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Special Report: Inside Greece's war on tax evaders
August 11, 2010 / 10:39 AM / 7 years ago

Special Report: Inside Greece's war on tax evaders

<p>An employee of Greece's Financial and Economic Crimes Unit performs a search amongst confiscated boxes inside a warehouse in Athens July 23, 2010. Greece has vowed to go after tax dodgers and end what the IMF has called "wide tax evasion and corruption" as part of its 110 billion euro ($143 billion) rescue deal with the European Union and the International Monetary Fund (IMF). REUTERS/John Kolesidis</p>

ATHENS (Reuters) - The tax investigator thinks she’s nearly cracked it. For months the civil servant has pored over storage inventories, confiscated computer files and the bank records of Greek doctors pointing to millions of euros not explained by their pay slips.

Working with another investigator in Greece’s Financial and Economic Crime Unit, a dull grey concrete building in central Athens, she has built a case that her bosses hope to use in prosecuting the local representatives of a major U.S. pharmaceutical company and its British subsidiary. Tax investigators believe the companies bribed dozens of doctors in Greek state hospitals to persuade them to buy over-priced drugs and medical materials.

They believe the scam cost the state millions of euros between 2000 and 2005, not just because hospitals paid exorbitant rates -- sometimes up to seven times the regular price for drugs -- but also because the doctors hid their extra income from tax inspectors.

“All I needed to wrap it up was to confirm at least one case of overpricing,” the investigator says with a small smile of satisfaction. “This case was sent to us from the United States, where 50 officers were working for two years just to get it referred. It took two of us just a few months to almost crack it.”

The case -- and hundreds of investigations like it -- is part of Greece’s new war on tax evasion. Athens has long struggled to collect enough tax revenues to cover what it spends. According to Eurostat, when you exclude social security contributions Greece has the lowest tax revenue-to-GDP ratio in the euro zone, at 20.4 percent. The black market makes up close to a third of the country’s 240 billion euro economy, compared with 27 percent in Italy and 15 percent in Germany, according to the most recent estimates by the World Bank.

Now, as part of its 110 billion euro rescue deal with the European Union and the International Monetary Fund (IMF), Greece has vowed to go after tax dodgers and end what the IMF has called “wide tax evasion and corruption.”

The success of this effort will go a long way to determining Greece’s financial future. The country’s top commercial bank, National, believes better collection could boost revenues by up to 9 billion euros a year, equivalent to 3.8 percent of its GDP, or more than a third of the sum Athens has pledged to lop off its budget deficit over the next four years.

But it’s not just about finance. The Socialist government hopes toughening up on taxes will not only stave off the threat of sovereign default, but also transform the political and economic relationship between the state and Greece’s 11 million citizens. “We are called today to stage a revolution,” Prime Minister George Papandreou told a conference on the island of Crete on July 30. “To turn the crisis into an opportunity for changes that have been needed for decades.”

THE FRONT LINE

Dressed in a bright pink T-shirt, pants and scarf, rose-colored high heels and with shiny pink loops dangling from her ears, the tax inspector on the pharmaceuticals case is, at first glance, an unlikely revolutionary.

But as her gaze flicks from the confiscated files on her computer screen to the paper records on her desk, she has the air of a quiet crusader. The 40-year old mother of two, who asked to remain anonymous so she could speak more freely, was an economic analyst in the private sector before moving to a state job a decade ago. Attracted by regular hours that made it easier to raise her daughters, she says the crackdown on tax evaders has forced her to take home thick case files to study at night: “I now work as hard but make a lot less.”

Like all Greek public servants she has been hit in recent months by government pay cuts. The average state worker now takes home 14 percent less in their pay packet than at the end of last year. Still, she says, she and her colleagues remain determined to turn things around.

This is not the first time a Greek government has promised to go after tax evaders. Almost every government over the past two decades has said they would put a stop to tax dodging for the benefit of the country.

But there is reason for hope this time round, if only because the accumulation of failed promises in the past has helped fuel such a deep and dangerous crisis.

In April, Papandreou’s government passed a law that forces small businesses to use cash registers and requires all payroll and business transactions to be carried out through bank accounts. The new law empowers auditors to levy fines directly and confiscate assets for debt liabilities to the state.

The government has set up a hotline to report incidents of bribery or tax evasion and introduced rewards for information leading to arrests for those crimes.

