Accountancy Cyprus - No. 137 - October 2021

NO. 137 / OCTOBER 2021

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THEΣΥΝ∆ΕΣΜΟΣ INSTITUTE OF ΕΓΚΕΚΡΙΜΕΝΩΝ CERTIFIED PUBLIC ΛΟΓΙΣΤΩΝ ACCOUNTANTS OFΚΥΠΡΟΥ CYPRUS

ACCOUNTANCY CYPRUS

Y L MBL A E NU ASS N A AL h t R 60 ENE G

10 proposals to tackle

challenges and to open up new economic prospects SELK's AWARDS

DISTRICT POST OFFICE CY-1901 NICOSIA, CYPRUS POSTAGE PAID LICENCE no.33 SEALED UNDER PERMIT no. 133

ΠΕΡΙΟΔΙΚΟ ΤΑΧΥΔΟΡΜΙΚΟ ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ.239

ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ ΑΔΕΙΑ ΑΡ. 133

The new edition next December

MARCH 1982, No. 1

The Journal of the Institute of Certified Public Accountants of Cyprus

Το 1ο τεύχος του περιοδικού του ΣΕΛΚ Από το 1982 ενημερώνουμε τα μέλη μας

Τρεις από τις σελίδες που δημοσιεύθηκαν στο 1ο περιοδικό του ΣΕΛΚ που εκδόθηκε τον Μάρτιο του 1982

| Forward thoughts By the General Manager

Getting ready for the next era Kyriakos Iordanou General Manager

2021 is a landmark year for ICPAC, not only because of the successful completion of the first 60 years in life and service, but because it is also a turning point for its strategic planning, roles and activities. That was the main message conveyed at the 60th annual general meeting (agm) of the Institute last June. Despite the festive occasion, the whole event took place within the constraints of the Covid 19 virus pandemic. Yet, the messages and the warm wishes of the President of the House of Representatives, the Ministers of Finance and Energy, Commerce and Industry, as well as of the President of the International Federation of Accountants were well conveyed to the members of ICPAC. Learning from the long experience and hard work and consolidating knowledge and aspirations, ICPAC now stands at the edge of the springboard for a new dive into the future, the next era! With this new dive, ICPAC looks both inwards and outwards, with the former aiming to provide the foundations of the latter.

The day after will not be the same; the challenges are multiplying and are different in nature and scope from the traditional ones.

The Covid 19 predicament, technology and digital transformation, environmental and social concerns, surging multi-level regulation coupled by transparency and additional disclosures, as well as international business and cultural changes form a new pattern for the accountancy profession.

Challenges will be of course confronted both domestically and internationally.

Local economy shows signs of recovery and potential considerable growth; however, we have to work carefully and methodically to achieve a steady and sustainable rate of growth.

At the same time, being a traditional centre for international business and professional services, we also assist the country through our professional attire and knowledge to maintain and further expand its pivotal business character.

ICPAC is ready to provide any assistance to the

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government for the needed structural reforms, tax transformation and the conversion into the digital age.

It is not far-fetched to admit that this point in time we are currently living, is in essence a gamechanging juncture, forcing thus everybody to adapt to the new reality, adopt alternative means of working and living and improve existing practices, mindset and culture.

ICPAC is preparing for this new age to meet with competence and sufficiency the challenges of the future. Hence, the strategic planning for the next short-term period is under way, with the respective reform of internal processes and structures, placing the human capital of the Institute at a premium position, blended with technological advancement.

Capitalizing on its 4 R principle, incorporated in the strategic planning and operational mindset, ICPAC places particular emphasis on further establishing and excelling its Relevance, as an economy and social sought-after stakeholder, its Reputation, both in Cyprus and abroad, instilling credibility, its Recognition, as a competent authority and a professional organization of value and trust, and its Responsibilities, by expanding its roles, activities and widening its purpose.

We are looking into the coming years with optimism and with feelings of calculated certainty of the desired outcome. We are committed to our strategic principles, whilst placing ethics, competence, knowledge, foresight and professionalism on top of our priority list. ICPAC is committed to pursue further enhancement of its good services to its members, the economy, the society and the public in general. History so far is not by itself guarantee of what will follow, but it is a strong indication that we will keep on progressing on robust foundations.

Hence, having the experience of the first 60 years of professional commitment, we are at our toes for the dive into the next era, equally strong and determined!

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1961 - 2021

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YEARS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF CYPRUS

confidence, credibility, value!

ACCOUNTANCYCYPRUS

08 ICPAC NEWS

ISSN 1450-2380 The Institute Council Demetris Vakis (Chairman) Pieris Markou (Vice-Chairman) Maria Pastellopoulou (Secretary) Members Nicos Chimarides, Odysseas Christodoulou, Stavros Pantzaris, Gabriel Onisiforou, Petros Petrakis, Savvas Poyiatzis, Demetris Shiacallis, Spyros Spyrou, Demetris Taxitaris, Christos Vasiliou, Karios Zangoulos General Manager Kyriakos Iordanou Address 11 Byron Avenue, 1096 Nicosia, Cyprus Mailing Address P.O.Box 24935, 1355, Nicosia, Cyprus Tel.: +357 22870030 Fax: + 357 22766360 e-mail: info@icpac.org.cy www.icpac.org.cy The publication is prepared by FMW Financial Media Way 23B Armenias Street, Office 101 Strovolos, 2003, Nicosia Tel.: 22342005 Fax: 22342006 e-mail: info@fmw.com.cy www.fmw.com.cy Design and Pagination: Christiana Loizou Accountancy Cyprus is published quarterly by the Institute of Certified Public Accountants of Cyprus and is send free to all members of the Institute as well as to a large number of other persons, companies and organisations.

The Institute can accept no responsibility fot 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.

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• Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the Cyprus Bar Association.

• Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the University of Central Lancashire Cyprus (“UCLan Cyprus”)

09 NEW ICPAC COUNCIL

President: Pieris Markou, Vice-President: Nicos Chimarides, Members: Andreas Andreou, Demetris Vakis, Christos Vasiliou, Karlos Zangoulos, Gabriel Onisiforou, Stavros Pantzaris, Maria Pastellopoulou, Petros Petrakis, Demetris Siakallis, Spyros Spyrou, Demetris Taxitaris, Odysseas Christodoulou

10 COVER STORY

THE 60TH ANNIVERSARY ANNUAL GENERAL ASSEMBLY WAS CONCLUDED WITH GREAT SUCCESS Ten proposals to tackle challenges and to open up new economic prospects were submitted by the ICPAC • Annita Demetriou, The President of the House of Representatives • Costantinos Petrides, Minister of Finance • Natasa Pilides, Minister of Energy, Commerce and Industry • Alan Johnson, President of International Federation of Accountants (IFAC) • Dr. Stavros Thomadakis, Chair of International Ethics Standards Board for Accountants (IESBA) • Myles Thomson, President of Accountancy Europe • Mr. Panagiotis Alamanos, President of Fédération des Experts Comptables Méditerranéens • Pieris Markou, ICPAC President

20 AML COMPLIANCE

• Money laundering – the cleaning process of “dirty money" Orestis Papacharalambous Managing Director & Financial Trainer, Financial Learning Hub • Updates on the Prevention and Suppression of ML activities …

24 AUDIT & ACCOUNTING

• Our chance to shape the accounting standards Pantelis Pavlou, ACA, BFP – IFRS Expert and Head of Integrated Risk at KBC Group

26 BUSINESS & ECONOMY

• Turning Back the Clock Post-Brexit UK and Cyprus Cross Border Insolvency Recognition Chris Iacovides, Certified Public Accountant and a Licensed Insolvency Practitioner, Director CRI Group Ltd, Andri Antoniou, Solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner - Director CRI Group Ltd • What is the Shareholder Manager problem and by what means it can be resolved?

Alexandros Anastasiou, President of ICPAC Larnaca-Famagusta Committee • Investing in a more sustainable future Integrating sustainability across all areas of business Theodora Economides, Senior Manager | Risk Advisory Deloitte Limited • European Commission’s proposal for a Corporate Sustainability Reporting Directive Eleni Ashioti, Head of Technical and Professional Matters, The Institute of Certified Public Accountants of Cyprus • Cyprus – the country of choice for remote working 30 june 2021 Angelos Gregoriou, Senior Manager, Tax & Legal services, Deloitte Cyprus and Michael Michaelides, Partner, Tax & Legal services, Deloitte Cyprus • The pan-European Personal Pension Product (PEPP) Constantinos Kourouyiannis, CFA, Executive Director of Easternmed Asset Management Services Ltd and Alkis Hajittofis, FCA, CFA, Executive Director of Resolute Investment Management (Cyprus) Ltd • REITS: How to earn dividends from real estate investments—without having to buy, manage, or finance any properties yourself.

Styliana Charalambous - (ACCA, BA) Head of Investments & Market research at Pure Market broker

40 C-SUITE CORNER •

Meet Stavros Kattamis Chief of Finance & Operations at PwC Stavros Kattamis

42 ECONOMIC CRIME & FRAUD • Fraud rationalization and the guilty mind • Financial Statement Fraud and Covid-19 Remnants • Digital on-boarding, the new era…

46 TAXATION

• Recognising intragroup loans following the OECD’s FTTP guidance Christos Theophilou, Costas Savva, of Taxand Cyprus consider how the OECD’s guidance on financialtransactions and transfer pricing (FTTP) can be interpreted in consideration of intra-group loans

48 IFAC NEWS • IFAC Latest Activity

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| ICPAC NEWS Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the Cyprus Bar Association.

President of ICPAC Mr. Demetris S. Vakis: “This Memorandum is an important development for both organizations, as they are important pillars of the services sector. This is a fulfillment of a commitment for closer cooperation between the supervisory authorities under the legislation on money laundering.”

Signing of a Memorandum of Understanding between the Institute of Certified Public Accountants of Cyprus (“ICPAC”) and the University of Central Lancashire Cyprus (“UCLan Cyprus”) ICPAC and UCLan Cyprus signed a Memorandum of Understanding and co-operation, aiming at the development and reinforcement of a co-operation framework between the two Organisations.

On behalf of ICPAC, General Manager Kyriakos Iordanou, noted: “ICPAC aims at further strengthening the co-operation with the Academic Institutions and the signed Memorandum of Understanding with UCLan Cyprus constitutes an important milestone towards that direction, as it establishes a co-operation with a respected British University and at the same time it empowers the services sector in the geographical area of Larnaca-Famagusta. Through the joint actions and initiatives, we anticipate that both UCLan Cyprus students, as well as ICPAC Members located in the area and moreover the local economic community, will enjoy significant benefits going forward.”

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New ICPAC Council The Institute of Certified Public Accountants of Cyprus (ICPAC) held its 60th Annual General Assembly on 24 June 2021 online from Nicosia Municipal Theatre.

Following the procedures of the General Assembly, the new Council was formed as follows: President:..............................................Pieris Markou Vice-President:.....................................Nicos Chimarides Members:..............................................Andreas Andreou

Demetris Vakis

Christos Vasiliou

Karlos Zangoulos

Gabriel Onisiforou

Stavros Pantzaris

Maria Pastellopoulou

Petros Petrakis

Demetris Siakallis

Spyros Spyrou

Demetris Taxitaris

Odysseas Christodoulou

The Council is thankful to the former president Mr. Demetris Vakis, for his valuable services.

SHORT BIO OF THE NEW PRESIDENT Pieris Markou is the CEO of Deloitte Cyprus and a member of the Deloitte Middle East Executive Board as of 1 June 2021, having previously served as the Tax & Legal Services Leader. He started his career in London in 1986 and was admitted to Partnership at Chrysanthou and Christoforou (Andersen) in 2000. He has been a member of ICPAC since 1992 and he served as the Vice President of the Institute in 2019-2021. He had previously assumed many professional roles within ICPAC, including Chairman of the Tax and VAT Committees. Pieris is also a board member of the Nicosia Chamber of Commerce & Industry. Pieris holds a B.A. (Hons) degree in Accounting. He is a fellow member of the Institute of Chartered Accountants in England and Wales and a member of the Chartered Institute of Taxation.

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1961 - 2021

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ΧΡΟΝΙΑ

ΣΥΝ∆ΕΣΜΟΣ ΕΓΚΕΚΡΙΜΕΝΩΝ ΛΟΓΙΣΤΩΝ ΚΥΠΡΟΥ

εµπιστοσύνη, αξιοπιστία, αξία!

| COVER STORY

The 60th Anniversary Annual General Assembly was concluded with great success

Ten proposals to tackle challenges and to open up new economic prospects were submitted by the ICPAC

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• ICPAC vision for Cyprus • Tax reform should move forward

T

he Institute of Certified Public Accountants of Cyprus (ICPAC) has submitted ten proposals for the enhancement of the economy, that will enable the country to recover from the pandemic and to respond to the future challenges. In his speech at ICPAC’s 60th Annual General Assembly, which was held at Nicosia Municipal Theatre, the President Mr. Demetris Vakis stated that the day after the pandemic would be very different for all of us.

