{"id":10677,"date":"2016-06-22T22:02:59","date_gmt":"2016-06-22T19:02:59","guid":{"rendered":"https:\/\/www.dianeosis.org\/en\/?p=10677"},"modified":"2017-03-28T17:36:46","modified_gmt":"2017-03-28T14:36:46","slug":"tax-evasion-in-greece","status":"publish","type":"post","link":"https:\/\/www.dianeosis.org\/en\/2016\/06\/tax-evasion-in-greece\/","title":{"rendered":"Tax Evasion in Greece \u2013 A Study"},"content":{"rendered":"

T<\/span>he legendary Supreme Court Justice\u00a0Oliver Wendell Holmes famously said that taxes \"are the price we pay for a civilized society\". In a recent\u00a0diaNEOsis opinion poll, respondents seemed to agree: 85,5% stated that they consider tax evasion to be equivalent to theft. At the same time, however, 35,1% acknowledge that they would readily\u00a0evade their taxes if the opportunity arose, because \u2018everyone does\u00a0it.\u2019<\/p>\n

\u00ad<\/span><\/span>
\nTax Evasion in Greece - The Full Study (PDF, in Greek)<\/a><\/p>\n

Tax evasion is one of the most important problems facing any democratic state. It\u00a0appears to be even more acute in Greece; according to several studies, tax evasion in our country is substantially higher than in other developed countries.<\/p>\n

In this study, we\u00a0cooperated with Ernst &Young in order to map out the problem of tax evasion in Greece, analyze all available data to reach conclusions about the problem\u2019s scale and nature, and arrive at\u00a0a series of policy recommendations to help curb it. This is a\u00a0summary of the basic results.<\/p>\n

How much tax evasion is really going on?<\/h2>\n

T<\/span>he exact scale of tax evasion in Greece is obviously unknown. We can only rely on estimates that calculate its scale based on indicative data but, by definition there is no available information\u00a0to measure its exact size. We gathered estimates\u00a0that have been published\u00a0on all different types\u00a0of tax fraud, and we arrived at a range that may appear arbitrary to a certain\u00a0extent,\u00a0but which does present the closest estimate one can get from data that is available. According to the studies:<\/p>\n

Revenue lost due to personal income tax evasion<\/strong> ranges from 1.9% to 4.7%<\/strong> of annual GDP.<\/p>\n

An additional 3.5%<\/strong> of GDP<\/strong> is estimated to be lost due to Value-Added Tax (VAT) fraud<\/strong>.<\/p>\n

Losses from alcohol, tobacco\u00a0and fuel smuggling<\/strong> amount\u00a0to about 0.5% of GDP<\/strong>.<\/p>\n

For legal entities, revenue\u00a0lost from\u00a0tax evasion and tax avoidance is estimated at around 0.15% of GDP<\/strong>.<\/p>\n

Consequently, the scale of tax evasion in Greece can be relatively safely estimated at somewhere\u00a0 between 6%<\/strong> and 9% <\/strong>of GDP, which amounts to something\u00a0between \u20ac11<\/strong> and \u20ac16<\/strong> billion a year.<\/p>\n

The study of different types\u00a0of tax fraud\u00a0can provide some\u00a0extremely interesting insights, debunking\u00a0several long-standing myths. For example:<\/p>\n

Who pays taxes in Greece?<\/h2>\n

T<\/span>he Greek state's annual revenue hovers\u00a0around \u20ac50 billion<\/strong>. This is income\u00a0that, along with social security payments, insurance revenues, and loans from the European Union together must cover all state expenses. These expenses include the\u00a0government's operating costs, repayment of the country's loans (around \u20ac12 billion a year), pension payments (\u20ac28 billion a year), salaries of public employees (around \u20ac15 billion a year) and, according to the memoranda that have been signed with Greece\u2019s creditors, significant annual primary surpluses.<\/p>\n

\"tex_evasion_eng_3\"<\/p>\n

According to the most recent data from 2015, 88% of the state\u2019s revenue<\/strong> (not including insurance revenue collected by the social security funds) comes\u00a0from taxation<\/strong>. Direct taxes bring in around \u20ac20 billion<\/strong>, while indirect taxes (VAT, fuel tax, tobacco tax, etc.) bring in around \u20ac24 billion<\/strong>. This is important.\u00a0Indirect taxes are considered more \u2018unjust\u2019 because they affect the rich and the poor equally. The tax systems of most\u00a0developed countries rely more on direct taxes for that reason. It is mostly developing or third world countries that\u00a0rely more on indirect taxes.<\/p>\n

