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IOBE proposes overhaul of tax system to bolster competitiveness

20/05/2004 16:23
An employer-sponsored economic think tank has proposed a cut in corporate taxes to be offset by a tax on dividends.

The proposal is made in a report on the “The Impact of Corporate Taxation on Competitiveness,” prepared by the Foundation for Economic and Industrial Research (IOBE), which is sponsored by the Federation of Greek Industries (SEV).

The author, Assistant Professor at the Athens University of Economics Vassilis Patsouratis, says Greece must follow in the steps of other European countries and push through a gradual but significant reduction in company taxation. He notes that the reduction in profits which a high tax rate causes cuts into the return on new investment and the availability of capital for more investment.

The report also expresses the view that a reduction in the company tax rate would weaken the incentive for tax evasion, and thereby partly offset the loss of public revenue as firms would declare larger incomes.

Nevertheless, it warns that “an inefficient public administration can neutralize even the best taxation system.”

“Particularly in the Greek situation, the inefficiency of taxation administration, combined with the irrational tax framework, maximizes the negative effects on businesses and competitiveness.”

IOBE also proposes a progressive differentiation in company tax rates according to the level of profits, as many other countries are doing, including France, Belgium, the Netherlands, Spain, the UK and USA. But Patsouratis warns that the company tax scale must be structured very carefully so as not to provide an incentive for large enterprises to be broken up into smaller entities so that they benefit from the lower rates.

Differentiated rates

The author proposes one more taxation method, namely that the government differentiates tax rates according to the contribution by sectors of activity to economic development, as Ireland does. Sectors with a currency-earning potential, including tourism or information technology, could enjoy favorable tax rates.

The report also urges the government to look into the possibility of firms being taxed at lower rates early in their life. For instance, a 15 percent rate would be a strong support to newly established businesses. Such a rate could be increased after four or five years of operation.

IOBE also proposes that depreciation rates are set according to the principles of International Accounting Standards, that is, on the basis of the economic life of each asset. Regarding expenses, which is a permanent point of friction between tax authorities and firms, the report proposes that they be deducted from the latter’s gross revenue as long as they do not exceed a certain percentage of turnover.

Furthermore, it recommends the abolition or reduction of the 20-30 percent advance tax payment now demanded when firms seek redress before the courts so as to facilitate them in doing so in cases of blatant mistakes by tax authorities.

IOBE says the government’s foremost priority must be to eliminate disincentives and introduce incentives aiming at broadening the productive base of the economy and the adoption of new technologies. It proposes the abolition of retroactive taxation, “absolution” certificates for “blanket” sums, all loopholes, and the confidentiality of bank accounts; the introduction of a single taxation policy irrespective of the legal status of companies; the substitution of personal declarations for certificates; and that tax officials are transferred after five years of service in one post, with a view to minimizing corruption.