Reframing Taxation: A Tool for Building the Future
By Alexandra Loli, Publisher | Business Partners, Jan-Feb 2022

One of the main conclusions derived during the recent 17th Tax Forum is that the Greek tax administration has a seat on the table of the global taxation policy discussions.

Taxation has a major role to play in the transformation of global economies towards sustainability

The now former Secretary General for Tax Policy and Public Property Athena Kalyva stated during our very interesting discussion that “The Ministry of Finance is monitoring the international developments, taking strong positions in European and international fora to protect our economy’s interest.” This is a prerequisite to achieve the restoring of the Greek economy’s competitiveness. On one hand, worldwide economic affairs become an integral part of every country’s foreign affairs policy to enhance its trade balance, i.e. achieving further export growth. On the other, taxation has a major role to play in the transformation of global economies towards sustainability, e.g. the developments in the automotive industry or the recent discussions on the EU’s Energy Directive.

Therefore, it is the right time to leave behind stereotypes of the past. The private and public sectors should work together; the interests of Greek entrepreneurship is a discussion topic with the authorities, and their protection, in international fora, is a mutual responsibility.

It was not long ago that the local business community was complaining about the lack of interest by the tax administration in the global development front. Now that this seems granted, are we ready to leverage it?

No longer merely an old-fashioned cash collection and compliance mechanism, taxation has become a modern tool for overcoming challenges and planning ahead for growth and development.

Taxation must be a front line policy instrument, playing a key role in the ongoing transition

Case in point, in July 2021, the environmental crisis led the European Commission to introduce its “Fit for 55” climate package — aiming to achieve a reduction of at least 55% in CO2 emissions by 2030 and to be the first climate-neutral continent by 2050 — including a proposal for the revision of the EU’s Energy Taxation Directive. The proposal introduces new measures and structure of tax rates, based on energy content and environmental performance, and will have major impact on competition, energy cost, consumption profiles, and the adoption of cleaner/sustainable energy technologies. Greece, being on the border of the EU, will be less competitive against neighboring countries not bound by such restrictions, therefore further sufficient measures and transition preparation time need to be considered. The road to go green will be neither short nor free. To meet the reform’s goals, sufficient funding for the relevant activities needs to be secured to also encourage initiatives towards growth and change of behavior.

Furthermore, digitalization is fundamentally changing the way we do business and live. The impact in taxation is of paramount importance; the exchange of information globally, as well as the introduction of e-books and e-invoicing (subsequently e-audits) nationally, are key drivers for transitioning into a more transparent and efficient tax system, increasing speed and reducing costs.

And in all this, taxation must be a front line policy instrument, playing a key role in the ongoing transition.

In the last two years, the vast upheavals brought about by the Covid-19 pandemic necessitated many changes, including the need to significantly transform taxation, both globally and domestically. There are two such changes that I consider to be the most significant. The first is the digital transformation of tax administration. Lockdowns and other pandemic-control measures made it necessary to process numerous tasks — tasks that had previously required taxpayers to visit tax offices in person — digitally and remotely. Today, such remotely settled tasks range from the issuance of VAT to the application of digital books through the well-known myDATA and tax audit platforms, through correlation of taxpayers’ assets and expenses from various sources to reduce tax evasion. The second change refers to the fact that a large number of states have agreed to switch to more rational taxation. In this context, it was agreed to apply a lower tax rate of 15% in order to prevent transfer of profits through aggressive tax schemes. Moreover, the European Commission recently put forward legislation aimed at ending the misuse of shell entities generated for tax evasion purposes or concealment of taxpayers’ assets. All this will overturn tactics previously applied by tax advisers, who will now have to review and revise their planning.

The 17th Tax Forum provided a platform to raise awareness of such issues and highlight many other matters. The Forum worked to keep ahead of the developments in our domain and proposed best practices to the tax administration in order to ensure a more rational taxation in Greece.

With a horizontal rate of 15% on the value of the property, the Special Real Estate Tax (SRET) was introduced as a disincentive for tax evasion, through the disclosure of the ultimate beneficial owner (UBO) of the property. Thus, SRET became a substitute for tax auditing. Apart from the discussion on the constitutional tolerance of said function, nowadays the precedent from SRET audits is very poor: 19 explicit decisions of the Directorate for Dispute Resolution (DED) for 2020, 10 for 2021, and three decisions of the Council of State for 2020 and 2021. However, over time, the administrative and case law approach of SRET seems to be punitive for the real estate investor. A narrow interpretation of the law is chosen without considering the restrictive, as inferred from the explanatory memorandum, aim to only curb the extremes of tax evasion through offshore companies.