\"tex_evasion_eng_32\"<\/p>\n

T<\/span>he country\u2019s revenues have been more or less steadily decreasing since 2010, with the largest decrease occuring in indirect tax revenues. There was a rapid decline in income tax collected (from 17.2 billion in 2008 to 12.1 billion in 2015) \u2013 which is to be expected, since citizens\u2019 incomes have decreased dramatically. At the same time, however, during the crisis, direct tax rates increased, and new direct taxes were also introduced\u00a0(solidarity tax, Single Property Tax-ENFIA), which softened\u00a0the state\u2019s losses but increased the tax burden for everyone -primarily for the poor.<\/p>\n

\"\"<\/p>\n

During the crisis, citizens pay around the same direct taxes that they paid before, despite the fact that they have much lower incomes than before.<\/p><\/blockquote>\n

B<\/span>ut who is<\/em> paying taxes? It appears that, up until the first few years of the crisis, it was generally the rich who were bearing the county's tax burden.<\/p>\n

In Greece in 2011 \u2013 the last year for which analytical official data from the GSPW are available \u2013 5.7 million tax returns were filed, a number that has remained more or less constant for the past\u00a0ten years. Nearly half of them (49%) featured declared\u00a0incomes below \u20ac12,000. 64% of the self-employed declared income below the tax-free limit of \u20ac12,000<\/strong> (they declared a mean income of just \u20ac4,300). These taxpayers combined paid less than 1%<\/strong> of the total tax revenue. In other words, 2.8 million citizens paid a total of 60 million euros in taxes \u2013\u20ac21.4 each. On the other hand, the 8% of taxpayers who declared income above \u20ac42,000 -around 400,000 citizens in total- paid 69% of the total personal income taxes<\/strong>.<\/p>\n

\"\"<\/p>\n

The situation is\u00a0similar when it comes to\u00a0businesses. In Greece in 2011, there were 220,000 businesses that declared less than 1.2 million euros annual profit<\/strong>, and just 901 businesses that declared greater income. The latter category, which makes up 0.4% of Greek businesses, paid 61% of taxes<\/strong>. Companies from the\u00a0former category were\u00a0paying on average \u20ac5,400 a year<\/strong>, while companies from the latter category were paying\u00a0\u20ac2.1 million.\u00a0<\/strong><\/p>\n

\"\"<\/p>\n

In other words, in 2011, 8% of taxpayers paid 69% of the personal income tax, and 0.4% of businesses paid 61% of legal entity income tax\u00a0in Greece.<\/strong><\/p>\n

The \"rich\" were bearing the country\u2019s tax burden. And who are these \u2018rich\u2019? In their large majority, they are highly paid salaried workers and large businesses. The great majority of revenue from income taxes came from them. This appears to be\u00a0changing, however.<\/p>\n

According to unofficial data available to diaNEOsis for the 2014 tax year, there has been a dramatic downward shift in income (individuals who declare income above\u00a0\u20ac<\/strong>42,000<\/strong>\u00a0are no longer 8% of total tax payers, but merely 1.6%<\/strong>) and there has been a strong\u00a0shift of the tax burden towards\u00a0the middle class.<\/p>\n

\"\"<\/p>\n

Who evades taxes?<\/h2>\n

T<\/span>here is a truth that is more or less valid throughout the world: the self-employed and small businesses avoid paying their\u00a0taxes. From the United States to Germany, and from Italy to Bulgaria, there are small businesses and many freelancers that fail to accurately declare their true income to authorities. Unlike salaried workers or large businesses, they are able to hide their income because the likelihood of detection is very low and the incentive\u00a0to issue invoices and to declare every cent they make is smaller. Despite the tax-paying culture and the enormous fines, small businesses in Germany can avoid\u00a0issuing receipts\u00a0for some of their\u00a0sales, without any consequences.<\/p>\n

This\u00a0phenomenon\u00a0has a relatively small\u00a0impact on\u00a0tax revenues in most developed countries for one simple reason: The number of very small businesses in those economies is lower, and the self-employed represent\u00a0a smaller percentage of the workforce. This is a critical characteristic of the Greek tax problem: in Greece, the percentage of the self-employed is twice as high as\u00a0the European average<\/strong>. According to studies, the self-employed hide around\u00a057-58.6% of their income<\/strong>,\u00a0while salaried workers are only able to hide about\u00a00.5-1%<\/strong>. Very small businesses (0-9 people) in Greece employ a staggering 59% of all workers in the country -double the EU average. The percentage of workers in large businesses\u00a0(with more than 250 employees) is just 13%<\/strong> in Greece, compared to 33%<\/strong> in the EU. This is a very serious problem, because small businesses\u00a0can more easily employ undeclared workers, avoiding tax and social security payments, while issuing fewer invoices and paying less VAT.<\/p>\n

