slow pace in gathering and presenting to the CI concerned, the documents required. Then, the viability of each case should be evaluated, something that will come from the analysis of the various documents. Following the analysis, a report should be prepared for the approving bodies (Committees) which have responsibility for the approval of restructurings.one should add to these, the fear to take responsibility and the lack of initiative, that has overwhelmed the personnel of CIs, following the euro group events and the approach to stick strictly to all rules, something which makes the situation worse. Although CIs have to serve their own interest, at the same time, they have every reason to find reasonable solutions, which will serve the interest of their customers. Only this way, CIs will be in a position to recover their loans and to continue to have customers to do banking business. With respect to the concern for massive sales (foreclosures )it is more than obvious that it is neither in the interest of CIs, nor of borrowers or the economy in general. There will be losses with respect to loans that are liquidated and reduction in the values of other immovable property used as security(collateral ) for loans.they may also result in impairment of loans,downgrading of the loan portfolio of CIs and need for further capital requirements. Therefore there is no incentive for such a move. On the contrary, there is every reason for CIs to refrain from such actions(massive foreclosures). The job of CIs is to make money from intermediation between savers, who put their savings in deposits and borrowers, who borrow money for investment or any other reason. It is not their job to sell or manage immovable properties, especially houses belonging to medium and low income groups, which will be a hard job, if not impossible, to sell. Times are difficult and decisions painful. However the management of the economy is an affair for all of us. Problems need to be solved. Inaction or delay in taking the necessary decisions may be catastrophic we witnessed such cases in the recent past. We need consensus and realism from political parties for rational decisions that will serve the best interest of Cyprus. The restoration, viability and operation of the banking system on healthy ground are a priority. Furthermore we should carry out the necessary reforms, if we wish to turn the economy to effective and credible. Only this way, trust may be restored with all the benefits that follow. Without managing NPLs effectively, the granting of credit which will give momentum to growth, creation of new jobs and reduction in unemployment, will not come to the extent required, to take the country out of recession

21 Economy Borrowing to spend and quality life One of my favourite persons in the world was my late grandfather. While he may not have achieved much in the eyes of the world, to me he was a true hero. He led a simple life and always made sure that his family was looked after. If the family needed more money he would make sure that it was provided, by putting in extra hours at work or by giving up his free time to generate extra income. What he never did was burden himself and his family with loans that they would struggle to repay later on. He was always a happy, easy-going individual who would ride his bicycle to the seafront in his spare time for a quiet get-together with friends. By Frixos Kyprianou Director MK KYPRIANOU LTD Unlike my grandfather and his generation, many people today find themselves struggling under a mountain of debt that they have no hope of ever repaying. Simply keeping up with their obligations to service the loans means that their family has to make sacrifices. This creates discord and tension, pushing stress levels through the roof. The irony is that none of these pressures would arise if we had only been able to control our expenditure in the first place and keep our feet on the ground. The size of your house or the make of your car may be an indication of your status, but in reality these things add nothing to the happiness of your family. Because the banks were offering us the extra money, many of us, who could comfortably afford a 75 square meter apartment, chose to over-extend ourselves and bought a 300 square meter house instead. We then made matters worse by asking the bank to accept a higher valuation on the house so that we could take out an extra loan to buy a fancy car. Now we are deep in the red and our happiness is gone. With the recent fall in family incomes and increased taxes, combined with the fact that most mortgages are for 15 to 20 years or even longer, many people can see no realistic way out of their difficulties in the foreseeable future. For large sections of society there is no relief in sight: they may be free in theory, but in reality they have become debt slaves to the banks. Since they have mortgaged their lives for a good number of years they are free to live them only to the extent that the bank allows it. In an earlier article I explained why I believe that mortgage repayment periods should be limited The size of your house or the make of your car may be an indication of your status, but in reality these things add nothing to the happiness of your family. to not more than 10 years. The availability of long-term mortgages encourages people to take on commitments they cannot meet. This also creates artificial demand and pushes prices up. The current situation confirms this belief in my mind, and I believe that the government and the central bank should give serious consideration to setting a limit. Limiting the term of mortgages will make it more difficult for a real estate bubble to develop, and will make property ownership accessible to more people as it will put downward pressure on prices. Furthermore, I believe that such a measure will also protect home owners from the worst effects of economic downturns. During the term of a mortgage of 20 years plus it is almost inevitable that the economy will go through a recession that reduces incomes of families, along with all the other risks associated with such downturns. A mortgage with a 10 year span improves the chances that by the time a serious recession occurs the loan will be settled, or at least reduced to a manageable level. I hope, for our own sake and for the sake of future generations, that the difficulties we are undergoing will help us realise that quality of life does not come from bank loans. I am certain that Cypriots of the past enjoyed a far higher quality of life than we do today. They may not have had the material possessions and the luxuries that we are now finding it so hard to do without, but they were free from worry and the rat-race of constantly wanting more. Lessons from the past are usually a good guide to avoid the pitfalls of the future. 38 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

22 Economy Decisions of the Council of Ministers of the Republic of Cyprus and the power to promulgate them by publication By Theodosis A. Tsiolas Secretary to the Council of Ministers The issue concerning the publication of the Decisions of the Council of Ministers has been a subject of public concern from time to time. On occasion, concern and distrust have been expressed, especially regarding those Decisions that were not publicly disclosed. However, it might not be widely known that the publication or not of the Council of Ministers Decisions is expressly determined by the Constitution, through clear references in specific articles. The Council of Ministers Decisions are related to items included in the agenda of each meeting. Pursuant to Article 56 of the Constitution, the agenda is compiled by the President of the Republic at his discretion. Furthermore, according to the same article of the Constitution, the agenda is communicated to all concerned prior to such meeting. The Council of Ministers is called upon to take a specific Decision on the items included in the agenda, as compiled by the President of the Republic. Therefore, the Council of Ministers, after discussing each item, can decide on the approval or rejection of the proposal put forward. In cases where the Council of Ministers cannot reach a Decision on a specific item, it can postpone its discussion for a subsequent meeting or, even authorize the competent authority (the Minister concerned), to re-examine and resubmit the issue to be included in the agenda of the next sitting of the Council of Ministers. In both cases mentioned above, the Council of Ministers may decide either on the postponement or the complete withdrawal of the item from the agenda. The Decisions of the Council of Ministers in each of the above cases, shall be transmitted, forthwith to the office of the President and of the Vice-President of the Republic respectively 1, in accordance with Article 57(1) of the Constitution. The President or the Vice-President of the Republic or both shall have the right of referral of such Decisions, within four days from the date when a Decision has been forwarded to their respective offices, back to the Council of Ministers for reconsideration. In such a case the Council of Ministers is obliged to review the Decision and if it insists in not changing its original Decision, then the President and the Vice-President of the Republic shall, subject to paragraph 4 of this Article, promulgate by publication such Decision in the Government Gazette. However, if the Decision relates to foreign affairs or the defence and security of the Republic, as these are explained in Article 50 of the Constitution, the President or the Vice President 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 the Decision was forwarded to their respective offices. In cases where a Decision is enforceable and no right of veto or referral has been exercised, such Decision shall be forthwith promulgated by the President and the Vice-President of the Republic by publication in the Government Gazette, unless the Council of Ministers had already decided otherwise in the original Decision. Within the constitutional framework, as described above, it is apparent that the constitutional legislator has provided that the power of deciding whether a Decision is to be published or not, rests with the Council of Ministers itself. Therefore, the publication or not of Decisions taken by the Council of Ministers requires, as a necessary constitutional requirement, the prior approval of the Members of the Council. Consequently, the Council of Ministers is the only Authority responsible for authorising the publication of the Decisions taken. It is noted that not even the President of the Republic is authorized to publish any Decision taken by the Council of Ministers, despite the fact that, in accordance with Article 55 of the Constitution, he has the power to convene the meetings of the Council of Ministers himself, or on being asked by the Vice-President of the Republic in due time, as well as to preside these meetings. Accordingly, it is clear that the validity of the Decisions taken by the Council of Ministers presumes the prior lawful composition of the Council. It is worth mentioning that during the past, this issue had been discussed within the Council of Ministers, and it was an issue for which the opinion of the Attorney General was sought. The Attorney General expressed the opinion that, during the sessions of the Council where the Council acts as an Administrative Body, its Decisions are subject to judicial review and as such, no other person except the Ministers should be present. Furthermore, according to Article 60 of the Constitution, the Secretary to the Council of Ministers is present during these meetings for the purpose of keeping the minutes. 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 as long as the position of Vice President is vacant, the executive power is carried out solemnly by the President of the Republic. As further noted by the Attorney General, the specific Decisions are enforceable administrative acts whereby the will of the Council is expressed, which is intended to produce legal effect on the individuals subject to administration and involves their immediate implementation through official channels. However, the participation of other persons in the Council s meetings is not forbidden when the Council convenes pursuant to Article 54 of the Constitution or during the discussion of national issues or other issues of general interest. It should be noted though, that the publication of all Decisions which constitute enforceable administrative acts without any restriction, could possibly conflict with other legislation which may prohibit the publication of their content, specifically where these refer to classified information or the personal data of citizens. It should also be noted that any of the Decisions classified as Top Secret, Secret, Confidential or Restricted cannot be published in order to safeguard their content, according to the Security of Classified Information, Documentation and Hardware and Related Topics legislation. Furthermore, according to the Order 1 (6) of Chapter III of the General Orders, all documents containing personal data are considered classified and are being managed in accordance with the provisions of the Processing of Personal Data (Protection of Individuals) Laws of and therefore, for the protection of personal data, their disclosure is prohibited. Moreover, Decisions taken by the Council of Ministers, relating to information and/or data falling under the Processing of Personal Data (Protection of Individuals) Laws of which specifically have reference to personal and/or sensitive data, are not publicized. Consequently, in every case, it is important that there is careful assessment of the contents of each Decision, in order to protect both classified information and personal or sensitive data of individuals, and in addition to safeguard the interests of defence 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 guaranteed by the Constitution of the Republic and the relations of the Republic with other states. In any such cases, the Council of Ministers may, by resolution, decide the non-disclosure of the Decision. Without a doubt, the aforementioned legal framework, that regulates the broader issue of disclosure of the Decisions taken by the Council of Ministers, does not allow for the publication of all Decisions taken by the Council. As such, this means that the power given to the Council by Article 57(4) of the Constitution is not unrestrained. The legal barriers placed by the Constitution and other legislation which limit the power of the Council for publication without exception all of the Decisions, de facto protect the reputation and the rights of citizens and also the interest, the security and the defence of the Republic, from any uncontrolled and irresponsible disclosure. Therefore, the criticism against the present government, for non-disclosure of Council Decisions, is unreasonable and lacks any legal basis, since all the Decisions taken by the Council are published, except for those Decisions that fall into the restrictions mentioned above. In fact, statistical data shows that the current government in comparison with previous governments has managed to achieve the greatest possible disclosure rates on Decisions taken by the Council. Specifically, an analysis and examination of a sample of historical data maintained by the Council, from 2004 to date, shows that during the past ten years the number of the Decisions published was extremely small, given that in each of the previous years, published Decisions did not exceed 20% of the annual Decisions taken. In fact, the results indicate the absence of political will to improve the rates of Decisions published, since, basically, the maximum annual percentage increase in the number of published Decisions, is only approximately 2%. Based on these data, in 2004 only 8% of all the Decisions taken that year were published, while in 2013 these rates reached 14%. Of course, a somewhat bigger increase was observed in the years from 2008 to 2012, with the annual average of published Decisions reaching approximately 18% of the total. In comparison with data of other periods, the corresponding percentage figures referring to the current Government, show a reversal of the above situation, since the percentage of Decisions published represent the 72% of all Decisions taken by the Council. The big percentage difference obviously shows the will of the current government to publish the highest possible number of Decisions taken by the Council of Ministers. Undoubtedly this is based on the target set by President Nikos Anastasiades, who aims to limit the number of the unpublished Decisions to the absolute minimum, for reasons of transparency and disclosure of policies and issues handled by the Government, to the general public. To this end, the Council, with Decision No dated , as well as with a second decision dated , confirmed its position that all Decisions taken will be made public, except for the Decisions carrying classification of any level, or in cases where the Council considers that the publishing of a certain Decision would conflict with the Constitution or legislation or would be detrimental for the defence and security of the Republic of Cyprus. It should be emphasized that this Decision is being fully implemented, following the preparation and circulation of a relevant Circular by the Secretariat of the Council of Ministers. Concluding this short article, one must state that, in the light of the constitutional framework and all aforementioned analysis, it is clearly apparent that the disclosure of Council Decisions is a power vested only within the Council of Ministers. Nevertheless, this power, should in no way be considered undemocratic or contrary to the principles of transparency and the rule of law when, in fact, today, the current government has put this issue in the right dimensions, by reducing the number of Decisions not published to the minimum, while at the same time safeguarding the rights of its citizens as well as the defence and the security of the Republic

23 Economy Banks should handle their customers in a professional and humane manner 2015: What would it be like? By Dr. Ioannis Violaris, Economist As the end of 2014 is approaching enterprises and individuals alike wonder how 2015 would be like. In order to reply to this question one needs to assess and reflect on what has taken place in Basically what has been done in 2014 was the strict observance to the Troika s dictates, which have corrected some long existing evils in our practices, but at the same time they have dramatically altered the way business was done in Cyprus. Specifically they have changed the way banks operate, the way tax authorities do their business and the way individuals, families and enterprises manage their affairs. Unfortunately, so far, this recipe hasn t brought about any growth. On the contrary it has deepened the recession and has retained, almost unchanged, the unemployment rate. In 2015 therefore it must be expected that the situation won t dramatically change unless certain positive events occur. These events have to do with the inflow of foreign direct investment, the positive outcome of the inter-communal talks and the prospects of the hydrocarbons exploitation. On all these three key areas our input is necessary and expected. No new investor will decide to invest here unless we persuade him, [with convincing arguments and benefits] that he has to do it. We need therefore to come up with a plan as to which prospective customers to approach and how to convince them. On the issue of the inter-communal talks, and despite the other side s recent provocative actions, we need to act cleverly and aim in persuading them that it is to their interest too to finally resolve this long existing problem. On the hydrocarbons exploitation we need also to act wisely and aim in a solution that, without jeopardizing our integrity, will bring about results in the earliest possible time. There are, unfortunately, no easy solutions or suggestions anyone can propose. Yet it is about time we avoid amateurship, that has been characterizing most of our actions so far, and instead build on our well trained and educated human force, which is our only valuable asset. And it is about time we start trusting more our young generation, as most Europeans already do, as they have fresh ideas, new approaches and they are disassociated from the evils of the past. By Alecos Vilanos Manager of Vilanos Real Estate Agents The New Year 2015 is upon us and although these should be days of joy and preparation for the celebration of the New Year, there are fellow human beings, households and small businesses suffering as a result of large claims by the banks for payments of loans and the fear of divestitures. As a real estate consultant with extensive experience, I see close up the drama of a portion of borrowers due to the financial crisis, who found themselves in the very uncomfortable position of not being able to meet their obligations towards financial institutions, due to dismissal from work, salary reduction, etc. These people, in an effort to find a solution with their bank and to reach an agreement on the restructuring of their loans, are faced with the cold face of credit institutions. And as they have described to me, some employees of credit institutions, either due to ignorance or insufficient education, do not treat them professionally, do not treat them in a humane way, and in some cases do not comply with the Code of Conduct for handling borrowers facing financial difficulties which is part of the Directive for the management of delays of 2013 issued by the Central Bank, and pressurise them into accepting non-beneficial restructuring, which they will probably not be able to meet in the future, and in some cases are led into restructuring with a higher monthly installment and with an increased interest rate. According the Code, all credit institutions are obliged to implement the directive of the Central Bank and the code of conduct on the restructuring. The main aim of the Directive is to achieve fair restructuring for viable borrowers who are facing financial difficulties (individuals and businesses) who are unable to respond to their contractual obligations. According the code, the banks are required to examine and evaluate each case individually and propose a solution, preferably long-term, which will respond to the specific characteristics and the financial situation of each borrower. Based on this, several questions arise: 1. Before assigning some officers the task of restructuring loans, did the credit institutions offer them appropriate training? 2. Did they give them the right guidance on how to treat each case separately? 3. Is there a purposefulness behind this indignity of some bank employees? 4. Have the employees studied the Code and the Directive issued by the Central Bank? 5. Have they attended a training seminar on credit facility issues? On the other hand, the establishment of the institution of the Financial Commissioner gives hope to these people to reach an advantageous solution, based on their current financial abilities, regarding the restructuring of their loans. Already the office of the Financial Commissioner has begun to receive requests from consumers for mediation in terms of restructuring non-performing loans. What the society is requesting from credit institutions is for them to show a more human face to borrowers who are seeking a rational restructuring of their loans, faithfully based on the Central Bank instructions, but also on what the borrower themselves can pay according to their financial situation, to educate bank employees on how to handle each case separately and indicate the faithful implementation of the Directive and the Central Bank Code. As a conclusion, I would like to point out that the main axis of restructuring is the following triptych: Lengthening the duration of loan repayment - Lowering monthly payments - Maintining the interest rate at around 3% per year