He pointed out that new developments have marked international economy, new methodologies have been developed in the markets, new impacts will affect the sustainability of businesses, new behaviours and attitudes have been adopted by societies. All these developments, driven by a new technological revolution, will create a new arena for the whole planet.

Mr. Vakis added that Cyprus cannot remain intact from the international changes, especially as an EU member. For this reason, we need to make the right moves promptly, that will enable us to make our economy more robust, and more adjustable to the new developments, allowing it to respond to all the challenges successfully.

He explained that the first step should be towards recovery from the pandemic, bringing economy and society back to normality. The second step should be towards a further economic development, opening up to new prospects for the future.

Both steps require certain conditions, according to the Institute, such as the following: • Close cooperation among the Government, the Parliament and the Private sector so as to accelerate the reforms on the public sector, justice, local governance and digital governance • Strict fiscal discipline to avoid further deficit • Re-establishment of the country’s reputation on an international business level • Drafting a new long-term strategic plan for the country’s economy • Focusing on matters related to technology and digital transformation • Focusing on the opportunities and potentials of green and sustainable development • Taxation transformation within the context of a long-

term strategy • Promotion of the competitive advantages of Cyprus on an international level • Investment in new infrastructures, reduction of bureaucracy, and facilitation of services to international investors and large organisations that wish to conduct business in Cyprus • Alignment of the economic development model with the social development model Mr. Vakis pointed out that the above requirements are essential if we want to be prepared for new achievements after the pandemic. If we fail to act with courage and determination, if we get hindered by political or personal cost, we will end up in the last place, with devastating effects for both economy and society.

In his speech, he also stated: • Nowadays, time runs extremely fast. Countries that are well-prepared will be the winners. The rest will keep making circles, with zero potentials.

• Serving as a steady pillar for the economy and of the business sector, the ICPAC is ready for the new era.

We are ready to support any initiative that moves the country forward. We support every change and every reform that leads to progress, modernisation and development.

Mr. Vakis highlighted that the Institute draws on its 60year experience, knowledge and expertise and is eager to share them for the benefit of our country. He stated this as a formal commitment towards the members, the State and society.

60 YEARS ICPAC Referring to the 60th Anniversary of the Institute, Mr. Vakis stated that the ICPAC was founded in April 1961 by 21 pioneer colleagues who realised the need for a professional representative body for the certified accountants of Cyprus.

Aiming at serving its members, while contributing to the economic growth of the island, the ICPAC evolved to a dynamic institution with active involvement in the business and economic developments of the country.

During its 60 years, the ICPAC has had a significant impact on Cyprus economy. Following numerous initiatives and activities, the Institute had a leading role in the evolution of Cyprus economy from an agricultural economy to a dynamic, promising service economy.

With its devising ideas and decisive interventions, the ICPAC promoted Cyprus as a regional business hub and as a foreign investment destination.

Mr. Vakis expressed his pride of the substantial contribution of the profession during historic landmarks of Cyprus. The ICPAC and its members have proven that we are not merely a professional association, but one of the main pillars of the Cyprus economy as a whole.

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| COVER STORY

The ICPAC is currently a modern, flexible and dynamic part of the country’s economic structure, with active and significant contribution in a wide range of topics, such as the tax system, investments, economic diplomacy, development, reforms, the establishment and acknowledgement of the profession, professional development and training of its members, among others.

ICPAC STRATEGIC PLANNING Outlining the Institute’s Strategic Planning, Mr. Vakis described how it is based on the following four pillars: • Constant and further recognition of the ICPAC by the State and the society as the competent authority on matters related to the accounting profession • Enhancement of our institutional role through participation at Committees and Councils on major economic and social matters • Constant development of our supervisory role for administrative monitoring of our members, as well as further recognition by international organisations, such as OECD, Moneyval, IMF, etc.

• Improvement of our internal operation through constant development of our organisational structure and recruitment, through implementing efficient governance procedures, and through applying computer systems that will facilitate automatisation and digitalisation of processes and activities.

PANDEMIC – ECONOMY Talking about the challenges risen by the pandemic, Mr. Vakis asserted that the ICPAC is more than ready to tackle the new challenges. The Institute already cooperates closely with the government and other institutions, joining efforts to deal with the major impacts of the pandemic on the economy and the business sector.

He also indicated that apart from the European aid, the government has had to take additional loans of 6.5 billion euro, increasing public dept to 120% of GDP. In addition, the fiscal deficit is growing even further. He pointed out that the Institute is greatly concerned about these two aspects, as they amplify our fiscal problems.

Moreover, the increase of unemployment to around 8% is quite alarming.

He added that the economy has reached a new bottleneck. Hence, the right measures and interventions are required in order to bring the major indicators to manageable levels. Despite all the challenges and the amount of work that needs to be done, he expressed a moderate optimism for the economic course in 2021 and 2022. According governmental and European estimations, the economy is expected to have a 3.5%

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growth in the next couple of years. This projection is encouraging, in the hope of no more negative developments.

TAX SYSTEM As far as the tax system is concerned, Mr. Vakis announced that the ICPAC has submitted a written proposal to the Minister of Finance, aiming to the commencement of a discussion that will lead to the reform of our country’s tax system.

The Institute’s suggestions, he said, are not restricted merely in tax policy and regulatory adjustments. They extend to operational and administrative reforms, they promote the implementation of technological tools and digital governance. This is why they call this venture “transformation” of the current tax system, aiming to its evolution, rather than to its abolition and replacement.

Mr. Vakis expressed the Institute’s strong belief that such a venture, which is one of the most fundamental reform and development projects in Cyprus, requires the guidance of specialised international experts.

1. Mr. Costakis Christophides ICPAC Founding member, 2. Mr. Angelos Pikis ICPAC Founding member 3. Mr. Nikos Lakoufis ICPAC Founding member 4. κ. Theodoros Philippou First General Manager of ICPAC (2002) 5. Mrs Eleni Christofi 30 years at ICPAC (1991) 6.

Posthumous honor to Ioannis Papakyriakou ICPAC Founding member and as the inspirer of the idea for the creation of ICPAC

INVESTMENT SCHEME

BREXIT

Mr. Vakis pointed out that the ICPAC supports the operation of a wider program which will be based on clear, transparent and unimpeachable procedures that will ensure the quality of investors and businesses who will choose Cyprus as an investment or business destination. The new program should be linked to the island’s wider economic development, based on its long-term strategic development.

Regarding Brexit, Mr. Vakis said that the Institute has acted with informed and justified interventions. He added that though they are not part of the executive government to decide on our own, they are a significant stakeholder which awaits for specific directions and instructions from the competent services and authorities so as to apply the law and the Acquis Communautaire, as these have been developed.

ADDRESSES Recorded addresses to the General Assembly were made by the President of the Parliament Ms Annita Demetriou, the Minister of Finance Mr Konstantinos Petrides, the Minister of Energy, Commerce and Industry Ms Natasa Pilides, as well as the President of the International Federation of Accountants Mr. Alan Johnson.

A video clip was screened, which presented the 60-year course and evolution of the ICPAC, as well as its contribution to the economy. Mr. Doros Theodorou and Savvas Savvides talked about the history of the Institute. Finally, the clip presented statements of the Institute’s President Demetris Vakis, Vice-President Pieris Markou and General Manager Kyriakos Iordanou.

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| COVER STORY

Annita Demetriou The President of the House of Representatives

Costantinos Petrides Minister of Finance

Natasa Pilides Minister of Energy, Commerce and Industry

Dear president of CIIA, I would like to start by thanking you for the invitation to attend today’s Annual General Assembly, which I have accepted gladly, though I cannot stay long due to other commitments.

Through its proactive role, Internal Audit may serve as a powerful weapon against corruption. Strong internal audit structures ensure that internal control systems work effectively, while detecting potential weaknesses and gaps that need to be covered with additional safety measures.

Therefore, through efficient procedures, both deliberate and unintentional mistakes are prevented, while the legitimacy and validity of the transactions and the procedures of an organisation, public or private, are safeguarded.

I am aware that your institute tries hard to introduce and implement strong internal audit structures, especially in the public and semi-public sector, and it has already submitted specific suggestions and proposals to the Government and the political parties.

The House of Representatives and myself, fully support your efforts, and I would like to assure you that the newly elected Parliament will support any initiative and effort against bad administration, corruption and fraud, through a further enhancement of Internal Audit.

I would like to end by thanking you again for your invitation, wishing you a productive Annual General Assembly.

Dear Council Members, Dear Members of the Institute of Certified Public Accountants of Cyprus, Though I am not physically present, it is with great pleasure that I am addressing the 60th Annual General Assembly of the ICPAC, which I sincerely respect for its major contribution to the development of our local economy.

The ICPAC is the exclusive representative body of professional accountants in Cyprus and serves as an essential partner in developing the financial and taxation policies.

I would like to refer to the role of the Institute during the period of financial crisis, as well as during the pandemic, when it contributed substantially towards the gradual rebuilding of trust and confidence that led to the recovery of the business sector and re-established Cyprus on an international level.

Macroeconomic data project a gradual economic recovery and confirm the efficient governmental policy in dealing with the crisis. It is worth mentioning that the performance of Cyprus with regard to the financial impact of the pandemic has been quite positive, in comparison with the majority of the European countries.

Ladies and Gentlemen, The indications for economic recovery are evident, and the prospects of the Cyprus economy are expected to improve even further.

Together we shall continue putting forward new policies and initiatives for national economic growth and for attracting investments to our country with vigour and responsibility. I am confident that together we will create the right conditions for a sustainable development, based on decisiveness, commitment and cooperation.

I wish you all the best on the Institute’s 60th Anniversary.

I would like to wish many happy returns to the ICPAC on its 60th anniversary. Being an ICPAC member myself, I feel proud of its contribution both to the Cyprus economy and the society. I wish that the next 60 years will be filled with great success and substantial contribution to our country’s development.

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Alan Johnson President of International Federation of Accountants (IFAC)

I send my congratulations to the ICPAC on its 60th anniversary – a tremendous milestone, and a reflection of the lasting value of the profession’s contributions to the public interest.

I sincerely thank every ICPAC member, past and present, for your work to build a strong accountancy profession in Cyprus.

I would like to explain briefly explain IFAC’s mission, and why the close partnership between IFAC and the ICPAC is so important.

IFAC is the global voice of the accountancy profession. We serve the public interest by enhancing the relevance, reputation, and value of the accountancy profession around the world since 1977. Through our 175 member PAOs and network partners, we represent more than three million professional accountants in more than 130 jurisdictions. With ICPAC as a founding member IFAC has had a very close and productive relationship with ICPAC for 44 years.

Our work falls broadly under three categories: We represent and advocate for the profession as its global voice.

We help to equip the profession, through our member PAOs and all the professionals they represent, for the future.

And we support the development, adoption, and implementation of high-quality international standards. This third point is especially important at a moment of unprecedented global uncertainty.

IFAC supports three independent international standard-setting boards: the International Auditing and Assurance Standards Board, International Ethics

Standards Board for Accountants, and International Public Sector Accounting Standards Board.

These standards are a common language for all stakeholders in value creation. With a common language, the ease of doing business increases and barriers to crossborder investment fall. Global standards bring greater transparency and trust to financial markets, which in turn increases financial stability.

The accountancy profession’s international standards for professional integrity, embodied in our International Code of Ethics, are unparalleled. These standards are essential to our ability to speak and be heard on issues affecting the public interest.

It is important to note that there are no laws requiring nations to adopt international standards and none requiring their implementation. National authorities will align national standards with global standards only if they see global standards as relevant and appropriate for their jurisdictions. As professional accountants, our public interest mandate calls on us to encourage and work with regulators to adopt and implement high-quality global standards.

Adoption and implementation is hard work, and the process often requires years of advocacy, public education, outreach, and coalition building. I commend the ICPAC for continuing to do this vital work with remarkable success over six decades.

The importance of international standards is also apparent in the social contract between citizens and governments. The massive fiscal response to COVID-19 has made this clear. The public in every country will look

for transparency and integrity in how public money is spent. A great deal of trust is at stake.

IFAC has many strengths. We are a global convener of the profession’s stakeholders, a global forum for thought leadership on the most pressing issues facing our profession and our world, and an influential voice in critical international conversations about public interest issues.

But what IFAC aims to do is possible only with our member, associate, and affiliate organizations. Together they offer the resources and geographic reach to make global transformations happen.

The ICPAC, for example, engages extensively with the profession across Europe and around the Mediterranean through regional PAOs and the ACCA – to the benefit of everyone.

