The new Auditor General, Andreas Papaconstantinou, has warned that a scheme intended to generate revenue through guarantee fees from banks benefiting from deferred tax assets is instead creating a fiscal burden for the state.
In a letter to the Finance Ministry, Papaconstantinou challenged the ministry’s position that the arrangement, which allows Bank of Cyprus to convert accumulated losses from the former Laiki Bank into deferred tax assets, does not incur fiscal costs.
The legislation, approved in May 2022, requires credit institutions to pay an annual guarantee fee of up to 1.5% (capped at €10 million annually) in exchange for special tax credits.
However, the Auditor General argues that Bank of Cyprus’s recent financial performance undermines the ministry’s assumptions about the scheme’s fiscal neutrality.
According to tax department data, Bank of Cyprus recorded losses between 2018-2021, and while profitable in 2022, offset these gains against other losses rather than those inherited from Laiki Bank.
This resulted in the state granting €189.55 million in special tax credits to the bank for 2018-2022, of which €102.3 million has been used to settle the group’s obligations to the state.
The Auditor General particularly criticised the ministry’s failure to consider scenarios where the bank makes losses or profits below the annual €303.27 million instalment level, both of which create fiscal costs for the state while benefiting the bank.
