What Tax Changes Does the Eurogroup Require for Greek Bailout?
July 22, 2015
There has been some confusion over the tax changes required by the Eurogroup as part of the Greek bailout deal. As we understand, only the broadening of the Value Added Tax (VAT) is required to satisfy the Eurogroup demands.
The specifics of the VAT base broadening were announced on Monday. The VAT rate was increased for many goods and services with special rates, but the standard rate of 23% for most purchases remained the same.
Many foods, such as beef, coffee, and sweets; agricultural inputs, such as animal feed, seed, and fertilizer; clothing, and household items lost their reduced-rate status, which requires them to pay the standard 23% VAT rate. In addition, bars and restaurant also must pay the standard VAT rate.
Hotel accommodations, private hospitals, entertainment, and transportation VAT rates increased from 6.5% to 13%.
Only books, theater admission, and certain medicines remain in the lowest reduced rate. Interestingly, the VAT rate on those items actually dropped from 6.5% to 6%.
Maintaining a third VAT rate was a sore point for the IMF who preferred a two-rate VAT system. The IMF has argued that a simplified two-rate VAT would alleviate administration costs on an already dysfunctional Greek tax authority. Although the IMF potested the third reduced rate, it was not part of the bailout deal.
In addition to changes in the categories, the Greek islands in the Aegean Sea are slated to lose their reduced rates of 5%, 9%, and 16% for the three categories of goods. They will be required to pay the same VAT rates as the mainland after October 1st.
There are reports that, along with changes to the VAT, there is a proposed increase of the corporate rate from 26% to 28%. The tax rate increase on corporation was not part of the original agreement between the Eurogroup and the Greek government, and there has been no official response by the Eurogroup that suggests an increase in the corporate rate is required for the bailout. In fact, as of the first bridge loan approved July 17th the Eurogroup only asks for changes to the VAT.
An increase in the corporate income tax would be a major mistake for Greece. Along with an already weakened economy, the increased tax burden on corporate entities would encourage Greek corporation to flee across the board to Macedonia, who has a 10% tax rate.
Additionally, there are reports that the Eurogroup is requiring the Greek government to increase the income tax rate on farmers from the special rate of 13% to the standard rate of 25%. Once again, the official Eurogroup documents do not support these claims.
Thus far, only the VAT has changed, as the Eurogroup-Greek agreement requires, but there are rumors of additional tax changes required by the Eurogroup. Whether these rumors are true is still unknown. It would be in the best interest of the Eurogroup to release a comprehensive document with the required tax reforms, but as of today, we have no such official document.