With 60 years of remarkable service to the people of Cyprus, the ICPAC is a prime example of IFAC’s family in action. For your continued partnership and commitment to the public interest, I would like to say: thank you. Despite the ongoing challenges caused by COVID-19, I hope you are able to celebrate your anniversary with the pride and recognition your achievements deserve, and I wish you much success for the next 60 years of service to Cyprus and beyond.

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| COVER STORY

Dr. Stavros Thomadakis Chair of International Ethics Standards Board for Accountants (IESBA) The 60th Anniversary of the Institute of Certified Public Accountants of Cyprus (ICPAC) June 2021, Cyprus

Friends, Colleagues and Members of the Institute, Your 60th anniversary is a great occasion.

Congratulations!

Looking back over 6 decades you must be proud of your contributions: the development of the Accounting Profession in Cyprus and Greece, the successful support to companies, the economy and the welfare of Cyprus. I want to commend you for these achievements, and wish you personal and collective longevity, professional success and progress.

An important Anniversary is always a moment of reflection and planning for the future. We are living in a period of several transitions with many uncertainties, challenges and opportunities for change. Technology opens new paths forprogresswhile looming risks of climate change, biologicalthreatsand geopolitics press us to plan for adaptation and resilience.

These challenges and opportunities renew the need to elevate professional ethics to center stage. Our Board is diligently working to maintain and enhance the Code’s relevance and applicability to our dynamic global environment. And Professional Accounting Organizations, such as ICPAC, must also continue and intensify their efforts to apply ethical principles and standards in novel circumstances.

As we slowly rise out of the terrible COVID-19 pandemic, there are many who are struggling to make a successful restart and many who make use of extensive programs of public support. The crisis has

also created temptations and opportunities for malfeasance. Professional Accountants everywhere remain at the forefront of efforts to rebuild trust in economic relations, perform their duties with integrity and competence, care for their clients with diligence and agility, protect the Public Interest with prudence and perseverance.

In short, they must be not only ethical practitioners; they aspire to be ethical leaders.

We at IESBA appreciate especially that your Institute and Cyprus belong to the early adopters, among world jurisdictions, of the restructured International Ethics Code for

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Professional Accountants (including the International Independence Standards) and that the Code and its newer revisions have been invested with the force of law in the Republic of Cyprus. This is a timely and future-proofing achievement of your Institute that we salute.

I am confident that the current and future professionals of the Institute of Certified Public Accountants of Cyprus will be protagonists in responding to the challenges of our time.

STAVROS B. THOMADAKIS Chairman, International Ethics Standards Board for Accountants (IESBA)

Myles Thomson President of Accountancy Europe

Dear Members of the Institute of Certified Public Accountants of Cyprus (ICPAC), Congratulations to ICPAC on its 60th anniversary. I am honoured to be part of such an esteemed group of leaders and colleagues and welcome the opportunity to congratulate you.

Accountancy Europe As Accountancy Europe, we are the umbrella organisation for the European accountancy profession. Next to ICPAC, we represent 49 other institutes from 34 countries. As accountants, we make numbers work for people; the human aspect is central to Accountancy Europe’s mission and strategy.

Because people count – is what we want to express in informing the European and global policy debate. I would like to thank Kyriakos Iordanou and his team for representing ICPAC’s expertise at European level; it is always a pleasure to work with you. ICPAC is an integral part of our decision making and we appreciate the perspectives that you bring to our work in Brussels.

Cypriot profession Ever since ICPAC joined Accountancy Europe in 1991, you have been such an active contributor and we greatly appreciate your continuous engagement on the European stage. It is good to see that Cyprus values accountants for their strategic and important role affecting society. You are well respected for what you do, and you are central to how the economy works and participate in strategic debates.

Global focus The Cypriot profession is also a very globally focussed one, with Cyprus being at the forefront in adopting global standards. It is now 17 years ago that Cyprus joined the European Union. Cyprus has continued to reaffirm its commitment to the EU. In this challenging time, it is very important that we stand united as the accountancy profession and as Europeans. We believe that future is brighter when we work together.

Our priorities As we are seeing the recovery from the Covid crisis coming along, many new EU initiatives will affect the profession in all Member States. We are a single market which helps the profession operate more effectively. This also means that 80% of rules professional accountants deal with daily come from EU level. It is thus important that we are an integral part of informing the EU decision making process at an early stage; rather than amending what is already proposed, we should be involved in setting the agenda.

Also, to remain relevant in influencing legislation, we need to be an innovative force.

We cannot just bring our issues to the table but need to come with solutions.

Our mission spans over the following three dimensions: 1) influence decisionmakers, 2) help the profession shape its future, and 3) facilitate cooperation among Members.

To execute this mission, we have developed a flexible and ambitious strategy for my 2021-22 presidency to respond to the main challenges that are impacting the profession and business. We need to be able to

quickly adapt our strategic choices when the political agenda changes. Our strategy aims to enhance the profession’s reputation and advance transparency, accountability, digitalisation, and sustainability. Therefore, based on our Members’ input, we have selected the following 6 focus areas: 1. SMEs: The EU must unleash the potential of SMEs and realise how accountants, as their key advisors, can help the European economy grow. We aim to assess the impact on SMEs and SME audits in all our projects. For example, Accountancy Europe has a key role in reminding audit standard setters and regulators of the potential consequences on SME audits so standards can be applied proportionately.

2. Reporting: Next to our regular contributions to shaping IFRS, we need to focus on the importance of sustainability reporting standard-setting and digitalisation. Accountancy Europe has led the Europe wide debate on shaping the future of corporate reporting since 2015.

3. Audit & assurance: We will have our hands full with the review of the 2014 audit reform by 2022. This is another area where a united European profession is more important than ever. The future of audit & assurance and especially technology are also high on our agenda.

4. Sustainability: Here we deal with the wider EC sustainability agenda, including sustainability reporting and assurance, supply chain and green tax.

5. Corporate governance: We focus on contributing to the EU sustainable corporate governance reforms, combatting AML/fraud, the role of audit committees and tax good governance 6. COVID recovery: SMEs are crucial to the European economy and the crisis has hit them especially hard.

Accountants can support their SME clients on risk management, going concern issues and restructuring.

Stronger together I invite you to join me and Accountancy Europe in looking forward at the challenges and the opportunities which lie ahead – let us make the best of it by working together.

We strive to meet the needs of our members and encourage them to grow. This is only possible through collaborating closely, as we do with ICPAC. Congratulations again on your Platinum Jubilee and I look forward to celebrating many future milestones with you.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

17

| COVER STORY

Mr. Panagiotis Alamanos President of Fédération des Experts Comptables Méditerranéens In my capacity as President of the Federation of Mediterranean Certified Accountants / Fédération des Experts Comptables Méditerranéens – FCM (www.fcmweb.org), which represents the accountancy profession in the Mediterranean area, it is my pleasant duty to address a wholehearted message on the 60th Anniversary of the Institute of Certified Public Accountants of Cyprus (ΣΕΛΚ), where there is so much to celebrate.

Back in 1999, on the initiative of several leaders of national accounting institutes in the Mediterranean area, among which was ICPAC, a non-profit association called FCM was created out of the necessity for a strong voice of the accountancy profession from bodies which are connected by the great cultural and economic highway that is the Mediterranean Sea . Today, FCM’s membership consists of 16 professional institutes of accountants from 12 Mediterranean countries (Albania, Bulgaria,

Cyprus, France, Greece, Italy, Kosovo, Morocco, Portugal, Spain, Tunisia & Turkey), plus one associate member, ACCA GLOBAL and it is the only representative organization of the accountancy profession in the Mediterranean and the regional organization with the widest representation in the area.

In this inspiring cooperation, ICPAC has set, among other co-founding institutes – the foundation, by sharing expertise, knowledge and cultural confidence for the preparation and implementation of what was meant to be an example for others to follow.

A true and faithful supporter at seminars, conferences and events of publicity at large, the ICPAC has strongly supported the FCM’s mission to promote co-operation among the professional accountancy bodies in the region, both in the private and in the public sector, to share knowledge and provide technical assistance to members to help them achieve

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and maintain high professional and quality assurance standards.

The ICPAC also helps its peers in many ways.

The Institute of Certified Public Accountants of Greece (SOEL) to which I am member, started its fruitful negotiations with the largest British Accountancy Institutes - ACCA and ICAEW on the encouragement and support of ICPAC and has collaborated with ICPAC in various endeavors including the translation of the IFAC International Code of Ethics for Professional Accountants, and the International Standards on Auditing (ISAs).

The 60 years of fruitful experience, successful development, and excellence at work truly worth celebration and international acknowledgement. Looking forward to many more working adventures in the future, let me end with an old wise saying by the ancient Greek storyteller Aesop: “Union gives strength”. _

Pieris Markou ICPAC President Dear friends and colleagues, It is my pleasure to welcome you to this month’s edition of our Accountancy Cyprus magazine and to address you as the new President of ICPAC. Our Institute celebrates 60 years of contribution to the economic development of our country and our society. On April 4, 1961, a group of twenty-one visionaries set a common goal: the creation of an Institute that would have a leading role in the economy and our society. Today, 60 years on, the 5000+ members of our Institute, continue to share in these values and contribute both in their personal as well as professional capacity, in the development and improvement of our economy and business environment.

During the last 15 months, our economy has been negatively affected by the consequences of the pandemic. Both public finances and businesses alike, face unprecedented challenges. As a result of the vaccination programme, the economy is gradually returning to normality. It is our obligation and responsibility, on the one hand to tackle the challenges that have emerged, and on the other hand to create new prospects for growth. Our Institute stood by the government during the difficult years of the Turkish invasion and played an important role in the recovery of the economy. We have done the same during the financial crisis of 2013 and we will do the same now.

We declare our readiness to contribute to a framework of actions that will cover all sectors of the economy and that will start its implementation immediately.

The pandemic has also brought forward

technological and digital transformation, as well as developments in the future of work. The future of our economic model relies on our ability to embrace technology and improve our working environment, by applying innovation and flexible working.

Taxation has always been at the forefront of our agenda. We are facing changes globally and within the EU that undoubtably will impact the way that governments assess and collect taxes. Our Institute has continuously made recommendations for the modernisation of our tax system, which take into account the new ways of doing business and increasing regulatory demands, both internationally and within the EU. With the various initiatives around global taxation, Cyprus cannot remain at a standstill.

We need to act and conclude quickly and

decisively, ensuring whatever changes are implemented maintain the attractiveness of Cyprus to international investors.

In the field of professional services, our members are ambassadors of our country and our profession, ensuring the best standards of quality and professionalism.

We have a lot to offer and we should not hesitate to recommend developments that will contribute to the improvement of the business environment and the economy.

We welcome the government’s initiative on economic diplomacy, and we are at the disposal of the state to join forces for the promotion of Cyprus in the international arena.

I look forward to working with all our members to achieve our ambition: instilling confidence, credibility and value.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

19

| AML COMPLIANCE

Money laundering – the cleaning process of “dirty money" Can too much money actually be a problem?

Well yes, if we are talking about ill-gotten money.

Dealing with large amounts of illegal cash is inefficient for criminals and might lead to them getting caught. It is, therefore, necessary for criminal organizations to find a way to make “dirty money” appear legitimate. This process is called money laundering (ML).

There is a common misconception that the vast majority of laundered money relates to the illegal drug trade. This is incorrect; the size of the global illicit drug market is close to $400 billion1 per annum, and the estimated amount of laundered proceeds globally in one year approximates $1.6 trillion2. ML is a necessary process for any crime that generates income,

Orestis Papacharalambous Managing Director & Financial Trainer, Financial Learning Hub

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such as extortion, insider trading, robbery, environmental crimes, drug trafficking, and many more.

The three basic stages of ML Despite the variety of methods employed, ML typically involves 3 steps: 1. Placement – represents the initial entry of the “dirty cash” or proceeds of crime into the financial system.

2. Layering – the primary purpose of this stage is to separate the illicit money from its source, so as to obscure the audit trail and sever the link with the original crime.

3. Integration – at this stage, the money is returned to the criminal from a seemingly legitimate source.

“Money laundering is a necessary process for any crime that generates income.”

“Among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals.”

“Recent findings suggest that the AML policy intervention has less than 1% impact on criminal finances.”

The three basic steps may occur separately, simultaneously or, more commonly, may overlap.

Why we must combat ML ML has devastating economic, security, and social consequences3: 1. ML provides the fuel for smugglers, drug dealers, terrorists, traffickers, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises.

2. It diminishes government tax revenue and therefore indirectly harms taxpayers.

3. Money launderers often use front

companies to hide the ill-gotten gains by co-mingling the proceeds of illicit activity with legitimate funds. These front companies have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates. This makes it difficult, if not impossible, for legitimate businesses to compete against front companies with subsidized funding.

4. Among its other negative socioeconomic effects, ML transfers economic power from the market, government, and citizens to criminals.

