Tax evasion

I’ve just come across an interesting article in the New York Times entitled “Tax Cheats Become Italy’s Public Enemy”.
Much of the article details how the Italian financial police is trying to find tax evaders and the pros and cons of tactics such as using denunciations, targeting drivers of luxury cars and even Facebook initiatives to report businesses that were not issuing receipts.
I think that similar tax raids on yacht marinas were done (and duly shown in the press) last year in Greece, possibly to appease the poorer tax paying masses, but I don’t know if much came out of it.

What I found most interesting though was the attempt to change public perception about tax in Italy:
“..a new, all-out war against tax evaders that Italian officials have opened on several fronts, hoping to close Italy’s $2.5 trillion public debt and revive a frail economy that has been buffeted by the euro crisis.
In addition to banning cash transactions, it has included an ad campaign comparing tax evaders to parasites.

And further down in the article
“Since Prime Minister Mario Monti’s three-month-old government has made clamping down on tax evasion a priority, tax officials have taken to the task with gusto, emboldened by the clout of new legislation and the blessing of public opinion. There is a growing sense “that tax evaders are no longer an example to follow but an intolerable burden and a threat to collectivity,”

It looks like things could be changing in Italy.

And is public opinion about taxation changing in Greece?
I think that maybe the need for taxation (and payment of such) is slowly sinking in and that  people might slowly stop believing that evading tax is a question of (manly) honour. Maybe one day they will even think that paying tax is one’s duty to society, especially one’s duty to people in your society that are much poorer than you. What I haven’t seen yet is a campaign to promote the idea but I might have missed it as I don’t watch TV so please correct me if I am wrong.

But there is another aspect to not paying tax: Greece has such an unwieldy bureaucracy that it is often not possible to do things the correct way.

Here is an example of someone who shall remain unnamed (but I know him well): as a self-employed person he declared several activities which are mainly in the field of web publishing and advertising and can therefore issue invoices (and get taxed and pay VAT) for these activities. So far so good, everything legit and accounted for.
But when this person who also happens to do a lot of photography for his web publishing activities (it’s no secret, the photography equipment is deducted from taxable income as an expense) tries to issue an invoice (because he wants to be legit, maybe he even wants to pay tax) for the sale of rights to photographs (to be used in books produced by other publications) he is told by his accountant who is interpreting tax law for him that he cannot sell photographs, not even rights to photographs because that makes him a photographer.
“Ha! So what’s the problem?”
“To be a photographer you need to have a shop”
“Why do I need a shop to sell the rights of photos I take in the course of my taking photos for my web publishing activities?”
“Because you cannot sell them unless you are declared as a photographer and to be declared as a photographer you need to have a shop. This is what the tax law states.”

So what happens then? Well, you either don’t ever sell your photos (or the rights to them) to anyone…or you don’t tell that you are. There is no other choice.

Now this could be seen as a special case, the sort of fluke that you find in every legal system but I could list similar examples ad nauseam.
So maybe reforming the Greek tax system needs to include getting rid of an insane amount of bureaucratic interference in everything people are doing or trying to do. Get rid of the hurdles, make it simple for people to be openly and legally enterprising and maybe they will be open and legal about what they are doing.

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13 Responses to Tax evasion

  1. Yorgos says:

    Jean, there are two issues that you have raised here; the first is public attitudes towards tax evasion and the second is the effectiveness of current tax laws.
    Regarding the first issue, from discussions with friends in Greece and from personal observations while in Greece, as well as from my regular reading of the Greek press, I haven’t seen a marked change in attitudes to tax evasion yet. Hopefully the revelations over the last few months of the massive tax evasion by very well off Greeks who have been arrested and prosecuted and their details released to the press might change public attitudes. But they need to change towards all tax cheats, including the small ones, not only the wealthy ones.

