Greece’s story includes tax compliance

World Bank data to the end of 2013 shows Greece has only 29 per cent of its GDP as tax receipts; the EU average is 37 per cent. – Breitbart

Navagio beach, Zakynthos, Greece

There are three major factors in Greece’s success in the future:

  1. Government expenses (primarily employee compensation and pensions)
  2. Youth unemployment (which is at about 55%)
  3. Tax Compliance

The first two are discussed a lot because of the dramatic human toll newspapers can interest readers in. Decreasing government pay could look like the government is gouging its employees when they could be raising taxes on wealthier people who can afford to pay, but Greece is also notorious for high pay and early retirement, some as early at 50 years old, which makes employees look like they are milking the system. Youth unemployment is a particularly difficult topic of people because many older Greeks do not make much money but then they must also support their grown children (18 to 24 year old) who cannot get career jobs and are employed part time for part of the year. There is a generational battle here. Older people can command higher wages with their knowledge and experience, but younger people are cheaper.

Tax collection has its human aspects as well. In this day and age, there is really no tax collector. It is all done through administratively by filing papers or filing online. The human aspect of the tax collection story is on the issue of tax evasion. In greece, such a small percentage of people actually pay taxes when they owe taxes that the tax rate really doesn’t matter. If tax rates were raised in order to close the deficit (government funding gap), then more people will evade taxes. If taxes were lowered, the government would just reduce revenues because people had evades taxes for so long that they would not want to reveal how they have been making a living to begin with. Tax avoidance isn’t much of an issue since Greek tax structure is simpler than in the United States. When so few people pay taxes, making it more difficult to figure out how much one is supposed to pay only increases the likelihood of evasion. (Tax avoidance is the act of avoiding taxes in ways the law allows, like a deduction. Tax evasion is to not pay taxes in part or in whole.)

It is hard to blame Greeks for not paying taxes. First, non-government employees get very little for the Euros paid. It isn’t like Greek infrastructure is among the best in the world. It isn’t like Greece is a leader in an industry. Greece’s biggest attraction is tourism. Just look at the picture of the beach. Beautiful sand, clean blue water, happy people sunbathing; it’s the type of place people imagine when they imagine paradise.

But even if Greece paid its taxes, it has a long way from being financially healthy. Let me bring the financial aspect of this discussion down to ground level. Each of Greece’s 11 million people owe about $23,000 and they earn about $22,000 per year. That actually isn’t too bad except each Greek owns only about $18,545. Compare that to the United States. Each American owes about $55,000 and earns about $53,000. Per cent, it is almost exactly the same as Greece. But each American owns about $257,232. These are all averages, of course, and it does not address distribution. The point is that on average a Greek person can’t give up all of his wealth to pay of the debt and start outright, while an American could pay off the debt with about 80% of their wealth intact.

Greece now has a little bit of a surplus, meaning they are making a little more than they are paying to live. If this continues, with some adjustments in the way it collects taxes, it could work its way toward financial solvancy. But at this point, it looks like it is just too difficult people for Greeks to do, at least not while the sun continues to shine on their beaches.


What do you think about Chris Evans becoming a new Top Gear host?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


One time stimulus bill

President George W Bush had a wonderful idea to stimulate the economy: one time tax break to repatriot offshore corporate profits.

Okay, so we know that this didn’t work. This didn’t work because repatrioting, bring back, corporate profits with a lowered tax incentive didn’t come with the restrictions necessary to funnel the funds toward productivity. What do I mean by this?

Simply put, buying things does not always lead to productivity. What is bought is very important. If I bought undeveloped land and decided to build a house, that increases productivity (not the rate but just overall), it distributes the wealth that was brought into the country and lowers unemployment.

However, the companies that had loads of profits sitting outside of the country didn’t do that. They didn’t invest in making their factories more productive. They didn’t give employees a raise. They didn’t hire new workers for the demand that was being created. Let’s remember what types of companies had lots of profits sitting outside of the country: large corporations. They decided to buy their competition, the smaller firms that were creating products and providing services that could force them to lower prices to compete for customers and increase wages to compete for workers. The result was less competition for customers and employees.

So, repatrioting offshore profits can work as long as we don’t give the tax break to buying non-productive assets, like equities or debt or commodities or, essentially, any financial instrument. Repatrioting the profits is supposed to replace financial instruments for financing activities, not bolster them.

Today, corporations are, again, sitting on mountains of cash from profits offshore, ready to be repatrioted but are not because it would cost them dearly in taxes. Plus, deflation is still a risk. Unemployment hovers above 5% and people are making 10% less than they did 15 years ago. People should be making 10% more, though.