Is the current anti-money laundering (AML) policy intervention effective?

Recent findings suggest that the AML policy intervention has less than 1% impact on criminal finances. In other words, 99% of illicit funds remain in criminal hands; enabling, facilitating, and rewarding the continued expansion of serious crime.4 Furthermore, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers, and ordinary citizens are penalized more than criminal enterprises. It is evident that there is a huge gap between policy intent and results. The current system appears to have almost no impact on crime. There are many reasons for this failure, but one of the most crucial ones is the misplaced emphasis on processes rather than on policy effectiveness and outcomes.5

1 United Nations publication (1998), “Economic and Social Consequences of Drug Abuse and Illicit Trafficking” https://www.unodc.org/pdf/technical_series_1998-01-01_1.pdf 2 United Nations Office on Drugs and Crime (2011), “Illicit money: how much is out there?” https://www.unodc.org/unodc/en/frontpage/2011/October/illicit-money_-how-much-is-out-there.html 3 Bangladesh Bank (2018), “Guidance notes on prevention of money laundering” http://biabd.org/wp-content/uploads/2018/03/guaidence_on_insuran_-of_money_laundering.pdf 4, 5 Ronald F. Pol (2020), “Anti-money laundering: The world's least effective policy experiment? Together, we can fix it” https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1725366

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21

| AML COMPLIANCE

Updates on the Prevention and Suppression of ML activities …

C

yprus has implemented necessary changes to bring its law in line with the European legal framework. The amending law to the Prevention and Suppression of Money Laundering Activities and Terrorist Financing Law (the AML/CFT Law), which was enacted by Cyprus Parliament on 18 February 2021, harmonizes the European Directive 2018/843 on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing (the 5th AML Directive) and introduces certain provisions that stem from international country assessments.

Nafsika Ttofa Monitoring & Compliance Officer - The Institute of Certified Public Accountants of Cyprus

The new Law introduces innovations in the fight against money laundering and terrorist financing that touch upon many aspects.

EXPANDED SCOPE OF APPLICATION The scope of application of the new Law is significantly expanded to include a range of new obliged entities. The obliged entities that have been added and are now required to abide by its provisions are: a. Art Dealers and Warehouses that provide storage services for works of art According to the provisions of the new Law, any person trading or acting as intermediary in the trade of works of art, given that the value of the transaction or a series of linked transactions is €10.000 or more and any person that owns or operates a warehouse that provides storage services for works of art, given that the value of the transaction or

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a series of linked transactions is €10.000 or more is included in the definition of “obliged entities”, thus coming under the scope of application of the law. b. Cryptoasset service providers Service providers of cryptoassets dealing that provide exchange services between cryptoassets or between cryptoassets and fiat currencies or that provide wallet custodian or other cryptoasset-related financial service as these are included in the Law, are now identified as “obliged entities”.

It should be noted that the new Law extends the services that are captured by the notion of “cryptoasset service providers” beyond the provisions of the 5th AML Directive, as to incorporate recommendations and provisions included in the Guidelines issued by the Financial Action Task Force (FATF).

d. Register of Bank accounts, payment accounts and safe boxes The Register of Bank accounts, payment accounts and safe boxes will be held by the Central Bank of Cyprus and access will be strictly limited only to the FIU (MOKAS), the Police, the Customs, and the Tax Department within their responsibilities. e. Register of Cryptoasset Service Providers The Register of Cryptoasset Service Providers will be held by the Cyprus Securities and Exchange Commission. All providers in cryptoasset related services or activities mentioned in the Law, must apply for registration in the said Register and must fulfill the criteria that will be set by the Cyprus Securities and Exchange Commission.

DUE DILIGENCE MEASURES a. High risk third countries The application of specific enhanced due diligence measures when dealing with high risk third countries is now mandatory. b. Politically Exposed Persons According to the provisions of the Law, Cyprus must set up a list of functions that qualify as “prominent public functions” so as persons exercising any function contained in the list will be identified and treated as politically exposed persons. Cyprus is also required to draw up a list of international organizations located in its jurisdiction.

c. Tax advisers Tax advisers were already included in the AML/CFT Law. The new law has broadened the notion as to include any person whose main business or professional activity is to provide material aid, assistance, or advice in taxation related matters. d. Real estate agents The new law covers not only real estate agents but has been extended to include real estate agents when acting as intermediaries for the rental of immovable property as well, but only if the monthly rent is €10.000 or more.

CENTRAL REGISTERS a. Register of Beneficial Owners of Companies and other legal entities The said Register will be kept by the Department of Registrar of Companies.

Certain information contained in the Registry will be available to the public. b. Register of Beneficial Owners of legal entities The said Register will be kept by the General Commissioner and will contain information on the beneficial owners of clubs, foundations, federations, and unions.

Again, the Registry will be open and certain information will be available to the public. c. Register of Express Trusts and similar legal arrangements The Register of Express Trusts and similar legal arrangements will be kept by the Cyprus Securities and Exchange Commission. The Register will not be open and any person of the public that wants to gain access must prove legitimate interest.

c. Risk assessment of new technologies, products, and services Based on the Law, prior to the launch of a new product, service or technology, a risk assessment of the said product, service or technology must be made.

The enactment of the amended AML/CFT Law marks the shift towards an even more rigorous anti-money laundering/ terrorist financing legal framework. Its significantly expanded scope brings many entities within its scope and makes its application binding upon many professions that will now have to abide with all the provisions of the law, including the KYC/CDD and monitoring requirements, effectively closing any gaps existed in the application of the provisions of the Law. The establishment of the Beneficial Owners Registers and the other Central Registers services the public interest of enhanced transparency and create a fully regulated environment.

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| AML COMPLIANCE

AML considerations for International Assignments Terry Kiely Partner and Head of Compliance at BDO Cyprus Recently I was referred a situation where a client (whose parent company was listed company in another EU country) was querying whether they had to provide some of the identification documents that we had requested for the directors of the Cyprus subsidiary. These documents would be considered quite a normal request amongst Cyprus firms and certainly would be expected to be on the client AML file should we have a monitoring visit. However, the client informed us that the auditors of their parent company had said these documents would not be required in their own country and since both countries followed EU regulation why should they have to provide them?

Such situations seem to be becoming more common and highlight the differences in practical application of the EU’s directives on AML in different Member States. Initiatives amongst large international accounting firms to try and centralise regional AML acceptance procedures and systems have largely not been achievable for similar reasons.

The grievances of the client in the above example can be understood: Why provide different documentation on the same entity to multiple institutions and firms across multiple Member States? How can they predict what information might be required on individuals and potentially keep requesting additional information from them as more advisors and institutions become involved? How is this an efficient way for firms to service their Group?

For firms themselves, the increasing compliance requirements, although welcome and necessary in the modern world, present obvious challenges.

Encouragement of a more consistent approach on all regulated firms and institutions as well as better ways of information sharing would surely

significantly improve knowledge of their clients and their financial background.

On 20 July 2021 the European Commission published new proposals with respect to AML rules within the EU. One of these includes the provision of a regulation establishing the Authority for AML (“AMLA”).

The aims of the AMLA appear to be more focused on consistent supervision of member states’ National Competent Authorities such as MOKAS. However, the AMLA will also directly supervise some

financial firms which are considered high risk cross border credit and financial institutions operating in a number of Member States. Whilst this will not directly affect accounting firms, this might pave the way for the start of a more consistent application of the practical requirements across the EU. For the time being, in order to conduct AML procedures more efficiently all firms and institutions can help each other. Some ways this can be achieved:

• enhanced training of staff and ensuring a consistent systematic approach within their own organisations; • manage client expectations and let them know that different organisations may have different client acceptance procedures and requirements • obtain an understanding of the type of AML documentation other firms and institutions already have or will require to accept the client; • focus on quality and reliability (source) of information and not just quantity. Make sure the information requested is both necessary and meets the requirements of the law; • establish chains of communication with other known advisors and institutions at an early stage in the client acceptance procedure; • try to get as close to the key decision makers as possible and reduce beaurocracy; • be careful of individual’s data privacy rights and always seek client’s and individuals’ permission to share and obtain information with other advisors and institutions; • make sure that you don’t fall foul of “tipping off” rules if you are exchanging information.

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Website Advertising Order Form

Year 2021-2022

To: The Institute of the Public Accountants We wish to book an advertisement place on ICPAC WEBSITE:

PRICE LIST Duration

Price per entry

6 months

150 per month

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120 per month

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Member account

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1. Please mark with an X any quarter as appropriate 2. The above amounts do not include VAT

Contact Person Constantina Achilleos

ICPAC Form (November 2021)

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF CYPRUS 11 Byron Avenue, 1096 Nicosia P.O.Box 24935, 1355 Nicosia, Cyprus Telephone: +357 22 870030, Fax: +357 22 766360 info@icpac.org.cy www.icpac.org.cy 1961 - 2021

σελκ

YEARS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF CYPRUS

confidence, credibility, value!

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

25

| BUSINESS & ECONOMY

Turning Back the Clock

Post-Brexit UK and Cyprus Cross Border Insolvency Recognition

T Chris Iacovides Certified Public Accountant and a Licensed Insolvency Practitioner, Director CRI Group Ltd

Andri Antoniou Solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner, Director CRI Group Ltd

he loss of the relatively streamlined and automatic recognition regimes which applied between the UK and EU member states by virtue of the EU Regulation on Insolvency Proceedings 2015 (848/2015) (EUIR), has been described as a “great tragedy” 1.

What was a clear and smooth route to recognition between member states, facilitating more efficient and swift cross border insolvency proceedings with obvious benefits to creditors and other stakeholders, no longer applies for UK office holders who will need to seek recognition in EU member states and vice versa, leaving office holders to navigate through a fragmented and less predictable landscape of common law, domestic legislation and international treaties to identify the most appropriate route.

For insolvency proceedings which commenced prior to 31/12/2020, the position was clarified by the Withdrawal Agreement (2019/C 384 I/01); the EUIR continues to apply to those cases. The pathway, however, to recognition for insolvency proceedings commenced post 31/12/2020 will undoubtedly be more complex and the increase of cross border structures involving Cyprus means it is necessary to identify the legislative framework which will be applicable for recognition to be achieved.

Recognition of UK insolvency proceedings in Cyprus The process for recognizing UK insolvencies in Cyprus, in the absence of the EUIR, is largely untested.

There are a limited number of reported cases where the Foreign Judgments (Reciprocal Enforcement) Law 1935, Chapter 10 (“Cap 10”) has been relied upon as the

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pursuant to which a foreign representative appointed in foreign insolvency proceedings may make an application to a court in Great Britain for recognition of those proceedings.

The impact of the recognition is, inter alia, that the foreign representative will have standing to make an application to the English Court under the claw back provisions under the Insolvency Act 1986. Also, for foreign main proceedings only (commenced where the debtor has its centre of main interests) recognition results in an automatic stay on certain enforcement actions against the debtor, equivalent to the stay which applies in English liquidation proceedings.

Thus, there are routes available for recognition albeit the position is not anywhere near as clear and predictable as it was under the EUIR; the procedures will now be more costly and time consuming and automatic recognition between Cyprus and the UK, at least for now, is a thing of the past. For practitioners who need to act expeditiously to protect and safeguard assets even a 3 to 6 month delay in their recognition may mean it is too late! basis for the recognition of receivers in other common law jurisdictions2.

As per s3 of Cap 10 any judgment (by virtue of the amendments introduced by Law 130 (1)/2000 the definition of a judgement was extended to include judgements or orders regardless of whether a monetary sum is awarded) of a Superior Court3 will be recognized by the Cypriot court, inter alia, provided it is final between the parties4.

Common law may be another route to recognition; in the first instance case of Eitan Erez v Dr Borris Bannai (Appl no. 1535/2011) , although the court refused to recognise the foreign insolvency proceedings because the respondents were not Cypriot residents and the applicant failed to sufficiently prove that they held assets within the jurisdiction, nonetheless the court was willing to follow common law principles as a route to recognition.

Recognition of Cypriot insolvency proceedings in the UK The UK already has domestic legislation in place through which it can continue to recognise Cypriot (or other member state) insolvencies; the UK implemented the UNCITRAL Model Law on Cross Border Insolvency (“Model Law”) via the Cross Border Insolvency Regulations 2006 (SI2006/1030) (“CBIR”) 1 The UK and the EU Cross Border Insolvency Recognition: from Empire to Europe to “Going it alone” Susan Block Leib Fordham International Law Journal Vol 40, Issue 5 2017 2 Application no 449/19 of the D.C. of Nicosia, judgment dated 13/7/2020 and Application no 7/15 dated 18/7/2017 of the D.C of Limassol 3 Section 3 (1) (b) provides that such Courts of that foreign country shall be deemed superior Courts of that country for the purposes of Cap 10 and section 9 (1) provides that Cap 10 applies to inter alia, judgments obtained in Courts of the United Kingdom.