    Now the issue of the Greek legal system that the Greeks proudly used to say was full of “parathirakia’, small windows, which enabled the smart ones to avoid being caught by the letter of the law. This is changing, but very slowly. The first move was the establishment last July of a specialist branch of the police, the Financial Police and Cybercrime unit. The giving of power to this unit to demand and get access to bank accounts of suspects was the second move. And the third success was to get last November a high court ruling that nonpayment to the state of VAT taxes is theft from the state rather than debt to the state. (VAT is collected from customers on behalf of the state so nonpayment of the money that belongs to the state is theft. Previously it was argued that it was a debt by the business to the state and then the business used to try and hide behind bankruptcy protection provisions). Since then more than 80 high profile business people have been arrested for VAT theft of amounts higher than 150,000 euro (smaller amounts are handled differently by the provisions of the law). Access to bank accounts has also revealed massive gaps between declared income and actual cash deposited in bank accounts. The Financial Police is reported to have asked details of 4,500 accounts but they are complaining that the banks are slow to provide the details. Nevertheless, the results are staggering. From 39 inspections, some 100 million euro of undeclared income was revealed in the first two months of this year alone. The Ethnos newspaper reported today of a priest who was discovered to have more than one million in his bank account who immediately offered as settlement 531,00 euro for his undeclared income. This case of course will have to go to court and hopefully the fines will add to this amount, if not a jail sentence also.

    These changes are taking place slowly but hopefully will lead to changes to public attitude to tax evasion. But there is a need for changes to laws, including tax laws, which would close many of the “small windows” that I mentioned above. For example, a tax evader of personal income tax can still hide behind bankruptcy provisions and the courts will not allow the state to chase the forfeited tax that has been invested in property in the names of relatives.

    So changes to the tax definition of who a business photographer is might be low on their list of priorities. Greek law, including tax law, has a long way to go to become effective.

  2. Jean says:

    Thanks for taking the time to write this long comment. Being Greek you have better access to and understanding of the Greek press, and may also have more of a finger on the pulse of things than I do.
    As you said, good to see that some things may be changing.
    As for the second part of my post, it was not so much a dig at tax law but a complaint at the stifling Greek bureaucracy which sometimes forces people to not be straightforward even when they want to. And that’s when you start using “small windows” because they are you only options.

  3. DavidA says:

    Excellent comments. Somehow they also need to address the problem of , for example, the surgeons in Kolonaki who have such a tiny declared income but who require large amounts of cash before they will see a patient. If there is to be an official receipt given for the payment, then the payment often is said to more than double.
    We shall be back in Crete again in May when I still expect to pay cash for my car hire and hotels and meals and for many transactions: I shall be very surprised if I receive an offical receipt.

    • Jean says:

      You are mixing two things here.
      The “surgeons in Kolonaki” might be working as private doctors in which case they can charge what they want. What they declare to the tax authorities is another story (and scandal),
      The bribe (‘fakelaki’ meaning ‘little envelope’) that has been much publicized recently and is said to be often needed in order to get (preferential?) treatment exists but from what I saw it is a relic of the past. Older patients will often insist on giving a fakelaki when it is neither needed nor wanted but they THINK that they will be better treated that way. Of course there are still crooked doctors but it is diminishing fast. My personal experience is that I always got first class treatment and nothing was expected of me.
      Car rental: Cretans like to deal with cash. They will also save between 1.5 and 3% on a transaction by not taking credit card payment. But if you rent a car it is almost impossible to do it “off the books” because the insurance papers need to be done before the car is given. Even if someone lends you a rental car for free (I have done that a few times) the rental company will need to fill in papers (and at least pay for the insurance).
      Hotels and other places….that’s far less controlled.
      But what I want to say is that Greece is maybe not quite as crooked as we sometimes think it is.

      • Yorgos says:

        If I could add some further comments regarding the issues addressed by David and Jean above. The undeclared income issue (or the under declared income in David’s example of the Kolonaki doctor) is being tackled through the comparison of bank balances and tax returns method by the Financial Police mentioned in my earlier response. This is further to the method that has existed in Greece for many years, but has not been fully enforced; the matching of asset growth compared to income over a period of time (pothen esches or where you got this from). Hopefully a new focus on tax evasion by the Financial Police, without any political interference, might produce some encouraging results soon.

        The Financial Police have also installed a telephone line where citizens are encourage to report (even anonymously, if they prefer) cases where they suspect tax evection. Since its introduction, over a year ago, more than 40,000 such reports have been received. The Police have not provided any report of the success of this service yet.

