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Ever-changing Greek tax system a factor in crisis

The Finance Ministry is seen in central Athens as a newspaper headline in the foreground reads 'Zero hour for (fiscal) measures' on Tuesday, Feb. 2, 2010. Greece's ever-changing tax system undermines compliance and revenue _ and makes a major contribution to the government financial crisis that has shaken the entire European Union and undermined the euro currency. The Finance Ministry is seen in central Athens as a newspaper headline in the foreground reads "Zero hour for (fiscal) measures" on Tuesday, Feb. 2, 2010. Greece's ever-changing tax system undermines compliance and revenue _ and makes a major contribution to the government financial crisis that has shaken the entire European Union and undermined the euro currency. (AP Photo/Thanassis Stavrakis)
By Elena Becatoros
Associated Press Writer / February 2, 2010

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ATHENS, Greece—It's a problem all too familiar to Greek business owners: the gnawing uncertainty of what taxes they might owe next year -- and whether they'll even be hit by a sudden increase in the bill for last year.

Greece's ever-changing tax system undermines compliance and revenue -- and makes a major contribution to the government financial crisis that has shaken the entire European Union and undermined the euro currency.

"With regulations amended or overhauled practically every year for decades, businesses -- and the average Greek taxpayer -- don't know what to expect from the future, or even from the past.

You never know what tomorrow's dawn will bring, or what's in store for you for yesterday," said Giorgos Patas, who runs a health and beauty institute in the capital's northern suburbs. "Who says you can plan your budget? You do something rough and hope for the best."

On Wednesday, the European Union will unveil its a monitoring program for Greece that could call for more taxes and spending cuts if the government doesn't make progress.

But Greeks themselves can already point out the problems with the tax system. Constantly shifting and complex regulations deter desperately needed investment and discourage some from fully complying.

"The unstable tax environment is one of the disadvantages of attracting foreign capital and it's certainly a disincentive for locals, for investments," said Nikolaos Patelis, general secretary of Greece's Federation of Tax Preparers.

"I've been dealing with this for 26 years, and the same thing has been happening for the past 26 years. There's always something that will change," Patelis said. "And what's worse, regulations are passed with retroactive application."

Amending tax regulations is an easy, but usually short-term method to try to increase revenue.

"It is a fact that any changes are made under the pressure of the country's fiscal problems," Patelis said. "but ... if we want to increase our tax revenue, businesses must be given incentives to invest, to create jobs and added value to our country."

And so businesses and professionals across the country brace for change each time a new government comes into power -- or even when a new minister is appointed in a Cabinet reshuffle.

"When a government changes, everything freezes," said Jean-Robert Malandra, who runs Food Guru, a high-end office lunch catering business. "What are we supposed to do, operate our business on a four-year cycle?"

This week, yet another new tax bill is to be announced -- one which the Socialist government of Prime Minister George Papandreou hopes will increase its revenue by hundreds of millions of euros and help lift the country out of the clutches of its worst debt crisis in years. It is aiming for a dramatic decrease in the deficit from an estimated 12.7 percent last year to below the euro-zone's 3 percent limit by the end of 2012.

"This year the changes will be radical, they'll be very significant," said Patelis. "And unfortunately we've got through January and we (still) don't know how the incomes of 2010 will be taxed, and ... we're uncertain even about the income that concerns 2009."

There are no EU regulations against countries changing their tax policies -- it is the one domain the EU has very little power over, and its 27 members are very keen to keep it that way.

Accountants and tax experts say there are too many instances to list, but one recent example was the tax on company dividends, which stood at 25 percent. In 2009, it was raised to 35 percent -- and then applied retroactively to 2008 dividends. The amount of income tax that has to be prepaid has also increased, from 55 percent of the year's estimated tax due in 2005, to 80 percent in 2008.

Property taxes have also been changed radically, with measures introduced several years ago making it easier for parents to transfer property to their children to avoid inheritance tax. Then the measures were suddenly changed to increase the price of the transfers and make the terms less favorable.

"All governments say that we must create something stable, but in the end, even though we start out that way, with time they always change something," Patelis said.

This time, the government has promised to crack down on rampant tax evasion, hike taxes for the rich and do away with some of the hundreds of tax breaks and exemptions currently on the books. Certain professions that are widely considered to under-declare their incomes, such as doctors and lawyers, are expected to come under stricter control and scrutiny.

The practice of dodging taxes, frequently by failing to give receipts and therefore not declaring chunks of income, is common, exacerbated by the complexity of Greece's tax system and the widely acknowledged practice -- although few are willing to speak about it on the record -- of tax officials accepting bribes to look the other way.

Greece plunged from 57th place on Transparency International's perceived corruption index in 2008 to 71st place last year, putting it at the bottom of the EU countries along with former Communist bloc countries Bulgaria and Romania.

Although reaction against the government's austerity plan has been relatively muted, with no mass demonstrations so far, there has been a backlash from some sectors, with customs, tax and civil servants declaring strikes this month.

Some say that with Greece's economy in such obvious dire straits, most people understand tough measures need to be taken. They just hope that whatever is imposed will actually last for long enough for them to be able to produce some sort of fiscal plan for their businesses and families.

"Whatever reform or tax change there is, good or very good or moderate, it should be done fast so we know what's going on," said Andreas Triantafillidis, a vice president of the Athens Traders Association, adding that discussions and rumors about the current reform had been going on for months, increasing uncertainty.

"The average Greek and the average businessman has understood what is happening and is ready to accept any correct or almost correct reform so long as it is clear, as correct as possible, and lasts at least for a some time, so he knows what to do," he said.