New Tax Regulations for Small Businesses: A Double-Edged Sword
In December of the previous year, Law 5073/2023 was enacted, which notably includes Article 15, adding provisions to Article 28 of Law 4172/13. This law establishes a minimum deemed net income from the business activities of individuals. In essence, this provision sets a minimum profit threshold below which a business cannot be taxed. For example, if the profits are €12,000 and the minimum deemed income is €15,000, the sole proprietorship will be taxed based on the €15,000 figure.
This measure was justified as a means of ensuring fairness, and in some cases, it indeed serves this purpose. Many are familiar with instances of freelancers who, despite enjoying a lavish lifestyle, report minimal profits or even losses to the tax authorities each year. However, the law has also created numerous injustices, particularly affecting various groups such as:
- New mothers running their own businesses aiming to work part-time.
- Individuals wishing to maintain their freelance status for insurance benefits.
- Freelancers approaching the end of their careers who no longer have the clientele they once did.
- Small neighborhood shops that once thrived but now face competition from large chains opening nearby.
For all the aforementioned cases, and many others facing similar injustices, there is an opportunity to request a tax audit to rectify the situation and ensure they are taxed based on their actual profits. Unfortunately, while this sounds appealing in theory—after all, “a clear sky fears no lightning”—the reality is quite different. The possibility of redress through an audit often exists merely as a formality.
Subjectivity in Tax Legislation
The tax legislation is marked by a significant degree of subjectivity in interpreting its provisions, with each party interpreting it as they see fit. For instance, Article 22 of Law 4172/2013 states that all expenses incurred in the interest of the business are deductible. This means that for an entrepreneur to classify an expense in their books to reduce their profits, it must be related to their business activities. Almost every business audit will reveal some expenses that the auditor deems unrelated and considers personal, while the entrepreneur insists these expenses are indeed relevant to their activities.
This scenario serves as a simple example of the complexities within Greece’s tax legislation, which is intricate and often leads to conflicting opinions. The crux of the matter is that tax audits are not black and white; auditors do not simply declare individuals as tax evaders or compliant. It is a multifaceted process, and even if an initial audit identifies violations, the individual business can appeal to the Dispute Resolution Directorate. Even if this decision is adverse, they can further appeal to the Council of State.
Indicative of the subjectivity present in tax legislation are the appeals submitted to the Dispute Resolution Directorate.
Tax Disputes and Procedures for Entrepreneurs
In recent developments, over 35% of tax disputes are being upheld. This situation poses significant challenges for entrepreneurs. Initially, it’s important to note that tax is assessed based on deemed income when the tax return is submitted. Subsequently, a reconsideration can be requested by indicating during the submission that the individual business intends to contest the assessed amount. Consequently, the tax based on the minimum deemed income due remains as a liability until the dispute process is successfully concluded, which can impact businesses that may require tax compliance certificates.
Dispute Process for Entrepreneurs
Entrepreneurs must first enter the my Business Support platform within 60 days, where they will select the option to contest the minimum annual income from business activity, as outlined in paragraphs 3 and 4 of Article 28A of Law 4172/2013. Following this, a comprehensive questionnaire must be completed, gathering information not only about the entrepreneur but also about their spouse and dependent family members. The required information includes:
- Personal Information
- Bank Account Information: Detailed data including bank name, account balance as of January 1 and December 31, etc., for all accounts
- Investment Participation Details: Type of investment, capital invested, acquisition method (purchase, inheritance, gift), year of acquisition, and company or organization name
- Bank Safe Deposit Information: Bank, country, and account holder
- Other Investment Details: Information on artwork, collections, valuables, and other high-value items
- Vehicle Information: Details of cars and motorcycles, year of registration, acquisition value, acquisition method, and engine capacity
- Cash Availability: Data at the beginning and end of the tax year
- Cryptocurrency Availability: Data at the beginning and end of the tax year
- Utility Information: Service numbers for all self-used residences
- Telephone Information: Details for all telephone accounts, provider, holders of each number, and total annual expenses
- Details on Debit, Credit, and Prepaid Cards
- Automobile and Motorcycle Insurance Information: Annual cost, policy details, insurance company, etc.
- Personal Insurance Information: Type of insurance program (life, health, etc.)
- Property Insurance Information: Type of insurance program (life, health, etc.)
- Tuition Expense Details: Total cost and related information
- Travel Expense Details: Destination, duration of the trip, accommodation details (hotel, Airbnb, etc.), and total expenditure
Upon submitting the questionnaire, entrepreneurs must have any available evidence to verify the accuracy and correctness of the information provided in the questionnaire, which they may need to present to tax authorities. For instance, if an entrepreneur did not retain precise records and documents for a trip taken in 2023, unaware of future developments due to the passage of Law 5073/2023 in December, they may find themselves unprotected against tax authorities.
In any case, except for the documentation aspect, the aforementioned process, although time-consuming, can be considered straightforward as a step. The more demanding part of the dispute process begins later during the tax audit. This audit process may extend over several years and, beyond the entrepreneur’s books, will also examine additional elements such as bank account transactions. Furthermore, the tax administration has the ability to determine income using indirect audit techniques. Therefore, aside from the subjectivity of interpretation, the process requires careful management of financial records and documentation.
Subjectivity in Tax Audits: Challenges and Costs
In the context of tax legislation, both the tax auditor and the taxpayer introduce a level of subjectivity regarding the profit margins considered in indirect audit techniques. For instance, in the case of Decision 1374/2023, the audit determined a benchmark profit margin for pharmacies based on sales, which is unattainable in certain neighborhoods and geographic areas, leading to significant backlash.
It is important to emphasize that viewing tax audits as a form of a “Solomonic solution” is misguided. This perspective categorizes the audited parties into two groups: Guilty and Innocent, which oversimplifies the complexities involved.
Cost of the Dispute Process
Ultimately, the most compelling reason for taxpayers to avoid disputing the minimum deemed income is the financial burden of the process. Even with ample time, willingness, and patience to navigate the aforementioned procedures, these factors inherently incur additional fees for accountants and potentially legal advisors, who play a role in the lengthy and intricate dispute process.
In many instances, the fees required to manage these processes could easily exceed the amount of tax being contested as unfair. Consequently, the number of individuals who might initiate a dispute over the minimum deemed income is expected to be quite low. This is not necessarily due to any wrongdoing on their part but simply because it is often not financially viable to engage in such disputes for a relatively small amount, such as an additional thousand in taxes. Thus, business owners are compelled to accept the situation and pay the owed amount.
