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Recommendations for Improving Greek Sectoral & Tax Competitiveness

20 May 2011 | Philip Ammerman

The main problems faced by Greece remain a large and dominant public sector, and an adverse business environment for the private sector. Unless rapid structural changes are made to this business environment, it is difficult to envision how Greece will be able to compete in the future, let alone handle the challenges of managing its public debt.

Today, few of the business closures or sectoral difficulties evident in Greece are the result of the Troika’s structural adjustment programme. If we take sectors such as tourism, construction, shipping or retail (which are the mainstays of the Greek economy), the main problems are due to public sector taxes and distortions, as well as inevitable economic changes which have long been taking effect.

Some examples are seen below:

Construction Sector

a.     The construction industry was formerly a powerhouse of the economy, comprising over 7% of GDP in 2006-2007. Since then, the sector has seen a major decline, with a resulting impact on high unemployment. The origins of this “crisis” are in fact driven in the first place by the change in taxation of property which took effect on 1 January 2007. All buildings with licenses after this date, and all transactions after this date (with some exemptions) became liable for a VAT rate of 18-19%. This touched off a classic boom-bust cycle, with a spike in construction licenses issued prior to January 1st, 2007 (which made these buildings exempt from the new VAT rates). This stock of new buildings hit the market between 12-18 months later. Most urban centres in Greece have an oversupply of new buildings, which cannot be absorbed according to normal supply and demand.

b.     A further distortion in the construction sector is the adverse impact of high social security taxes (44% between employer and employee) and the resulting use of low-paid, black market labour, primarily immigrants. To insist on social security taxes of 44% is economically irrational in Greece, given that there is so little value returned from the public health or retirement system. This is a major reason why there is so much illegal labour in the sector.

c.     Today, very little is being done by the government or the Troika’s structural adjustment programme to counteract these two distorting taxes. In fact, the new environmental and zoning regulations recently passed make things worse. If Greece wants to see a recovery in this area, it should reduce both the VAT and social security taxes, and loosen the town planning requirements of a 4,000 m2 land plot for buildings outside urban zones. The entire town planning and building codes should be rationalised and revised.

Tourism

a.     Greece is an important  tourism destination in Europe in terms of arrivals per capita. The recent crisis, as well as the wider economic crisis and exogenous factors such as the decline of the British Pound have seen declining arrivals and expenditure per tourist. Moreover, these arrivals are far below potential. If we compare Cyprus or Singapore to Greece, for instance, we see that it is possible to achieve a ratio of arrivals to permanent population of 4:1. In Greece, this would amount to at least 40 million tourists per year: the highest number Greece has been able to attract peaked at 17 million arrivals per year.

b.     Arrivals will only occur once the product is developed to correspond with a more diverse and demanding customer segmentation, but also once the price:quality relationship is rationalised. There are urgent issues to address in product development which have remained unaddressed: golf courses, marinas, conference centres, and integrated tourism resorts all insufficient or inadequate.

c.     The licensing process for new hotels, marinas or golf courses is a major disincentive to development. Major projects have been cancelled or delayed for this reason, depriving Greece of new products and badly-needed sources of investment and employment.

d.     Transport infrastructure (ports and airports) has not been properly developed. This is an issue of both quality and quantity. Regional airports need urgent upgrading to handle direct international charter flights and seasonal flights from source markets. The potential of Thessaloniki as a regional multi-modal transport hub has been ignored for too long. New airports are needed in areas like Igoumenitsa and the Peloponnese.

e.     Employment in the tourism sector will remain seasonal, so issues of staff transfer, retention, development and employment need to be addressed—among them the futility of a 44% social security tax, and the institution of flexible work time.

f.      Higher tourism arrivals require a stable, long-term marketing campaign and professionalism among the public and private organisations in the market. Neither exists. Greece spends far more on agricultural subsidies each year than on tourism promotion, despite the fact that the agricultural sector is less than one-fifth the value of the tourism sector.

g.    There has been an uncontrolled policy of subsidising hotel investment over the past 20 years. This has had the unforeseen result of an oversupply of small hotels (5-20 rooms). These are usually under-capitalised and run by families with no professional experience or background in hotel management. This oversupply destroys market quality and pricing power. These units operate on a seasonal basis, using low prices and often create a negative brand image. They rely on untrained or unmotivated family members or black labour, and have little economic future without resorting to tax evasion or unsustainable working conditions.

h.     As with other sectors, we see almost nothing being done to address these issues. The policy commitment to turn over regional ports and airports over to private operators for long-term lease could yield results, but it has not yet materialised, and there is no apparent effort to link this with strategic business development or investment attraction. Yet the tourism sector offers the greatest chance of short-term growth in GDP and employment in Greece, and given the unrest in Egypt, Tunisia and other countries, it’s clear the government is missing a major opportunity.

Retail

a.     The retail sector shows some of the greatest investments, but also some of the greatest changes needed, in Greece. Over the past 15 years, the sector has been revolutionised through the entry and expansion of big box retailers as well as specialists ranging from Public and Marks and Spencer to the development of large malls and high-end outlets such as Golden Hall, The Mall, etc.

b.     While these investments have by and large been successful, this has had an inevitable competitive impact on the small family retail points which used to be the backbone of the Greek middle class. Such stores are still present in all neighbourhoods of Greece: few of them are doing particularly well.  For many, the financial value of their inventory (their cost of goods sold) is far higher than the value of their sales turnover. Yet the transition is unstoppable.

c.     Additional structural challenges exist in this segment: in the past, loans were given based on hard assets which were collateralised (e.g. a family apartment). Such liquidity is no longer available, and in any case should not be extended given the business potential of most small points. Many of them are housed in inadequate retail space: average floor space is low. Many are undifferentiated: they offer largely the same products at the same prices. Few of them are computerised; few have a stock control or customer relationship management programme; few have a website. The same problem with social security costs exists, leading to a high use of illegal or part-time labour.

d.     In short, far too many small retailers are operating according to the same playbook as they were in the 1970s. Yet both customer expectations and competitors have changed. We can predict a far higher liquidation rate of small businesses of this sort, with an attendant impact on unemployment and GDP decline. There is little that can be done here, except to make the playing field more attractive for those companies and entrepreneurs that are able and willing to invest further.

