Greece’s chief tax collector is on a mission to improve compliance – IMF F&D
Finance & Development, September 2019, Vol. 56, No. 3 PDF version
The head of Greece’s tax collection agency is on a mission to improve compliance
It’s the height of a hot Greek summer and Athens is beset by tourists. Dressed in shorts and sandals, they crowd into the shops lining the narrow cobbled streets of historic Plaka, at the foot of the Acropolis, looking for olives, magnets, T-shirts and other trinkets . A man haggles with a street vendor for the price of a tote bag. This is the kind of cash transaction that George Pitsilis is trying to eradicate.
If tourist arrivals match last year’s figures, some 30 million people will visit Greece this year, buy Greek coffees and Greek salads, rent cars and umbrellas and boost the country’s shrinking economy with 16 billion euros of expenditure. Pitsilis, Greece’s top tax collector, is determined to ensure that value added tax – a crucial source of revenue for the cash-strapped state – is collected on these transactions.
By law, retailers and other service providers are required to accept credit, debit and charge cards and issue receipts. But with a value added tax of 24%, among the highest in Europe, the temptation to cheat is strong.
For example, the Greek tax administration has launched a public relations campaign, dubbed “Apodixi, please”, encouraging tourists to use plastic and ask for a receipt, or apodix. Pitsilis has also ordered business audits and inspections and has no qualms about shutting down famous Mykonos restaurants that don’t issue receipts. Advertising is good.
“You raise awareness, you get a message across,” Pitsilis says in an interview. Tourists can “do their part to help the country stand up”.
Tax evasion is a particular problem for Greece, which lags far behind other EU countries in tax collection efforts. The result is tax rates that are too high and applied to too few people. In 2009, the country saw its budget deficit climb to more than 15% of GDP.
Improving compliance is key to lowering tax rates and paying for things like better social safety nets and higher public investment. All of this would help Greece recover from an eight-year economic crisis that has shrunk its GDP by 25% and led to 289 billion euros in international bailouts.
The problems were countless at the start of the crisis. Greece’s underground or undeclared economy is estimated to account for up to 27% of GDP, among the highest percentages in Europe. Some 75% of self-employed professionals declared income below the taxable threshold, according to an IMF study. The tax collection system was antiquated and vulnerable to political interference. Corruption was commonplace. The tax code changed frequently. Disputes became entangled in Greece’s slow-moving court system.
Attempts to tamper with government budget statistics could not hide the problem. In 2010, Greece promised to reduce its bloated budget deficit as part of the emergency aid package. But the task has become more difficult as the financial crisis has deepened. Further bailouts followed. In 2015, seeking to prevent a collapse of the banking system, the country imposed capital controls, which included daily limits on the amount of money that could be withdrawn from ATMs.
After efforts to boost collection failed, the Greek government set up the independent Public Revenue Agency, aiming to insulate the tax administration from political pressure and free it from some of the complex labor rules that plague bureaucracy. Greek. Pitsilis, a 44-year-old lawyer born in the United States, raised in Greece and trained in Greece and France, took charge when the agency opened on January 1, 2017.
Pitsilis works in an office on the eighth floor of a nondescript Ministry of Finance building in downtown Athens. The agency has a separate entrance, a nod to the need to keep it away from the political appointees who run the department. On a recent Friday at 5 p.m., he returned to his office after a meeting, put on a tie, and got back to work. His day usually ends at 9:30 p.m.
In May, a day after the government announced that snap general elections would be held this summer, Pitsilis summoned his team to deliver a message: for them, it would be business as usual. There would be no relaxation of tax administration, unlike in the past when tax collectors slacked off to help the government curry favor with voters.
This summer, inspectors are rolling out to perform 50,500 on-site audits and inspections. Surveillance drones fly over Santorini to ensure that tour boat operators provide receipts to visitors who come to see the island’s sea-filled volcanic crater. A monthly lottery offers taxpayers €1,000 rewards for using payment cards in their daily transactions.