It also re-launched the Financial and Economic Crimes Unit, which was effectively inert during five years of conservative rule. Reporting directly to the Finance Minister, the unit investigates both independently and in collaboration with judicial authorities, who often refer cases.

It employs 1,300 staff nationwide, including 500 in Athens, and has a permanent public prosecutor on board. A computer system allowing it to cross-reference data is in a pilot stage and should be in full operation by 2011. That should make enforcing controls much easier and more effective.

In a March speech, Papandreou, the son and grandson of former Greek leaders, made the tax system his number one priority. “To give you just one measure of the scope of that problem: Fewer than 5,000 Greeks declare incomes of EUR100,000 or more,” he said. “And that pattern must end, and it will end.”

As evidence that it is serious about enforcing change, Athens in May announced the names of 68 high-earning doctors found guilty of tax evasion. “We sent a message to society by announcing these names,” says the unit’s new chief Ioannis Kapeleris, a veteran taxman at the finance ministry. “There is a clear political will to win back society’s trust in our morality and ethos. Inertia in the past few years had not only led to poor revenues but to a climate of tax chaos in society.”

You only have to look out of Kapeleris’s window to see how serious the problems are. Along Piraeus Street, which links central Athens with the country’s main port, run-down industrial estates were gentrified in the run-up to the 2004 Olympics. In the heady days of 4 percent economic growth, the street became a fashionable night club spot.

Now the crisis has plunged the road back into its former decrepit state, with shops shut and beggars loitering at traffic lights. At tavernas and cafes, Greeks talk about how their prosperity was built on fragile foundations -- a boom based on cheap loans, grey money and state handouts.

“Greeks got fake money, credit card money, and they were spending it like there was no tomorrow,” says Sofia Fachidou, 52, who owns a jewelry shop. “But it wasn’t only their fault. The state turned them into thieves and tax dodgers -… made them believe in the economic development bubble.”

Further underlining the enormity of the problem, a 2009 study by U.S. academics Carmen M. Reinhart and Kenneth S. Rogoff asserts that Greece easily leads the European field with its history of sovereign default. It has spent more than half the years since 1800 in default or restructuring, according to their book, “This Time is Different”.

THE CORRUPTORS AND THE CORRUPTED

Long dissatisfied with public services and angry at politicians amassing fortunes at the expense of the state, most Greeks see little wrong with cheating the taxman. Many Greeks understate their income -- particularly farmers, over half of whom were found to under-report in a study published by the London School of Economics (LSE) in January. It also found men living alone are bigger offenders than single women.

Shopkeepers regularly quote two prices when selling goods and services -- one with and one without Value Added Tax. Or take the roadside bookseller who on a sunny day in central Athens hands over two books for cash without giving a receipt.

“I’ve never had a problem with the taxman, I always hand out receipts,” he declares. “Tax evasion is rife but it is the rich who are doing it. The state should go after them. But all they know how to do is pursue the poor -- it is always them who end up paying.”

It doesn’t help that close to 35 percent of Greek workers are self-employed, family workers or the owners of small or medium enterprises -- more than double the EU average. Almost a quarter of the self-employed under-report, according to the LSE study. “People who are not the payroll can understate their income,” says Dimitris Karantinos, director of research at Greece’s National Center of Social Research. “We do not have a serious mechanism of checks. We have 800,000 SMEs, but if only 1,000 are inspected, we are not doing much.”

And all too often, tax inspectors themselves have been part of the problem. A poll by Amnesty International published in March found tax offices among the top three public services asking for bribes. In terms of the size of the average bribe requested, tax offices topped the bill at 1,684 euros.

“Corruption among tax officials is widespread,” says Abraham Panidis, president of the Pahnellenic Federation of Self-Employed Tax Advisors (POFEE). “It results in people evading tax -- but also in people who try to honestly do their books getting into trouble.”

Some of the new tax laws have come in for criticism as well. Panidis says they are obscure even for accountants, making it possible for even the well-intentioned taxpayer to fall foul of the law. “We have too many laws voted on by politicians that do not know what is in them. I do not believe there is a Greek today who can do their books on their own.”

Mary Psylla, head of PricewaterhouseCoopers’ tax team in Greece, believes tax inspectors have used the regular changes in legislation to their advantage. “Tax is a law, it has to be interpreted,” she says. “The tax system in Greece was unfavorable due to its vagueness and because it changes often, even once and twice a year, based on the demands of public finances. What is needed now is activation of the inspection mechanism at all levels.”

WHAT IS BRIBERY?