4 Section 3 (3) Cap 10 provides that a judgment is deemed to be final irrespective of whether an appeal is pending or the judgment is subject to an appeal.

5 A.G. Erotocritou LLC, Cross Border recognition of insolvency proceedings 13/05/2009

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| BUSINESS & ECONOMY

What is the Shareholder

Manager problem and by what means it can be resolved?

T

Alexandros Anastasiou President of ICPAC LarnacaFamagusta Committee

he above named theory was discussed extensively throughout the years and it remains an issue for discussion in modern businesses. The Shareholder – Manager problem is fully developed and explained in Moral Hazard theory, or what is well known in economics, the principal agent problem. Moral Hazard occurs when an agent has incentives to act in his/her own interest, in a way which is contrary to the principal’s interest. The agent’s actions are largely unobservable by the principal. The agent is the person who takes the action, which in our case is the manager and the principal is the affected person, which in our case are the shareholders. The concept of Moral Hazard is often found but not always, where the agent is an employee of the principal, or at least there is some form of contractual arrangement between them.

Concluding, taking into account that through times of financial crisis, the phenomenon of Principal – Agent problem appears frequently, all organizations, irrespective of size and industry, must adopt the best option available under the circumstances as described above, following the cost benefit analysis model at all times

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The problem of Moral Hazard arises due to the fact that in many Public Limited Companies, the owners are thousands of small shareholders and institutional investors. Therefore, the control of these companies is found in the hands of senior managers, who are responsible for the day to day running of the firm. In addition, although, top managers, have the required knowledge to take the best decision under the circumstances, they might follow their own policy, which best suits their own interests, such as demand for high wages and extra bonuses.

According to Adam Smith, “The directors of such companies…being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private capartnery frequently watch over their own…negligence and profusion therefore must always prevail, more or less in the management of the affairs of such a company”.

Some of the solutions that the shareholders of the organization can adopt, in order to motivate the manager, is to offer a fixed percentage of profit, through a motivated profit sharing scheme.

Another option to be considered is to offer to managers an optimal contract. This is sometimes referred to as a ‘forcing contract’ as well. The contract terms are designed to force the manager to take the optimal level of effort, otherwise the manager is penalized, if his decision is not in the best interest of the firm (for example by earning low amount of income or bonuses).

Another solution that shareholders can consider, with the prime objective of minimizing the Principal – Agent problem, is by appointing ‘outside directors’, who will be responsible for evaluating the performance of the managers, through a yearly appraisal.

Usually, targets are agreed at the beginning of the year among the parties and the reward is based, on whether the manager was successful enough achieving the agreed targets. At this stage, it has to be noted, that the agreed targets must be fair and feasible to be achieved, in order to avoid unnecessary tensions.

However, modern businesses nowadays, irrespective of their size and industry, are appointing Independent Professional Accountancy firms to evaluate and assess the existing internal control system of their organization.

Specifically, professional accountancy

firms are evaluating the existing internal control systems of an organization, in order to assess whether all employees comply with the organization’s internal policies and best practices in general. At the time of completing the assessment of the internal control procedures of an organization, professional accountancy firms, prepare a report addressed to Board of Directors with their findings, illustrating suggestions for improvement. Economy, Efficiency and Effectiveness are essential criteria used in evaluating the existing internal control procedures in place. Moreover, it has to be noted, that this exercise is regarded by the shareholders, as a ‘watch Dog’ approach, in the sense that radical actions can be taken on time, once an unpleasant phenomenon is developing (assuming that the internal control system evaluation assessment is performed on a frequent basis).

Concluding, taking into account that through times of financial crisis, the phenomenon of Principal – Agent problem appears frequently, all organizations, irrespective of size and industry, must adopt the best option available under the circumstances as described above, following the cost benefit analysis model at all times.

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| BUSINESS & ECONOMY

Investing in a more sustainable future

Theodora Economides Senior Manager | Risk Advisory Deloitte Limited

Integrating sustainability across all areas of business

T

he world is moving towards a cleaner more sustainable future, and the financial services industry is starting to transform and do its part in this new era. Shareholders, regulators, politicians, employees and

other key stakeholders all recognize this urgent need to act and are beginning to exert pressure on financial firms to mobilize.

In today’s business environment, where the financial services industry is beginning to realize the utmost importance of finding

1

Monitoring Effective, timely and ongoing monitoring of sustainability risks and ESG critria.

3

Risk Management Framework

2

the right balance between financial and environmental social and governance (ESG) priorities, a carefully orchestrated sustainability roadmap, from strategysetting down to regulatory compliance and disclosures, is vital to long-term success.

Strategy-setting and Operationalisation Embedding sustainability into the heart of business strategy, benchmarking current ESG strategy with optimal sustainability objectives.

Integrating sustainability risks into Risk Oversight, Risk Systems and Capability and Risk Processes.

4 Regulatory Compliance and Disclosures Compliance with regulatory requirements and promotion of sustainability integration.

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Material Risk Assessment • Defining institution’s exposure to sustainability risks • Assessing and defining prioritisation areas and qualitative parameters to assess their materiality • Updating of Material Risk Assessment

1. Embedding sustainability into the heart of strategy To begin with, sustainability considerations should be cultivated and embedded into the strategy-setting and decision-making process of financial institutions; they should thus become intrinsic to the institution’s success and business models.

Clear and thorough consideration and decisionmaking framework for sustainability risks is of great importance as is the role of the Board of Directors in setting the right tone from the top.

Although unavoidably a costly and time-consuming exercise, there is potentially considerable commercial benefit that financial institutions can extract from investing in sustainability. Customers appear to increasingly want product and service offerings that align with their views and beliefs and regulators are in support of this (for example EU banks will need to consider sustainability risks at all relevant stages of the creditgranting and loan origination process and monitor these risks in their portfolios).

Risk Oversight • Attitude the Board and Senior Management take towards the role and prioritisation of sustainability risks • How this approach is cascaded throughout the organisation

2. Enhanced Risk Management Framework An enhanced risk management framework may allow institutions to be better prepared and more resilient to manage sustainability risks. For this to happen, sustainability risks should be integrated into the existing Risk Management Framework, demonstrating linkages, dependencies and potential impacts to support decision-making and strategy setting.

In considering the Risk Management Framework there are a number of areas financial institutions need to consider in terms of integrating these risks into their Material Risk Assessment, Risk Oversight, Risk Processes, and Risk Systems and Capability. Building capabilities (e.g. data), setting limits as well as developing appetite, models and stress testing methodologies that incorporate these risks, is a key step towards an enhanced risk management framework.

Risk Processes • Assessment of how sustainability risks are identified, assessed, and monitored, forming linkages between risk management and actual decision-making • Incorporation of sustainability risks in the risk register • Relevant controls and processes in place to monitor and evaluate such risks 3. Monitoring and Data Infrastructure The existence of a robust and effective monitoring framework supported by an enhanced data infrastructure and data capabilities is crucial in ensuring that relevant information and required reporting is reliable, complete, up to date and timely.

The development of a sustainability strategy dashboard for internal reporting and monitoring as well as the availability of the right tools, processes and systems shall ensure that all relevant hallmarks and targets are monitored against and shall enable the timely identification of any gaps and need for action.

THE OPPORTUNITY The need to act is greater than the regulatory requirements. There’s an enormous opportunity on the horizon for those who can effectively manage sustainability and environmental risks. Differentiation in the financial services industry is as difficult as it’s ever been and being sustainability-friendly can be a powerful tool to help firms rise above collective commoditisation. Engaging in strategic sustainability and environmental thinking and decision-making will be key in the success of an institution’s sustainability journey.

Risk Systems and Capability • Reviewing and updating of risk infrastructure • Consideration of resources, such as upskilling relevant staff and educating them to better comprehend sustainability risks • Effective risk monitoring and reporting

4. Regulatory Compliance and Disclosures EU Regulators and policy makers are looking more closely at disclosures and transparency in this area, in an attempt to promote comparability on how financial institutions consider sustainability and environmental risks in their investment decisions, business strategy, governance and risk management framework. To this end, a number of related requirements and consultations have recently been published, for example the EU Sustainable Finance Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), the Non-Financial Reporting Directive (NFRD) Requirements and the ECB Climate-related and Environmental Risks Guide.

This intensified regulatory environment around sustainability heightens the need for financial institutions to make use of an integrated management reporting system enabling the quantification of the implications of sustainabilityrelated decisions. High-quality and reliable disclosures and external communications should provide insights to market participants, consumers and policymakers into how effectively the institution manages ESG impacts and requirements.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

31

| BUSINESS & ECONOMY

Eleni Ashioti Head of Technical and Professional Matters, The Institute of Certified Public Accountants of Cyprus The Non-Financial Reporting Directive (Directive 2014/95/EU, the NFRD), amending the Accounting Directive, was implemented in 2014. It is one of the ten actions of the Sustainable Finance Action Plan of the European Commission enhancing transparency of corporate reporting on sustainability issues.

Companies within the scope of the NFRD had to report in accordance with its provisions for the first time in 2018 (covering financial year 2017). The European Commission committed itself to proposing a revision of the NFRD and so it did.

The change in the name of the NFRD to Corporate Sustainability Reporting Directive (CSRD) reflects the fact that as many of the Environmental, Social, Governance (ESG) issues currently covered by the NFRD have a financial impact, the European Commission no longer considers it relevant to call it “non-financial” reporting. Therefore, the NFRD will become the CSRD. The proposal will help reduce systemic risks to the economy. It will also improve the allocation of financial capital to companies and activities that address social, health and environmental problems. Lastly, it will make companies more accountable for their impacts on people and the environment, thereby building trust between them and society.

Comparison between the NFRD and CSRD sustainability reporting requirements 1. Extension of the scope NFRD: EU rules on non-financial reporting currently apply to: • Large public-interest entities with more than 500 employees.

• Public-interest entities that are parent companies of a large group with an average number of employees in excess of 500 on a consolidated basis.

European Commission’s proposal for a Corporate Sustainability Reporting Directive CSRD: Proposal to extend the scope to apply to: • All large companies meeting at least 2 out 3 criteria: • > 250 employees and/or • > €40M Turnover and/or • > €20M Total Assets • All companies listed on a regulated EU market (except for listed micro entities) 2. CSRD clarifies the principle of double materiality: removing any vagueness about the fact that companies should report information necessary to understand how sustainability matters affect them, and information necessary to understand the impact they have on people and the environment.

3. CSRD requires assurance of sustainability information (performance of a limited assurance engagement) -NFRD did not have such requirement.

4. CSRD specifies in more detail the information that companies should report and require them to report in line with

mandatory EU sustainability reporting standards.

The European Commission will also develop proportionate standards for SMEs. While SMEs listed on regulated markets would be required to use these proportionate standards, non-listed SMEs may choose to use them on a voluntary basis. Listed SMEs do not have to start reporting until three years after the effective date (i.e., 1 January 1, 2026).

5. CSRD ensures that all information is published as part of companies’ management reports (NFRD option to allow companies to disclose sustainability information in a separate report is proposed to be removed).

6. CSRD requires companies to digitally tag reported sustainability information in accordance with a digital taxonomy, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

TIMING AND SUBSEQUENT STEPS The subsequent step is for the European Parliament and the Council, to agree on a final legislative text based on the European Commission’s proposal. The final timetable will depend on how the European Parliament and Council progress in their negotiations. If they get to agreement in the first half of 2022, then the European Commission will adopt the first set of reporting standards under the new legislation by the end of 2022. That would signify that obligated companies would use the new CSRD standards for the first time to reports published in 2024, covering financial year 2023.

These revisions are important as they safeguard that companies will provide more relevant, comparable, and reliable sustainability information. Assurance will also play an important role in achieving quality of reported information. Furthermore, they will certainly strengthen the EU’s social market economy, helping to ensure that it is future-ready and that it delivers stability, jobs, growth, and investment.

32 | ACCOUNTANCYCYPRUS | OCTOBER 2021

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ACCOUNTANCYCYPRUS | OCTOBER 2021 |

33

| BUSINESS & ECONOMY

Cyprus – the country of choice for remote working 30 june 2021

Michael Michaelides Partner, Tax & Legal services, Deloitte Cyprus

Angelos Gregoriou Senior Manager, Tax & Legal services, Deloitte Cyprus

COVID PANDEMIC, WORK FROM HOME AND THE FUTURE OF WORK "Work from Home" or in short “WFH” is a concept popularized from Covid-19, which describes work being done from home or in general remotely, instead of from an office/designated premise.

Along with the numerous challenges the pandemic has brought into our lives, it pushed a significant part of the population to work from home. Adapting to this new reality, many businesses have to date announced their intention to move to a hybrid or even full work from home model, shaping, in other words, the future of work. Organisations that give the opportunity to their employees to remotely work from another country, could appeal to a broader and more diversified pool of people and could potentially attract the best talent, offering them a competitive edge.