24 Economy Tax amnesty and real estate It is an irrefutable fact that our economy is in urgent need of liquidity. Neither the real estate market nor any other investments will be boosted without the possibility of securing loans. By George Mouskides General Manager, FOX Smart Estate Agency Licensed Estate Agent, US Certified Public Accountant We also know that the gap between loan and savings interest rates is too wide. This will shrink with the reduction of savings interest but most importantly with that of loans interest rates, once market liquidity improves. Liquidity will also help reduce the number of Non-performing Loans (NPL). Where s the cash? It is widely rumoured that Cypriots keep about billion out of the banking system, in bank vaults, houses, etc. It is also not a secret that many Cypriots have significant deposits abroad. Many of these deposits originate from undeclared income. Based on all these factors and given the fact that the market is craving for liquidity is it perhaps essential to go ahead with a new tax amnesty? Similarly is it also essential to offer incentives so that declared funds find their way to banks? In other words what we should be aiming for is tax amnesty for undeclared and incentives for declared funds. European Central Bank With the stress tests behind us the European Central Bank, (ECB), could guarantee new deposits in even in excess of say up to , in cooperation with the Central Bank of Cyprus. These deposits may carry a reduced interest rate as a cost for the guarantee. Yet another suggestion would be for the ECB, to issue bonds for Cypriot buyers through Cypriot banks and deposit the funds with the banks so that they can benefit from the generated liquidity. As far as undeclared funds are concerned, a minimum taxation should apply for them to be deposited in Cypriot banks say a 30-day grace period should be given. All deposits made within this period should be considered taxed funds and must be ignored for purposes of capital statement. Booster Even if just 1billion finds its way to the banks, it will increase liquidity and be a boost for many sectors of the economy, including that of real estate. It should be made clear however, that laundered money regulations should apply to the full (illegal activities, drug sales) and such funds will never be allowed to permeate into the banking system. We expect that bold moves, like the tax amnesty, are the ones required and should help the government bring about the much-needed economic growth. 44 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

25 Economy Corporate Governance Practices of Cyprus Companies listed in the Cyprus Stock Exchange By the Corporate Governance, Internal Audit and Risk Management Committee The Corporate Governance, Internal Audit and Risk Management Committee (the Committee ) of the Institute of Certified Public Accountants of Cyprus ( ICPAC ) commenced a survey in June 2012 with the aim of identifying major corporate governance practices of Cyprus companies listed on the Cyprus Stock Exchange ( CSE ). The intention of the Committee was to accumulate information to aid in the understanding as to how companies in Cyprus are managed and controlled, as well as how the relationships between the management team, the Board of Directors ( BoD ) and the shareholders are managed. The survey contained 41 closed-ended questions and was mailed to all CSE listed companies (funds were excluded), of which only 37 replied. In situations where the respondents provided an obviously erroneous response or provided no response, the percentages for those questions were revised accordingly. The information collected was processed by PA College and was treated with the utmost confidentiality. The economic recession in Cyprus, and especially the March 2013 events in relation to the Eurogroup decision to restructure the two largest banks in the country through bail in have delayed significantly the accumulation, processing and analysis of the survey data. Even though the overall response to our survey was low, hampering a more detailed statistical analysis of the data obtained, some interesting matters in the areas of BoD structure and committees, the BoD remuneration and performance, independence, the Chairperson-CEO role and the whistle blowing process were identified and are further discussed below. Board Structure The responses indicated that the utilization of the company s management in the proceedings of the BoD (including BoD Committees) meetings appeared to be satisfactory. Specifically, 62% of the respondents believed that management resources are utilized substantially in BoD meetings. Around 30% also believed that management could be utilized further and only one survey participant noted that the company s management is utilized more than necessary. BoD members seemed to be timely and adequately informed through an agenda about the matters to be discussed in their forthcoming meetings. The attendance, the frequency and the duration of the BoD and Committee meetings appeared to be satisfactory and appropriate for the facilitation of the decision making process. 90% of the survey participants seemed to agree that the BoD and Committee decisions are being implemented within appropriate timeframes. The level of expertise of the BoD members thought to be adequate in relation to the company s business and in the areas of financial management, human resource management, marketing, law and IT. The survey participants further reported that BoD members allocate satisfactory time and resources on strategy, financial monitoring, risk management, HR management, internal audit findings, monitoring of the external environment and technology. BoD Committees An approved and signed charter should exist detailing the BoD Members roles, duties and responsibilities. The Chairpersons of BoD committees can invite to the meetings whoever they think will add value to the meetings, such as the CEO, CFO, Internal Audit Manager, Risk Manager and external advisors. A proper meeting agenda and minutes should be held for every meeting and these meetings should be held at least once every quarter. In their relevant charters, it should be clearly stated that the Risk Manager and the Internal Audit Manager are recruited and/or dismissed by their relevant committees, they undergo formal performance appraisals on a regular basis and in accordance with the company s policies, and their remuneration packages are also approved by the same committee. Audit committee ( AC ) ACs should be comprised only of Non-Executive Directors ( NEDs ) and they should meet at least four times a year. The survey indicated the following: 70% of the BoDs of the respondents reported to have set up an AC with 45% of them having three-member committees; 22% of the internal auditors seem to come from accounting / tax backgrounds, 40% seem to come from an economic background and the rest from various other backgrounds; 10% of the companies that have an AC have at least one Executive Director ( ED ), which is not in accordance with the Corporate Governance Code (the Code ), and the remaining members being made up of NEDs and Independent NEDs; The majority of Chairpersons of ACs seemed to be Independent NEDs. The second largest group of Chairpersons were NED s; 40% of the ACs meet 4 to 6 times a year, with an average duration of 1 to 2 hours per meeting. During these meetings, a third of the same members seemed to be present during all the meetings; 60% of the ACs reported to have signed and approved charters; In 50% of the charters, the AC has the role of appraising the manager of the internal audit department and also approving his/her remuneration package. Nomination Committee ( NC ) NCs should have a majority of NEDs and the chairperson of the BoDs should chair this committee, provided he/she is non executive. Otherwise, a NED should chair the committee. The NEDs in the NC should never nominate themselves; other board members or the Chairperson of the BoD should be doing this for them. The NC should be dealing with the BoD members and top executives of the company only. The NC is responsible for determining the most desirable BoD size, given the skill needs, cost constraints and strategies of the company to establish the appropriate balance between EDs and NEDs and create a succession plan for the board. Identified gaps in these requirements should be filled by new appointments ensuring that the BoD contains the requisite skills, knowledge, diversity and experience. The survey indicated the following: 60% of the respondents do not have a NC and 33% of them have a three-member committee; 40% of the respondents that have a NC, have at least one member who is an ED; 50% of the respondents have at least 2 NEDs in the NC and 31% have at least 1 Independent NED; In 60% of the respondents that have reported to have a NC, the chairperson is an ED, in 25% is a NED and only 5% have an independent member as a chairperson; 45% of such committees meet at least 3 times a year with an average duration of 1 to 2 hours and at least half of the members being present; 50% have charter-terms of reference. The above denote that the current number of NEDs in most companies is inadequate and could render such companies non-compliant with the respective corporate governance guidelines. Remuneration Committee ( RemCom ) The role of the RemCom is to have an appropriate reward policy that attracts, retains and motivates directors to achieve the long-term interests of shareholders. In order for this committee to be effective, it needs to determine both the organisation s general policy on the remuneration of directors and specific remuneration packages for each director. The committee must be comprised only of NEDs, the majority of whom must be independent. NEDs in the RemCom cannot and should not approve their own remuneration package. The survey in this area showed the following results: 53% of the respondents have no RemCom, 6% have a five-member committee, 37% have a three-member committee and 4% have responded to have a committee with fewer than 3 members; Only 22% of such RemComs have reported to meet more than three times per year with an average duration of 1 to 2 hours and with about 50% attendance; 50% of those entities that reported to have a RemCom, have also reported to maintain a charter terms of reference; Only 60% has a written remuneration policy, which is also disclosed in its annual report; Only 10% has a named reference on the remuneration of each director, in the company s annual report; and only 5% has a performance related package. From the above, it can be deduced that there might be instances where the composition of RemComs has not been consistent with the Code, thereby potentially increasing the likelihood of setting compensation packages that are not commensurate to the size of the entity or not based on the entity s performance goals. Remuneration packages should be structured in a way to ensure that individuals are motivated to achieve desired performance levels that are in their best interests, their entities and the entities shareholders. The reported number of RemCom meetings conducted and their members attendance might also suggest that a significant number of RemComs might not had properly convened to adequately address matters fallings their spectrum of responsibilities. It was further noted that even typical compliance matters such as the committee charter and a written remuneration policy were not prepared for a large number of RemComs. BoD Remuneration and performance In general terms, performance-related pay serves to align directors and shareholders interests in that the performance related element can be made to reflect those things held to be important to shareholders (such as financial targets). This, in turn, serves to motivate directors, especially if they are directly responsible for a cost or revenue/profit budget or centre. The possibility of additional income serves to motivate directors towards higher performance and this, in turn, can assist in recruitment and retention. Finally, performance-related pay can increase the BoD s control over strategic planning and implementation by aligning rewards against strategic objectives. The survey indicated the following: 75% of the respondents have reported that their BoDs are appraised on their annual results; 95% of the respondents have reported not to have performance benchmarks for EDs; 30% of the respondents have reported that they do not receive adequate training and 22% gave no answer on this question; 92% of the respondents have reported to receive satisfactory information for the matters called to discuss and reach decisions. It appears from the above that a large percentage of respondents have reported that their BoDs are appraised on their annual results, a rather short-term goal benchmark. This finding, together with the results of the next response, which indicated that 95% of the respondents reported not to have performance benchmarks for their EDs clearly suggests that the BoDs performance is not properly assessed through the progress/ achievement of relevant long-term goals (i.e. market share of company, target level of its share price in the stock market for a set period, etc). Another important matter to note is that a significant number of respondents reported not to receive adequate training. Important areas to offer training to a director might include among others, the major provisions of the Code and the directors legal responsibilities. Independence NEDs / Independent NEDs The four general roles of NEDs are: strategy, scrutinisation, risk and people. In the strategy role, NEDs may challenge any aspect of strategy they see fit and offer advice or input to help develop a successful strategy. The scrutinising or performance role is where the NEDs independence is perhaps of utmost importance. NEDs are required to hold executive colleagues to account for decisions taken and company performance. In this respect, they are required to represent the shareholders 46 47

26 Economy interests against any vested interests or short-term executive pressures. The risk role involves NEDs ensuring the company has an adequate system of internal controls and systems of risk management in place. Finally, in the people s role, NEDs oversee a range of responsibilities with regard to the management of the executive members of the board. This typically involves issues concerning appointments and remuneration, but might also involve contractual or disciplinary issues, and succession planning. The survey indicated the following: 10% of the respondents have reported no NEDs and no Independent NEDs; 35% of the respondents have reported to have only 1 to 2 Independent NEDs; Based on the survey, 40% of the BoDs members hold their position for a period in excess of 9 years and only 25% for a period of 3 years or less; Only 32% of the respondents stated that the decisions relating to the appointment or dismissal of independent directors lies in the hands of the BoDs or a BoDs committee. 60% stated that such decisions are mostly influenced by one dominant member of the Board (Chairman, CEO, controlling shareholder). The remaining 8% of participants have not responded; Approximately 45% of the respondents believe that the independent members of the BoDs cannot substantially affect important decisions, such as the dismissal of the General Manager, Internal Auditor, CFO or other senior level officer. Note that, approximately 20% of the respondents did not provide an answer to this question. It appears from the responses that even hard and fast rules, such as duration, are not adhered to, plus even if on paper there is a satisfactory presence of NEDs in the BoDs, the perception is that they are chosen by a dominant member of the BoD (thus questioning their independence), plus they cannot exert significant influence in the decision making process. Furthermore, the service of BoD members shall not exceed nine years, consecutive or not. All Directors must resign at regular intervals and at least every three years. If they so wish, they may offer themselves for re-election. Evidently, all of the above suggest that independence is an important area that requires significant attention by listed companies in Cyprus. Chairperson-CEO The strongest and most common reason for the separation of these roles is to avoid the dangers of unfettered power that may arise, when power is concentrated in a single, powerful individual. The separation of roles offers the benefit that it frees up the chief executive to fully concentrate on the management of the organization, without the necessity to report to shareholders or otherwise become distracted from his or her executive responsibilities. The arrangement provides a position (that of Chairperson) that is expected to represent shareholders interests and that is the point of contact in the company for shareholders. Having the two roles separated reduces the risk of a conflict of interest in a single person being responsible for company performance, whilst also reporting on that performance to markets. Finally, the chairperson provides a conduit for the concerns of NEDs who, in turn, provide an important external representation of external concerns on BoDs. According to the survey results, 75% of the respondents have reported that they have separated the roles of the Chairperson (appointing a NED or an Independent NED) and the CEO (appointing an ED). Whistle blowing process Organizations require honesty and ethical behavior from and among their people. Establishing and maintaining an effective whistle blowing process in an organization could operate as a strong deterrent for illegal, unethical and other inappropriate behavior within an organization. The survey showed that 65% of the respondents did not have a whistle blowing process and of those that had one, 15% reported that it was not effective, whereas 35% reported that it was not functioning satisfactorily. The results clearly indicate that the whistle blowing process is neither effectively nor widely used in Cyprus. Considering that other countries have already incorporated into their companies laws (and they have also laws to protect the whistle blowers) the requirement of a whistle blowing mechanism, it is evident that the use of such a mechanism in Cyprus could further improve compliance with laws and regulations. Conclusion A number of companies in Cyprus are making a good effort to fully implement the Code. With regard to accountability and transparency, the responses received suggest that there has been a noticeable improvement, since through the annual reports the necessary information such as the remuneration of EDs, the results of the external audit, the duties and responsibilities of the BoDs, etc. are communicated to the shareholders. More work seems to be required in the areas of independence and objectivity of the BoDs. These areas are admittedly challenging considering the small size of our country and our economy, where unavoidably many businessmen and professionals personally know or somehow relate to each other. Additional challenges exist in composing effective BoDs in terms of size, the proportion of EDs, NEDs and Independent NEDs, as well as the quality of BoD members in relation to the expertise and their commitment to the organization, establishing clear roles and responsibilities within the BoDs and its Committees by setting up their respective charters/terms of references and applying and communicating effective procedures for evaluating the performance of EDs, checking their remuneration levels and also having succession plans for replacing them. The above are of paramount importance, because their successful implementation is expected to enhance independence and objectivity, avoid or reduce conflicts of interest, achieve a clear separation between the roles of the CEO and the Chairperson of the BoDs and maintaining a fair balance of power. Pursuing effective corporate governance is not an easy task. It is an ongoing challenge that requires among others, ethical behavior, commitment, accountability and transparency. Other countries with much more mature economies dare to admit that there are always improvements that are required in their corporate governance policies and practices. With that said, it would be fair to also state that the Cyprus economy requires a stronger and more effective corporate governance that will also serve as the cornerstone of its economy and its markets and become the catalyst to achieve in the medium to long term the so desired growth that we all expect that will lead to the improvement of our standard of living and reduction of unemployment. 48 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

