Is VAT all you’ve got?

P1030112 (390x293)Grabbing a coffee for 20 cents less doesn’t really sound like the start of an economic recovery but who knows, maybe after this week’s decision to cut value added tax at restaurants and cafes, Greece will soon be measuring out its success with coffee spoons.

Naturally, the government has made the most of the skeptical troika finally giving in on a longstanding Greek demand for VAT in the food service sector to be reduced from 23 to 13 percent. Even so, Prime Minister Antonis Samaras announcing the temporary measure in a televised address was a touch excessive given he only informed the nation that a nightclub drink would soon be about 50 cents cheaper. For the government, though, the symbolism of the reduction is perhaps more important than its economic impact.

Samaras presented it as a personal triumph of persistence. Deputy Prime Minister Evangelos Venizelos said it was a sign that the troika had begun listening to Greece. Indeed, the VAT reduction represents something of a milestone in the Greek bailout program as tax hikes have been the norm and a regular source of much anger over the last three years. It was billed as the first tax cut since the program began, which is not quite accurate. Technically, it was the second as a 15 percent reduction in the emergency property tax introduced in 2011 had been agreed a couple of months earlier. This came after pressure from Democratic Left, which was still part of the coalition at the time. There was no televised address, though.

The government hopes the VAT cut will boost one of the biggest employers in Greece’s all-important service sector and make the country’s tourism sector more competitive against its rivals. However, introducing the tax reduction on August 1 for a trial period seems to undermine the aim of attracting more customers. One imagines that an agreement earlier this year, which could have been communicated widely and loudly to visitors, could have been a real boon. Equally, a reduction of the rate to 13 percent, where it was two years ago, is far from enough to give Greece a decisive edge over its competitors for tourists’ spending money. In Italy and Spain, for instance, restaurants charge 10 percent VAT. In Cyprus it is 8 percent.

Then, there is the question of whether restaurateurs and cafe/bar owners will pass on the savings to their customers. It is difficult to imagine they will follow this path in the middle of the tourist season when they stand to gain little or no extra business from doing so. Instead, paying less VAT will allow them to hold on to more profits. It is worth noting that after the UK government implemented a VAT cut in late 2008, the Office of National Statistics found that about a third of businesses did not reduce their retail prices.

In his address, Samaras also told his audience that if there is no improvement in tax compliance among restaurants and bars, the measure will not be made permanent. His warning seemed to send the morally questionable message that the tax cut was an incentive for the sector to comply with a law that many other businesses already follow.

Finally, to convince the troika to approve the temporary measure, Greece had to agree to slash about 100 million euros from its defense budget. This is roughly how much the country’s lenders estimate will be lost in tax revenues and they cannot allow any room for the possibility of Greece not producing a primary surplus this year.

All in all, the VAT change is a breakthrough of sorts for Greece but much less than a triumphant achievement. From the troika’s side, it appears more of an attempt to fob the government off rather than a genuine concession aimed at stimulating the economy.

There is also a risk, especially as the new tax code is currently being prepared by the Finance Ministry, that the focus on the VAT in just one sector masks a much more serious economic problem. While hospitality may, or may not, profit from VAT dropping to 13 percent, businesses in all sectors of the Greek economy will continue to labor under an incredibly burdensome tax system.

Currently, many businesses pay 26 percent company tax and another 10 percent on redistribution of profits. They also have to prepay 80 percent of their tax for the next year. This means that the total tax bill works out at more than 40 percent of profits and leaves a company making 50,000 euros with more than 20,000 euros to pay in taxes. This amount, of course, will be cleared and some businesses will receive returns but the sluggish rate at which the Greek state is dealing with its arrears means this is of little comfort to businesses strapped for cash.

So, while we wait to see what impact the VAT reduction in the food service sector has over the next few months, there are thousands of Greek businesses that will enjoy no such fillip. Fighting for survival in a depressed, demand-deficient, liquidity-parched economy, they are being incessantly hammered by their own government and its lenders. For them, a cheaper cup of coffee is no consolation at all.

Nick Malkoutzis

4 responses to “Is VAT all you’ve got?

  1. A small correction Nick, which does not materially alter your meaningful points: The “another 10 percent on redistribution of profits” is actually a withholding tax on dividends, which burdens shareholders and not the company’s P&L.
    The corporate tax rate (26%) and the withholding dividend tax (10%) apply as of 2013. Last year they were at 20% and 25% respectively.