34 | ACCOUNTANCYCYPRUS | OCTOBER 2021

THE OPPORTUNITY While corporations are re-considering their working models, employees and entrepreneurs are reflecting on how to rebalance their lives and improve their quality of life. In this pursuit, people that can effectively perform their work from anywhere in the world, are even contemplating which country they would like to call “home”.

Leveraging on its unique location, EU membership, safe and family friendly environment, sunny weather and high quality of life, Cyprus can potentially become a hub for remote workers.

TAX INCENTIVES PROVIDED FOR RE-LOCATION Besides the multitude of non-tax benefits that Cyprus has to offer, Cyprus provides a very attractive personal tax regime, especially for those that will become Cyprus tax residents.

There are numerous tax incentives available to individuals relocating to Cyprus.

Incentives for employment Taxable income up to €19.500 is effectively exempt from income tax. In addition, an individual taking up employment in Cyprus may be eligible, subject to conditions, to a 20% or 50% income tax exemption on employment income, enjoying an effective tax rate on such income, in the range of 0% - 20%. Furthermore, earnings from overseas employment for which a Cyprus tax resident spends more than 90 days abroad in rendering his/her services, are exempt from tax.

Incentives for traders and those earning investment income A Cyprus tax resident who is not Cyprusdomiciled (“non-dom.”) is exempt from tax on dividends and interest income. According to the Cyprus laws, an individual’s domicile is defined at birth as being that of his/her father’s, or that of his/her choice. Therefore, a Cyprus tax resident born to a non-Cypriot domiciled father, would generally be considered, for at least 17 years, as a “non-dom.” and enjoy dividend and interest income tax-free.Taking

into consideration that Cyprus tax residents can also enjoy reduced withholding taxes on dividends and interest (due to the wide tax treaty network of Cyprus) received from abroad as well as enjoy tax-free realised and unrealised gains from shares, bonds, and other qualifying financial instruments, then the status of a Cyprus tax resident “non-dom.”, becomes even more attractive, especially for those active in financial trading.

No hidden taxes An individual deciding to reside in Cyprus does not need to worry about estate duty, immovable property tax, wealth tax, gift tax or inheritance tax, since none of these are applicable in Cyprus.

PLANNING CONSIDERATIONS The decision of working remotely from Cyprus needs to be planned carefully, taking into account (among others) the following considerations: Permanent establishment An overseas business could create a permanent establishment (PE) in Cyprus, when it has such a business activity that triggers taxable presence. Although the Cyprus corporate income tax rate is only 12,5%, the creation of a PE can be an important consideration as it creates a number of compliance obligations. In general, different factors can determine whether a PE has been created, like the length of stay of the remote workers, the functions they perform, the place of their work and its degree of permanency etc.

Dual tax residency Individuals interested in becoming Cyprus tax residents, would need to ensure they “break” their previous tax residency to mitigate the risk of dual residency. Cyprus is party to more than 60 tax treaties, providing for “tie-breaker” rules where two countries claim the tax residency of an individual.

Payroll taxes and contributions The large majority of the tax treaties that

Cyprus has with other countries, contain an ‘employment income’ article which does not give taxing rights to Cyprus if certain conditions are met, including that the individual spends no more than 183 days in Cyprus in any 12-month period.

Such being the case, for short-term remote workers that can choose Cyprus as a remote location for less than 6 months within a given year and their presence in Cyprus does not create a PE for their employer, Cyprus can be an ideal location, without creating any tax implications for the individual or the employer in Cyprus.

Contributions to the Social Insurance and General Healthcare System may arise in such case, however EU individuals can be exempt if they hold a Certificate of coverage (A1 certificate) that would allow them to continue their contributions in their home country.

A decision to live and remotely work from Cyprus for more than 6 months during the calendar year, would mean that an individual would become a Cyprus tax resident. Although in such case, Cyprus would most likely have taxing rights over the income of the employee, given the significant tax incentives on offer, this may not be an issue.

Compliance obligations Where Cyprus would have taxing rights over the income of any employee, the overseas employer would need to register as a local employer and maintain a payroll in Cyprus for the purpose of withholding the relevant tax and contributions.Whilst the freedom of establishment would mean that an EU organisation would only register as an employer in Cyprus for payroll purposes, a UK and any other non-EU employer would also have an obligation to register a branch or a company in Cyprus for the purpose of withholding such taxes and contributions and remit them to the Cyprus authorities.

Furthermore, these branch or company registrations would give rise to other compliance obligations for the non-EU organisations, with the need for accounting, tax filing and annual audit requirements in Cyprus.

THE COUNTRY OF CHOICE There are many Cypriots looking to relocate back home trying to convince their employers that Cyprus is an ideal place to do business from. The same applies for non-Cypriots looking for a safe, sunny, and business-friendly location to work remotely from and enjoy quality lifestyle.

The Government and the competent authorities in collaboration with ICPAC, should enhance their efforts to simplify the relevant registration processes, introduce more efficient ways to collect the resulting taxes and, in general, minimise the compliance burden.

Given the significant tax and other incentives, with the right actions, Cyprus can become the country of choice for remote workers and their employers.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

35

| BUSINESS & ECONOMY

The pan-European Personal Pension Product (PEPP)

T

he introduction of a uniform and portable pan-European Personal Pension Product (“PEPP”) will have multiple benefits for Europe as it would provide solutions to critical demographic challenges of an ageing continent. Although EU households are amongst the highest savers in the world, most of their savings are held in bank accounts with short term maturities despite the long-lasting low interest rate environment. By directing these savings to long-term investment products, individuals could benefit from higher target returns and the real economy from higher growth rates.

The European Commission published Regulation (EU) 2019/1238 (the “Regulation”) on the 20th of June 2019 to address these demographic challenges Europe is currently facing, by introducing the legal framework for PEPP. In August 2020, the European Insurance and Occupational Pensions Authority (“EIOPA”) issued draft Regulatory and Implementing Technical Standards which supplement the Regulation and provide proposals for various issues, namely pre-contractual and annual information documents for consumers, cost caps for certain types of PEPP, Risk-mitigation techniques, supervisory reporting, and cooperation between National Competent Authorities.

PEPP is a long-term savings personal pension product, which is provided by an eligible financial undertaking to a PEPP saver for retirement purposes and has no (or strictly limited) possibility for early

Constantinos Kourouyiannis CFA, Executive Director of Easternmed Asset Management Services Ltd

redemption. It is particularly attractive for young people and mobile workers and will further facilitate the right of EU citizens to live and work across the European Union.

Furthermore, given the long-term nature of some of the investment opportunities, PEPP is expected to support the supply of funds into the real economy. The purpose of the PEPP is not to substitute but instead to complement the existing pension systems of each member state.

PEPP may only be provided and distributed in the European Union, and each PEPP must be registered in the Central Registry kept by the EIOPA. It is a regulated product which requires national authorization, regular supervision of both provider and product by National Supervisory Authorities (“NSAs”) and monitoring by EIOPA. A large pool of financial providers may offer these products as PEPP providers, such as credit institutions, insurance undertakings,

36 | ACCOUNTANCYCYPRUS | OCTOBER 2021

Alkis Hajittofis FCA, CFA, Executive Director of Resolute Investment Management (Cyprus) Ltd

investment firms, UCITS management companies and Alternative Investment Fund Managers (“AIFM”). PEPP providers may offer their products domestically in their home Member State or internationally across Europe by utilizing passporting provisions of the Regulation.

Given the long-term investment horizon of PEPP savers, PEPP providers may invest in a broad range of assets, including infrastructure projects, unlisted companies seeking growth and real estate projects. In fact, the European Commission encourages PEPP providers to allocate sufficient part of their portfolio to sustainable investments with long-term economic benefits to the real economy.

One of the main advantages of PEPP is its mobility, which is extremely useful when PEPP savers change their residence to another Member State, and they need to utilize the portability service of the plan. In

this case, PEPP savers have three choices: (1) Continue contributing into their existing PEPP account, (2) Open a new sub-account to the new Member State of residence, or (3) Switch PEPP provider without delay and free of charge (or at a minimal cost) when the PEPP provider is not able to ensure the opening of a new sub-account in the new Member State of residence.

PEPP have several other advantages, such as cost-efficiency and transparency. The Regulation introduces the Basic PEPP as a default option for PEPP savers, which is essentially a safe product designed in such way to provide a guarantee on capital. The costs and fees for the Basic PEPP should not exceed 1% of the accumulated capital per year. The Regulation also ensures the transparency of PEPP since potential PEPP savers shall receive the related Key Information Document (KID) before signing up, which among others includes

clear information about costs and fees, performance scenarios and the risk-reward profile of the PEPP. PEPP has two principal phases, (1) the “accumulation phase”, which is the period during which assets are accumulated in the PEPP account and (2) the “decumulation phase” which is the period during which assets are drawn up to fund saver’s retirement. During the “decumulation phase”, PEPP providers make available to savers one or more of the following forms of out-payments: (1) annuities, i.e. the amount is payable at specific intervals over the PEPP beneficiary’s life or a certain number of years, (2) lump sum, i.e. the amount is payable in a single payment, which the PEPP saver may subsequently invest on his/ her own, (3) drawdown payments, i.e. the amount is payable in discretionary amounts that the PEPP saver may draw up to a certain limit on a periodic basis and (4) a

combination of the above forms.

With the expected launch date for PEPP fast approaching, the CFA Society Cyprus (“CFA Cyprus”) has taken several steps over the last year, aiming at raising awareness of PEPP amongst stakeholders such as PEPP savers, prospective PEPP Providers, and NSAs. Steps taken include providing feedback to the European Commission through consultation papers and targeted questions sent through the CFA Institute, and attending meetings with the Minister of Finance, the Vice President of CySEC and the Governor of the Central Bank of Cyprus, with the aim of providing practical suggestions on the implementation of PEPP in the local market. Feedback from all meetings was positive, with the Minister of Finance agreeing to assist and having sent a letter to all authorities asking for comments on CFA Cyprus’ suggestion.

Further to the above initiatives, CFA Cyprus has recently partnered with the CIFA Asset Management and Distributions Committee to set up a joint committee on PEPP. Members of this diverse committee will share their views on PEPP related matters such as successful procedures implemented in other Member States to enhance the benefits to savers, suggested amendments to local legislation (e.g. through tax incentives for PEPP savers) and provide suggestions to ensure that prospective PEPP providers are subject to a common framework, regardless on the supervisory authority they are regulated by. The joint committee has also shared a Q&A with members of both CFA Society Cyprus and CIFA, clarifying some basic points on PEPP and answering specific questions received from members.

With the first PEPPs expected to launch in late 2021, opportunities exist for savers and prospective PEPP providers. For savers, PEPP will provide an optional supplement to the existing pension products offered locally. On the other hand, prospective local PEPP providers, such as Investment Firms, Fund Managers, Insurance Companies and Banks, may consider adding PEPPs to their existing product offerings to service both local savers and those across the EU, as internationally based providers may consider transferring their products to Cyprus based savers.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

37

| BUSINESS & ECONOMY

REITS: How to earn dividends from real estate investments—without having to buy, manage, or finance any properties yourself

Styliana Charalambous (ACCA, BA) Head of Investments & Market research at Pure Market broker

Additionally, investors are eagerly waiting for 2021 to arrive. Real estate investment trusts, or REITs, are among the industries most looking forward to closing the book in 2020.

The pandemic led to store closures and stayat-home orders across the country, which had a devastating impact on REITs. What Is a Real Estate Investment Trust (REIT)?

A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and commercial forests.

REITs pool the capital of numerous investors and they are modelled after mutual funds, which makes it possible for individual investors to earn dividends and also invest in the real estate market, without having to inject large amount amounts of capital.

Moreover, it requires less effort and time since investors do not manage those properties.

Unlike other real estate companies, a REIT

A

s the world steadily recovers from the coronavirus pandemic and we see investors unwound their positions in high-growth stocks in favour of shares of companies with earnings more closely tied to a strong economic recovery. Leadership in the S&P 500 has shifted to the energy and financials sectors so far this year, and away from the information technology and consumer discretionary sectors that led the market higher in 2020.

BENEFITS OF REIT INVESTING

One of the major benefits of Real Estate Investment Trusts is the fact that they are able to avoid paying income tax at the corporate level, provided they pay out at least 90% of their income as dividends to their shareholders.

This resolves the double taxation issue that affects most companies since the Company pays taxes on it’s income at the corporate level, and then investors pay taxes on their dividend income. REIT income is only taxed once.

It is important to mention that historically, REITs, utilities, the big integrated energy companies, and pipeline partnerships have been good dividend payers. They tend to have stable earnings and a lot of assets.