The country has now fully adopted the European legislation on the Real Beneficiaries Register (RBR)

The country has now fully adopted the European legislation on the Real Beneficiaries Register (RBR), which results to the disclosure of UBO. In addition, Greece has adopted all EU and OECD measures for automatic exchange of financial information and reporting suspicious cross-border transactions (DAC 6). So, it might be time to abolish SRET or, at least, to exempt from the obligation to disclose with a Greek TIN the UBO of entities operating in countries where RBR is adopted. It might also be time to broaden the administrative and case law approach, emphasizing the growth of the real estate market.

One of the main conclusions of the 17th Tax Forum was that in order to achieve a sustainable future, all companies should pay their fair share of taxes; transparency is the cornerstone of fair taxation.

To this end, the European Commission recently made a proposal that will increase scrutiny of shell companies in the EU to prevent them from being used for tax evasion and avoidance. A new filtering system will be introduced to identify shell companies, based on the following criteria: Is the bulk of the company’s income passive (dividends, interest on bonds, etc.)? Are a majority of transactions cross-border? Are management and administration outsourced? If the answer is yes in all three cases, the company will be subject to new tax reporting obligations related to economic substance.

Further, if the required indicators (i.e. premises, active EU bank account, and qualified, tax resident director(s) or staff) are demonstrated and backed up by documentary evidence, then there is a presumption that the entity is not a shell for the purpose of the proposed Directive. If, however, a company fails at least one of the substance indicators, it will be presumed to be a shell and will not be able to benefit from tax advantages intended to support real economic activity.

The proposal foresees timely and extensive information sharing between member states of data pertaining to shell entities in the European Union. Once adopted, the proposed Directive should be transposed into national law by the member states before 30 June 2023 to come into effect from 1 January 2024.

Increasingly, extreme weather events are affecting entire populations and threatening the habitability of large geographical areas. The situation calls for the urgent adoption of policy measures at different levels to mitigate the effects of climate change. This is a global task that requires collaboration from all actors and at all levels to develop innovative environmental policies. At the EU level, policies should be enacted to harmonize domestic tax systems in order to relieve national legislature from the pressure of cross-border environmental competition. As part of the European Green Deal, the EU has set out ambitious targets to tackle climate change and foster a cleaner environment. With a target to reduce emissions by at least 55% (in comparison to 1990) by 2030 and to make Europe the world’s first climate-neutral continent by 2050, the Commission’s climate policy package, Fit for 55, comprises a range of proposals, including the application of the EU’s emissions trading system (ETS) to new sectors, a revision of the Energy Taxation Directive, and a new carbon border adjustment Mechanism (CBAM).

At the recent 17th Tax Forum, we had the pleasure to discuss with the Minister of Infrastructure and Transport Kostas Karamanlis, the tax measures already taken by the Greek government to implement EU policies and tackle climate change, with a focus on the National Energy and Climate Plan (NECP), which includes a detailed road map to achieving certain environmental goals by 2030, and how it can serve a double purpose of fighting climate change and also driving investment and economic activities in favor of the Greek society.

Advances in digital technology have made remote working a reality. The climate and living conditions in Greece are among the best in the world. The cost of living and the wages of employees are lower than in other developed economies. The biggest investment of Greek society is the private and public expenditure on the education of the new generations. Its new generations are multilingual, and they are the cornerstone of the brain drain process. All this combined indicates where Greece should position itself in the modern globalized economy, focusing on becoming a new development center of supporting services in the global trading network. Service providers could be established that will make use of the country’s high quality workforce and competitive labor costs to offer services to entities abroad. Significant foreign investments in our country in recent years have these characteristics.

an economy can only expand when it benefits from its strategic advantages

It is deemed essential that (a) the tax authorities consider the provision of specific tax incentives, especially when taking into consideration that similar favorable tax legislation is already in place for companies that provide services to their affiliated companies abroad, that (b) in the context of the EU’s new Multiannual Financial Framework 2021-2027 the possibility of supporting and financing of these companies is examined, and that (c) the opportunity of creating smart business centers supported by public and private entities, where these companies offering services to companies abroad will be established, is considered.

Greece should capitalize on its higher education investment, particularly now that technology facilitates similar initiatives, as an economy can only expand when it benefits from its strategic advantages.

Some years ago, the establishment of a holding company in Greece was totally outside the radar of foreign and domestic investors. A long time ago, many European Union countries had introduced rules in their domestic tax systems, allowing for full tax exemption on dividend income and capital gains from the disposal of participations. Thus, they were all classified as the classic destinations for establishing a holding company. Since then, however, additional anti-avoidance rules were also introduced, aiming at combating structures lacking the adequate substance.

