Tax & Accounting Blog

Greek VAT: Creditors pressure driving tax changes

Blog, Indirect Tax, ONESOURCE May 9, 2016

Greek officials have announced that the country will adopt a series of tax and economic measures in order to comply with fiscal targets agreed with its creditors. On negotiations held last month Greece and the representatives of the institutional creditors (European Commission, European Central Bank, International Monetary Fund and European Stability Mechanism) agreed on different measures worth 2.7 billion Euros to be adopted by the Greek government, which will allow the country to comply with the fiscal targets set as part of the bailout program.

Amongst the measures agreed by the parties is an increase of 1% in the current VAT standard rate, which will hike from 23% to 24% as off 1st July 2016, as informed by government officials. The VAT increase could allow 400-500 million euros extra annually but it is unlikely in Greece’s current situation and could lead to a revenue decrease because of increased tax evasion.

Other tax measures that were discussed by the parties include a possible reduction in the amount of the tax-free income threshold for individuals and an increase on the VAT rate applicable to certain goods that currently are subject to a reduced rate of 6%, such as books, newspapers and others. Details on the increase of VAT has not been revealed yet, so it is not clear which products it will cover and whether they will be subject to the 13% reduced VAT rate or to the future 24% standard VAT rate.

The abovementioned changes have not been drafted into a bill and presented to the Parliament for approval yet. According to the information provided by government officials, the change in the standard VAT rate is to become effective on the 1st of July of 2016, so it is likely that during the next few weeks the bill should be presented to the Parliament and more details regarding the tax changes will become available.

This is not the first time Greece has implemented tax changes in order to meet conditions agreed with its creditors. Last year the country eliminated several products from the list of goods subject to the reduce rate of 13%, which are now subject to standard rate, and also commenced a process of increasing the VAT rates applicable to the islands of the Aegean, which were subject to lower VAT rates than continental Greece. According to data released, even with the application of the aforementioned measures the Greek revenue only increased 12 million Euros between 2014 (13.613 billion Euros) and 2015 (13.625 billion Euros).

Besides the measures agreed in order to comply with fiscal targets, the Greek government and the creditors are also trying to achieve a commitment for a contingency plan in case the fiscal targets are not met, but the negotiation on this has been a bit more difficult and an agreement on this issue has not yet been reached. In this sense, the Greek government has said it is not possible to adopt contingency spending cuts suggested by the International Monetary Fund in case the fiscal targets agreed with creditors are not met.

This situation reflects of an extended practice by governments around the world which adopt tax reforms in order to balance their budgets due to an economic crisis or to unforeseen circumstances that have an impact in the country’s budget, such as a natural disaster. Usually this implies that changes are quickly adopted, without giving much detail before their implementation.

In the case of Greece, we will have to wait for the bill to be presented to the Parliament in order to get more details of all the tax changes to be adopted.