Other more mundane innovations made the difference. Tax authorities have better access to third-party information such as bank accounts, and a dispute resolution system handles complaints more quickly. The mobile squads of the customs unit, which work on land and at sea to carry out random inspections, are grouped under a new central organization; a special unit will focus on investigations in three broad sectors: large businesses, small businesses and the self-employed, and high-net-worth individuals.
“Tax evasion is not a monolithic thing,” says Pitsilis. “It takes many forms. Clearly, there is no one-size-fits-all approach.
Still, it’s clear that the proliferation of point-of-sale terminals, which underpins the new “Apodixi, please” campaign, has been key to improving tax collection. The number of terminals more than doubled to some 700,000 in the two years ending December 2018, according to Cardlink, which operates the country’s largest card acceptance network. The value of transactions increased from 19 billion euros to 31.5 billion euros.
The sudden popularity of plastic coincided with the imposition of capital controls in 2015, when Greeks faced limits on cash withdrawals using debit cards to buy gasoline and groceries . The government then decided to require the terminals for a range of professions and businesses.
As the use of point-of-sale terminals has exploded, value-added tax revenues have also increased, as payments are collected automatically. Electronic payments contributed at least half of the increase in value added tax revenue recorded in 2017, according to a study by IOBE, a Greek think tank.
In 2018, these payments jumped 24% to 31 billion euros, according to a European Commission report, boosting the collection of value added tax, which accounts for a third of government revenue. Spending cuts, along with increased revenue, helped generate a budget surplus of 1.1% of GDP last year, compared to a deficit of 11.2% in 2010.
Electronic payments “have helped because they empower the individual,” says Pitsilis. “It gave individuals the ability to opt out of certain conversations, to allow them to say, ‘I want to pay by card’.”
Even so, Greece has plenty of room for further gains; Card use as a percentage of private consumption was 14.8 percentage points below the EU average in 2017, according to IOBE. Annual revenue from value added tax would be 21%, or €3.3 billion more, if Greece were to reach the EU average level, according to the report.
With the relaxation of capital controls and limits on cash withdrawals, there are fears that still-weak tax compliance could suffer. A quarter of terminals installed in 2017 and 2018 remain idle, Cardlink representatives told a conference earlier this year.
One reason: unlike their younger urban counterparts, older Greeks and people living in rural areas still prefer cash. Independent professionals regularly offer discounts to customers who pay cash, a deal easier to make in the privacy of the doctor’s office or the lawyer’s office. This is a serious problem, as the self-employed make up almost 30% of the Greek workforce, according to Eurostat, the highest proportion in the European Union and double the EU average.
As a result, the main tax burden was borne by easy-to-tax wage earners and retirees, while relatively wealthier self-employed groups escaped the tax net. Promises to ease the tax burden contributed to Prime Minister Kyriakos Mitsotakis’ election victory in July.
“Taxation cannot simply be a source of revenue, it must evolve into a lever for growth,” Mitsotakis said in his first policy. speech in Parliament, announcing reductions in property taxes and corporate tax rates. Electronic payments and mandatory electronic invoicing and accounting will broaden the tax base, he said.
Change of attitude
For traders like Ilias Tsingas who depend on foreign visitors, electronic transactions are a necessity. “Tourists don’t use cash,” he says.
Tsingas, 57, mans a bandstand in central Athens, minutes from Parliament and in the path of members of the Presidential Guard, who parade in their regalia to stand guard at the Tomb of the Unknown Soldier. Its kiosk, which sells everything from tissues to plastic soccer balls, is adorned with signs in English proclaiming that it accepts debit and credit cards. Among Greeks, however, only politicians and civil servants are regular users of the terminal because they have to justify their expenses, he says.
For Pitsilis, changing that kind of attitude is the key to success. It’s time for Greeks to develop a sense of personal responsibility, he says, and avoid the temptation to accept a discount in exchange for a cash payment to avoid tax.
“It behooves us all to understand that such a proposal hurts our future, our children’s future, our pensions and affects whether our child or grandchild will find a job tomorrow,” Pitsilis said. “Because at the end of the day, we all end up paying.”
PHOTO: ISTOCK / HOLGS
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.