  2. I have developed an aversion against the VAT in restaurants. Why? Because I saw on innumerable occasions how restaurant owners increased their prices allegedly because of the increased VAT but, at the same time, never handed out receipts.

    Cheating on income taxes is one thing. Collecting more from customers because of the higher VAT but not giving receipts is quite another thing. In the latter case, the owner has a fiduciary responsiblitiy. He collects, on behalf of the state, taxes from people who have trouble paying those taxes but instead of passing those taxes on to the state, the owner keeps them for himself. It’s not only stealing from the state. Instead, it’s stealing from other tax payers. Strangely enough, when I talk to Greeks about that, they don’t understand why I get so excited about it. To them, it’s just another form of tax cheating. Well, it ain’t! Instead, it is stealing from those who have the will (or no other choice but) to pay taxes.

  3. Taken from a Xydakis article commentary of mine on eKathimerini, so I don’t have to re-write it.

    Apparently some people don’t get it, so let’s try to explain it in baby steps.

    Last year 2012 we had the following current account performance:

    http://www.tradingeconomics.co

    Summer is the traditional time for primary surpluses(due to tourism), so let’s summarize the “sunny period” of the Greek economy based on the seasonal pattern:

    May 2012: – 1.2 Bil. euros

    June 2012: 0.133 Bil.

    July 2012: 0.63 Bil.

    August 2012: 1.56 Bil. euros

    September 2012: 0.82 Bil. euros

    October 2012: – 0.7 Bil. euros

    Since this year May instead of a -1.2 Bil. turned out to be slightly positive (0.035 Bil), let me try to project the next few months for you (and feel free to hold me to such numbers and compare them to actuals as soon as they come out). So here is Dean’s projection for the 2013 months ahead based on what we know from prelim tourism receipts and other conservative projections (i.e. tax revenue stronger in 2nd half):

    June 2013 est.: 1 Bil. euros
    July 2013 est. : 1.6 Bil. euros
    August 2013 est.: 2.7 Bil. euros
    September 2013 est: 1.9 Bil. euros
    October 2013 est.: 0.4 Bil. euros

    Therefore the estimate for the June-October 2013 primary surplus is 7.6 Bil. (according to my estimate; it could turn out to be better (i.e. higher)).

    Given the fact that the Greek primary balance at the end of May was a negative 3.5 Bil.(because in the first half of any year Greece burns more than it earns), this is more than enough to end the year in a primary surplus territory because the last two months Nov-Dec (given our improvements in trade balance) would result in small negative numbers below 1 Bil.

    Therefore my projection is that Greece will end up this year with a positive current account balance of 2 Bil. euros or more.

    As a result let’s abandon this irrelevant discussion about VAT and let’s focus on the big picture.

    And for crying out loud stop being Talibans of gloom and doom. The solution is under your nose. If the government talks about it then Syriza proclaims that there is no need for further reform. So, we pretend that we don’t know what the solution is when in fact everyone form Schauble, Stournaras and Samaras says the exact same thing: primary surplus. And it’s 100% doable and within our grasp.

    • Again here is the Greek current account performance for 2012 ad 2013 YTD.

      http://www.tradingeconomics.com/greece/current-account

      If you don’t trust my calculations then I would encourage you to project it yourself. If you do, here is the trend to be aware of for the first 5 months of 2012 and 2013:

      Current Account 2012 Current Account 2013 Difference
      -1.45 Bil. -0.22 Bil +1.23 Bil.
      -1.06 Bil. -0.72 Bil. +0.34 Bil.
      -2.10 Bil. -1.29 Bil. +0.81 Bil.
      -0.88 Bil. -1.19 Bil. -0.31 Bil.
      -1.16 Bil. +0.035 Bil. +1.20 Bil.
      Total: 3.27 Bil.

      Therefore for the first 5 months of 2013 we have an average monthly improvement on the current account deficit of 3.27/5 = 0.65 Bil.

      Throw in an average 0.35 Bil. of increased tourism revenue during the summer months and we arrive at an average projected increase of 0.65+0.35= 1.0 Bil. Therefore I increased last years monthly totals by 1 Bil. on average (plus some other minor adjustments I expect from better trade balance).

      Do your own calcs but I think the message is clear. We will have a primary surplus this year.

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