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14 July, 2024
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Backlash over Cyprus' VAT refund change

Lack of consultation and sudden implementation raise concerns

Maria Eracleous

Maria Eracleous

The recent decision made by the Department of Customs to raise the expenditure limit for VAT refunds to third-country travelers visiting Cyprus is receiving criticism for its adverse effects on tourism expenditure. The legislation, originally introduced in 2000 with a minimum purchase amount of £100, was subsequently reduced to £30 in 2007. However, on June 2nd of this year, it was changed again without prior consultation or a transitional period for implementation.

The decision has particularly impacted small and medium-sized enterprises (SMEs) and small businesses in the retail and cottage industry. They argue that tourists were not informed about the change until their VAT refund claims were disapproved just before they departed for Cyprus. In response to these concerns, the Commerce Committee of the Parliament discussed the issue during their recent meeting. They have requested an impact study from the Ministry of Finance regarding the decision. They are planning to send a letter urging its reconsideration and a return to the previous purchase limit of €50.

It is worth noting that while Cyprus has increased its minimum expenditure amount for VAT refunds to €100 (originally planned for €175), competing countries in the tourism sector have different thresholds. According to 2022 data, Greece, Malta, and Portugal have a minimum expenditure amount of €50, while in Turkey it is 4.50 euros, and in Spain, it is as low as 0.01 cents. Furthermore, Cyprus has one of the lowest average spendings on purchases, standing at €240, just below Turkey's €250. Comparatively, Greece has an average shopping expenditure of €430, Spain €400, and Malta €850. With the recent change, Cyprus is automatically elevated to countries with higher spending reimbursement thresholds, with only Belgium (€125) and Malta (€154.94) having higher limits. The minimum amount for shopping in the European Union is €48, while the average spending on shopping within the EU is approximately €1,350, as presented to parliament.

This sudden change has caught both stakeholders and tourists off guard, particularly affecting small businesses that predominantly sell local products.

In 2019, a total of €5.2 million was refunded to third-country tourists, but in 2022, following the pandemic crisis, this amount decreased to €3.8 million. The decline is attributed to the absence of Russian tourists after March 2022, as they were known to be significant spenders in the retail sector among third-country tourists. Based on 2019 data, Russians accounted for 64% of tax-free purchases in terms of purchasing power, followed by Ukrainians (7%), Israelis (5%), Lebanese (4%), Chinese (3%), and other nationalities (17%). It is important to note that Cyprus is not typically considered a shopping destination, especially for luxury goods. British tourists are now classified as third-country travelers, but they have only recently become eligible for VAT refunds, as they were previously excluded and largely unaware of this benefit. Additionally, food and tobacco products are excluded from the refund. VAT refunds are generally seen as an essential incentive for boosting purchases by tourists from non-EU countries, effectively providing a discount on their purchases. Therefore, while beneficial for Cyprus in terms of tourism, it is also expected to stimulate retail trade and cottage industry businesses.

The Cyprus Tourism Business Association expressed dissatisfaction with the lack of awareness within the State Ministry and the untimely decision to increase the minimum amount during the peak of the summer tourist season. Stakeholders were not properly informed about the change, which was communicated through a circular issued by the Customs Department on June 2nd, with immediate effect. According to the circular, the VAT refund scheme will now be applicable for purchase receipts of €100 or more, instead of the previously enforced limit of €50. However, the scheme can still be used for receipts below €100 if the total value of purchases from the same company/trader exceeds €100 within 10 days from the first purchase. The new regulation came into force on the same day, revoking the previous one. This sudden change has caught both stakeholders and tourists off guard, particularly affecting small businesses that predominantly sell local products. Currently, two approved companies serve as intermediaries between traders and tourists, facilitating the payment of refundable VAT at airports and ports.

The Parliament has called for the withdrawing of the Customs Department's decision and is expected to send a letter to the Ministry of Finance in the coming days. MPs expressed concerns over the decision-making process, highlighting the absence of consultation and transparency. The timing of the decision was also heavily criticized, as it is seen as detrimental to tourism competitiveness amid the summer season. A more comprehensive understanding and conclusions can be drawn once the impact study, which influenced the decision, is made available, although it was not presented to the Trade Committee during discussions.

[This article was translated from its Greek original]

Cyprus  |  economy  |  tax  |  vat

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