The Greek tax legislation, since 2013, has introduced a full income tax exemption for EU origin dividends, provided that the holding percentage was more than 10%, kept for more than 24 consecutive months at the time of the dividend distribution. Since the summer of 2020, this final tax exemption also covers capital gains from the disposal of participations bearing the same characteristics as above, applicable at the time of the disposal, as long as the holding referred to an EU established company.

This change brings Greece within the spectrum of options and aims at facilitating foreign direct investments, as well as the architecture of the participations of Greek investors. The latter could easily examine operating a holding company in Greece, avoiding excessive costs and ensuring, at the same time, the non-application of the various anti-avoidance rules.

Greece aims at facilitating foreign direct investments, as well as the architecture of the participations of Greek investors

Transparency is increasingly becoming a key element of ESG and tax, and various initiatives have been integral in advancing the concepts. The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) has been a catalyst for increasing tax transparency. BEPS addresses many aspects of aggressive tax planning, including treaty shopping, hybrid structures, earnings stripping, transparency, and substance. Country by country reporting (CbCR), which is now widely adopted by many countries, mandates global reporting of income, profit, taxes paid, and economic activity among tax jurisdictions in which multinational enterprises operate. The EU recently mandated that enterprises with more than €750 million in annual turnover are required to make public tax disclosures. It is still unknown whether there will be public CbCR beyond the EU, but advocates of this approach, including Norges and the French government, view public CbCR as a key step forward in promoting tax transparency. Another tax transparency development is the EU’s requirement that tax intermediaries disclose qualifying cross-border arrangements to tax authorities. The mandatory disclosure rules (MDR or DAC 6) require that intermediaries and relevant taxpayers disclose potentially aggressive tax planning arrangements, aiming to discourage aggressive tax practices and ultimately promote the payment of responsible levels of tax. With the United States and more than 130 other countries recently endorsing the key components of the OECD’s two-pillar proposals to address major changes to certain rules of international taxation, we are all anticipating further developments to promote and support responsible tax as an integral part of ESG.

Consistent with tradition, the 17th Tax Forum devoted a session to justice and tax disputes resolution. As the host, I had the pleasure to discuss related issues with prominent guests.

Minister of Justice Kostas Tsiaras referred to the legislative initiatives undertaken by the current administration towards modernization of the legal framework on court proceedings and e-justice. A comprehensive plan for major transformation of the judicial system is already underway and a number of projects, including ongoing training of the judiciary as well as infrastructure improvements, are included in the National Recovery and Resilience Plan. Minister Tsiaras expressed his appreciation for the increasing degree of confidence, with which, according to statistics, citizens face the judicial system and his commitment to support what he called the three pillars for efficient and fair justice: human power, efficient procedures, and modern infrastructure.

Michail Pikramenos, Vice President of the Hellenic Council of State, explained that, despite the dramatic overall reduction in pending tax cases and the increased production of decisions by the specific chamber, a big number of cases are still pending and addressed a plea for less unreasonable petitions and requests for suspension. He also valued the continuing education of judges as well as their regular appraisal and encouraged distant hearings and deliberations through video conference.

Finally, in a discussion with the prominent tax law colleagues Alex Karopoulos and Panagiotis Pothos, we all agreed that the measures undertaken in the last years for a more efficient and inclusive tax procedure as well as for accelerating court proceedings produced considerable results but there is room for reassessment and improvement.

Historically, tax revolutions tend to occur following moments of crisis.

We stand at a turning point today. The economic crisis, the digital revolution and the Covid-19 pandemic have given birth to a redefined tax culture: everyone should pay a fair amount of tax in a responsible business environment. Hence, a new international tax order is forming to cope with an increasingly mobile and digitally transformed economy, shifting from national, bilateral perspectives to international multilateralism. To tackle BEPS, the OECD Inclusive Framework on the Two Pillar Solution has drawn a unique consensus from 137 of the 140 countries involved. Consensus was in shifting allocation of taxation rights to jurisdictions where consumers are and on a 15% minimum global tax rate. In this context, the EU has launched two more Directive proposals, to prevent allocation of tax benefits to shell companies and to incorporate in EU law the 15% minimum global tax rate. The focus is clearly on supporting green, sustainable, digitalized, and transparent business purposes. Current expectations for imminent tax reform in the U.S. mirror this objective.

tax revolutions tend to occur following moments of crisis

Responsible tax strategy is therefore at the top of the board agenda, who must shift their gaze beyond tax optimization to creating a culture of trust with tax authorities and other stakeholders; the shift appears backed by global public demand. Inevitably, the role of the tax function is redefined to that of a business partner helping companies thrive under a “nothing to hide” approach.