        An interesting case was reported recently of a farmer from an island (not Crete) who came to the attention of the Police (did not say whether he was dobbed in) being the proud owner of a red Ferrari and a Porsche. On investigation it was determined that he had more than 10 million euro in 6 bank accounts while he had a declared income from farming activities of 106,000 euro over the last 10 years! Part of his additional income was coming from money lending activities. The Police reported that they were confident that all the 10 million will be confiscated.

        Another interesting report relating to the large numbers that have been arrested for the nonpayment of VAT (see my earlier comment) was that 29 business people have come forward to pay some 8.4 million euro for outstanding VAT, fearing arrest and imprisonment if they were to be found by the authorities first.

        Car hire companies, as Jean commented, have very few opportunities to avoid declaring income as when you hire a car you are obliged by law to have a signed car hire contract with you, which also covers you for insurance purposes. Hotels and restaurants are different, but still they take the risk of being caught in the act if they don’t issue a receipt, or later on when the Financial Police will start investigating their bank balances or assets against the declared income.

        These are significant changes that are taking place which in my view are driven by responsible and better educated public servants, including Police, who are not being obstructed by politicians anymore. Police, tax and computer experts from other states (Germany, France and some other states) are also providing advice and guidance to the Greek authorities so there is some hope here.

        • Jean says:

          You seem pretty optimistic in your last paragraph. That’s nice.

          • Yorgos says:

            I am optimistic about reducing tax fraud amongst the more wealthy Greeks but not about the direction that the country is being forced to go by the German economic dogma. Greece, Ireland, Portugal and others need economic growth to overcome their economic and social problems. This will not come through more austerity, more cuts, but by expansionary fiscal policies in both the private and public sectors. Keynesianism versus Ordoliberalism! A battle of dogmas while the place is burning down.

  4. DavidA says:

    I welcome Yorgos’ optimism and hope he is right. I recall that when I first went to greece in March 1959, after sitting up in the Tauern Express for 3 days and nights across Europe, I used to get official, full receipts for everything – cafes, hotels, everything. I hope that the pendulum has now swung back towards this manner of doing business!

  5. DavidA says:

    I apologise for writing again but I am delighted by Yorgos’ accurate prescience. The Financial Times today carries an article headed “Greece cracks down on graft” and I see that the Greek government yesterday suspended more than 100 civil servants involved in making investment grants following the arrest of two officials for taking bribes. This was the result of a sting operation by the SDOE financial police. ” “We are going to unravel the knitted pullover of corruption” said Anna Diamantopoulou, a former European commissioner who took over as development minister last week.”
    Officals had been requiring backhanders equal to between 2 and 4% of the value of a grant application. The officials were arrested while accepting a cash payment of 120,000 euros in return for a hotlier’s 13 million euro grant to build a resort in southern Greece. Apparently they had earlier demanded 700,000 euros.
    The government also gathered just under one billion euros in back taxes last year which was more than double its target. “Fixing Greece’s tax collection system has emerged as one of its priorities. The country has an estimated 60 billion euro in outstanding unpaid taxes of which 8 billion euro could be collected.”
    The governemnt has acknowledged too the challenges of trimming Greece’s bureaucracy to improve the environment for new businesses. “”There is too much red tape, too many administrative barriers,” Horst Reichenbach, the head of the taskforce, said.”

    Reasons to be cheerful.

    • Jean says:

      And this is the link to the article you referred to:

      What concerns me is that the top dogs in the corruption league have created laws that grant them immunity from prosecution.

      • Yorgos says:

        Jean, you must be referring to members of parliament and their parliamentary immunity. Certainly this is a scandal, but it is almost impossible to change the situation as this immunity is part of the Greek constitution that has been abused to the extreme. All members of parliament cannot be prosecuted for any reason at all (even if the crime has no relation at all to their parliamentary duties) unless the parliament, through a formal voting process of the full house, removes this immunity on a case by case basis. In the last 40 years, from reading a relevant article, there have been 400 requests by prosecuting authorities for the removal of this immunity, and only 3 were allowed!

        • Jean says:

          Yes, that’s what I am referring to. In Greece if you are a member of parliament you are effectively above the law.
          I guess that it might apply to Sfakians too 😉

          • Yorgos says:

            Not yet. About 20 of them, including the Mayor and the ship owner, still face an individual fine of 3,000 euro regarding the Samaria boarding but they are refusing to pay it! The lines have been drawn. I am with the Sfakians’ side of course!

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