In this article we are analysing how the proposal published by the European Commission on June 28th influences certain companies and industries within the Greek territory.
The following reforms are expected to directly and/or indirectly
affect the Greek firms’ economics:
VAT reforms:
“Adopt legislation to reform the VAT system that will be
effective as of July 1, 2015. The reform will target a net revenue gain of 1
percent of GDP on an annual basis from parametric changes. The new VAT system
will: (i) unify the rates at a standard 23 percent rate, which will include
restaurants and catering, and a reduced 13 percent rate for basic food, energy,
hotels, and water (excluding sewage), and a super-reduced rate of 6 percent for
pharmaceuticals, books, and theatre; (ii) streamline exemptions to broaden the
base and raise the tax on insurance; and (iii) eliminate discounts, including
on islands.”
A rise in VAT represents a measure of fiscal tightening and
has the following effects on the macro-economy:
- Negative effects on GDP, consumer spending and employment.
- Higher prices which leads to inflation, lower real income and finally reduced domestic demand and retail spending.
- The overall effect of rises in VAT is highly correlated with increases in unemployment and reduced growth rates.
- Higher VAT through the elimination of the VAT discounts in islands will lead to a deterioration of the competitiveness of tourism, a major contributor in the Greek GDP. Thus leisure and hospitality sectors are expected to be prejudiced more than other sectors from this proposal.
- On the other hand, higher government revenues from increased VAT are expected to lower the fiscal deficit which in the long-term may be beneficial. But increases in VAT are linked to larger shadow economy and VAT evasion which may not bring about the desired outcomes. Also, in present value terms, the result to the economy is negative.
The proposal does not provide any quantitative analysis with
the expected result in absolute or relative terms.
Our view is that the proposed VAT reforms are anticipated to
harm domestic demand and overshadow corporate profitability across all
industries although the effect is not expected to be as material as that of
other measures such as the increases in corporate tax rates (see below).
Fiscal structural
measures
“In view of any revision of the zonal property values,
adjust the property tax rates if necessary to safeguard the 2015 and 2016
property tax revenues at €2.65 billion and adjust the alternative minimum
personal income taxation.”
“Eliminate the cross-border withholding tax introduced by
the instalments act (law XXXX/2015) and reverse the recent amendments to the
ITC in the public administration act (law XXXX/2015), including the special
treatment of agricultural income.”
Pension Reforms
“Gradually phase out the solidarity grant (EKAS) for all
pensioners by end-December 2019. This shall start immediately as regards the
top 20% of beneficiaries with the modalities of the phase out to be agreed with
the institutions;”
“Increase the health contributions for pensioners from 4% to
6% on average and extend it to supplementary pensions;”
Public
Administration, Justice and Anti-Corruption
“Establish within the new MTFS ceilings for the wage bill
and the level of public employment consistent with achieving the fiscal targets
and ensuring a declining path of the wage bill relative to GDP until 2019;”
The reforms mentioned above relate to tax increases, wage
decreases and pension reforms which have similar fiscal results:
- Reduced consumer spending and negative effects on GDP.
- Reduction in deficit.
Fiscal structural measures, pension reforms and Public
Administration, Justice and Anti-Corruption measures together are expected to
influence profitability mainly though the consumer spending channel. We expect
the reduced income available for spending to damage domestic demand which in
turn will lower the economic growth of the country. Again, the effect on
corporate sales and profitability is detrimental.
Fiscal Structural
Measures
“Increase the rate of the tonnage tax and phase out special
tax treatments of the shipping industry.”
Industries influenced directly: Shipping industry
Indirect effects: Probably higher freight costs – various industries
“Increase the corporate tax rate from 26% to 28%”
“Close possibilities for income tax avoidance (e.g., tighten
the definition of farmers), take measures to increase the corporate income tax
in 2015 and require 100 percent advance payments for corporate income as well
as individual business income tax by end-2016; eliminate the preferential tax
treatment of farmers in the income tax code; raise the solidarity surcharge;”
Direct effect
- · Both measures will negatively affect profitable companies with advance payments possibly resulting in further investments in working capital.
- · The higher tax rate will result in higher tax expense and lower net profitability.
- · So both measures deteriorate future cash flows and suggest immediate reductions in companies’ values.
Indirect effect
- · The indirect effect of the proposed measures (especially the advance payment of tax for individuals) is expected to result in a greater liquidity issue and very possibly in a reduction on consumer spending as households will have less available income for spending.
- · This is going to lead to lower or even negative sales growth.
- · The direct and indirect influences together are expected to result in significantly reduced bottom line figures.
Industries which will be affect the most:
Virtually every corporation in any industry but mainly:
- · Retailers
- · Shipping
- · Oil & Gas
- · Banks
- · Construction