\"\"<\/p>\n

How do the rich and big corporations avoid paying\u00a0taxes?<\/h2>\n

A<\/span>s a general rule, as we saw above, the \"rich\" have been paying\u00a0most of the country's taxes until recently. At the same time, however, wealthy individuals (a very, very small subset of the 400,000 who declared revenue above \u20ac42,000 annually), have a series of tax avoidance tools at their disposal, like the foundation of offshore companies, shell corporations, trusts and other legal entities. According to studies, 8% of global taxpayer wealth is hidden\u00a0in tax havens<\/strong>. In Greece, the most common tools that have been used to evade paying taxes are the transfer of real estate to offshore companies (a phenomenon that is being partly tackled by imposing a specific tax on real estate), and the transfer of tax domicile, sometimes even with artificial means.<\/p>\n

Legal entities evade taxes in a series of ways. The most common is the issue of false invoices -a common practice especially in small and medium-sized companies-, which aims to both reduce the income tax and the VAT companies need to pay, as well as showing false losses. There are\u00a0several other tricks companies use to avoid paying VAT and fraudulently reducing declared profits.<\/p>\n

Large corporations cannot, as a rule, use such means to avoid taxes, so they appear to pay the majority of taxes declared by legal entities in the country. However, there are other means of tax avoidance\u00a0for large multinational corporations. Transfer pricing within the EU and the so-called carousel fraud (or \"missing trader\" fraud), which are analyzed in the\u00a0study, are the most common. Of course, individual countries cannot easily address these practices on their own. Around 60% of global trade takes place within multinational groups with intra-group transactions, where there is ample room for tax avoidance. It is estimated that around\u00a04-10%<\/strong> of the worldwide corporate income tax is not paid every year. Curbing\u00a0this phenomenon is a major challenge and requires cooperation and coordination among\u00a0many nations\u00a0and cross-border organizations.<\/p>\n

In Greece, of course, as we have mentioned before, there are only 901 \u2018large\u2019 corporations<\/strong>\u00a0(we define as \"large\" those with annual profits over\u00a0\u20ac1.2 million) \u2013 just 0.4% of the total. Some of these definitely could use these methods to avoid some of their tax burden. At the same time, however, these are the enterprises that pay 69% of corporate tax revenue in the country, a total\u00a0amount that is around\u00a04% of state revenue, approximately \u20ac1.9 billion<\/strong>. The revenue lost by the state from tax avoidance by companies like these\u00a0is difficult to calculate, but according to conservative estimates, as we said above, it could amount to about\u00a00.15% of GDP<\/strong>.<\/p>\n

It\u2019s obvious\u00a0that tax evasion\/tax avoidance at this level, though serious, is on the one hand very difficult to identify by individual states and on the other, much smaller in scale than tax evasion by\u00a0the self-employed and small businesses.<\/p>\n

The shadow economy<\/h2>\n

T<\/span>he shadow economy is the sum of undeclared economic transactions in an economy. It is not synonymous with tax evasion. It includes a series of undeclared \u2018hidden\u2019 secret activities that range from smuggling, to private lessons, to casual restaurants that do not issue receipts.<\/p>\n

\"tex_evasion_eng_38\"<\/p>\n

In contrast to what many believe, the largest part of the shadow economy (around two thirds of it) is attributable to undeclared employment<\/strong> - and that is one sector that has increased rapidly during the crisis. In 2010 the Hellenic Labour Inspectorate audited 22,000 private enterprises and found that a quarter\u00a0of employees had not been declared. Since the crisis began, this number has increased dramatically: by\u00a02013 it had reached 40.5%. According to research by the Ministry of Labour, 27% of those working undeclared had asked their\u00a0employers to allow it.<\/p>\n

In Greece, various studies have calculated that the shadow economy makes up between 20 to 30% of GDP<\/strong>, an unusually high percentage for a developed country. It is estimated around 4-5 percentage points above the average of\u00a0the European Union. During the crisis it has decreased across Europe. For 2015 it was calculated to make up around 22.4% of Greece's GDP which, in absolute numbers, comes out to about\u00a0\u20ac40 billion.<\/p>\n

\"\"<\/p>\n

<\/h2>\n

Why is\u00a0tax evasion possible?<\/h2>\n

A<\/span>ccording to the relevant academic\u00a0literature, there are three parameters that determine the level of tax evasion in an economy:<\/p>\n

    \n
  1. The level of tax rates.<\/li>\n
  2. The likelihood of detection and punishment.<\/li>\n
  3. The level\u00a0of fines imposed.<\/li>\n<\/ol>\n

    Whether or not a citizen or a business will evade taxes is a decision that is essentially affected by these three factors. If tax rates are low, the motive for tax evasion is smaller. If tax enforcement mechanisms of the state are\u00a0ineffective, or if the penalties in case of arrest are negligible, the motive for tax evasion increases. This is not \u00a0true only in Greece \u2013 tax evasion is a universal phenomenon. These parameters apply everywhere.<\/p>\n

