Distortions in the Greek Tax Code

Despite five years of “structural reforms” and repeated promises by every single Greek political party to “reform the tax system”, the distortions in the Greek tax code continue. This is illustrated nowhere more clearly than in two decisions announced recently by the Hellenic Ministry of Finance.

Exemption from Issuing Automated Electronic Receipts

In the first decision, the Ministry of Finance published (ΠΟΛ 1002/2014 issued on 31 December 2014) a list of 12 professional categories that would be exempt from the need to issue electronically-printed receipts in 2015, i.e. receipts from a cash register or point of sale device. This list includes the following professions (I’ve translated most but not all of the professions on the list):

1.     Beauty centres, gyms, accommodation areas, training and educational centres, kindergartens, clinics or therapeutic centres, doctors and orthodontists

2.     Parking lots

3.    Theatres, lottery agents, including Pro-po, Lotto, etc., transport firms except taxis

4.     Self-employed tailors or seamstresses, as well as operators of health spas licensed by the Greek Tourism Organisation

5.     Veterinarians, physical therapists, biologists, psychologists, judicial employees, architects, civil engineers, topographical surveyors, chemists, geologists, foresters, oceanographers, designers, journalists, authors, interpreters, tourist guides, translators, teachers, trainers, sculptors and painters, drawing artists, actors, musicians, singers in nightclubs, dancers, choreographers, producers, interior designers, economists, analysts, programmers, researchers, management consultants, accountants, tax advisors, sociologists, social workers, advisors, homeopaths, alternative therapists, psychotherapists, speech therapists, speech coaches, dieticians, nutritionists, occupational therapists.

6.    Operators of agricultural machinery or olive oil mills, or flourmills.

7.     Any profession involved in construction of any kind of technical work, including woodworkers, iron workers, plumbers, electricians, builders, builders, and marble workers.

8.    Property agents, real estate brokers, funeral home operators, marriage offices, confidential business offices, and recruitment firms

9.    Press agencies and magazines, in terms of collecting subscriptions, car rental firms, services issuing common expenses for buildings, elevator maintenance, and transport firms

10.  The public sector, municipalities and other public agencies

11.  Insurance firms, banks, credit institutions, and the Hellenic Post Office, for retail sales and services

12.  Operators of highway tolls as well as travel agents.

This decision is incomprehensible for the following reasons:

a.     It has long been known that a key issue in Greece is under-reported income. Earlier decisions required the issue of electronic receipts precisely in an effort to avoid this problem. The law is now changing (and right before a national election), giving entirely wrong signals to economic operators.

b.     Most of these occupations have already implemented electronic cash registers and POS. Hairdressers, parking lots, gyms, olive mills, theatres, etc. have all been issuing receipts.

c.     It is impossible to understand how the public sector is being exempted – by the public sector – from issuing electronic receipts. What problem does the Hellenic Post Office have with issuing receipts?

Given that Greece needs every cent of public revenue needed to pay both for ongoing public sector operations as well as debt, it is impossible to understand how this decision makes any sense in a rational context.

While it is true that some professions have not invested in cash registers (for instance, consultants), they do as a matter of course issue either printed receipts, or in some cases hand-written ones. It is understandable if this is a law designed to absolve some professional categories of using cash registers, but there are obviously better ways of handling this than by granting a blanked exemption to professions that are already using them—as decided by previous laws.

VAT Exemption for Professions Reporting under € 10,000 in Annual Income

According to article 251 of law 4281/2014, economic operators with under € 10,000 in annual income will be able to opt out of paying Value-Added Tax (VAT), provided they register with their regional tax authorities by January 15^th.

If they choose this option, they no longer have to collect and pay value added tax, which is currently in different bands from 6.5% - 23%. The economic justification for this is that it will alleviate the administrative cost of reporting for small enterprises and self-employed professionals.

Unfortunately, this law contains three major distortions:

a.     It increases the moral hazard of under-reporting income. Given that this is already a problem among most self-employed artisans or professionals (doctors, dentists, plumbers, etc.), and given that most of these people are systematically offering their services “with VAT” (at a higher price) or “without VAT” (without an receipt of payment), we can assume that we will see a large increase in professionals reporting under € 10,000 in annual income in 2015.

b.     The second distortion is that of VAT refunds. Operators who do not collect VAT cannot apply for a VAT refund on their purchases or subcontracts.

c.     The third distortion is that of future tax audits. In the case of a future audit on an operator who will claim a VAT exemption in 2015, how robust will the Tax Authority’s record-keeping be in terms of registering who did and who didn’t opt out of VAT?

An operating charging € 10,000 per year is charging € 833 per month. This hardly creates a massive administrative burden.

Conclusions

In an election year, any changes to the application of tax laws automatically create friction in terms of achieving tax revenue targets. The present two laws are largely unnecessary and contradict previous efforts at tax compliance. If everything else were functioning correctly, there might be a rational explanation for these laws. Given that very little is functioning correctly, and given the massive incentives and moral hazard contained in these laws for further tax avoidance, and given their contradiction of previous laws and initiatives, it is difficult to understand through rational analysis why they have been announced.

(c) Philip Ammerman, 2015

This article was first published by the author on Navigator Consulting Group's website on 10 January 2015.