Shipping

a.     The major problem with shipping always has been that the Greek government does not offer an attractive investment regime for companies which are based in Greece but do the large majority of their businesses abroad. In addition to high taxes, Greek regulations sabotage the sector by imposing outmoded requirements on shipping crews and obscure rules of cabotage. As a result, the number of ships sailing under the Greek flag continue to fall, while those registered in offshore jurisdictions continue to rise.

b.     The sector is further weakened by Greece’s inability to develop clusters of excellence for service professions such as ship chandlers, brokers, maritime insurance specialists, finance, and others. As a result, most major shipping companies and professions are based in London or other international centres.

c.     The strength of unions and extremely poor public sector planning and services (e.g. a corrupt Customs service) has damaged Greece’s ability to development multi-modal shipping hubs or duty free zones, which would enable certain areas to become high value, high volume transport and logistics nodes.

d.     As with the other sectors, we see nearly no movement on what should be a series of logical, strategic steps to develop this sector.

So what is to be done? I will cover general (structural) recommendations here, and cover sector-specific recommendations in the following days.

Corporate Taxation and VAT

1.     Reduce the tax on corporations (Societe Anonym) to the same tax level as limited liability companies, partnerships and individual enterprises to 20% in 2011 and 15% in 2012.
 

2.     Tax dividends from corporations and limited liability companies should be taxed at 5%, with no further personal taxation.
 

3.     Reduce the VAT on construction, real estate purchase or transfer and building materials to 10%. Allow additional exemptions from VAT for families, first-time home buyers, etc.
 

4.     Reduce VAT on tourism services to 10%. Eliminate all other indirect taxes on tourism.
 

5.     Develop an International Business Company legal form. Enable companies which are registered in Greece, but gain income exclusively outside Greece, to pay a reduced corporate income tax to 5%. This is an expansion of the existing Law 89 regime. Eligibility includes a EUR 10,000 minimum paid-in capital, requirement of 1 full-time employee and a permanent office. Encourage the establishment of corporate headquarters units, shipping companies, and other international firms or their subsidiaries in Greece using this IBC regulation. Assure proper infrastructure and support, e.g. all documentation and registration online, in English language, with immediate processing of visa requests and other requirements.
 

6.     Develop an International Shipping Centre to highlight the IBC corporate form and host ancillary services.
 

Labour Taxation and Social Security
 

7.     Reduce the social security tax from 44% to 20% of the gross wage, splitting this equally between employer and employee (10% / 10%).
 

8.     Enable flexible labour arrangements. Allow each worker to choose where they will register (OAEE or IKA) in line with their own requirements and desires.
 

9.     Assure that part of each worker’s social security is personal and portable by setting up individual retirement accounts. Transfer all social security functions online and enable each user to see their contributions, social expenditure incurred and likely pension levels and pay-in requirements. Enable the selection of doctors and clinics online. Assure all documentation in Greek and English.
 

10.  Develop a real labour inspection function to ensure that the current widespread abuses seen in the private sector are effectively and immediately punished with high fines and future business closure and asset seizure.
 

Investment Promotion and Incentives

11.  Restructure the Hellenic Investment Promotion Agency so that 50% of its share capital is from the government, and 50% is from private sector organisations (chambers of commerce & industry, the Society of Greek Industrialists, etc.).
 

12.  Develop transparent procedures for the promotion of specific investment opportunities. Ensure that the President and Vice-Presidents of this agency are recruited independently; are not a civil servants, and have a contract based on performance and results, monitored by the Board of Directors.
 

13.  Spend at least EUR 100 million per year promoting Greece as an investment destination.
 

14.  Develop a list of priority sector and specific investment projects, available online and promoted internationally.
 

15.  Provide scaled income tax incentives (exemptions) for investments at all investment levels, starting from projects as small as EUR 100,000, and provide a real “fast track” investment licensing regime for this.
 

16.  Develop a business / investor’s visa and citizenship scheme. Make it easier for companies to bring skilled labour and management into Greece (it is currently nearly impossible for citizens of non-EU countries). Make it possible for non-EU nationals who want to live in Greece year-round to gain residence permits easily and effectively. Specifically:
 

  • Grant fast-track residence permits to all investors and their families who purchase a property of at least EUR 300,000 in Greece.
     

  • Grant fast-track residence and work permits to investors with specific investment project with a value of at least EUR 1,000,000
     

  • Grant fast-track residence and work permits to company staff, where the employer can demonstrate the need to bring in high-value, skilled managers and labour
     

  • Grant the right to fast-track citizenship for investors and their families who invest over EUR 50 million in Greece.
     

  • Grant fast-track residence and work permits to individuals of Greek descent and their immediate families.
     

17.  Eliminate all military service requirements foreign citizens of Greek descent.
 

Building and Town Planning Codes
 

18.  Fundamentally restructure the building code to make it simpler, eliminate bottlenecks and provide for energy-efficient building. Develop a pro-growth building code.
 

19.  Revise the Urban Planning code to encourage growth in specific areas. Incrementally transfer public land, via long-term lease or sale, for development.
 

Most of these recommendations can be implemented within 6 months. They should all be implemented in 2011.

Philip Ammerman

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