Troika: Greece must repeal reduced VAT on the islands

By Paris Ayiomamitis

Greece is under pressure from the troika of its international lenders-the ECB, the European Commission and the IMF – to repeal its reduced rates of value-added tax on several of the country’s islands in favour of a single, lower rate of 18%. The rate in the rest of the country is at 23%.

The government had reportedly agreed earlier in the year to submit a proposal on VAT reform in the summer, put it in law by October and implement it by January 1, 2015.

The issue had resurfaced on October 13 at the Eurogroup meeting in Brussels, when troika representatives told Εurozone finance ministers that Greece had to do more in the area of pension funds and the existing VAT system – in place since 1987.  
According to the in.gr (link in Greek) news site, the VAT issue had already been raised a week earlier, a day before troika representatives left Athens

The government has expressed its intention to exit the bailout but this will hinge on a series of troika-dictated reforms – a unified VAT rate,  adjustments to the minimum wages of civil servants and the country’s notoriously bottle-necked justice system to name a few.

Greece’s lenders have repeatedly insisted that unless Greece implements reforms it has agreed to and balances its budget, it will not regain the confidence of markets.

VAT rates on Lesvos, Chios, Samos, the Dodecanese and the Cyclades islands are 30% lower than in the rest of the country while on Thasos, Samothrace and Skyros they are  5%, 9% and 16% lower respectively. The troika believes the system is conducive to tax fraud and must be reformed.

Greece’s islands are a stronghold of the country’s thriving tourism industry which has emerged relatively unscathed by the recession but have been under the spotlight in recent years over high rates of tax evasion.  

The islands have, for years, enjoyed lower VAT rates as part of the effort to render the country’s tourism sector – the lifeblood of the Greek economy- more competitive compared to neighbouring Turkey and other destinations. Lower VAT rates were also applied to provide investment incentives in other less developed parts of the country.

Deputy Finance Minister Giorgos Mavraganis  and the chairman of the council of financial experts, Christodoulos Stefanidis, have been examining the proposal since August but the government is stalling because conditions have, reportedly, not yet matured yet for such a change.

The European Commission announced  in October that VAT revenue loss in 2012 due to non-collection or non compliance in Greece rose to €6,6 bln, equating to 33% of total expected revenue. Total revenue losses in VAT across the EU were €177 bln – 16% of expected revenue of of the EU’s 26 member states.