Paying great dividends is a REIT’s job While most people find very little “sexy” about dividend stocks, that’s because they don’t appreciate true beauty. True investment beauty is an asset that helps you accumulate wealth (or maintain it, if you’re retired) through a healthy combination of safety and growth.

This type of investments make me wonder, is there anything better than passive income?

Portfolio diversification One of the most important principles of investing and risk management is portfolio diversification. There is a well-known phrase ‘Don’t put all your eggs in one basket’ and it is highly relevant in this case.

REITs really do offer historically low correlation with other stocks and bonds.

When they go down, those investing

does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.

LONG-TERM INVESTMENT REITs are more beneficial to investors when they are used as a long-term investment.

REITs prices can be affected over short periods of time by too many factors, including interest rate fluctuations. Consequently, you shouldn’t put any money into REITs that you’re going to need within the next five years. Longer time horizons are even better.

38 | ACCOUNTANCYCYPRUS | OCTOBER 2021

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counterparts tend to go up. When they go up, the others usually go down. Far from a see-saw effect, this helps balance out your portfolio so you don’t get more motion sickness than you can handle. It leads to higher-risk adjusted returns through tangible assets – which are still very much in need despite the digitalization of seemingly everything around us.

Liquidity Another major advantage of Real Estate

2021 May

Investment Trusts is that they offer high liquidity since there are more than 200 REITs traded on U.S. stock exchanges for a combined $1 trillion market cap, REITs take a traditionally illiquid asset – real estate – and makes it easily accessible. As such, they allow you to get in on a money-making proposition with long-term demand.

And they do so without locking you into months-long buying and selling ordeals. This also allows for better, faster asset allocation and portfolio rebalancing capabilities.

Publicly traded REITs give investors access to incomeproducing real estate combined with the transparency of investments listed and traded on public markets. REITs must disclose financial information to investors and report on material business developments and risks on a timely basis. Unlike other public companies, REITs’ high dividend payouts and limited retained earnings mean they must more frequently seek funding from the capital markets, requiring them to disclose and justify their plans for using the funds. This requirement provides investors with additional visibility into REITs’ finances and operations. Moreover, disclosure is required by the U.S Securities and Exchange Commission, Generally Accepted Accounting Principles, and the various stock exchanges on which their shares trade.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

39

| C-SUITE CORNER

Meet Stavros Kattamis Chief of Finance & Operations at PwC

I

am a member of the Board of Directors and a member of the Management Board of PwC Cyprus. I have the leading responsibility of the Finance and Operations functions.

What challenges brought by the Covid pandemic in your sector.

As a firm and from the very beginning, it was agreed that in the prevailing COVID-19 crisis situation we will focus on the following priorities: 1. The health, safety and well-being of our people whom we need to keep engaged and committed. In this respect an internal COVID-19 Google site was launched and was constantly updated with health & safety guidelines. Furthermore, we took the decision to go 100% remote working and keep the main offices open for technical support.

To further support and reassure our people, we also informed them very early on that their jobs, remuneration and benefits are secure. It is worth noting that PwC Cyprus holds the Business Continuity Management System Certificate of Conformity from the Cyprus Certification Company and in this context, from the very beginning it has successfully implemented its business continuity plan.

2. To give our teams the necessary support to service clients remotely.

On the basis of our strong and cloud technology infrastructure, we proactively introduced, prior to the pandemic, flexible working practices to enable people to work efficiently from home.

3. To engage with clients and the market and support our community. In this respect we connected with all our clients assuring them that as we change the way we work what remains unchanged is our focus on servicing them with quality, dependability and reliability. Through our virtual events, media presence and leadership pieces, we remain

close to our clients, the business community and society in general to support them in preparing for the post COVID-19 era. In addition, we presented the views of CFOs in Cyprus, regarding the impact of the pandemic, as recorded in three survey rounds conducted by PwC during 2020. We have also published 3 studies regarding the impact of the pandemic as well as the restart and transformation of the economy for the 21st century. The most recent one, entitled “Restart Cyprus: Now” is a comprehensive study that includes a series of proposals aimed at promoting reforms to restart and transform the economy and achieve sustainable growth in the post COVID-19 era.

4. To safeguard our business by following up on a daily basis the latest management information and cash flow models and scenarios on the basis of the developments and foreseeable expectations and taking appropriate decisions and actions.

Stavros Kattamis PwC | Partner Head of Finance & Operations

New opportunities are expected to be created post the pandemic. Such opportunities include among others, acceleration of the digital transformation and changes in work practises, more regulation in various industries and ESG and greater emphasis on sustainability

40 | ACCOUNTANCYCYPRUS | OCTOBER 2021

In your personal role at PwC are there aspects of the work that are very specific to the company and the sector or is a CFO doing pretty much the same thing in any company or organisation?

The CFO role implies a certain knowledge background and skills.

Some aspects of the work and responsibilities of CFOs are, more or less, the same in every company or organisation. Being a Partner at PwC and a member of the Management Board, I am closer to the business and I am working towards bringing the strategy and vision of our organisation to life. I have a close cooperation with the CEO and the other members of the Management Board on a daily basis.

This gives me a better understanding of the business issues and challenges that the company may face. I use this knowledge and understanding to support my organisation and come up with suggestions and solutions to address these issues and challenges.

What specific skills have you developed for your position?

Thought leadership, business and global acumen are only some of the managerial/executive competences that the CFO of an organisation of any size must develop and possess in order to stay relevant. In today’s constantly changing corporate world, CFOs must always be updated on all changes occurring, either locally or globally, which may affect their business and the business of their clients.

Regulation requirements are increasing, and CFOs have an

increasingly personal stake in regulatory adherence. Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through ‘big data’ and analytics. The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate governance. There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero costs.

What inspires you in your position?

The traditional role of the CFO is very time demanding and requires energy and clear thinking. Under this environment, sometimes a CFO may feel unmotivated and tired by doing the same things more or less every day.

The CFOs of today need to find ways and challenges that inspire them in order to overcome such feelings and support their organisation to prepare for the future. CFOs today devote most of their time to emerging priorities such as strategic analysis and planning, stakeholder management, business transformation, risk management, technology, regulation and compliance, performance management and organisational planning. Their aim is to create value, to support and protect the business by securing its smooth and uninterrupted operation and to contribute to its sustainability and growth. These are the challenges that keep a CFO inspired today.

What are the prospects for your company?

As we bring the pandemic under control, mainly through the vaccination programme, most of the economic sectors that have been affected will start recovering. The Cyprus GDP is expected to grow by more than 3% in the next couple of years.

As a human led and tech enabled organisation, we are committed to helping clients address the challenges they are facing by combining human ingenuity with technology to deliver sustained outcomes whilst building trust across the value chain. On a global level PwC has recently embarked on a new strategy, “The New Equation” that speaks to the two most fundamental and interconnected needs clients and organisations are grappling with today. The urgency to build trust at a time when it is more fragile and more complicated to earn and the need to deliver sustained outcomes in an environment where competition and the risk of disruption are more intense than ever. On this basis, we are very optimistic about the prospects of our organisation going forward by providing those services that address the clients challenges. At the same time, the requirements and expectations of all stakeholders for trust-based services tend to increase.

Furthemore, new opportunities are expected to be created post the pandemic. Such opportunities include among others, acceleration of the digital transformation and changes in work practises, more regulation in various industries and ESG and greater emphasis on sustainability.

ACCOUNTANCYCYPRUS | OCTOBER 2021 |

41

| ECONOMIC CRIME & FRAUD

Fraud rationalization and the guilty mind

T

o better understand why people commit fraud, someone has to consider the fraud triangle.

A model developed by Donald Cressey, a sociologist and criminologist that studied the behavior of white-collar criminals. The fraud triangle is based on the premise that, trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or propertyi Hence, the fraud triangle is widely used to explain the motivation behind a fraudulent activity, but, what exactly is fraud? As defined by Black’s Law Dictionary, fraud refers to a deception, which is intentional and caused by an employee or an organization for personal gainii.

Andria Shiakalli Financial Crime and Forensic Accounting Committee

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The purpose of this article is to help gain better insight into the mind of a fraudster in order to combat fraud more effectively. How were these people thinking and why did preventive efforts fail? What are the elements that make fraud possible?

“It wasn’t my intention to mislead anyone or the organization.”iii Fraud perpetrators use a number of reasons to mitigate the culpability of their mental and psychological condition, mostly because they realize that they will not be prosecuted until prosecutors can prove their criminal acts were accompanied by a guilty state of mind- called mens rea.

When trying to provide an understanding of fraudsters,

this example from WalMart who accused its former VP Tom Coughlin of misappropriating hundreds of thousands of dollars (approximately $500.000) of company money for himself through fraud, forgery and misrepresentation, is perfect. Mr. Coughlin used false invoices, false travel, and expense vouchers to pay for food, clothes, beer, wine, holidays and hunting supplies for more than 10 years.

Where this story gets interesting is the following- Mr. Coughlin was making $6 million dollars per year in salary and bonuses - and it appears that he was willing to sacrifice everything, his income, his employment, and his reputation.

From this story, there are couple of important lessons.

One, do not inflict your values system when trying to understand what others might do, often times fraud in related financial crime do not make sense. When examining the facts and circumstances and evidence of a fraud, always keep an open mind.

Follow the evidence, document the evidence, and do not make assumptions.

Use the evidence to determine who, what, when, where and how- Mr. Coughlin is a great example of the

accidental fraudsters.

The typical fraudster is often depicted as the first time offender, who is doing something seemingly out of character.

The Fraud Triangle suggests that the perpetrator has a non-sharable problem that is grounded in financial shortcomings. Moreover, when aligned with opportunities in rationalization, and otherwise good citizen succumbs to committing fraud.

This person might be characterized as the accidental fraudster.

Notwithstanding the fraud act, the accidental fraudster is considered to be a good, law-abiding person who under normal circumstances would never consider theft, breaking felonious laws or harm others.

When discovered, family members, fellow employees, and others in the community are surprised or even shocked by the perpetrator’s alleged behavior.

A fraudster engaged in occupational/ workplace fraud can argue that even though there was commitment of fraud, there was lack of the mens

rea to commit fraud, because of personal beliefs that (s)he would ultimately repay the money. The emphasis is not however, on how fraudsters interpret their actions, but rather on the implications of their conduct to take property from an entity without the authority to do so.

Even though they perceive it as a loan, which is not a criminal matter in their mind, the fraudster acted with knowledge that, for example, exploiting weak internal controls for financial gain could cause financial harm to the organization. It is the consequences of a fraudster’s behavior that is questioned here not their own personal motivations.

Fraud offenders, like any other offenders, have their own rationalizations to morally distance themselves from their criminal acts. If a person lacks the mens rea required for conviction, then that person is not guilty of fraud.

A weakness in many accounting or auditing programs is the fact that fraud is often treated as something

that can be prevented through internal controls.

Fraud cannot be eliminated through internal controls alone and/or through data analysis. No matter how sophisticated internal controls an organization has, the clever fraudster can still find a weakness. In addition to the individual seeking to get around controls, management might actively override existing controls.

Top management also has the ability to steal large amounts of funds at high level by simply ignoring or ordering others to override standard procedures. The fraud examiner cannot be everywhere at once. But, what organizations can do, is to multiply their eyes and ears by recruiting employees as part of a fraud detection team. If fraud is occurring, more often than not, someone else is aware of it or has suspicions.

An effective reporting mechanism is one of the most important parts of your anti-fraud programs. There is no doubt that fraud costs an organization money. That money is not available for benefits, raises, new equipment, or new employees. So, when people steal from the company, they are stealing from everyone at the organization. And studies show that once the money is stolen, the chances of getting the money back are not good. According to the surveys conducted by the Association of Certified Fraud Examiners, about half of fraud cases result in no recovery at all, and the remainder only see a limited recovery of the stolen fundsiv.

That is why it is important to emphasize that part of everyone’s job responsibility is to watch for and report suspected fraud. It is very important to make employees part of the fraud detection team and encourage them to report any misconduct they know about by establishing whistleblowing policies and procedures.

i Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30 ii https://thelawdictionary.org/fraud/ iii https://www.financial-ombudsman.org.uk/businesses/complaints-deal/fraud-scams iv https://www.acfe.com/report-to-the-nations/2020/

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| ECONOMIC CRIME & FRAUD

Financial Statement Fraud and Covid-19 Remnants

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oing through an unprecedented situation and circumstances that have changed our daily lives, the remnants of the pandemic are now visible and increase the possibility of committing financial statement fraud.

The pandemic has placed enormous pressure upon organisations and individuals, striving to come to terms with the new realities. Many organisations have been negatively affected by the pandemic, facing huge downturn in their revenues, as well as liquidity issues.

