Cyprus is inching towards hiking its corporate tax rate in an attempt to stave off IMF pressure for investors to take losses on bank deposits to pay for a bailout that would avert the sovereign default.
Corporate tax, now at a nominal 10 percent and among the lowest in the European Union, was previously considered a no-go area for authorities.
But it may be one of two lesser evils if the International Monetary Fund sticks to its guns for granting up to 17 billion euros in aid with the European Union, sources close to consultations told Reuters on Monday.
Government officials have been dropping hints Cyprus's resistance to an increase in tax may be waning in the face of what is seen as a more serious threat, that bank depositors be called to pay the cost of aid via a so-called haircut, in a process known as a bail-in.
Cyprus says any impact on deposits is out of the question.
"At the end we will look at the pros and the cons, lay out priorities then decide what measures can be taken which are not destructive for the promotion of growth," said Averof Neophytou, deputy leader of the ruling Democratic Rally party.
Cyprus needed to make some choices because a bailout accord is needed to avert bankruptcy, he told state radio when asked whether an increase in corporate tax might be on the cards.
A corporate tax increase - its last major adjustment was before Cyprus joined the EU in 2004 - a temporary capital gains tax and application of a financial transaction tax are among new demands of lenders, who restarted talks in Nicosia last week.
A source with direct knowledge of consultations told Reuters a "small" corporate tax increase could be considered by Cyprus, along with a temporary levy on capital gains.
"It looks like consultations are starting to yield results, and the proper compromises are being found," the source said.
The island, one of the euro zone's smallest, needs up to 17 billion euros in emergency loans mostly to recapitalise its banking sector hit by a Greek debt restructuring.
Cyprus has been shut out of international financial markets for almost two years. It has been forced to rely on high-yielding short term borrowing from domestic lenders to pay its day-to-day bills.
Cypriot President Nicos Anastasiades, who won presidential elections last month replacing a communist administration accused of running the economy to the ground, has vowed to work for a swift bailout deal.
He was due to meet with Greek Prime Minister Antonis Samaras in Athens on Monday.
Officials said he was exploring the possibility of Cypriot banks with a presence in Greece getting some form of assistance from Athens, through tapping into bailout funds made available to Greek-based banks.
(Editing by Jeremy Gaunt.)