So, I would like to propose bringing back the one time repatrioting of corporate profits. But this time, do not allow companies to buy other companies, or anything in the capital markets. Force companies to spend on meeting more of the market’s needs. After all, in good times and bad, a healthy economy is one that meets the needs of the people as a whole, not the few people who can afford to own lots of shares of corporations.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

Reverse Morris Trust Is A Tax-Free Merger Deal

In order to talk about Reverse Morris Trust, we need to discuss Morris Trust. And then we will talk about why this is relevant.

Morris Trust was a company that, in the 1960s, received a tax-bill for unpaid taxes for a $413.44. The trust was being held at American Trust Company. The tax bill was a result of ATC merging with a competitor. Mind you, nothing about the Trust had changed, it’s just that the merger created a transaction with tax consequences.

The tax liability is created for the target company because the target company, presumably, sells its shares at a premium to the buyer. The Reverse Morris Trust puts the tax liability to buyer instead, which it may be able to offset with other expenses. (Expenses reduce income, lowering the tax liability.)

Example of a Reverse Morris Trust from Tax Interpretations
Example of a Reverse Morris Trust from Tax Interpretations

The mechanics goes something like this. Buyer wants to buy Target and Target wants to sell to Buyer. Buyer divests a portion of itself into a newly created subsidiary. At this point Buyer own 100% of the subsidiary. Buy SELLS 49% of the shares of the subsidiary to Target for a price. The price costs Target its whole company. So, now, the subsidiary includes 100% of Target and a line of business from Buyer. Having sold 49% of the subsidiary, Buyer retains control. Target, having BOUGHT 49% of a company using itself as the price, it writes off the expense of purchasing those shares. The Target is allowed to merge with the subsidiary. See the trick here? Buyer SOLD while Target BOUGHT.

Executing an RMT is difficult. Buyers and Sellers must find each other for not just for the M&A and the right price, but then also willing to go through with this complicated transaction method. While tax compliance isn’t my area of expertise or interest, business is. M&A is an interesting area that creates many compliance issues, including tax compliance. Tax avoidance is legal, but tax evasion is illegal. RMT offers a way to avoid taxation when done right.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


Greek Tax Evasion Is Money Laundering?

Yanis Varoufakis, Finance Minister of Greece
Yanis Varoufakis, Finance Minister of Greece

Tax evasion in Greece reached 49% in 2005. Has come down since but still above 40%.

Fakelaki means “little envelope”, the term being used as the bribes made to public servants to expedite certain services or look the other way on certain infractions.

Forokarta means “tax card”, the term being used as the failed proposal to give everyone in Greece a spending card to track how much each person is spending. If the spending be beyond the income, wealth and other financial resources available, then that person is a likely tax evader.

Tax evasion is a predicate crime to money laundering. Tax evasion is, in essence, skimping out on one’s debt to society. Many wealthy tax evaders hide their funds in tax havens with lax AML programs and loose incorporation standards. These are the same jurisdictions that tend to allow shell banks – banks that do not have a physical presence anywhere, just a bank on paper. If only half of Greece’s taxable income earners are paying taxes, that means the nation is half populated by money launderers. The reason Greece doesn’t consider them money launderers is because they are voters. Plus, Greece isn’t the only country with high tax evasion rates. It has been reported that about 20% of taxable income is never reported in Italy.

Tax collection is important for two main reasons:

  1. the need to pay government employees, and
  2. the need to show creditors that they have the ability to pay back its loan.

This second reason is often overlooked by people who are not involved in sovereign debt markets. Simply put, if the borrower shows that it should be able to bring in a certain amount of money each year but its history shows that it always brings in less, then the stated projection is not to be trusted. Once trust is gone, it is very difficult to get it back. While Italy might be able to win trust back quickly if it gets its act in order because it is such a large economy, Greece is not in such a recoverable state at the moment. Not only does it have among the lowest tax collection rates in the Eurozone, but it is also a very small economy in it as well. Greece makes up about 2% of the Eurozone GDP. The only importance Greece has is a symbolic one: the Euro currency stand to lose trust in the world markets if Euro economies can leave the currency zone.

This is a long way of saying that Greece’s economic problem might start to get solve simply by reclassifying tax evasion, a minor offense, to money laundering, a major offense. This reclassification does not take any change in laws because Greece already has laws that state that tax evasion is money laundering. It had to write such laws to join the Financial Action Task Force, the world’s leader in the promotion of anti-money laundering.

Note: While all of the figures are correct, they might be a little outdated. The difference with updated data should not material change the issues.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How Criminals Got Paid and Got Away.


Happy Tax Day


No one likes Tax Day, but I would like to celebrate it by taking the day off. Be back tomorrow!

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How Criminals Got Paid and Got Away.