At the same time, new working conditions have been adopted for employees and the working-from-home policy has become the new norm, increasing the risk of weak control procedures, since the risks associated with remote access were not high enough in the corporate agenda for the majority of the organisations. What is more, during these crises’ periods, unacceptable behaviors may be rationalized and applied, in order to address financial needs, meet key financial targets or manipulate financial statements to meet stakeholders’ expectations. As defined by the Association of Certified Fraud Examiners, financial statement fraud is “the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users”.

Based on the above, the following areas could be susceptible to fraud: Revenue Recognition – Manipulation of accounting policies for revenue recognition might lead to increased revenues and thus profits, to conceal the decrease in consumer consumption and spending during the pandemic and thus “show” management’s ability to handle crises.

Manipulation of Valuations and Impairments – The valuation of financial assets such as inventory and investments is becoming more and more challenging, given the uncertainty of the global markets and the business disruption worldwide. This may lead to inappropriate

Irene Panayiotou Financial Crime and Forensic Accounting Committee

delay in the recording of losses or misleading valuation results to avoid impact on profit levels.

Expenses Treatment – Pandemic-related expenses might be significant and it might be tempting to capitalize them and recognize them gradually throughout a certain period, rather than recognize them when incurred and thus affecting profit levels.

Financial Statement Disclosures – Inadequate and insufficient financial statement disclosures, disguising from the stakeholders the actual effects of the pandemic, risks and uncertainties, concealing at the same time the actual facts (e.g. failure to meet contractual obligations), could in turn lead to claims against the organisations.

Margin Manipulation – The reduction in revenues along with the payment of fixed expenses, increase the risk for margins manipulation.

Asset Misappropriation – Asset misappropriation fraud might be tempting for employees of the organisation who may abuse their positions in order to steal from it, considering the current distressed financial positions. Such actions may include submission of fictitious invoices, creating fictitious suppliers, etc.

Internal Controls over Reporting – Internal controls over reporting should be amongst the top priorities of the management of an

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organisation, considering the shift to a virtual work environment which might lead to the override of internal controls including, amongst others, segregation of duties, delegation of authority and information systems access. What is more, new controls may be implemented without sufficient assessment and testing of their design and effectiveness, increasing the opportunity for fraud to occur. Despite the challenges brought about due to the extended office closures, social distancing and travel restrictions, organisations may provide employees with secure access to remote access technology to do their job effectively, while train them to be alert to the additional threats of remote access. Moreover, organisations should educate employees on threats and reinforce their code of ethics and rules. All relevant stakeholders should be kept aware of perceived risks, prevention strategies and contingency plans.

Financial statement fraud is likely to increase dramatically in the coming months.

Organisations should be proactive, alert and better prepared to address this new wave of fraudulent activity. The organisations that overcome this challenge can use it as a catalyst to better prepare their teams, technologies and plans for the future.

| ECONOMIC CRIME & FRAUD

Digital on-boarding, the new era…

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igital connectivity has redefined all aspects of our lives and this applies to a very large extent to the financial sector. Financial service organizations can uti-lize the emerging technology as well as the changing regulatory landscape to digitize their products and services, not only to provide their clients with faster, 24/7 service, but also as a tool to fight against fraud and financial crime.

Niki Charilaou Manager Financial Crime & Sanctions Compliance Department at Bank of Cyprus

Financial service organizations can utilize the emerging technology as well as the changing regulatory landscape to digitize their products and services, not only to provide their clients with faster, 24/7 service, but also as a tool to fight against fraud and financial crime.

The legal and regulatory framework both at EU and national level now allows fi-nancial service organizations in Cyprus to offer their clients the option to on-board and commence a business relationship digitally, a much-needed develop-ment, given also the restrictions in movement caused by the COVID crisis.

The 5th EU AML Directive, issued in 2018, introduced the option to identify customers and verify their identity through the use of electronic identification means and relevant trust services, as set out in the eIDAS1 regulation, or any other electronic identification process regulated, recognised, approved or ac-cepted by the relevant national authorities. This provision was recently trans-posed into the Cyprus AML Law issued in March 2021, however, the relevant Cy-prus authority to provide assurance has yet to be named.

Local regulators are expected to issue guidelines to obliged entities to assist them in implementing the relevant provision in the Law. CySEC has already is-sued a consultation paper in preparation of the relevant transposition in the Law. Until such guidelines are issued, obliged entities eager to introduce electronic identification processes may use guidance already issued by the FATF2 and the EU (Joint Opinion by the European Supervisory Authorities)3, in order to perform proper risk assessment of the adequacy of CDD measures and controls in place, where innovative solutions are used.

The regulatory framework issued by authorities in other EU countries could also be utilised. Bank of Greece, for example, issued a relevant framework whose provisions are pretty much in line with those in place in most EU Member States.

This framework allows two digital on boarding methods:

(a) by video conference with a trained agent, or (b) an automated procedure via a dynamic selfie, sub-ject to additional safeguard measures. Identification types that are acceptable are the ones included in the Public Register of Authentic Travel and Identity Doc-uments Online (PRADO) and which bear: (a) photograph and signature of holder; (b) a machine-readable zone (MRZ); and (c) two additional advanced visual security features among those specified in PRADO. Most notably international passports incorporate such enhanced security features. Obliged entities should perform and document a thorough risk assessment of the process having regard to the Joint Opinion of the European Supervisory Authorities mentioned above, which should be approved by their BoD. Specialised technical audits should be carried out both to verify the suitability, adequacy and reliability of the remote electronic identification process and the technological solution used.

Obliged entities could greatly benefit from the use of digital on-boarding meth-ods, and this applies to small firms as well who can purchase this service from larger organizations who have the capacity, the funds and the know-how to ap-ply it.

With the necessary controls in place, such solutions offer fast, reliable digital identity verifications screening, transcend geographies, boost operational effi-ciency and remove the human factor error.

They also optimize compliance models, improve risk mitigation and protect customers from identity fraud. Finally, less reliance can be placed on the chain of business associates, on whom cur-rently many financial service organizations in Cyprus depend on, to on-board cli-ents from abroad.

1 Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market 2 https://www.fatf-gafi.org/media/fatf/documents/reports/Digital-ID-in-brief.pdf 3 https://www.eba.europa.eu/sites/default/documents/files/documents/10180/2622242/1605240c-57b0-49e1-bccf-60916e28b633/Joint%20Opinion%20on%20the%20 risks%20on%20ML%20and%20TF%20affecting%20the%20EU%27s%20financial%20sector.pdf?retry=1

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| TAXATION

Recognising intragroup loans following the OECD’s FTTP guidance

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n February 11 2020, the OECD released transfer pricing rules with respect to financial transactions, namely “Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10” (FT Report). The guidance provided in the FT Report is to be included in the OECD transfer pricing guidelines (TPG) as Chapter X. Notably, the FT Report provides comprehensive guidance to all stakeholders (i.e. taxpayers, tax authorities, tax advisors etc.) on pricing intra-group financial transactions. Furthermore, the FT Report is of great importance as the TPG tend to have a retroactive application, as the TPG are presented as ‘clarifications’.

Taxatelier

Christos Theophilou

Costas Savva

of Taxand Cyprus consider how the OECD’s guidance on financial transactions and transfer pricing (FTTP) can be interpreted in consideration of intra-group loans

Recognising the accurately delineated transaction Typically, from the TPG, a four-step analysis can be derived in order to price an intra-group transaction: Step 1: Identifying commercial and financial relations; Step 2: Recognising the accurately delineated transaction; Step 3: Selecting the most appropriate transfer pricing method; and Step 4: Applying the most appropriate method.

This article focuses on recognising the accurately delineated transaction (i.e. step 2) with respect to intra-group loans.

Once an intra-group loan has been accurately delineated, in exceptional circumstances tax authorities are allowed to either replace (i.e. recharacterise and therefore replacing it with an

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alternative transaction) or even disregard (i.e. both designated under the term ‘non-recognition’) the actual transaction (see TPG paras 1.119-125). Notably, the FT report on paragraph 10.8 incorporates this general exception “arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, the guidance at Section D.2 of Chapter I may also be relevant.”

It is worth noting that, apart from transfer pricing rules, intra-group loans may also be subject to other specific or general anti-avoidance rules. This is noted in the FT Report on paragraph 10.9 which states that: “this guidance is not intended to prevent countries from implementing approaches to address the balance of debt and equity funding of an entity and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt.”

Practical application and planning points To take a simple example, assume that a company being tax resident in State A is the parent entity (parent) of a multinational enterprise (MNE) group, and decided to take a project in State B. Assume further that according to the financial position of the MNE group, parent decided to incorporate a whollyowned subsidiary (subsidiary) in State B, and fund this start-up subsidiary primarily with debt. Normally, the start-up subsidiary would not be expected to generate

sufficient cash flows to repay the loan in the early years of its operations and further remembering that the subsidiary does not have any assets to provide as collateral or access to guarantees, so that a third party (e.g. a bank) would not be willing to provide such a lending.

In case the tax authorities decide to either not recognise or re-characterise an intra-group loan, at least two implications might arise. To begin with, if the intra-group loan is not recognised, then the interest expense is disallowed. Likewise, if the intragroup loan is recognised but eventually re-characterised, then it could be considered as equity rather than debt, and therefore the interest expense treated as a constructive dividend.

Another consequence would arise in relation to tax treaties. That is, as the interest payment is considered to be dividends and not interests, then a different tax treaty reduced withholding tax rate may be applicable (i.e. OECD Model Article 10 Dividends and not Article 11 Interest).

In order to avoid such unwanted implications, an intra-group loan needs to be analysed from both perspectives (i.e. lender and borrower, see FT Report paragraph 10.51) and effectively, answer the following two questions: Could the borrowing entity as an independent enterprise obtain access to similar level of debt from third-party lender such as a bank?

Would the borrowing entity be willing to obtain such a loan under such terms and conditions from a third-party lender?

Consequently, on one hand, the borrower should establish that an independent borrower, behaving in a commercially rational manner, is considering the options realistically available to financing an existing need and what it is willing to pay. On the other hand, the lender should establish whether a third-party lender, would be willing to provide a comparable loan under comparable terms and conditions or would be willing to provide such loan in light of its options realistically available for investment, including the option of not investing or lending. In doing so, the lender would analyse the borrowers’ financial, operational, market and economic factors such as level of credit risk. Notably, the FT Report at paragraph 10.62 emphasises that “the creditworthiness of the borrower is one of the main factors that independent investors take into account in determining an interest rate to charge”.

In light of the above, taxpayers entering in cross-border intra-group transactions, need to analyse their capital structure (i.e. the balance of debt and equity funding), in order to ensure that they comply with the FT Report.

https://taxand.com.cy/recognising-intra-group-loans-following-the-oecds-fttp-guidance/

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| IFAC NEWS

IFAC Latest Activity

On the IFAC Gateway & Implementation Support: • Ethics, Technology, and the Professional Accountant in the Digital Age — Summary of a global event covering the ABCDE of the digital age (Artificial intelligence and robotic process automation, Blockchain, Cloud, Data, and Ethics) and compliance with the IESBA Code.

• Redefining Accounting for Tomorrow — How we define accounting today and what defines accounting tomorrow are fundamental to the purpose, value and identity of the accountancy profession.

• Blockchain Technology: Shaping the Future of the Accountancy Profession—what does this have to do with the accountancy profession?

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Audit

IAASB Guidance on Assurance for Non-Financial Reporting: The IAASB published NonAuthoritative Guidance on Applying ISAE 3000 (Revised) to Extended External Reporting (EER) Assurance Engagements.

• Quality Management Standards: Visit IAASB’s dedicated webpage to the new and approved Quality Management standards – effective December 15, 2022.

• Getting Started on the New IAASB Quality Management Standards: An Overview— Firms are required to have their system of quality management designed and implemented by December 15, 2022—and ready to start operating from that date.

• Addressing risk of overreliance on technology arising from the use of automated tools and techniques and from information produced by an entity’s systems — The IAASB released a non-authoritative Frequently Asked Questions document to help auditors address the risk of overreliance on technology, whether it arises from using automated tools and techniques or from using information produced by an entity’s systems.

Ethics • IESBA Measures to Strengthen Auditor Independence: IESBA released revisions to the Non-Assurance Services (NAS) and fee-related provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards).

Education • Syllabus & Competencies Matrix for a Three-level Qualification: This syllabus and competency matrix for a three-level qualification for professional accountants was developed by the Institute of Chartered Accountants in England and Wales under the IFAC Professional Accountancy Organization Capacity Building Program funded by the UK Aid from the UK Government.

Public Sector • Greater Transparency and Accountability in the Public Sector: IFAC’s Point of View explores the need for strong governance and public financial management (PFM), so that governments and public sector entities around the world can make informed, data-driven decisions for people, the planet, and the economy. It also outlines how the accountancy profession, with its public interest mandate, can support the public sector in achieving long-term financial sustainability and resilience, to help create a better world with stronger economies and fairer societies.

www.ifac.org, www.ipsasb.org

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