27 Business Major changes in the energy markets By Marios Mavrides Member of the Parliament Associate Professor of Economics European University Cyprus The price of oil has been in a free fall since June 2014, when it was trading at $110 per barrel. During the past five months the price of oil has fallen byalmost 40%, a significant drop in the price of energy with significant consequences. The decision by Organization of Petroleum Exporting Countries (OPEC) to maintain production at the same level, has caused a further drop in the price of oil in the international markets. Even though OPEC s decision was expected, the price of oil dropped below the critical level of $70 per barrel. Experts say that at a price below $70 per barrel, production of shale gas is not profitable for many producers. However, this remains to be seen as more and more production of shale gas creates economies of scale, this reducing its price further. The price of oil has been in a free fall since June 2014, when it was trading at $110 per barrel. During the past five months the price of oil has fallen byalmost 40%, a significant drop in the price of energy with significant consequences. The fall in the price of oil is due to three factors. The first one is the discovery of enormous amounts of shale gas reserves in different parts of the planet and the ability to exploit those reserves. The second reason is the decrease in the dependence of oil importing countries from specific oil exporting countries where there is tension and conflict. The third reason is the overall decrease in demand for oil and energy worldwide. The United States of America, probably the biggest player in the energy markets, possesses huge reserves of shale gas, which may give her the ability to export rather than import energy. The dependence of the world economy from oil exporting countries was a significant factor that kept the price of oil at high levels. The uncertainty regarding the trouble free supply of oil in the real economy was responsible for the large fluctuations in the market price of oil. In some oil producing countries, like Iraq, Iran, Nigeria and Libya, there was and still there is, tension and conflict, and lack of stability, leading to instability and uncertainty regarding the supply of oil. The market became very sensitive to new information regarding the political situation in those countries. Despite the fact that tension and conflict continues in some of the oil producing countries (now including Russia), the market for oil is not so sensitive any more, as the market for energy is currently undergoing fundamental changes. Oil is no longer the major energy source and production is no longer concentrated in some parts of the world. Nowadays, oil is produced in many parts of the world and the power of OPEC is diminishing. Also, oil is no longer monopolizing the energy markets, rather, is facing strong competition from natural gas. Natural gas is now a major player in the energy markets and can substitute oil in areas like industry, commercial and home use. Natural gas has a limited use in transportation as well, however, it may take years before it can become a perfect substitute for oil in the transportation sector. It is worth noting that natural gas is much cheaper than oil and that may speed up the process of moving from oil to natural gas. Based on current market prices, a million British Thermal Units (BTU s) is costing $12 worth of oil and $4 worth of natural gas. However, it is not easy to move from oil to natural gas in a short period of time due to the lack of infrastructure. Water Management: Mapping the Cost of Non-Europe By Alexandra Attalides Acting Head European Parliament Office in Cyprus The central notion is that the absence of common action at European level may mean that there is an efficiency loss to the overall economy and/or that a collective public good that might otherwise exist is not being realised. By definition, the potential gains to the European economy identified in this study could only be realised over time. If these policies were to be pursued effectively, the economic benefit would build up annually to a point where, on present calculations, some 990 billion euro - or currently about 7.5 per cent of EU GDP - might be added to the European economy. Key proposition The effective use and management of water is an increasingly important part of an efficient and environmentally sustainable economy and society. Currently, some 20 per cent of water in the EU is lost due to inefficiency, while as much as 70 per cent of water supplied to cities may be wasted. With the Water Framework Directive s (WFD) entry into force in 2000, the EU set itself long-term and ambitious objectives for managing and improving its entire aquatic environment, and laid down requirements for integrated and transparent river-basin management. At the request of European Parliament s Committee on the Environment, Public Health and Food Safety, research is currently being undertaken to assess the implementation of EU water policies and to identify and quantify the economic and social costs of the various failings in the current situation, and to analyse the feasibility and benefits of further action in this field. The research will be structured along the lines of five topical issues related to the water policy to identify concrete buildingblocks for future action to realise efficiency gains: programmes of measures, reuse of waste water, eco-design and water metering, economic Instruments, and pharmaceutical residues. More detailed analysis Less than a year away from the deadline for achieving the general objective of the WFD - namely, achieving good status for all water bodies - the challenge faced by the EU and its Members States remains immense. Around half of the water bodies are expected to remain below good and the use of derogations has become common practice. In many cases, it is unlikely that the good status can be achieved by 2027, the last possible deadline, by only relying on existing national and EU measures. New environmental pressures, namely changes to the morphology and connectivity of water bodies and excessive water abstractions, have been identified as having significant impact on water status, in addition to chemical pollution, which was the main focus of the EU s water protection before the establishment of the WFD and remains a leading reason for poor water quality. Existing EU legislation in this field needs to be better implemented and adapted to take account of new environmental pressures and technological advances, notably enabling greater reuse and recycling of wastewater. i Source European Parliament Research Service The European Parliament has embarked on a postelection long-term project which tries to identify the cost of non-europe, European Parliament position in this field While the European Parliament considers the existing Water Framework Directive (WFD), 2000/60/ EC, to be a solid basis for long-term integrated water management in the EU, it notes that its implementation needs to be improved significantly, in order to achieve good status throughout European waters by The Parliament has therefore called on the Commission to update and adapt existing legislation to water policy priorities, to address the impact of specific sectors and activities, to take account of technological advances for the reuse and recycling of water, in order to allow efficient reuse of treated waste-water and greywater, and to ensure that various activities producing significant amounts of water-waste are duly covered by the Environmental Impact Assessment Directive. The Parliament has also encouraged the adoption of an EU policy on water shortages and droughts

28 Business Bureaucracy puts the brakes on investment We need simpler and clearer procedures,and to escape current mentalities By Christodoulos Angastiniotis* Chairman of the Cyprus Investment Promotion Agency (CIPA) The events of the first half of 2013 shook the Cyprus economy, but also society as a whole, to its foundations. Practices that were considered a given in the past have been proved erroneous. We should learn from this upheaval and become wiser so we can avoid repeating similar mistakes in the future. We insist that attracting foreign investment is not just a basic pillar in efforts to kick-start the economy, but perhaps the only realistic way of achieving this goal. So we can create new jobs, absorb expertise and draw broader development benefits. However, we need to realise that the key to achieving this goal is to create a friendly business environment, which operates under a framework of transparency and is truly welcoming to foreign investment. We do not have the luxury to approach investment opportunities and possibilities with misgiving and malevolency. We cannot live under the false illusion that just any investor will risk investing in a country, where a complicated and nontransparent operational framework impinges on procedures. Various studies, including the World Bank s Doing Business Report 2015 which assesses how easy it is to start and operate a business across 189 economies confirm the need to take and implement drastic measures to combat bureaucracy. Specifically, Cyprus has fallen to 64th position, and is just 26th in the EU28. Despite Cyprus marginal improvement in numbers, the faster adoption of modern practices and procedures by other economies has led us to a lower ranking on the comparative list. Getting rid of the bureaucratic dysfunctions, exaggerated protectionism and onerous conditions that discourage foreign investors is a one-way street. We must upgrade the regulatory framework with new laws to make it more modern, flexible and friendly to the business environment. While at the same time understanding the investors needs, which we need to adjust to; within reason of course. Substantive reforms and improvements, and the adoption of simple and clear procedures, are important for us to break away from current mentalities. These measures must aim towards speeding up procedures in matters such as the approval of necessary licensing. We have a duty to broaden our horizons and be more accepting to new proposals and ideas. It requires a positive spirit, constructive approach and good will, as well as responsibility and sobriety. The positive assessments the Cyprus economy received by the Troika and international rating agencies over the past 18 months, attest to our economy s very swift recovery and return to competitiveness. However, the effort to restore Cyprus image abroad as an investment destination must be constant, coordinated and collective. This is the only way for an economy to cope and survive in a competitive international environment. EU energy policy towards 2030 EU leaders on the 23rd of October 2014 committed by 2030 to reduce greenhouse gas emissions by at least 40%, and increase energy efficiency and renewables by at least 27%. The deal is a clear message to big polluters such as China and the United States ahead of UN talks in Paris next year to agree global legally binding greenhouse gas emissions. By Dr. Andreas Poullikkas Department of Electrical Engineering Cyprus University of Technology * Efficiency and renewables targets An EU target of at least 27% is set for the share of renewable energy consumed in the EU in This target will be binding at EU level. It will be fulfilled through Member States contributions guided by the need to deliver collectively the EU target without preventing Member States from setting their own more ambitious national targets and supporting them, in line with the state aid guidelines, as well as taking into account their degree of integration in the internal energy market. The integration of rising levels of intermittent renewable energy requires a more interconnected internal energy market and appropriate back up, which should be coordinated as necessary at regional level. An indicative target at the EU level of at least 27% is set for improving energy efficiency in 2030 compared to projections of future energy consumption based on the current criteria. It will be delivered in a costeffective manner and it will fully respect the effectiveness of the European trading scheme system in contributing to the overall climate goals. This will be reviewed by 2020, having in mind an EU level of 30%. The Commission will propose priority sectors in which significant energy-efficiency gains can be reaped, and ways to address them at EU level, with the EU and the Member States focusing their regulatory and financial efforts on these sectors. These targets will be achieved while fully respecting the Member States freedom to determine their energy mix. Targets will not be translated into nationally binding targets. Individual Member States are free to set their own higher national targets. Interconnectivity The European Council noted the fundamental importance of a fully functioning and connected internal energy market. Agreement was also reached on increasing the interconnectivity of Europe s energy markets. Interconnectivity is an important part of the EU s plans for Energy Union, which is partly intended to wean some member states off their dependence on Russian gas. EU leaders renewed their 2002 commitment to increase energy trading through electricity connectors to 10% by Built into that is a commitment to subsequently up that percentage to 15%. The agreement specifically names socalled energy islands, such as, Spain Portugal and the Baltic states. They should have the highest priority, according to the conclusions. Malta, Cyprus and Greece also needed special attention, EU leaders agreed. Energy security Regarding energy security in the context of the Ukraine crisis, EU leaders endorsed further actions to reduce the EU s energy dependence and increase its energy security for both electricity and gas. Without going into detail, EU leaders agreed to implement critical projects of common interest in the gas sector, such as the North-South corridor, the Southern Gas Corridor, and the promotion of a new gas hub in Southern Europe. Also mentioned were key infrastructure projects enhancing Finland s and the Baltic States energy security. These countries were singled out as the most vulnerable in the case of a complete disruption of Russian gas supplies. The Commission was also tasked to set up task forces on specific interconnectors with member states for the purpose of their speedy implementation. Monitoring process The European Commission will monitor progress on the issue and will report on financing possibilities. The Council invited the executive to make legislative proposals on funding, if appropriate. * 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; 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

29 Business Cyprus shipping chamber For 25 Years it Navigates Cyprus Worldwide, carrying messages of Social Solidarity The Cyprus Shipping Chamber was established on 26 January 1989 as the trade association of the Shipping Industry in Cyprus. The main purpose of the Chamber is to promote the interests of Cyprus Shipping, to further the reputation of the Cyprus flag and at the same time, to promote and safeguard the legitimate interests of its Member-companies, at a national as well as international level. Today, the Cyprus Shipping Chamber is considered as one of the largest shipping associations worldwide and undoubtedly, not only it Navigates Cyprus Worldwide but also Carries Messages of Social Solidarity. By Thomas A. Kazakos, Director General Cyprus Shipping Chamber On the occasion of its 25th Year Anniversary since its establishment, and within the framework of celebrating World Maritime Day, the Cyprus Shipping Chamber initiated a public awareness campaign through the Media, to promote its social activities and events that were organised during this 25-years old journey, over and above the important economic contribution of the Shipping Industry to the Cyprus Economy, which also includes amongst others, its contribution to employment opportunities and the promotion of following a Career at Sea. In this respect, through all these different activities that have been organised all these years, the Chamber aimed at promoting and presenting its multifaceted and socio-economic contribution as well as the important contribution of the Cyprus Shipping Industry, which remains faithful to the Cyprus flag and continues to support the Cyprus Economy. Within this framework, the Shipping Chamber has organized in the past and still continues organizing events dedicated to charity, such as the Day of the Sea Event, the Annual Charity Beach Volleyball Tournament and Blood Donation Drives, projecting in this way the Chamber s high level of Corporate Social Responsibility. The Day of the Sea Event is organised every two years and is open to the general public. The Event includes sea and on-shore activities as well as presentations aiming at raising public awareness for the Cyprus Shipping Industry, such as educational programmes and employment opportunities that exist. All the proceeds from the Event are donated to the One Dream, One Wish Charity Association which fulfills the wishes of children suffering from cancer. Similarly, the Chamber organizes on an annual basis a Charity Beach Volleyball Tournament amongst its Member-Companies. The purpose of the Tournament is to provide the opportunity for the employees of its Member-Companies to enjoy a friendly competition through a pleasant, family-orientated social event, contributing at the same time towards the financial support of the One Dream, One Wish Charity Association. Furthermore, the Cyprus Shipping Chamber organizes every year a number of Blood Donation Drives amongst the employees of its Member- Shipping Companies. The blood donation drives are always held under the auspices of the Minister of Communications and Works and as a result, during the last twenty two years, more than 1800 blood units have been collected. For this commendable social service, the Cyprus Shipping Chamber has been honoured by the District of Limassol Blood Coordinating Committee. In addition, and in an effort to raise public awareness about the image and significance of the Cyprus Shipping Industry and its important contribution in matters concerning employment opportunities, the Cyprus Shipping Chamber has developed and initiated a Cyprus Shipping Public Relations Campaign, the aim of which is to promote further the employment opportunities that exist within the wider Shipping Industry for school and university graduates through various presentations, lectures and other activities related to Shipping. The Adopt-a-Ship Programme forms part of these activities. This particular programme has proven to be a very successful part of the general Cyprus Shipping Public Relations Campaign, which was launched in March 2006 by the Cyprus Shipping Chamber and it is now included in the educational programmes of the Eco- Schools. The programme involves assigning to a number of elementary schools classrooms a particular vessel or a group of vessels for more personal communication between the children and the crew of the vessel with the aim to inform the children about the itinerary and everyday activities taking place onboard a vessel and at the same time to improve the role, image and important contribution of Cyprus Shipping to the Cyprus Economy and Community, as well as Shipping and the Marine Environment in general. Chamber representatives also give various presentations promoting a Career in Shipping to high schools. The presentations are carried out at a national scale, something which demonstrates that the Cyprus Shipping Public Relations Campaign of the Chamber has a positive effect on educational institutions and young people in general. Moreover, for more than a decade, the Institute of Chartered Shipbrokers (Cyprus Branch) in cooperation with the Cyprus Shipping Chamber offers the Training Course entitled Understanding Shipping. The course has been customised through the years to meet the particular requirements of the Cyprus Shipping Industry and to be used as a tool in order to stimulate the interest of the students for furthering their education by attaining the qualifying examinations and becoming members of the Institute as Qualified Shipbrokers. Without a doubt, within the framework of its Corporate Social Responsibility programme and the charity events and activities, the Cyprus Shipping Chamber is The Voice of the Cyprus Shipping Industry, which for 25 years now, it Navigates Cyprus Worldwide, carrying not only cargo and passengers but also Messages of Social Solidarity

