Athens and its creditors reached an agreement on Wednesday on raising the ceiling of value-added tax but the distance between them on the tax-free threshold for incomes remains wide and is seen as the main stumbling block towards a full agreement on tax reform.
The two sides debated all day yesterday on tax issues and agreed to increase the top VAT rate from 23 to 24 percent – a decision that will affect the majority of commodities – as part of the package of measures concerning indirect taxation. The middle VAT rate of 13 percent will remain unchanged, they finally agreed.
In contrast, the tax-free income threshold remains a sticking point, as the International Monetary Fund insists on it being reduced to 8,182 euros per year from 9,550 euros today. The government, on the other hand, appears determined to stick to its proposal for 9,091 euros.
As a compromise solution, the European Commission has proposed a gradual reduction of the tax-free amount with the aim of coming down to 8,182 euros per year by 2018.
The income tax reform bill has been with lawmakers since Tuesday but it is still being debated in the bailout review talks.
If the government’s proposals for tax reform and the overhaul of the social security system – the bill for which is currently up for public consultation – are approved, self-employed professionals face giving up more than 50 percent of their takings to taxes and social security contributions. Although the income tax rate will go down for the lower earners among them from 26 to 22 percent, they will be asked to pay more to the state as their social security contributions will be significantly increased.
The self-employed will have to contribute a flat 20 percent rate on their income. They would also need to pay another 7 percent towards their auxiliary pensions and another 6.95 percent for their healthcare provisions. This means the self-employed would need to give away 33.95 percent of their revenues to contributions, on top of the 4 percent that goes towards their retirement lump sum, bringing the total contribution rate to 37.95 percent, not including income tax due.