    If we focus more on the Greek case, we can identify 8 main causes for tax evasion:<\/p>\n

      \n
    1. The complexity of the tax system<\/li>\n
    2. Legal uncertainty\u00a0for taxpayers and employees of the tax administration<\/li>\n
    3. Repeated tax hikes<\/li>\n
    4. The lack of political will to address the\u00a0problem<\/li>\n
    5. Technological failures<\/li>\n
    6. Bureaucracy<\/li>\n
    7. Structural distortions of the Greek economy<\/li>\n
    8. Tax culture<\/li>\n<\/ol>\n

      The first two problems are obvious, and linked to each\u00a0other. Since 1975, Greece has voted in 250 tax laws and 115,000 ministerial decisions.<\/strong> Within the last 30 months alone, 10 tax laws with 117 articles and 17 other laws with 71 tax provisions were voted in. For these provisions 111 ministerial decrees and 138 explanatory circulars were published.<\/p>\n

      It is clear that this complexity makes operating the tax collection mechanism exceptionally difficult. At the same time it inevitably causes uncertainty for tax payers and\u00a0tax administration employees alike. Even tax experts\u00a0often have a limited knowledge of\u00a0what is legal and what is not. And, of course, among all this complexity, there exist\u00a0opportunities and incentives for corruption.<\/p>\n

      The third cause is equally clear. During the crisis, the income tax on individuals has increased and the tax-free limit has been reduced. The tax-free limit has also been abolished\u00a0for the self-employed, who now have to pay a larger percentage of tax in advance. The corporate income tax has increased, in the form of an\u00a0advance tax burden. Finally, the rates of the \"special solidarity tax\", property taxes, the VAT rates on products and services, as well as\u00a0consumption taxes on alcohol, tobacco and fuel have all increased.<\/p>\n

      I<\/span>t is commonly believed that by now taxes in Greece are exceptionally high. Indeed, the OECD calculated that Greece\u2019s tax burden in 2014 increased from 34.4% to 35.9%<\/strong>. There is a threshold, predicted by the so-called \"Laffer curve\" (named after\u00a0the economist who drew it on a napkin in order\u00a0explain the phenomenon to Donald Rumsfeld and Dick Cheney, members of the administration of US President Gerald Ford in 1974) above which tax revenues decline. According to a European Commission study, this limit for countries within the EU is at 54% for\u00a0individual income tax and at 72% for income tax on legal entities. This\u00a0is considered an exceptionally high rate, much higher than the rates\u00a0in over-taxed Greece (personal income tax in 2012 was calculated at 38%, for example). Nevertheless, this does not necessarily mean that there is room in the Greek economy for further tax rate hikes. The same European Commission Study estimates that for countries with a sizeable\u00a0\"shadow economy\", the Laffer curve is shifted\u00a0downward. For countries like\u00a0Greece, the threshold\u00a0of individual income tax is at 39% - very close to the current rate. This means that a further\u00a0increase of tax rates in Greece would have little effect.<\/p>\n

      Of course, high tax rates have other serious consequences, beyond their reduced efficiency. They are a serious disincentive for investment, they rapidly decrease the competitiveness of domestic enterprises, while they also negatively impact consumer spending (sales of alcoholic drinks in Greece have decreased 45.7% between\u00a02009-2012).<\/p>\n

      But why doesn\u2019t the Greek state address the problem of tax evasion? Despite long-term commitments by all political forces that have ever participated in elections in recent history,\u00a0the results have been\u00a0meager<\/strong>.<\/p>\n

      The digitisation of the Greek\u00a0tax system has lagged significantly. For example, electronic submission of corporate tax returns beca<\/strong>me possible only in 2013<\/strong>, while a series of processes continue to require the physical presence of taxpayers at tax administration offices. Information systems are not linked to one another, databases are not digitized or up to date, information management systems are not regularly updated: there has been a series of bureaucratic failures, simple things that other\u00a0countries managed to solve many\u00a0years ago.<\/p>\n

      What are the solutions?<\/h2>\n

      T<\/span>he fight against tax evasion is a challenge for every state in the world. Both the European Union and the OECD have developed tools to fight tax evasion, and\u00a0there is a rich history of policies fighting the problem in other countries, which is worth studying. The extensive use of \u2018plastic' money and the extension of electronic transactions have been tested in many countries (from South Korea and Argentina to the Netherlands and Sweden). Modernization of the tax administration has been implemented in a remarkable way in Singapore, Brazil and even Bulgaria. Campaigns to create \u2018fiscal consciousness\u2019 have been successful in India, Israel and Mexico. The introduction of an Independent Authority against Corruption has had major results in Hong Kong.<\/p>\n

      These measures could\u00a0not all be easily implemented in our country, but some could serve as useful examples. The study of diaNEOsis arrives at a series of policy recommendations\u00a0that include:<\/p>\n