30 Business European Cooperation Helps Public Authorities Support Corporate Social Responsibility By Christina Neophytidou Research Associate, Cyprus University of Technology After two years of successful, interregional collaboration, the EU-supported COGITA project is now ready to present public authorities with policy guidelines on how to support small and medium sized enterprises (SMEs) in their CSR efforts. Corporate Social Responsibility (CSR) is on the agenda of many politicians and business leaders across Europe. COGITA promotes a CSR model that addresses social, environmental and economic concerns with joint tools. COGITA fills a gap at policy level, where until now there has been no proof of concept on how public authorities can support the uptake of an integrated concept of CSR in SMEs. The COGITA project now provides public authorities with a how-to manual, including ten steps to supporting CSR in SMEs through public policy. These new guidelines will be presented on October 23rdt in Bologna (Italy) at the project Final Event. Focusing thus on the specific challenge of how to increase the effectiveness of public initiatives to support CSR in SMEs, the CSR Research team at Cyprus University of Technology (CUT), coordinated by Associate Professor Maria Krambia Kapardis, has worked closely with members of the Cyprus Chamber of Commerce and Industry,the Planning Bureau, the Union of Municipalities, PwC Cyprus, the ex-environmental Commisioner and the Department of the Environment in order to develop and formulate its Implementation Plan based on addressing the challenge of creating an enabling environment for CSR so that public authorities in Cyprus can reach/attract/access SMEs. A team from PricewaterhouseCoopers has collaborated with the CUT team in fulfilling its mission and vision. In line with the needs of the Cypriot community with regards to the embedment of sustainable public procurement by the Public Authorities, the four measures of the Cypriot Implementation Plan developed under the COGITA project propose: 1. The creation and setting up of a platform to raise awareness on CSR and assist businesses and local authorities to implement it efficiently; 2. The gathering of all Good Practices examples in Cyprus to assist in capacity building and raising awareness for CSR and green procurement; 3. The creation of an online data matching tool which will be completed by local authorities regarding their CSR needs in an effort to match the supply (SMEs) and demand (local authority) on CSR; 4. The development of seminars for businesses and Local Authorities By assisting business in the application and use of CSR, Public Authorities will essentially be stimulating sustainable economic growth and structuring a sustainable public procurement policy. Additionally, by educating the public on the importance of CSR, consumers themselves will demand products and/or services that meet both social and environmental requirements. This will essentially serve as a means of influencing policy makers in order to place CR issues higher on their agenda so as to introduce regulations and further improve corporate governance through public procurement. Use the COGITA Approach Put simply, the 10-step approach that was among the deliverables of the COGITA project, provides an answer to the core question of the project, How to encourage long-term, strategic CSR planning in SMEs through public policy? The COGITA projects research and results states that if public agencies undertake policies leading to the use of the integrated CSR concept by SMEs they would contribute in an effective and efficient way to the achievement of their CSR and regional development goals fostering competitiveness of the regional companies and regional welfare. The ten steps provide a thorough guide through the steps that public authorities can take in designing a comprehensive action plan for CSR. This means starting with an analysis of the current CSR policies in the region in question to establish a status quo. The following steps advice on how to select relevant CSR fields of action and choose instruments for implementation of CSR strategies and policies. This includes prioritising the main challenges of the region, for example environmental or social challenges, and defining measures for improving policies that address these challenges through improved CSR performance in SMEs. The final steps focus on developing and executing an implementation plan and measuring the impact of the implemented measures. Public authorities choosing to use the integrated COGITA approach can get further inspiration from a long list of good practices that is available on the COGITA website. The COGITA 10-step guideline can be found on the COGITA webpage at: Energy updates When Vice President Joe Biden visited Kiev in 2009, in a public statement, he stated that Your economic freedom depends more on your energy freedom, than on any other single factor. By Alexandros A. Anastasiou Director, Audit & Assurance Services Head of Energy Sector Baker Tilly, Cyprus This statement is absolutely true. Ukraine will require billions of dollars in investments and in other facilities, in order to secure its energy future. If someone considers that almost two decades since Ukraine gained its independence, foreign investment projects, represents less that 10% of the country s oil and gas production, then certainly there is lot s of work which needs to be done. Things are becoming more difficult for Ukraine, if somebody takes into account the continuous tensions with Russia over Crimea. Europe, which is currently depending for its Energy supplies from Ukraine, has realised, that it has no other option than to consider other ways / other suppliers for its needs. Over the past few years, countries such as Greece, Bulgaria and Turkey, have realised, that Europe, will have no other option, than to consider alternative ways for its energy needs. Based on this, a discussion has been enacted, regarding the viability of the establishment of a peripheral natural gas virtual hub that will enable flexibility for the local markets, along with considerable price reductions, especially in times of great demand such as the winter period. The Greek Energy Ministry is already considering this idea, as well as the IENE, an energy institute which recently issued a detailed report on the above mentioned idea. At the time being, the next steps to be taken, in order to turn the above idea into action, is to finalise the interconnections in place, such as the Interconnector Greece Bulgaria (IGB), which is scheduled to be operational in 2016, along with the flow of the Azeri gas, from the Trans-Adriatic Pipeline (TAP), due around However, taking into account the above facts, it is absolutely certain, that no gas hub could be fully operational before 2020, making the Southeastern Europe the only energy region in the EU at present. Moreover, Turkey could not stay behind from all the above developments which are taking place in the region and they have made it obvious with their actions that they want to establish themselves as an Energy player. At present, Turkey is moving along to catch up with the rest of the countries, aiming to establish a hub in Istanbul hoping for the introduction of the Trans-Anatolic Pipeline (TANAP) prior of In addition, the recent agreements, which Turkey has signed with Iran and Russia over increased gas supplies, have as a prime objective, to upgrade the Blue Stream pipeline. At the same time, Turkey has created the EPIAS Energy Exchange, which handles the electricity market and has as a final objective to enter the gas trade. Taking into account all the above facts, certainly, someone can say with certainty, that Turkey is winning the race, compared with Greece and Bulgaria, since their quantities will not be available prior of In addition, if someone takes into account that the Greek economy is currently in financial crisis, then certainly no extra funds are available at present, for Greece to catch up and win the race. However, Turkey is closely monitoring the efforts of the Kurdish Regional Government (KRG ), which after winning the Jihadi militants of the Islamic State, through the well known peshmerga a few kilometres away from their capital Erbil in mid August, they are trying to export big amounts of oil without the mediation of the Baghdad authorities. It is well known, that Kurdish crude is already flowing for months to the Mediterranean Turkish port of Ceyhan, at a rate of around 120,000 barrels a day and, so far, the KRG has pumped about 6.5 million barrels to Turkey, according to the energy ministry in Ankara. Turkey fears an independent Kurdish state, which beyond the political issues, it might become a competitor and an obstacle with great difficulty to by pass in its established energy plans. On the other side, little Cyprus, despite its financial difficulties after the bail-in, it realises that they have to be part of this race, if they want to be included in the Energy strategic options considered by Europe. The recent agreements, between Cyprus Greece Egypt and the most recent one, between Cyprus Greece Israel, have as a prime objective, to safeguard its interests in the region, but above all, to establish energy security to perspective companies, which might be interested investing in the Cyprus energy sector. Furthermore, the Government of the Republic of Cyprus is fully aware, that it should grasp this opportunity called Energy, in order to establish prosperity for the economy. The above can be achieved, by improving the country s attractiveness for energy sector investments, by offering for example, tax incentives, to companies specialising in the above sector. We are all aware, that more investments, means more capital in the economy and certainly it leads to decrease in unemployment gradually. At present, the Government of the Republic of Cyprus is moving on the right truck. However, everybody is fully aware, that there are lot s of things which needs to be done, if Cyprus wants to play a key role in the energy sector and it is a race which we cannot afford to loose

31 Business A critique to the formula used by the Ministry of Energy, Commerce, Industry and Tourism to estimate the reasonable level of petroleum products prices By Dr. Panayiotis Agisilaou Managing Partner Trojan Economics During the last weeks, the issue of the rigidity of petroleum products prices has dominated, yet again, the public discussion, with consumers associations and other social actors calling for an intervention by the Ministry of Energy, Trade, Industry and Tourism (ETI&T) in order to provide a solution. It is a true that the Ministry of ETI&T could intervene, although temporarily, in order to set the wholesale prices of petroleum products (not the pump prices) by issuing a relevant decree. For the sake of discussion, let s just assume that this is the only available option for the Ministry of ETI&T. In order to issue such a decree, the Ministry of ETI&T should firstly prove that the market prices are unjustifiably high and secondly determine the reasonable level of prices. This discussion brings to light the following two critical questions: 1) how can it be proved that the market prices are unjustifiably high and 2) on what basis can the reasonable level of prices be estimated. The methodology that the Ministry of ETI&T uses to approximate the reasonable level of prices for the petroleum products is based on a formula, which was essentially used by the Ministry of ETI&T during the period where the market for petroleum products in Cyprus was regulated (i.e. close to competition). In short, the aforementioned formula was devised to estimate the prices that guarantee a specific return to the invested capital of the petroleum companies (e.g. 12%) in a regulated setting. It is important to highlight that the formula is based on the cost data provided by the petroleum companies. In general, the said formula has performed smoothly when the petroleum market was closed to competition and the Ministry of EIT&T used to set the prices of the petroleum products. However, given that the market for petroleum products has been liberalized, the application of the said formula, either to justify the level of the petroleum products prices that are freely formed by the market forces or to rule the wholesale prices by a decree, is rendered problematic. There are various issues regarding the application of the said formula and the conclusions that could potentially be derived on the basis of its outcomes. The first issue concerns the source of the data that are used to «run» the formula. Given that the formula, by construction, guarantees a specific return to the invested capital of the petroleum companies, the latter have strong incentives to inflate their costs, so that the formula results in higher prices. An additional issue is that the formula returns a single price for each petroleum product, regardless of the cost differences to the petroleum companies accounts. Although it could be argued that the cost structure of the petroleum companies is symmetric, the reasoning that the said companies have the same level of costs seems to be far-fetched, if not invalid. There are at least two characteristics that make this argument convincing, namely the different size of the petroleum companies and the disparate commercial strategies they adopt in the market. The most important drawback of the formula in question is that it presumes an environment where price competition is not feasible. It is important to emphasize that the said formula was applied before May 2004, when the market for petroleum products in Cyprus was close to free competition. Hence, even though the petroleum companies may operate today at the minimum possible cost, which is doubtful, the formula of the Ministry of ETI&T actually estimates the prices that could theoretically be justified in an environment without price competition. As a consequence, the comparison of the prices that result from the said formula, which ignores the intensity and benefits of competition, with the market prices, inevitably leads to precarious inferences. To conclude, the formula of the Ministry of ETI&T cannot be used as a reliable benchmark or a credible reference point for the prices that materialize in an open and free competitive market, mainly because it is incompatible with competition. Consequently, a potential intervention of the Ministry of ETI&T based on the application of the formula would most probably exacerbate or even create additional distortions in the market rather than rectifying them. The main lesson to be drawn from the above analysis is that we should stop using formulas to estimate the reasonable level of prices in competitive settings. The market for petroleum products has been liberalized over a decade ago, yet our reasoning and arguments are based on the principles of regulation. This should change! 58 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

32 Business Cyprus Hydrocarbon Discoveries: Learning how to manage our newly discovered wealth for sustainable economic growth and social development Studies carried out for the hydrocarbon potential of the region followed by Noble s offshore discoveries in block 12 in the Cyprus EEZ, the commencement of drilling activities by ENI in block 9 and TOTAL s exploration plans indicate the prospect that lies in the Cypriot EEZ (Exhibit 1). A prospect which if handled properly can support sustained and broad-based development for years to come. By Charlie Anastasiades PwC Cyprus Energy Team The natural gas discoveries could make Cyprus, a country currently reliant exclusively on oil imports, energy self-sufficient for decades to come. The Cypriot people could benefit from low-cost and cleaner energy with natural gas emitting less greenhouse gases than oil. Major energy companies and a variety of service-providing companies which will support the industry, have already set up in Cyprus aiming to participate in the hydrocarbon activities in the Cyprus EEZ but also the wider region. Harnessing this potential however is not an easy task, as the experience of other countries around the world suggests. The resource curse, as it is known, is the paradox that countries with natural resource wealth tend to have lower levels of growth and development than non-resource rich economies. A decline in the competitiveness of other sectors, volatility of revenues due to exposure to global commodity market swings and the potential mismanagement of the resources may be considered as the main factors culpable for its occurrence. Norway has been one of the best examples of natural resource management. The country has been achieving impressive overall growth side-byside with significant oil exports since it first started producing oil in Exhibit 1: Cyprus EEZ awarded blocks Source: MECIT of the Republic of Cyprus It is widely accepted that Norwegian policymaking has been a factor of utmost significance in successfully steering the nation away from the resource curse. Norwegian policymakers and governmental officials in the early 70 s were already aware of the dangers and effects of the resource curse and suggested deliberate counteracting policies. Initially, subsidies were used to shield and support certain domestic industries. Heavy investments were made in education and know-how. Unemployment was reduced as a result of the implementation of labour market reforms. Wage control and income coordination programmes were implemented. In order to protect the country s economy an expenditure limitation policy of fiscal prudence was established through the creation of The Petroleum Fund and the so called usage rule which limits exploitation of the resources of the Petroleum fund to an annual 4%. In line with the idea upon which the fund was initially established the future well-being of all the Norwegian people the Petroleum fund was renamed into The Government Pension Fund-Global and collects the net cash flow from petroleum activities and the return on investments. In 2013, the fund s market value was $835billion; this corresponds to over $ per Norwegian citizen. Investments were made exclusively abroad. Norway has managed to separate the natural gas revenues from the rest of the economy, to maintain a varied productive capacity and a sense of fair distribution of wealth. The country managed to escape the resource curse with great success having taken a long term approach regarding its natural wealth considering its most valuable asset: its people. This has not been the case for countries such as Cameroon where natural discoveries have contributed negatively to the country s development. Despite oil discoveries in 1977 and initial hope for long term development, Cameroon experienced an almost total economic collapse. GDP contracted by 5 % on average per year (period ) and in 1993 per capita income dropped to half of what it was in Levels of poverty in 2007 were still higher than in These disastrous outcomes are generally recognised as being a product of poor management of the resources discovered. Only 46% of total oil revenues accruing to the government between 1977 and 2006 may have been transferred to the budget, whereas the remaining 54% was not properly accounted for. Failure to engage in long term planning for the country s development, predatory behaviour and widespread corruption were all contributing factors to the resource curse experienced by Cameroon. So how can Cyprus avoid the resource curse and reap the benefits of the energy sector and maximise the value of the host nation from its assets, assuming its hydrocarbon resources are one day monetised? Following the example of Norway, it appears that one of the first initiatives is for key stakeholders in an emerging hydrocarbon producing country to implement a local content development agenda. This agenda, the establishment and implementation of which should preferably be the common vision of both host government and energy companies, could contain the following: Workforce development to support the industry Training and skill development is essential to give the local labour force the technical skills needed to service the hydrocarbons industry. Learning and developing programmes provided either locally or at IOC (International Oil Company) facilities abroad should enable individuals to gain practical experience. Other stakeholders such as the NOC s (National Oil Companies) must also take initiatives. They should evaluate the capabilities of the existing local workforce and identify and moreover analyse the gap, compile staffing requirements of upcoming projects and develop a structured plan for developing skills. The proactive implementation of mentoring programmes to inform, motivate and attract young talent into the promising energy industry is of vital importance. Local content policies In order to maximise local participation in the oil and gas industry a number of policies and legislations could be adopted. These could state the personnel, equipment, materials and services that need to be compulsory sourced from within the country. These terms, some of which are included in the PSC (Production Sharing Contract), oblige IOC s to include local content in their operations. However, as mentioned above, the host nation also has a significant role to play in developing its local content to ensure it can adequately support the hydrocarbons industry. National infrastructure development Infrastructure to support the hydrocarbons industry is crucial to sustainability of local content plans and activities. As well as supporting the energy industry, investments in new infrastructure such as roads, harbours, educational institutions etc will also have long term benefits for the nation. New infrastructure will not only raise living standards but will create a stable environment for business development and productivity and attract foreign investors. Sustainability in new energy infrastructure projects is evaluated in economic, social and environmental terms. Especially the latter gains great significance as social reaction to environmental issues is an increasingly important challenge facing the industry. Public attitude towards the energy industry and energy projects, often a result of misinformation, could result in delays and may have negative long term effects. NOCs, IOCs and service companies may benefit from developing more direct communication with the public in an effort to preserve the industry s image. Building a collaborative stakeholder network A solid stakeholder network should be built between suppliers, service providers, operators and other key participants in the industry. Companies can benefit from working with other stakeholders in terms of additional resources, knowledge, skills and risk taking. In conclusion, natural resource revenues need to be carefully managed and used in a prudent manner or they could stall the country s institutional and economic development. Long term investments should be made for future generations in the context of long term and sustainable planning. This way non-renewable fossil fuel resources will be converted into renewable knowledge resources, education, research and innovation resulting in the creation of a knowledge-based society for the industry which will sustain the country s development and wealth generation for many years, even after the resources have been long gone. References: African Journal of Business Management (2012) : Local Content and struggling suppliers: A network analysis of Nigerian oil and gas industry Accenture (2012) : Developing local content programs Collier,P., and Venables, A. (2011): Plundered nations Cyprus Chamber of Commerce and industry (2011): Natural Gas Discovery: a Pandora s box for Cyprus? Thordarson, K. (2012), The wealth of a nation: How Norway escaped the oil curse IPIECA. (2012). Local content Strategy Larsen, E.R (2004) Escaping the natural resource curse and the Dutch Disease? Norway s catching up with and forging ahead of its neighbours Norges Bank. (2014) International Energy Forum. (2012) 60 61

33 Business Amendments to the trust regulation regime consolidate Cyprus s attractiveness as an international business centre and trust jurisdiction By Elias Neocleous* and Philippos Aristotelous* The Law Regulating Companies Providing Administrative Services and Related Matters of 2012 (the ASP Law ) transposed the provisions of Directive 2005/60/EC into national law and provided Cyprus with an effective regulatory framework for providers of fiduciary and corporate services. In response to practical issues that emerged once the law took effect and following discussions between the Ministry of Finance, the troika of providers of international financial support to Cyprus, and the competent authorities (the Cyprus Securities and Exchange Commission ( CySEC ), the Cyprus Bar Association ( CBA ) and the Institute of Certified Public Accountants of Cyprus ( ICPAC ), in July 2014 a number of amendments were made to the ASP Law in order to resolve these issues and to implement the commitments made by the government to the troika as a condition of international financial support. The principal amendments are as follows: Cyprus companies offering administrative services only to fellow members of a group of companies of which they are a member and private trust companies controlled by the beneficiaries of the trust or their close relatives (spouses or relatives up to the fourth degree of kinship) are excluded from the scope of the ASP Law provided that they have a representative in Cyprus who is accessible and accountable for antimoney laundering purposes. Such companies are prohibited from advertising their services or soliciting clients for such services. The secretary of the company must be a natural person or a company that is regulated under the ASP Law. The role of protector of a trust is excluded from the scope of the ASP Law on the grounds that the protector is a person who the settlor appoints to exercise oversight in a personal capacity and that since the trustee is regulated there is no real need for the protector to be regulated. An ambiguity in the ASP Law which could be interpreted as requiring officers acting as signatories of bank accounts of certain companies to be authorised under the ASP Law has been removed. This change was deemed necessary so as to ensure that all persons who can legally be appointed as directors may continue to be signatories of company bank accounts. Overseas providers of custodian services that are appropriately regulated in a home jurisdiction that has a co-operation agreement with Cyprus for regulatory purposes are excluded from the scope of the ASP Law. Occupational retirement benefit funds which are under the supervision of the Registrar of Occupational Retirement Benefit Funds regulated by the Establishment, Activities and Supervision of Occupational Retirement Benefit Funds Law of 2012 are excluded from the scope of the ASP Law. Companies falling within the scope of the ASP Law may employ a lawyer who does not hold a licence to practise law as an advocate in Cyprus in the role of in-house legal advisor. In such a case, the legal advisor should be employed inhouse, whereas in the case of a licensed advocate, the lawyer should be retained. CySEC is required to provide a registration number to all service providers it authorises and to maintain a register of authorised service providers containing the following information: o full details of the service provider; o a description of the services offered; o the names of any wholly-owned subsidiaries offering administrative services; o the name and work address of its employees that offer administrative services; and o the name and contact details of the compliance officer. The CBA and the ICPAC are required to maintain registers containing the same information in respect of any of their members that provide regulated services. These amendments will further enhance Cyprus s reputation as a leading trust jurisdiction with a robust and transparent legal infrastructure that entrenches jurisdictional and asset protection for trusts whilst fully complying with all applicable EU and domestic anti-money laundering laws and regulations. Turnaround and Transformation Services for Family Businesses KPMG supports family businesses in their strive to survive and grow, with the Turnaround and Transformation Services. Through our diagnostic assessment we identify problems that family businesses are facing, develop solutions and help family businesses, utilising expertise in: Preparation of plans for management / ownership succession, including tax implications Establishment of procedures to resolve business related disputes between family members Protection of assets and preservation of accumulated wealth for the coming generations Development of new business activities and products Development of personnel management, remuneration and evaluation systems Restructuring of financial facilities and cash management processes Development of actions for better management / reduction of operational costs Automation of data analysis for monitoring business performance indicators based on best practices Automation of organisational processes for improved operation, control and performance. For further information please contact: Demetris S. Vakis Board Member Head of Family Business Practice T: , E: dvakis@kpmg.com Christos. V. Vasiliou Board Member Head of Advisory Services T: , E: cvasiliou@kpmg.com KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. *Elias Neocleous heads the corporate and commercial department of Andreas Neocleous & Co LLC. Elias graduated in law from Oxford University in 1991 and is a barrister of the Inner Temple. He was admitted to the Cyprus Bar in His main areas of practice are cross-border mergers and acquisitions, banking and finance, trusts and estate planning and tax. *Philippos Aristotelous is a partner in the corporate and commercial department of Andreas Neocleous & Co LLC. He graduated in law from the University of Kent in 2003 and is a barrister of the Inner Temple. He was admitted to the Cyprus Bar in His main areas of practice are corporate and commercial law, trusts and estate planning and tax. 62 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