That’s what the government says it is doing. In May, Athens replaced 20 tax office directors citing their poor performance. It rotates staff working on big corruption cases and has stepped up checks on taxmen themselves.

It seems to be working. “In the first six months of the year, we collected more taxes than the whole previous year,” Kapeleris told Reuters.

But not every inspector is happy. Dimitris Tsoukas, sitting at his long dark wooden desk with a gold-plated sign displaying his position as manager at a central Athens tax office, has been working for 30 years as a taxman, and now speaks fondly of the idea of returning to a sideline in teaching.

“There is a lot of pressure on us to meet targets but we cannot do everything,” says the graying official in an open-necked shirt. “We had 14 inspectors five years ago and now we have been left with six.”

Even the investigator on the pharmaceuticals scam gets frustrated. Cases that her unit works on for months can end up stuck in the court system for much longer. “We catch them, but they fight the system and stay unpunished for years,” she says, arguing for special courts to be set up to deal with the backlog.

Tsoukas says the downturn isn’t helping. “When you have recession, tax revenues go down. Some orders come out that we just cannot enforce. We cannot do regular checks on 6 million people. We are 15,000 tax officials, and our numbers are constantly being reduced.”

Asked about corruption, Tsoukas is dismissive. “I do not think there is great corruption in the tax service. I consider the number to be between one percent to two percent of our workforce.”

But what about all the stories of tax officials taking bribes? “I do not count the graft involving 1,000 and 2,000 euros,” he says. “The small amounts are hard to spot. I‘m talking about big sums. Besides, corruption exists everywhere in public services, both in our country and others.”

AN OLD PROBLEM

That’s true. But in Greece, evading taxes is so ingrained that changing attitudes does amount to Papandreou’s revolution. Back in ancient Greece, it was the collection of taxes that gave rise to democracy -- decisions on taxation were handed over to mass meetings of adult men. Greeks were denied democracy for 400 years during the Ottoman occupation and many refused to pay their taxes: for this they were hailed by their countrymen as patriotic heroes, according to Peter Bratsis, lecturer in political theory at the University of Salford.

Those attitudes have stuck and many Greeks still prefer to cheat on their taxes, figuring that, after all, they get things done through friends and acquaintances in public office rather than through official channels. “Clientism was promoted by Greek politicians looking to expand their power,” says Bratsis. “‘What can you do for me?’ is fine to ask in contemporary politics. What is different in Greece is that this becomes personalized and affects relations with bureaucracy.”

If Greeks are to rekindle an ancient sense of civic responsibility, the government will have to convince people that it can deliver better services and has really changed itself.

So far, it’s off to a rocky start. In May, tourism minister Angela Gerekou stepped down after press reports that her husband Tolis Voskopoulos, a prominent singer, owed the government more than 5 million euros in taxes. Soon after, revelations about property deals carried out by a Socialist former deputy prime minister through offshore companies put the spotlight on loopholes that are still open to exploitation.

A scandal involving German company Siemens and officials from both of Greece’s main political parties also cast a cloud over the government’s credibility. Siemens ended one of the biggest corporate corruption investigations in history in 2008, when it agreed to pay about 1 billion euros ($1.23 billion) in fines and penalties as a result of U.S. and German investigations into bribes it paid to win contracts globally, including Greece. High-ranking Greek party officials admitted to prosecutors that they had received funds.

“Greeks initially bought the line that they were to blame for the crisis, even public servants felt guilt,” says Bratsis. “They believe it less and less, as the financial pain kicks in and because of scandals like the bribes-for-contracts affair involving Siemens.”

Protesters angry at corrupt politicians and businessmen have repeatedly stormed parliament in recent months, demanding punishment for those they blame for the crisis. Analysts say social peace in the face of austerity will partly hinge on the government being able to prosecute some high-profile case of graft and tax dodging.

Tax official Tsoukas warns that Athens could lose the battle for hearts and minds if more scandals emerge. “The young had started thinking differently and these latest events have disappointed them,” he says. “They ask, if I pay, will my money go to some politician’s villa?”

Not if it’s up to the tax inspector dressed in pink and her team. “They really could never pay us enough for what we do, the hours we put in, the pressure we are under,” she said, still at her computer. “But it’s all worth it when I see a case go to prosecutors.”

Additional reporting by Konstantinos Ampatzis, Renee Maltezou and Lefteris Papadimas; Editing by Simon Robinson and Sara Ledwith

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