June 25, 2015 / 3:35 PM / in 2 years

Greek pledges rest on hard-to-keep promise of tax reforms

People fill in tax forms inside a tax office in Athens, Greece, June 25, 2015. REUTERS/Alkis Konstantinidis

ATHENS (Reuters) - When Greece’s tax police squad raided a busy cafe-restaurant in an upscale central Athens district earlier this year, it discovered two cash registers and an elaborate system of issuing fake receipts -- at least 15,000 of them, over four years.

Four months later, the cafe has been shut but local tax authorities have yet to pin down the exact amount of revenue the business concealed. A date for a court hearing for one of the owners has not yet been set, police officials say.

The cafe’s misdeeds are one of the more flagrant cases of tax evasion to emerge this year, but monthly reports by Greece’s financial crimes units highlight just how common tax dodging is, from doctors to farmers to contractors and civil servants.

That, and the prevalence of small- and medium-sized businesses and the self-employed, as well as the sizeable shadow economy, shows just how difficult it is to crack down on Greece’s corruption and tax evasion, which leftist Prime Minister Alexis Tsipras has made one of his priorities.

In May, a dentist who did not issue receipts hid 226,648 euros of income; a public sector worker concealed taxable income of 246,000 euros; and a caterer hid income totaling 1.3 million euros without being able to justify where it came from, according to the financial crime unit’s report.

The unit does not comment on cases outlined in the report.

Tsipras’s government has pinned its hopes for a cash-for-reforms deal with lenders on a series of tax hikes, hoping to avoid further painful cuts to wages and pensions after a six-year-long depression.

“The way they’re trying to sell it is good: We won’t cut wages and pensions, and we’ll target the rich,” said Aristides Hatzis, associate professor of law and economics at the University of Athens.

“But in Greece, it makes sense to tax evade if you can, because you win, because the chances of being caught are very small, and because it’s socially accepted. Your neighbors won’t tell on you,” he said.

Athens’s European and International Monetary Fund lenders are also deeply skeptical -- making taxes one of the major sticking points in the deal to avert a Greek default. The IMF, in particular, has resisted strongly.

“You can’t build a program just on the promise of improved tax collection, as we have heard for the past five years with very little result,” IMF chief Christine Lagarde told French magazine Challenges this week.

UNREALISTIC

Greece has so far disappointed its lenders on reforming revenue collection, with annual tax evasion estimated at billions of euros.

In fact, a collapse in tax revenue accelerated the Greek economy’s downward spiral during the financial crisis and was a major factor forcing Athens into an international bailout.

The problem is not only Greece‘s; governments throughout southern Europe have fallen short of targets for years. Italy has introduced higher jail sentences for evaders and incentives for people to voluntarily come clean on undeclared offshore funds. Those who confess have to pay high financial penalties, but don’t risk jail sentences.

Still, Italian tax authorities regularly have trouble recouping unpaid taxes even when they smoke out evaders. And tax dodgers often go back to their illegal behavior even when they are caught, in part because jail sentences are rarely enforced.

In its latest report on Greece, the IMF said that while debt collection was improving, tax evasion remained rampant among the rich and the self-employed. The Paris-based OECD has said Greece must make tax collection more efficient, improve audits and speed up court proceedings to strengthen enforcement.

Tax evasion raised concerns about an unfair distribution of the tax burden by focusing in on ordinary Greeks, it said.

The IMF’s concerns are shared by some Greeks.

“The (proposals from the government) aren’t especially realistic. There’s an overestimation,” said Harry Theoharis, Greece’s former tax boss and now a lawmaker with the centrist To Potami party.

Theoharis, who was appointed Secretary General for Public Revenue in 2013 at the behest of Greece’s EU/IMF lenders in an effort to modernize a 19th century, paper-based tax administration, said the problems were largely structural.

A thriving informal economy accounts for about a quarter of Greece’s gross domestic product -- the highest proportion in the euro zone.

A big chunk of the country’s businesses are small- or medium-sized, and twice as many workers as self-employed compared to other OECD countries, making it easier to evade tax, Theoharis said. Underperformance in the public sector and tax administration also made things worse.

Under the government’s latest plan, a solidarity tax for those earning over 50,000 euros will be raised, and a new solidarity tax of 8 percent on revenues above 500,000 euros will be introduced while a luxury tax on pools, planes, big cars and private boats over 10 meters will be increased.

Corporate income tax in 2016 will be raised to 29 percent from 26 percent, and a one-off levy of 12 percent on businesses that post a profit of over 500,000 euros will be imposed in 2015.

While it is considered too risky for big businesses to try to evade the latest hikes, analysts say the government will find it hard to collect more taxes from the richest Greeks, like doctors and lawyers, in part because many are self-employed and it is common to offer discounts if no receipt is issued.

The government could opt for an aggressive crackdown but that would create image problems, said Hatzis, the professor. A previous proposal to lenders by the finance ministry of encouraging tourists to work as undercover tax spies to help the state raise revenues was quickly dropped.

“Imagine the government’s first summer in power associated with financial police squads roaming the islands, closing down cafes and slapping fines,” said Hatzis.

COMPLICIT

Experts say apart from problems collecting taxes, large hikes feed into the problem by encouraging consumers to become complicit in evasion. It’s in the interests of both the business and the consumer to avoid value added tax, which can be as high as 23 percent, for example.

“If I go to a taverna in the countryside and you tell me ‘Do you want a receipt or to split the 23 percent tax between us?’ my answer would be don’t issue a receipt,” said Manousos Doukakis, deputy head of Greece’s tax consultants.

The fact that many small businesses -- including most restaurants in Greece -- accept only cash adds to the difficulty in tracking down tax evasion since there is no paper trail.

Yannis Siatras, former head of a taxpayers association, said the proposals would stifle internal consumption and deepen the recession.

That means over the long term that Athens will have fewer companies to tax if they go out of business or move abroad, while the rest are likely to have lower profits on which to be taxed.

For many Greeks whose incomes have dwindled during the crisis, new hikes may end up only adding to an already huge backlog of tax arrears.

“The (measures) won’t roll, tax evasion will swell,” said Doukakis.

Additional reporting by Phoebe Fronista of Reuters TV; Editing by Sonya Hepinstall

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