34 Business The AIFMD and what it means to you By Marina Joannou (Risk Management) and Kevin Mudd (CEO) KMG Capital Markets Part B (continuation of Past A in issue number 117) Step 3 FULL AIFMD REGIME APPLICABLE (You must have done one of the following by 22 July 2014): OPTION 1 Become an Authorised self-managed AIFM or Authorised External AIFM with the competent authority of your home Member State. This means that you must comply with the entire AIFMD, the supplementing Commission Delegated Regulation 231/2013, the various ESMA guidelines and many more to follow. (Note a self-managed AIF can only manage ONE AIF itself) There are extensive responsibilities laid upon AIFMs which fall under the full AIFMD regime. The AIFMD and supplementing regulations specify the requirements of an AIFM ALL of which need to be enacted by the AIFM. OR OPTION 2 Outsource. Appoint an authorised External AIFM to provide a turnkey solution. (At this point in time Option 2 is probably the only way to meet the deadline if you have not started the AIFMD compliance processes.) 7. How to proceed 1. The first step will be to establish your position via a call / with an external AIFM. 2. They will undertake full due diligence to assess your needs based on the AIFMD requirements. They need to ensure that all the AIFMD requirements are in place and where there are deficiencies, remedy them and implement ongoing processes and procedures for you to become AIFMD compliant. 3. A full operational memorandum will be drawn up clarifying information flows and responsibilities. 4. You appoint the AIFM who would then delegate back to you either: -the risk or -the investment (portfolio) management and your fund is then deemed compliant. 8. Who will regulate your fund? Your existing regulator will continue to regulate your fund, approve its Directors and ensure compliance with the fund laws of the jurisdiction of fund registration - The external AIFM is responsible for overriding EU regulation plus reporting/answering: 1) to your funds regulator for any matters on which it is responsible in its capacity as AIFM and 2) to its own regulator in its capacity as an authorised AIFM. 9. How long will it take for you to become compliant? As soon as you appoint an authorised external AIFM, your fund is compliant. It is the external AIFM s responsibility to ensure that all relevant aspects of your fund are AIFMD compliant before it accepts the appointment as AIFM. How long will depend on the amount of work required to get your fund compliant. It could take anything from a few weeks to a few months. 10. What might be involved? Fund managers must be familiar with the full spectrum of AIFMD and how it will impact their business. This includes everything from depository requirements to remuneration rules, to leverage calculations and fund services delegation arrangements. The extensive scope of this analysis may require the engagement of specialist consulting expertise to assist in analysing the business impact of AIFMD. Your AIFM can do this. The analysis will involve assessing your fund against the AIFMD requirements as mentioned in Step How will my operations be affected? Potentially quite extensively, depending upon your current practices and how you choose to comply. The appointment of an external AIFM should make the transformation less painful and more cost effective, as the regulatory burden is undertaken by a third party. This allows you to concentrate on investment management and client acquisition. However, whichever way you proceed your working practices may have to change and your processes and decisions will be subject to greater scrutiny, not only by your regulator but also by your service providers and auditors fulfilling their obligations under the directive. 12. What are the costs with becoming AIFMD compliant? This depends on the gap between your current arrangements and where you need to be. The key cost drivers are: AIFMD reporting requirements. Data administrators will have had to made system changes to extract data in the prescribed format. Most administrators are now offering AIFMD reporting as a service they will charge a set-up cost and a regular fee depending on the reporting frequency and fund type. Cost structures vary between administrators. Third party providers are also offering solutions but this will be impossible without involving the administrator(s), as almost all the data required is contained within the administrator(s) systems. If you use multiple administrators, you will have to consider how you will consolidate the reports into one integrated reporting batch for the regulator. introduction/ revision of Compliance, Internal Audit and Risk Management functions. The costs associated with these are really difficult to quantify and will vary with jurisdictions as well (varying cost of skills in various jurisdictions). You will require full-time employees in your risk management department, as it must generally be a permanent in-house department and you may either hire employees to fulfil (or outsource) the Compliance and Internal Audit functions. FATCA and EMIR. Don t forget that your Compliance department will also have to ensure compliance with EMIR and FATCA not directly related to AIFMD but affects AIFs nonetheless. FATCA Responsible Officers have a big responsibility and must answer to the US Internal Revenue Services. Even if you outsource the FATCA Compliance function there is a cost involved. EMIR reporting requires data to be reported and reconciled using specialised systems. Funds trading in derivatives need to comply with EMIR and need an LEI number per fund. Companies obtaining the number for you will charge a service fee. And don t forget the cost of the systems! This can cost around 20,000 per annum for 3 users. And you must have staff learn how to use the software; and they must make time to load and reconcile the data. Capital. An external AIFM needs 125,000 and a self-managed AIF needs 300,000. (Excludes the additional own funds and insurance requirements.) Due diligence, Electronic data processing, Investment in Securitisation positions, Conflicts of Interest management, Valuation requirements, policies and procedures. Require time and money. Depending on how advanced your processes, procedures and IT systems are you may need to invest time and money to get these compliant with the AIFMD. Let s say all of the above can easily rise to 500,000. For a fund which is 100,000,000 that is 0.5% - and we haven t even covered everything! Depositaries may review their fees to incorporate their responsibilities as specified in the AIFMD and the Portfolio Managers will have to be regulated entities if they are delegates Various reports have highlighted that if your fund is less than 500,000,000, it may well not be worth the time and effort to transform and to instead appoint an external AIFM. 13. Can I have more than one AIFM? No. There can be only one responsible AIFM per AIF. The identification of this AIFM may not be so straight forward for the complex structure of many asset management groups. Nevertheless this must be done as numerous regulatory requirements stem from this. The AIFMD provides a criterion for establishing the AIFM. It is, however, possible to have an AIFM and various investment managers delegated to manage different sub funds or compartments. 14. Will I have to do anything? Yes. The AIFMD will impact on your operations; an external AIFM will considerably lighten the workload and costs. However, whichever way you proceed the weight of this new legislation will be onerous. The upsides: the new brand created by the AIFMD will soon be sought after in the same way as the UCITS brand; and increased investor confidence. And don t forget that all important EU Passport 64 65

35 Business Transparency in Corporate Reporting Iphigenia Pavlou* According to the latest TRAC Report 2014 (Transparency in Corporate Reporting) of Transparency International, the world s biggest companies disclose little or no financial details about their operations outside their home country while ninety of the 124 companies assessed do not disclose the taxes they pay in foreign countries and 54 disclose no information on their revenues in other countries. The report discusses the findings of 124 companies, from the Forbes list of the world s biggest publicly-traded companies. The companies, whose combined market value is more than US$14 trillion, are ranked based on their reporting of the measures they take to prevent corruption, information about subsidiaries and holdings, and key financial information about overseas operations. According to these criteria, UK companies are the best performers, Chinese companies the worst. The report shows that the world s biggest oil, gas and mining companies are not ready for the kind of transparency rules that will enter into force across the EU from July These regulations require extractive companies to report payments such as taxes to governments on a country-bycountry and project-by-project basis. Of the 24 extractive companies in the report who would fall under the new EU and US rules, 19 disclose tax payments and revenue in less than half the countries where they operate. Only BHP Billiton, Statoil and Indian firms ONGC and Reliance disclose tax payments in almost all the foreign countries where they operate. As mentioned before the UK companies in the report performed strongly in reporting on anti-corruption. They all publicly commit to compliance with anti-corruption laws and have whistleblowing measures as well as either codes of conduct or anti-corruption policies applying to all employees. This performance could the result of a strong new law prohibiting bribery has been in force since 2011, in response to which many large UK companies have tightened their procedures. At the bottom of the ranking, 11 companies scored two out of ten or less, largely because they fail to disclose whether they have the corruption prevention measures common to higher ranking companies. Companies from China were seen as most likely to pay bribes in international business deals by 3000 CEOs surveyed by Transparency International in Transparency International reiterated its call on China the world s biggest trading nation - to join the OECD anti-bribery convention which sets standards for government investigation and prosecution of companies that bribe foreign governments. Forty-four of the firms in the report are American, of which Amazon, Berkshire Hathaway and Google performed worst. Only two US companies publish tax payments in foreign countries (ConocoPhilips in Canada, Walmart in Chile). Surprisingly, the sector that makes greater transparency possible is one of the least transparent. US tech giants Amazon, Apple, Google and IBM all score less than three out of ten. Amazon, Apple and Google are among seven US companies whose company leadership doesn t publicly demonstrate support for anti-corruption on their web site. Neither Amazon nor Apple say whether they have anti-corruption training for staff. Amazon is the only US company that is silent on its policy on gifts, hospitality and expenses, as well as on the channels it provides for whistleblowers. However, all 44 US companies enable staff to report corruption. The full report can be found at: transparencycyprus.org/el/wordpress/wp-content/uploads/2014/11/trac.pdf Cyprus Business Integrity Forum Transparency International- Cyprus launched the National Business Integrity Forum, based on the principles of Transparency International. The program promotes the alignment of the Cypriot business with the principles of integrity and anti-corruption policies. The participation of businesses, as members in the Business Integrity Forum, will highlight their practical commitment to transparency in all their activities. In the website of the National Business Integrity Forum, one can find all the relevant information relating to the program along with all the procedures of becoming a member. *Iphigenia Pavlou, B.A, M.Sc, Coordinator of Cyprus Business Integrity Forum Transparency International Cyprus 66 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

36 Business Retiring in peace? By Antonis Loizou F.R.I.C.S. Antonis Loizou & Associates Ltd Real Estate Valuers & Estate Agents Many of us reaching the retiring age never thought of actual retiring after the age of 63, since at this age the body may not be up to it 100%, but the wisdom/knowledge for any business is wealthier. In more advanced economies professional business which grow take in partners and upon retirement at the upper scale there is a scaled upgrading for those at the lower scale and more importantly young and capable newcomers have a goal to become at some point of time the managing partner or just a partner of the business. So far those professional firms who have managed to set up some sort of a proper partnership are the auditing firms (mainly due to the strict discipline that they grow up with, especially if they form part of the big 4 auditing firms). There are various schemes which include newcomers buying their way to partnership, having to compensate the retiring ones based on an asset value/or non payment with a reduced compensation at the end. In this way people who get retired, get some sort of a bonus, plus say for 3 years to follow an x share of the profits. Being quite young the Going towards retirement dear friends and planning ahead is not as easy as one might think. retirees can carry out work not in the same profession as such, but as consultants, directors of various local and offshore Cos etc. So far retirement looks good. Alas, this is Cyprus. Every young person who wants to enter into any profession has inspirations to have his own office. Not only due to his own attitude, but more to that of his immediate family, especially if the latter can support him financially at the beginning. So at the end we have numerous young professionals in a hurry to get their not being up to it. We note in our own profession all sorts of approaches in terms of valuations etc. Experience dear readers matters as much as qualifications, but there are differing views how people see it. In order to succeed the young generation in order to get work with limited overheads, undercut fees, which in one way is good for the consumers, but on the other you get what you pay for. So the younger professionals are bringing down the quality of the more established ones. End result is most likely the lowering of standards. So far various attempts have been made for other professions such as architects/engineers to become partnerships, but they were short lived. Legal firms seem to have better chances. You will see the above situation, repeating itself even for family business, where the old man retires, but the children who follow, cannot agree, thus splitting up the company/business into parts damaging at the end themselves. In a recent divorce case regarding property sharing to which we were witness on behalf of one of the parties, the historic analysis was shocking from the mother and the wife pushing and pushing for one child to split up and go his own way In our opinion with no evident reason in this case. One of the reasons of the split was that one of the shareholder daughters (who could not speak even English) was hired at a lower salary than the British educated one with experience etc. This poisoning attitude kills the future growth of business in Cyprus. Cyprus retirement provision is not bad in the sense that if one declares his maximum income and makes the analogous social security contributions, it can reach anything between p.m. The rest, being clever, underdeclare their income end up with ± 500 p.m., an amount not enough to live one. One must bear in mind that in this sense as one plans ahead in Cyprus in order to provide a dowry/studies for his children, surely retirement planning is as important. Planning ahead is not a secured job and it is not as simple as some people might think. Ignoring the prevailing situation in Cyprus we suggest that one s specific income towards retirement should be split up in real estate (at least to have at the end even an apartment), cash (major importance) and to a lesser extent shares (local/ foreign). You do appreciate of course that having said that, real estate is, now, down, cash have been haircut, whereas most shares have either zero value or are discounted by 90%!! Let s buy an apartment in London is the usual alternative offered. This is a sound advice provided the investment is a long term one. At this point of time prices in London are at their peak and they are expected to show a downward trend. Real estate taxes, non payment of rents, might get you to trouble but on the other hand, we repeat, there is at least one place to live, at the matured age. It is an asset and real estate is a circle. Hopefully the good old days will return to an extent, after 5-8 years. You will have the benefit however not seeing every month the landlord s face, demand for rental increases and never ending demands for repairs/maintenance etc. The X car salesman told us the other day that clients spend their money in cars, which you can sell them, there is no haircut, etc etc. What people do to promote the sales is beyond us. Having said that, it is correct to say that locals keep some cash at home, or in bank and private Cos safe boxes and this is worrying since cash is taken out of the much needed Planning ahead is not a secured job and it is not as simple as some people might think. cash market/economy. A few years ago Limassol Co-Op had a t.v. add showing a chap digging up his garden and placing his savings there (prior to the prevailing disaster). At the time we thought that this was a bad add. Yet, be it by chance, the add came true you do read reports from time to time of people keeping money at home, the grandma who placed her money in the oven (forgot about it and cooked later on), the chap who placed his cash in the couch pillows (disappeared) and the man who placed his cash in the hunting boots (duly stolen), as well as the couple who kept its valuables in the car boot (the car was stolen). So, going towards retirement dear friends and planning ahead is not as easy as one might think. Foreign banks do not offer interest on deposits (as opposed to local 3% p.a.), whereas opening an account abroad is hell. The local Russian Commercial Bank, Barclays Wealth etc are inundated with deposit requests, whereas a Swedish Bank who obtained recently a bank license, had so many enquiries about deposits that the bank itself was surprised. So, retirement dear friends and looking at our own Office, we had an offer by a Maltese agency to buy us out (8 years ago) provided we moved our key staff to Malta. At the time we said no, since who wanted to leave Cyprus paradise? Little we knew that after a few years it would become hell!! 68 69

37 Business The different types of decisions of managers By Demetris Ergatoudes* One of the main challenges that managers face every day are the decisions they have to make. Some of these decisions are fundamental in nature, whereas others are more routine, everyday decisions. The former are said to be strategic decisions, whereas the latter are known as tactical and operational decisions. Strategic decisions concern the objectives and overall plans of the organization, such as those relating to major capital investment, sources of finance, new products and markets and the future development of the organization. These decisions are made by senior management and directors. Strategic decisions affect the longterm future development of a business. Tactical decisions are medium-term decisions concerning the use of resources to achieve the organization s goals. Examples include those to do with minor capital investment and changes to marketing activities. Operational decisions are short-term in nature and are taken by departmental managers. Examples include those relating to ordering stock, detailed planning of production schedules and the control of credit. Some of these decisions are routine, whereas others are unique. As we move up the hierarchy of decisions, the greater the probability that the decisions will be unique. These unique (one-off) decisions are said to be unprogrammed. They require a combination of problem-solving techniques, judgement, intuition and creativity. The programmed decisions made lower down the organization are routine, repetitive and are handled in the context of an established framework. This will take the form of a policy and a set of rules and procedures. A policy is a framework (stated in general language) for organizational activity. It is a definition of what people in the organization may or may not do. A rule is more specific than a policy. In a sense, it is a detailed interpretation of the policy. A procedure is a statement of the standard method by which the work is to be performed. The decision- making process There are certain steps involved in the decisionmaking process. These are: Identify objectives The starting point for decision making is to identify objectives. Rational decisions are not possible unless there is a clear idea of what the decision makers want to achieve. Define the problem or issue Before making a rational decision, it is necessary to define the issue to be decided on or problem to be solved. This means separating the symptoms of the problem from the cause. Collect data Techniques of investigation and data collection are used to gather both quantitative (numerical) and qualitative (non-numerical) data, on factors such as: - growth in the market - consumer tastes - the cost of an investment project - manpower available - labour turnover Analyse data and identify constraints The data will form the raw material of the decision-making process. It is particularly important to investigate cause and effect and to identify the constraints on decision making. Constraints are factors that limit the choice of action and/or prevent the organization from achieving its goals. Internal constraints include limitations on access to resources of finance, manpower, materials and machinery. There are also constraints of a qualitative nature, such as limitations in the ability or vision of management. Hence a decision to expand may be constrained by financial and As we move up the hierarchy of decisions, the greater the probability that the decisions will be unique. real resources at the disposal of the organization, as well as possible resistance from employees, which will reduce the room for manoeuvre. Identify alternative courses of action Once the data has been analysed, it is necessary to identify alternative courses of action. This requires some creativity to complement the rational, scientific approach of the other stages in the decision-making process. Evaluation Invariably making decisions involves choosing from a number of courses of action. Should the firm choose machine tools from one firm or more expensive, but superior, tools from another firm? Should a company manufacturing electrical goods buy in components or establish production facilities itself? Should the firm increase output by taking on more workers or by employing existing workers on overtime? The decision maker has to consider the costs and benefits of each alternative. Selection The final decisions will be made on the basis of the following criteria: - financial cost and benefit - the human cost - the opportunity cost Implementation Once the choice has been made, the decision has to be implemented. This will require planning in order to ensure that resources are available to put the plan in operation. Monitoring and evaluation There must also be a control mechanism to ensure that the planned activity is guided towards its goal. Deviations from the standard set should be reported so that adjustments can be made. Then the final stage in the process is to review progress to see if the objective has been reached. If it has not, the results of the monitoring process should highlight the reasons for any failure and these should be analysed. The evaluation process thus provides data for the next cycle of decision making. *Demetris Ergatoudes is a retired (2006) Senior Manager of Popular Bank and fellow to the Chartered Institute of Bankers, London

38 Business Reading People Like A Book: mastering the art of understanding people By Demetris Stylianides, DipLC, CTM,CL,FAIA, FCCA, CPA, International NLP Trainer Reading people like a book... we all attempt it at some point. Living in a society inhabited by human beings pretty much demands it, don t you think? So we spend a good part of our everyday life second guessing people, mind-reading motives and intentions. We look for temperament patterns in them. We read books on reading people, we attend relationship seminars. We do all kinds of things trying to figure out people. Yet what good does it do us? How effectively have we developed in really understanding the strange and weird world that people live in, and out of which they come? Have you even have yourself figured out? Why is this important in the business world? Daily we interact with hundreds of people. Some of them will become our associates, others will become our clients. Some will become our employees. Being able to read people will enable you to screen out potential problems and avoid having to spend time or money on them. By focusing our attention on how people actually function in terms of their thinking, speaking and behaving you can discover not only what they are, but how they actually work in any given context or situation. The value of this focus? Recognizing how a person works enables us to figure out their model of the world (their mental paradigm) that describes their internal reality. This increases understanding and enlightens us about where the person comes from. An interesting presupposition of Neuro-Linguistic Programming states The map is not the territory. This means that each person has different experiences and therefore give their own meaning to events that happen daily. The same event may evoke a different response in each individual. For example, if you drive in a car believing that all drivers are good, then you will tend to see this being verified continuously. If, however, at the car s passenger seat, you have a person who believes exactly the opposite, i.e. that all drivers are bad, then he will tend to focus on all drivers that fail to signal or miss the red light. Whatever the person believes, it becomes a self-fulfilling prophecy. Being able to read people also increases our sense of empowerment. Why? Because in knowing how our brain works, or how someone else s brain works, enables us to evaluate and match that profile. How can you read people? There is a special type of software we carry in our brain and is called Meta-Programmes. Consider these as filters in our brain. When information is coming through our senses, it gets filtered and affects our behaviour. Each person has their own set of filters that have been created during childhood (up to the age of 7). Later on in adulthood, these filters are triggered and tend to run our behaviour. Recognizing these meta-programmes in people s heads which control and run their specific frame of mind, enables us to know how to more effectively communicate and relate to them, it empowers us to stop getting angry at their frame of mind as it equips us to effectively work with it. Meta-programmes are a special set of questions that enables you to read people in all areas of life. This article will just give an example of how metaprogrammes enable us understand people. These special set of questions are part of an Advanced Certification Training. Example: For instance, consider a person s strategy (or program) for reading. We begin with the stimulus of words in the form of a visual external. The little brown and white cat fought furiously with the dog We then take those scribbles of ink on paper and use them to make sense of what we have just read. Using associations from past references and constructed representations we make sense. The Meta-Program of chunk size governs whether our mind goes to trying to understand the big picture in a global way or whether our mind goes first to receiving and inputting all of the specific details. Do you really need to know the colour of the cat? or maybe you just want to know what has just happened? Recently I couldn t find the salt in my aunt s kitchen cabinet. As I looked, my aunt came over and picked it right out since it sat right there in front of my nose. You are blind! she said. No, I just see things globally. That s why I can t see the trees from the forest. You, on the other hand, can see each and every tree as you so choose but will tend not to see the forest! For years, I thought I was a poor speller because I would consistently and regularly misspell words in articles, handouts, books, etc. I just didn t understand how I could read quickly so many books comprehensively and spell poorly. How could I see and recognize words and not see them? When I later discovered that I operate at the global processing level the mystery became clear. I simply don t sort for the details of spelling, I sort for the larger level meanings. How can you elicit this metaprogramme? Obviously, you don t find out with experience but you use a question. The question simply is: If we were going to do a project together, would you like to know the big picture first or the details first? Once you get an answer, then ask the opposite. For example if the person answers The big picture first, then ask Would you like to know the details then?. We categorise people into four groups as follows: a. Global b. Specific c. Global to specific d. Specific to global There are people who just need the big picture (global). They can figure out the details themselves. Some people are specific, that is they just need to know details and they don t want the big picture as they can figure it out themselves. Some people are global to specific. They need the big picture and then the details. Finally some people are specific to global, that is they need to know details and then the big picture. Practical example of the use of the above meta-programme I will provide an example of the above meta-programme in a personal scenario but it works exactly the same in the business environment for, let s say a project. I have a Global meta-programme so I am more interested in the big picture. This affects my communication with people. Whenever I watch a film in the cinema, I mention the fact in my social circle. Those people who match my meta-programme, accept my comment with no further questioning. People with a Global to specific or Specific meta-programme need much more than the title of the movie. They need to know the actors, the scenario and a whole lot more information. I would rather have them go and buy the DVD instead because as a Global person, I find it a waste of time to go through such detail. Now imagine me being a manager in a company and I am announcing a new project to my team. If I just gave them a title, I would have created a lot of confused people going around and trying to find out more before they start work on the project. If, however, I knew the profile of my team members, I would arrange a meeting to announce the project and then let the Global people leave the room as they don t need anything else to get them started. Then, I will stay a bit longer with the rest of the team to give them the details (the specifics) they need so as they can leave the room knowing exactly what they need to do. Profiling people As part of my work, I am called in by companies to conduct a meta-profile analysis for their personnel. This helps management identify possible areas that need change. Some employees need to change either duties or work environment to enable them perform even better. Meta-Profiling takes about 15 minutes or less (per employee) and the results are pretty accurate. It is done by asking certain questions and it cannot be done via a questionnaire as there are other areas that need to be calibrated on the individual. Meta-profiling can help businesses identify: Potential future managers Team players Who is suitable for sales or for the reception area People who like repetitive tasks and people who like change How organized each person is People who work more effectively in an open plan office... and a lot more. That was just one of the meta-programmes. Once you get to know your own meta-programmes you can understand more about yourself and the way your brain is wired. This can enable you to make changes in your life, your business and the people you communicate with

39 Business Intermarket Analysis A guide to investing By Antypas Asfour, CFA * Portfolio Management Officer at FxPro Financial Services Limited / Performance Management, Business Ethics and Strategy Lecturer at the Cyprus Institute of Marketing At a time when US stock market indices are marking new highs and central bank actions are at the forefront, it pays dividends to analyse the market and economic cycles to plan for investments, both in securities and in capital expenditure. Intermarket analysis is the study that facilitates this through the investigation of the relationships between different asset classes, such as fixed income, equities, commodities, and currencies. Below we see the idealized business cycle in an inflationary environment. Stage 1 shows the economy contracting and bonds moving upwards as interest rates decline on loosened monetary policy. Stage 2 is the bottom in the economy and the stock market. Although economic conditions have stopped from getting worse, the economy is still stagnant. However, investors anticipating an expansion lead the stocks to bottom before the contraction period ends. Stage 3 shows significantly improved economic conditions as the business cycle prepares to move Idealised Business Cycle into expansionary territory. Stocks have been rising and commodities now start doing well as prices rise. Stage 4 marks a period of full expansion. Both stocks and commodities prices are on the rise, but bonds turn lower because the expansion increases inflationary pressures, which prompts interest rate hikes. Stage 5 marks a peak in the economic and the market cycles. Even though the expansion continues, the economy grows at a slower pace because rising interest rates and rising commodity prices impact inflation and consequently consumption. Stocks anticipate a contraction phase by peaking before the end of the economic expansion. Commodities remain strong and peak after stocks being held as a hedge against inflation. Stage 6 shows a deterioration in the economy as the business cycle prepares to move from an expansion phase to a contraction phase. Stocks have already been trending lower and commodities now start turning bearish in anticipation of decreased demand from the slowing economy. measures to re-inflate the economy, a divergence in monetary policies is apparent. This divergence in monetary policies indicates that the two greatest markets will be in different stages of their cycles making it worthwhile to assess when different sectors perform better. Before we begin reviewing the next chart, it is important to note that the stock market cycle leads the business cycle, crossing the contraction/expansion centreline threshold before the economic cycle does. Similarly, it contracts prior to the economic cycle. Cyclicals, or the consumer discretionary sector, are the first to turn up in anticipation of a bottom in the economy. Technology stocks then follow. These two groups are the big leaders at the beginning of a bull run in the stock market. The top of the market cycle is marked by relative strength in materials and energy. These sectors benefit from rising commodity prices and demand as the economy expands. The turning point for the market comes when consumer staples outperform the energy sector indicating that commodity prices are starting to hurt the economy. The market peak and downturn are followed by a shrinking of the economy, with central banks lowering interest rates and the yield curve steepening, i.e. the frontend rates move significantly lower relative to backend. Falling interest rates benefit utilities, which are highly leveraged, and banks who can conduct more business as the steepening yield curve also improves profitability at banks and encourages lending. Low interest rates and easily available money eventually lead to a market bottom and the cycle repeats itself. Sector Rotation Analysis Adapted from John Murphy s Trading with Intermarket Analysis (2013) Those wondering where we are now in the cycles should note that Cyprus is impacted not only by the ECB but also by domestic fiscal policies and the aftermath of the banking crisis. The below table may help as a guide to identify that we are likely somewhere between the recession and early recovery stages, with the road to recovery necessitating greater confidence in the banking sector above all else. On account of this specific risk, investors should ideally get out of their comfort zone and diversify, investing into other markets as well and this also means beyond Greece, which may experience significant uncertainty and risk with the prospect of snap elections looming. In the words of renowned investor Robert Arnott, in investing, what is comfortable is rarely profitable and one could not agree more. Based on the Pring-Turner business cycle Cycle Stage Identification In a deflationary environment, which we have been in since the 1997 Asian Financial Crisis, bond and stock prices tend to move in opposite directions. Whereas disinflation (falling inflation) is good for both fixed income and equity investments, deflation and the fear thereof, as is the case in the Eurozone, is bad for equities and commodities. This deflationary environment, which simply means that deflationary forces are stronger than inflationary ones, causes funds to move to fixed income investments and interest rate sensitive sectors such as Utilities. Asset buying programmes, dubbed Quantitative Easing (QE), by major Central Banks such as the US Federal Reserve (Fed), the Bank of England and the Bank of Japan have boosted many developed stock exchanges in recent years but improvements in the underlying economies will be needed for further advances in stock prices once the loose monetary policies are put to an end. With the US economy well on track to full recovery, as economists are anticipating the first post- QE Fed rate hike in H1 of 2015, but with the Eurozone ailing, as the European Central Bank (ECB) contemplates the use of extraordinary Based on Martin Pring s Technical Analysis Explained (2002) 74 75

40 Business Re-thinking approaches to business behaviour By Jo Iwasaki, ICAEW s Head of Corporate Governance As Cyprus emerges from the financial and economic shocks of the past few years, there has been renewed interest in corporate governance. Although legislative and regulatory changes have a key role to play, it is also vital for Cypriot businesses to support investor confidence, and this is one way in which they can pro-actively drive improvements. This comes at a time when corporate governance is undergoing evolution in wider markets. Over the past couple of decades, we have seen huge changes in the way capital markets are organised and how companies operate and interact. At the same time, the public has taken greater interest in what companies do beyond business. This has become more obvious in the wake of the global financial crisis, when public funds were spent to bail out financial services institutions on the brink. The scrutiny of executive remuneration and tax, for example, now comes from the public as echoed by the media and policy makers. Corporate governance is no longer an issue that are discussed in the boardroom and at AGMs with shareholders. The journey so far Major corporate failures often lead to the development of codes or regulations to prevent them happening again. That was the origin of the UK Corporate Governance Code, issued in 1992 as a response to high-profile business failures. The Code also introduced the comply or explain approach which requires listed companies to comply with the provisions in the Code or explain to investors why they haven t. This approach has since been adopted in many countries around the world, including Cyprus. Since then the Code has been through many reviews and updates, but its focus remains on boards, their structure and their processes as well as boards interaction with shareholders - the companies prime stakeholders. A challenge to such Codes today is that the debate on corporate governance is broadening. Notwithstanding their significance, there are other groups of people than boards and shareholders that have an impact on company culture and behaviour. A code for all? In a recent paper, ICAEW proposes that there should be a set of high-level, fundamental principles that would promote a good culture of corporate governance across society as well as within individual companies. We call such a set of principles a framework code. The principles in the framework code should set out what is expected from businesses today, and be consistently replicated in all governance related codes rather than to be regarded as another layer of regulation. We have in recent years seen a number of initiatives to develop principles and codes for different groups, not just for boards. For example, the UK Stewardship Code for asset managers was first released in Similar initiatives exist for audit firms, private equity investors, remuneration consultants and executive search firms. There are even principles for sovereign wealth funds. The growing importance of intermediaries in capital markets means that this trend of code development is likely to continue. Typically, the development of codes comes as a result of external pressure on the back of perceived failings, which is why it may become very relevant for Cyprus. While group specific codes may be effective at steering groups behaviour they may not always ensure different groups are all working towards the same goal which benefits all: creating confidence in business. Changing the public s confidence and trust in companies has to be a collective effort it cannot be done by individual companies, or industries, alone. We therefore believe the time is ripe to take a look at what we want the purpose of business to be and why restoration of public confidence is not necessarily happening. Having a wider debate can in itself help clarify what is expected of businesses today and help develop shared beliefs about what good governance means. We also need to consider whether we have necessary infrastructure to promote, guide, and enforce desired behaviours. There will still be a plenty of room for group-specific codes, and a framework code should help promote consistency, encouraging a shared sense of accountability. Having a wider debate would also enable peer pressure to be more effective, highlighting the fact that there is shared responsibility for governance. This is just a start Codes are typically more effective than prescriptive rules in dealing with behaviour so this approach has the potential to change business behaviour without creating new legislation. A framework code approach would also allow economies to maintain key benefits of a code-based regime, such as innovation and long-term learning. The ambition to establish a framework code may raise eyebrows, prompt questions and encounter challenges. However, our intention is to start a wide-reaching debate about the way we want to promote good businesses behaviour and the systems in place to hold companies to account. And that surely should be a good start. 76 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

41 Auditing & Accounting IFRIC 21 Levies By Tasos N Nolas Partner Assurance PwC Cyprus IFRIC 21, Levies, sets out guidance for recognising an obligation to pay a levy that is not income tax. The interpretation could result in recognition of a liability later than previously, particularly in connection with levies that are triggered by circumstances on a specific date. The IFRS Interpretation Committee (IC) published IFRIC 21 Levies in May The interpretation is effective for annual periods starting on or after 1 January 2014 (17 June 2014 for EU entities). The IC issued IFRIC 21 to address diversity in practice in the recognition of the liability to pay a levy. The interpretation focuses on the accounting when a levy is measured based on information relating to a period before the obligation to pay arises, or when the levy is only payable if a certain threshold is met (for example, revenue in excess of a specific amount). IFRIC 21 does not address whether the liability to pay a levy gives rise to an asset or an expense. Entities will need to apply other standards to determine the accounting for the expense. A provision should be recognised when: - an entity has a present obligation (legal or constructive) as a result of a past event; - it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and - a reliable estimate can be made of the amount of the obligation. IFRIC 21 did not change these criteria, but it did clarify that the obligating event for a levy is the event that gives rise to an obligation to pay. IFRIC 21 also clarifies the obligating event if a minimum threshold applies. The interpretation might therefore give rise to earlier or later recognition of a liability than previously, particularly in connection with levies that are triggered by circumstances on a specific date. The interpretation excludes: income taxes in the scope of IAS 12, Income taxes, fines or penalties for breaches of the legislation, and payments in exchange for an asset or service. Application of IFRIC 21 to liabilities arising from emission trading schemes is optional. This is because the IASB has a comprehensive project on this topic on its research agenda, which is expected to address the accounting for these liabilities. The scope includes any charges imposed by the government that are not in the scope of another standard. The following transactions are likely to be in the scope of IFRIC; levies on receipts; nonrefundable import duties; capital taxes; oil-pollution tax; property taxes; bank levies; production taxes; other taxes based on assets, liabilities; non-deductible VAT or physical measures One of the difficulties in considering what items are within the scope of the interpretation is that levies are often given different names, such as tax, rents, royalties, contributions and fees. Example 1: Cyprus property taxes Entities pay property taxes when they own immovable property in Cyprus. Are such taxes in the scope of IAS 37 and IFRIC 21? Analysis: Cyprus property taxes are in the scope of IFRIC 21. The application of the interpretation to such taxes will generally require a detailed analysis of the arrangements for each tax to determine when the obligation is recognised. Property tax is charged on the legal owner of the property at 1 January each year. Example 2: Payroll tax An entity pays tax to the government based on wages paid to employees. The amount is due only if annual wages exceed a minimum amount. Is this tax in the scope of IAS 37 and IFRIC 21? Analysis: Levies imposed on employee benefits are not explicitly outside the scope of the interpretation. The scope of IAS 37, however, excludes provisions addressed by another standard. IAS 19 addresses all forms of consideration given by an entity in exchange for service rendered by employees. This includes benefits settled by payments made directly to the employees or to others. The scope of IAS 19 is broad and, as a result, the majority of payroll taxes will be in the scope of IAS 19 and thus fall outside the scope of IAS 37 and IFRIC 21. A liability to pay a levy is recognised when the obligating event occurs. This might arise at a point in time or progressively over time. In example 1, the obligating event is ownership at a specified date and thus the entity recognises the liability on 1 January each year. This means that, if the entity issues quarterly reports, the liability is recognised in full in the first quarter of the year, because the liability is recognised in full on 1 January. Example 3: Obligating event operation on a particular date A levy is triggered if an entity is operating at the end of the annual reporting period. The levy is calculated based on total equity in the entity s statement of financial position at the end of the annual reporting period. The end of the entity s annual reporting period is 31 December 20X1. What is the obligating event that gives rise to a liability to pay the levy? Analysis: The obligating event is the entity operating at the end of the annual reporting period. Before that point, the entity has no present obligation to pay a levy, even if it is economically compelled to continue to operate in the future. When is a liability to pay a levy recognised? A liability to pay a levy is recognised when the obligating event occurs. This might arise at a point in time or progressively over time. How should an entity account for the debit when a liability is recognised? IFRIC 21 does not address the accounting for the costs arising from the recognition of a liability to pay a levy. It refers to other standards to decide whether the recognition of a liability gives rise to an asset or an expense. Example 4: Recognition of an asset under IAS 16 A government imposes a tax every time a property is purchased. How should the buyer account for this levy? Analysis: The definition of the purchase price of property, plant and equipment includes nonrefundable purchase taxes. IFRIC 21 requires recognition of a liability at the obligating event, which is the date of the transfer of the property. The buyer should recognise the levy as part of the cost of the property and thus recognise the expense over the time the property is depreciated. In some cases, the recognition of assets might be straightforward. In many cases, however, costs associated with levies might not meet the recognition criteria in these standards. Effective date and transition An entity should apply IFRIC 21 for annual periods beginning on or after 1 January Earlier application is permitted. If an entity applies the interpretation for an earlier period, it should disclose that fact. Changes in accounting policies resulting from the initial application of this interpretation will be accounted for retrospectively in accordance with IAS

42 Auditing & Accounting Significant changes in banks financial statements under new accounting standard A response to the global economic crisis: Following the commencement of the global economic crisis in 2008 there have been several criticisms and discussions regarding the way of estimating impairment provisions for doubtful loans in the financial statements of banks on the basis of the existing provisions under the International Financial Reporting Standards (IFRS). The main concerns which have been raised were about too little, too late provisioning for loan losses. Reference was made to the fact that the financial statements of the banks prepared under IFRS failed to present the real magnitude of the problem as to the existence of doubtful loans into the loan portfolios of the financial institutions. By Panayiotis A. Peleties, Board Member Head of financial services Banking KPMG Limited As a result of the above, the efforts of the International Accounting Standards Board (IASB) over the last years were intensified towards the issuance of a new IFRS to respond to these challenges. On 24 July 2014, the fourth and final version of the new standard - IFRS 9 Financial Instruments was published. New expected credit loss model The new standard is going to have a massive impact on how banks account for credit losses on their loan portfolios. Provisions for bad debts will be bigger and are likely to be more volatile. The new expected credit losses model will accelerate the recognition of losses by requiring provisions to cover both already-incurred losses and some losses expected in the future. The new standard is a step change in accounting for impairment and will give rise to new challenges. One such challenge is the increased need for judgment. Estimating impairment is an art, rather than a science. It involves difficult judgments about whether loans will be paid as due and, if not, how much will be recovered and when. The new model widens the scope of these judgments. A new threshold is applied to determine whether there has been significant increase in credit risk and this in turn is used to assess whether a loan should have an allowance to cover credit losses expected in the next 12 months, or to cover all expected credit losses over the life of the loan. Preparers will have to make new judgments, auditors will have to review them, and users of financial statements, including prudential and securities regulators, will have to understand them. Banking institutions need to get ready Adopting the new rules is going to mean a lot of time, effort and money for banks. A major issue for banks and investors in banks will be how adoption of the new standard will affect regulatory capital ratios. Banks will need to factor this into their capital planning and we expect that users will be looking for information on the expected capital impacts. It is important for banks not to delay in assessing the impact of the expected credit loss model on their business. Credit risk is at the heart of a bank s business and applying the new standard will depend heavily on a bank s credit systems and processes. Classification and measurement The final standard clarifies the principles already in previous versions of IFRS 9 and introduces a new fair value through other comprehensive income measurement category for financial assets. The new category aims to accommodate concerns that the standard did not cater for business models where assets were held both to collect cash flows and for sale for example, certain liquidity portfolios of banks and that it would have created accounting mismatches for insurers. However, the amendment means that the classification and measurement requirements of the new standard are at least as complex as the current IAS 39 standard that it will replace. Date of effect The new standard has a mandatory effective date of 1 January 2018 but can be adopted early. Companies need to think about when they plan to adopt the new standard. Many banks may need the whole three and a half years up to 2018 to prepare for adoption of the expected credit loss requirements. In many jurisdictions, including the European Union and thus Cyprus, companies will not be able to adopt the new standard until it is legally endorsed or permitted by regulators. Given the significance of the standard to the financial services sector, the road to endorsement may be longer and more winding than usual. 80 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

43 Taxation Implementation of FATCA in Cyprus Background In recent years there has been significant global political interest in driving forward automatic exchange of information as a key tool to combat tax evasion. Along with the work of the Global Forum on Transparency and Exchange of Information and the OECD/G20 Base Erosion and Profit Shifting ( BEPS ) project, the Foreign Account Tax Compliance Act ( FATCA ) was enacted in the US in 2010 to tackle perceived tax evasion by US persons. Intergovernmental agreements In order to comply with the FATCA rules described above, an FFI is required to enter into an FFI Agreement with the US Treasury or comply with the Intergovernmental Agreement (IGA), if any, concluded between the jurisdiction in which it is located and the US. By Pieris Markou Head of Tax & Legal Services Deloitte The objective of FATCA is to ensure reporting of financial assets held offshore by US persons. More specifically, FATCA stipulates for certain due diligence procedures on existing and new account holders to be performed by foreign financial institutions (FFIs). The FFIs are then required to report to the US Internal Revenue Service (IRS) assets held by US taxpayers or non-us entities in which US taxpayers hold a substantial ownership interest. FFIs are required to register with the IRS and obtain a Global Intermediary Identification Number (GIIN). Under the general FATCA regulations failure to comply will result in a 30% FATCA withholding on US sourced income derived by the FFI. FFIs are broadly banks, investment funds and managers, custodians, trusts as well as certain types of insurance companies. Information required in respect of their US accountholders that will need to be reported yearly includes the name, address, US taxpayer identification number, account number, payments received and value/ balance of the account. If an entity does not fall under the definition of an FFI or is otherwise excluded from the definition, the entity would be considered a Non-Financial Foreign Entity (NFFE). Generally if the NFFE is not an excepted NFFE (including an active NFFE which is predominantly involved in conducting business activities), the NFFE (i.e. passive NFFE) will have to provide its US withholding agent with information on any substantial U.S. owners or if none exist, a certification to that effect. This is in order to avoid any FATCA withholding being applied on any US sourced payments made to the NFFE. The US Treasury has previously released model frameworks for the IGAs. Model 1 IGA jurisdictions, which includes Cyprus, are expected to enact local legislation enabling and requiring FFIs to identify and report US accounts directly to their home country tax authority which will further share this information with the US authorities. Although the IGAs were originally developed to remove compliance impediments posed by local privacy laws, gradually they have evolved into a collaborative effort between the US Treasury and local governments to not only address the legal barriers in complying with FATCA, but also to resolve practical compliance issues and reduce the excess burden imposed on FFIs. If a jurisdiction enters into an IGA, the FATCA reporting and other compliance burdens on the FFIs in that jurisdiction may be simplified, and such FFIs will not be subject to withholding under FATCA. Since its enactment, FATCA has been signed up to by numerous jurisdictions worldwide (close to 100 countries have either signed an IGA or have agreed to one in substance). Agreement between Cyprus and US Cyprus signed a Model 1 IGA to implement FATCA, on 2 December The Cyprus-US IGA alleviates some of the implementation burden placed on Cypriot FFIs. Such FFIs will only be required to report the specified information to the Cyprus Tax Authorities which will further independently provide this data to the IRS. Cypriot FFIs will also be relieved of FATCA-related withholding obligations in respect of payments to non-compliant persons. The IGA with Cyprus also provides for reciprocal information exchange (i.e. the US authorities may provide information to the Cypriot authorities regarding certain accounts held with US financial institutions by Cypriot residents). The due diligence obligations of the Cypriot FFIs in respect of identification and reporting of the relevant US accounts are described in Annex I of the IGA. For pre-existing accounts the Annex stipulates that the due diligence procedures must be completed by 30 June 2016 unless the accounts are of high value in which case the respective procedures must be finalized one year earlier, by 30 June Annex II of the Cyprus-US IGA contains specific exemptions from FATCA reporting requirements for products and organizations deemed to present a low risk of tax evasion. For example, the category of non-reporting entities and exemption beneficial owners includes certain pension and retirement funds. The Annex also lists exempt products types, including certain saving accounts, life insurance contracts, escrow accounts and accounts held by an estate. Such items will not be required to be reported. The Cyprus government is expected to amend the legislation to facilitate the information collection provisions of the IGA shortly. The legislative changes are expected to be supported by the issue of respective guidance in due course. Concluding comments From a global viewpoint, it is of utmost importance for Cyprus to be in line with international standards on transparency and to exchange information on tax matters effectively with other jurisdictions. The signing of the Cyprus-US IGA was a necessary and important step in the right direction. The IGA will allow implementation of FATCA in Cyprus through automatic exchange of data between the Cyprus and US authorities, reduce compliance costs for Cypriot financial institutions and provide for reciprocity. The challenge remains, however, to make sure that FATCA standards are fully and consistently implemented. In light of the above, it is crucial for affected parties to have acted promptly in order to understand their due diligence and reporting requirements and to put in place the appropriate procedures in order to comply with FATCA

44 Taxation From eggs to BEPS THE EVOLUTION OF IMPOSING AND TAX COLECTION By Costas Markides Board Member, International Tax Services KPMG Limited Since ancient times, spanning back to the glorious days of ancient Greece and Egypt to the mighty Roman empire onwards, taxes have been due and paid one way or another. Through manual labor for the less affluent, and in monetary terms or in-kind by those who could afford it on commodities like tobacco and cotton, eggs and spices, sugar and coffee to name a few. Ever since, organized societies at first and sovereign states through their elected Governments thereafter, have kept pace by devising comprehensive mechanisms one after the other for collecting taxes from the people, always in the name of providing for the well being of society at large. In tax literature, it is often stated that tax is a distinctive mark of civilization. What the rationale is for this statement, I couldn t quite explain, but I would dare to assume it somehow manifests the transition from acting as a lone-wolf, to collectively contributing towards building a community, which is a better and safer place for all to live and prosper. It is those communities however, that collectively form society as we know it, that revolted against the establishment claiming that not everyone is contributing in proportion to their ability and earnings, sending shockwaves to the political elite globally. This helps explain why we have all witnessed in the last couple of years, an unprecedented and coordinated effort undertaken by the OECD and backed by all political groups of power and importance on this planet, like the G7 and the G20, to tackle tax evasion and tax avoidance. Undeniably, the world of international tax is currently undergoing fundamental changes comparable only to the sweeping effect that the industrial revolution had on the global economy back in the 18th century. Acronyms and technical terms like BEPS, CRS and CFC rules to name a few, have become part of the daily vocabulary of every C-level officer, Board member and tax practitioner in the last couple of years. 84 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014 In a nutshell, the BEPS (Base Erosion Profit Shifting) initiative which came into life only last year, is the answer to the tax injustices that were born out of a decades old global tax system that failed to keep pace with a constantly developing, heavily mobile and digitalized economy according to its critics. The BEPS initiative through a series of proposed steps-turn-actions, aspires to make international taxation fair and moral by coordinating the efforts of sovereign states in adopting or reforming legislation that will succeed in matching the act of a fair share of taxation with real activity and consumption on the ground. Another field where developments have taken the form and speed of an avalanche, is that of coherence and transparency in financial dealings globally. The Common Reporting Standard (CRS) is another reporting mechanism developed only this year, which breaths, lives and feeds on political support and endorsement. Its main purpose is to facilitate and statutorily accommodate the automatic exchange of information on a global scale, is already adopted by more than 50 countries (including Cyprus) who have committed to automatically start exchanging information on accounts held by individuals and entities alike (including trusts and foundations) as early as The information to be exchanged will cover sales proceeds from financial assets, account balances, dividends and interest income included. The sweeping impact and radical effect on a global scale that such measures introduce in the international tax scene, were only a few short years ago, in the sphere of the imaginary, no more real than Santa Claus and his elves. The irony however, lies in the fact that the very same political groups that made sure that such measures were kept away from the global political agendas for all those years are now the missionaries leading the crusade towards restoring order, substance and transparency in the medieval corporate world. The tax scenery is changing by the day and there is no looking back. Simple times demanded simple solutions and even though the most effective tax avoidance technique in antiquity was flight in order to escape from the tax collector, this is hardly an effective solution in the 21st century. In today s borderless business environment, the words of American legendary boxer Joe Louis sound fit for the occasion: You can run, but you can t hide We have over 700 offices around the world, so you don t have to leave yours. 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 info@rsmi.com.cy 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.

45 Taxation The Definitive Guide to Solving VAT Problems By Alexis Tsielepis, BSc, FCA Managing Director, Chelco VAT Ltd PART II Continued from Issue No.116, September 2014 Place of supply of services For place of supply of services, the 2010 amendment 1 to the VAT Directive introduced simplified general rules for B2B and B2C services. However, the MSs, in negotiating the rules, and in fear that businesses and consumers would chose the MS with the lowest rate of VAT, also imposed special place of supply rules, allowing for a total of 15 derogations, nine of which only apply to B2C transactions, one which applies only to B2B transactions, and five of which apply to both B2B and B2C transactions. The table below summarizes in simple terms the place-of-supply-of-services rules. Once the place of supply of the transaction has been determined, the fourth question can be addressed. 4. The question of exemptions Different exemptions exist in the legislation and due care should be given to determine whether the transaction under review is covered by one of the exemptions. If an exemption exists, there is no VAT. The exemptions could arise as a result of: Exports; Intra-community supplies; International transport; Supplies to vessels or aircrafts; Supplies under diplomatic and consular arrangements; or Supplies under VAT warehousing arrangement. If no exemption exists, then question 5 should finally be addressed. 5. The question of the person liable to pay the tax Once the above have been established, the question of who is liable to pay the tax is not always straightforward. Certain provisions of the VAT Directive, such as Article 196, which discusses the reverse charge on services received from outside of the recipient s MS, are uniform across the 28 MSs. Others, such as Article 194, which allows for MS to decide whether the recipient of a service, which is carried out by a supplier outside of that MS, should account for the VAT, are different across the MS. So it is imperative to have knowledge of the local legislation of the country where the supply takes place, and determine whether the person liable to pay the VAT is: (a) the supplier; (b) the customer; (c) the person to whom the services are supplied; or (d) a tax representative. The VAT advisor, in answering the above should also be aware if the client has multiple VAT registrations in other MSs, and the reasons behind such registrations, as this may determine the answer to question 5. 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). He sits on various committees charged with VAT and other tax matters and has authored a number of tax syllabuses. He lectures extensively on VAT and Cyprus taxation and has authored a number of related articles on matters pertaining to Cyprus and EU tax. 1. Council Directive 2008/8/EC of 12 February 2008 He also regularly advises reputable international professional bodies on advanced Cyprus VAT taxation

46 Fraud The threshold to trigger AML procedures from cash payments has been lowered from to Strengthening of communication channels between national FIUs Reinforcement of the administrative sanctioning powers of the national authorities and the communication between the various national authorities on cross-border cases The Dawn of the 4th European Union (EU) Anti Money Laundering (AML) Directive The New Year 2015 is upon us and although these should be days of joy and preparation for the celebration of the New Year, there are fellow human beings, households and small businesses suffering as a result of large claims by the banks for payments of loans and the fear of divestitures. By Marios M. Skandalis Director of Group Compliance of the Bank of Cyprus Group, Member of the ICPAC Council and Vice-President of Transparency International The EU s 4th AML Directive has already passed successfully from the European Council and other relevant committees/sectors of the EU and a preliminary agreement has been reached with the European Parliament as well. The draft Directive is currently in the agenda of the European Parliament for voting and distribution to all EU Member States with the requirement for implementation into national legislation by The past few months were characterized by long discussions and oppositions between the European Parliament and the European Council with the former striving for greater transparency and the latter for a more flexible compromise reaching finally to a compromising solution for a number of matters. The currently in force 3rd EU AML Directive applies to all financial and credit institutions as It is obvious that the application of this new Directive will have a huge impact in the national regulatory frameworks of almost all European Member States. well as to professionals such as accountants, lawyers, real estate agents, casinos and company service providers. Its scope also encompasses all providers of goods when payments are made in cash in excess of The new 4th EU AML Directive extends the scope of the 3rd AML Directive and aims in strengthening obligations in the following areas: Introduction of a more risk-based approach with enhanced efforts for higher risk sectors in relation to due diligence rules for transactions originating from the list of equivalent third countries. Rules on beneficial ownership identification and record keeping for ultimate beneficial owners. Expansion of the definition of Politically Exposed Persons (PEPs) to include domestic as well as foreign PEPs. Inclusion of tax crimes as a form of money laundering offence Extension of the Directive s rules to the entire gambling sector rather than just casinos It is obvious that the application of this new Directive will have a huge impact in the national regulatory frameworks of almost all European Member States. However the fact that most of the key provisions of the 4th EU AML Directive are already incorporated in the 4th CBC Directive in force in Cyprus since December 2013, secures only a minimal impact in Cyprus. More specifically, the key changes in the provisions of this 4th EU AML Directive compared to the existing AML regulatory framework of Cyprus, have as follows: 1. Politically Exposed Persons (PEPs) The only aspect of the new Directive in relation to PEPs which affect Cyprus framework is the extension of the definition of prominent public functions in order to include members of the governing bodies of political parties. In other words not only leaders of political parties will be considered as PEPs but also the key members of their executive committees. 2. Beneficial Ownership Information The 4th EU AML Directive requires that a public central register is maintained at each EU Member State including information on the ultimate beneficial owners of legal arrangements, such as companies, foundations, holdings and trusts. Member States will require that the information held in the central register is adequate, accurate and up-to-date. The central register would be accessible in all cases and without any restrictions to: The competent authorities and their FIUs The obliged entities such as banks conducting their customer due diligence duties, and Any persons or organizations that can demonstrate a legitimate interest. These persons or organizations shall access at least the following information on the beneficial owner: > Name > Month and year of birth > Nationality The past few months were characterized by long discussions and oppositions between the European Parliament and the European Council with the former striving for greater transparency... > Country of residence > Nature and extent of beneficial interest held Access to the information on beneficial ownership shall be in accordance with national data protection rules and may be subject to online registration and to the payment of a fee. The fees charged for obtaining the information shall not exceed the administrative costs thereof. 3. A List of Third-Country Jurisdictions A new requirement included in the Directive concerns the maintenance of a list of thirdcountry jurisdictions that have strategic deficiencies in their regimes for AML and for Counter-Terrorism Financing. 4. One-Off Transactions Another new aspect of the Directive is that it requires Member States to ensure that obliged entities apply customer due diligence measures for natural or legal persons trading in goods, when carrying out occasional transactions in cash amounting to or more, whether the transaction is carried out in a single operation, or in several operations which appear to be linked. Under the existing Cyprus AML Legislation, the threshold for one-off cash transactions is

47 Fraud Fraud is getting younger By Iacovos Ghalanos * and Antonis Bargilly * KPMG has recently conducted a study with respect to fraud focusing on the identification of common fraud patterns in 2014, with emphasis on the UK market. Emphasis is also drawn on the necessity of new measures that organisations need to apply in order to spot fraudsters and potential fraud activity. KPMG issues two bi-annual Fraud Barometers each year. KPMG s Fraud Barometer for 2014 has shown a high volume of prosecuted fraud cases which appeared at much lower value levels than recorded in previous years. The key findings of the Report indicate the following: Lower value of fraud in 2014 same number of frauds; Marked increase in frauds committed by those under 35 years of age; Size is everything as smaller value frauds dominate the Courts attention; and Increase in insider fraud. As per the report findings, the value of fraud in the UK totalled up to 317 million in the first half of 2014 compared to 516 million in Although, the figure represents a 39 percent drop compared to the same period, last year, the number of frauds has remained constant. The latest figures also show that, for the first six months of 2014, the average case value was 2 million a fall of 43 percent compared to that recorded between January and July 2013 ( 3.5 million). However, usual practise suggests that fraudsters tend to start with smaller schemes to achieve higher values, if not caught, as their confidence grows. An increase in volume of the 1-10 million bracket frauds has also been observed. A significant number of such cases were perpetrated by insider fraud, with the number of employee- frauds in this value range increasing more than ten-fold. As already mentioned, the latest cases also suggest that the profile of fraudsters shifts from rogue senior executives to younger individuals seeking to fund extravagant lifestyles. Analysis of the fraud cases since the start of 2014 shows that frauds committed by those aged were valued at over 62 million an increase of 285 percent compared to the first half of 2013, whilst frauds committed by those aged 46 and over fell by 72 percent to 88 million. It has been observed though that while fraudsters are at the cutting edge of technology, given their younger age, some have reverted to old-fashioned scams such as tax rebates, loans and mis-selling, since organisations focus efforts on technology-driven defences. Combined, the three forms of fraud totalled to 41 million in Meanwhile, there were cases where banks and businesses were attacked online, with fraudsters using computers, turning to robotics and malware in an attempt to avoid detection. It is once more evident that investors with extraordinary return expectations tend to be more vulnerable to conmen. The KPMG UK Barometer indicates that private investors suffered the 48 percent of fraud losses resulting from the false promise of a return on investment, which translates to 153 million losses, up from 74 million for the same period last year. Even in times of economic distress, the number of fraud activities is still high. Both private investors and organisations are likely to form the perfect victim for a fraudster and therefore, they need to remain alert to new threats and respond appropriately and proactively to fraud risks. They should be properly informed and seek for advice with respect to fraud activity, forensic accounting, and fraud auditing disciplines as well as on the relevant legislation. *Iacovos Ghalanos, Member of the ECFA Committee of ICPAC, Board Member, Head of Forensic and Internal Audit Services, KPMG Limited *Antonis Bargilly, Member of the ECFA Committee of ICPAC, Principal, Management Consulting, KPMG Limited 90 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

48 Real Estate Champions of Cyprus Property Investment Political unrest in Ukraine, ISIS terror and executions in the Arab World, collapsing banks and the rouble being devalued in Russia, a Communist regime in China... All these factors have contributed to political and economic uncertainty that is tormenting the population of many countries around the world. On the other hand, the citizens of these countries constitute the majority of the investors in property in Cyprus over the past months. Following is an analysis where in Limassol and what type of property these foreign investors prefer. By Yiannis Misirlis * Egypt Egyptian investors are demanding home buyers who like to view properties before making a final choice. They regard the maintenance of a private garden as a hassle, and therefore invest primarily in apartments. Developments with a communal pool and apartments with a private roof garden are particularly sought after. Their preferred locations are in the eastern suburbs of Limassol and the hills north of the town. Average investment: China Citizens of the up and coming superpower are increasingly interested in property investments in Cyprus, with over 1,000 investments recorded in The Chinese avoid the sun and therefore rarely visit Cyprus during the summer months from July to September. Beachfront properties do not appeal to them as they do not consider the sea an advantage (many do not even swim). The main feature they seek is proximity to supermarkets and good educational institutions. They invest primarily in small homes or apartments in and around the city centre (Agios Nektarios, Agios Nikolaos, Mesa Geitonia). Average investment: Ukraine The on-going turbulence in their country has driven many Ukranians to Cyprus. Like the Russians, they adore the sea, invest in properties close to the beach (max. 500m from the seafront), and are interested primarily in villas or penthouse apartments. Above all, they appreciate individuality. Their preferred areas are: the coastal promenade, Agios Athanasios, Neapolis and Potamos Germasogeia. Average investment: 500,000 Syria The majority of Syrian investors in Limassol are Christians who invest in Cyprus as a means of acquiring permanent residency. They prefer the western suburbs of Limassol, where they can enjoy bigger apartments at lower prices, while at the same time being close to My Mall. Maximum investment: Russia Russian expatriates have long established themselves as prime investors in Limassol properties, with over Russians declaring the town as their permanent home. The majority invest in seaside apartments (seafront and second row from the beach) and villas of sqm, no more than 500m from the beach. Known to be swimming enthusiasts, they appreciate the mild Cyprus climate. Their preferred location is the coastal area between the Crowne Plaza and the Four Seasons Hotel. Average investment: * Yiannis Misirlis is the Director of the award-winning property development company, Imperio, Secretary of the Board of Directors of the Cyprus Land & Building Developers Association, and Member of the Board of the Limassol Chamber of Commerce and Industry. 92 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014

49 ΙΤ Cloud Computing Cloud computing, we hear that a lot! Βut what is it really and how it will ever be useful to you or your business? Most of you may not realize it but most probably on a daily basis you are using one of the most basic form of cloud computing (hosted ). For ex. Gmail, Outlook, Yahoo or other hosted provider is providing some sort of cloud computing services. Expertise Solutions Value By George Agathangelou * The cloud computing sales pitch is seductive because the cloud offers many advantages. There are no utility bills to pay, no server room staff who want the night off, and no crazy tax issues for reducing the cost of the machines over N years. You give them your credit card, and you get administrative access on a machine, often within minutes. What is Cloud Computing? According to Wikipedia Cloud computing is computing in which large groups of remote servers are networked to allow centralised data storage and online access to computer services or resources. Clouds can be classified as public, private or hybrid. We can break down cloud computing according to service and deployment: you should think of the Electricity at your home as a utility as a service, you don t care what or how the electricity is produced, you just care that you have electricity at your home. Deployment models: Private Cloud: is the cloud infrastructure operated only for a single organisation. This infrastructure can be managed by the internal IT team, or by a third party, and can be hosted either internally at an in-house datacentre, or externally. The private cloud model is closer more to the traditional model of individual local access networks used in the past by organisations, but with the added advantages of virtualisation. It is hard to define what constitutes a private cloud from a technical point of view. Private cloud can be characterised by the ring fencing, higher security and privacy, and more control, etc. Service models: IaaS (Infrastructure as a service): is the most basic cloud-service model; it gives organisations the opportunity to provision their computing resources, which include networks, processing, and storage, to build their IT infrastructure in a way that is both flexible and rapid. For ex. You can setup physical machines, virtual machines, firewalls, etc. PaaS (Platform as a Service): provides an environment where organisations have the ability to develop and manage applications, which include capabilities such as team collaboration services as well as application design and testing, using programming languages, tools and platforms. As Eric Knorr described, this is like Legos, these services are constrained by the vendor s design and capabilities, so you don t get complete freedom, but you do get predictability and pre-integration. SaaS (Software as a Service): organisations are able to use collaboration, customer relations management and monitoring applications using this service without the need to install or configure them. Additionally, SaaS tends to be offered in a multitenant environment in which economies of scale can be leveraged, thereby providing organisations with the best practices in application configuration as well as reduced costs. As Constantinos Katridgis from Microsoft Cyprus says 94 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014 Public Cloud: is when services are offered over a network (internet) that is open for public use. This is the most recognisable model of cloud computing to many consumers. In contrast to private cloud, public cloud provides services to multiple clients using the same shared infrastructure, they are mostly used by private individuals who are less likely to need the level of security and privacy that the private cloud offers. However, there are multiple organisations who utilise public cloud to improve their efficiency, and reduce costs, for example, Microsoft O365, Dropbox, Google apps, etc. Hybrid cloud: is a composition of two or more clouds (private or public) they are distinct entities but are connected together, offering the benefits of multiple deployment models to the same organisation. Therefore an organisation can maximise its efficiencies by getting the best of both. In practice, an organisation could implement hybrid cloud hosting to the e-commerce website within a private cloud, where it is secure / scalable, and their company public website in a public cloud, where it is more cost effective. *Professional Services Director BSc CIT, MSc CSN MCTS, MCSA, CCSE, CITM, DCUCSS, RSA CCE HP-ASE, HP-APS, HP-ASP, STS, VSP, VTSP IBSAC Intelligent Business Solutions Ltd We support you to create the value you are looking for by providing specialised solutions based on quality. Together we build relationships based on trust and we say things as they are, to assist you to deal with issues that tomorrow will prove important. We adapt our expertise and the power of our global network to your specific needs helping you make the difference PricewaterhouseCoopers Ltd. All rights reserved

50 ΙΤ 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 Digital Certificates How usefull are they? By Chryssa Tsiotsi, Advocate Eurofast Global, Athens Office In case you sign a contract or any other document with another contracting party via , each party is concerned about the authenticity of the identity of the person that sends the document. Each party is also concerned about the integrity of the document. The document might have been altered from the time it was sent until its receipt. To alleviate these problems and to avoid any forgery of signature or alteration of the text content, the personal digital certificate has been established. By sending a digital certificate, the sender can send encrypted messages that only the addressee of the message is able to decode. The digital certificate belongs to the Public Key Infrastructure ( PKI ), ie. a system in which is created, used and / or canceled for both users and ISPs. Digital certificates are based on the concept of a private and a public key. The public key of a user is available to any other user in the simplest form, i.e. when it is not encrypted. On the other hand, the private key is secret and protected with a personal password. The personal digital certificate is installed in the browser after being obtained from the appropriate site. The person installs to the computer, the program of s management. Then the system is used automatically for example when the user is asked to sign an . When the certificate is installed and the appropriate arrangements have been made, then, there is a default signature in the user s s. Users of personal digital certificates should choose the same Certification Authority that will be trusted for both parties so there are no differences, problems or differentiation in its fairness in relation to the parties (the sender and the receiver of the ). The digital certificate provides authentication of the computer hosting the site, and encrypted communication between your computer and the site to which the user navigates. When you see a site that has in the browser the https and there is a locked padlock icon in the browser, then you understand that there is a digital certificate on this site and then you can feel safe about your navigation. 96 ACCOUNTANCY CYPRUS VOLUME 117 DECEMBER 2014 Thus, yes there is a way to sign a contract and send it via but be certain that both parties choose the same Certification Authority. Symmetria F.S. Ltd is regulated by the Cyprus Securities and Exchange Commission (CIF 228/14) / info@symmetriafs.com / 4, Dorieon Street, 1101 Nicosia - Cyprus / Tel.:

51 The Journal of the Institute of Certified Public Accountants of Cyprus 11 Byron Avenue, CY-1096 Nicosia, P.O.Box 24935, 1355 Nicosia Cyprus Tel , Telefax URL: