Uncollected taxes in Cyprus estimated at €2 billion

A number of loopholes and weaknesses in how rules are enforced have resulted in the delay of millions of euros in taxes being collected, according to a report released this week by the state’s Audit Service.

The service conducted an audit on a sample of collection and payment transactions by the Tax Department. The sample was selected using a specific methodology, in the context of an audit aimed at formulating an official opinion on the financial statements of the Republic of Cyprus. In addition, a compliance check was also carried out.

According to the report, the total of overdue direct and indirect taxes as of December 31, 2020, including interest and charges amounts to €2.34 billion (€2.21 billion on December 31, 2019), of which an amount of €1.83 billion (€1.62 billion in 2019) refers to direct taxes.

Moreover, an amount of €510.57 million (€594.3 million in 2019) refers to indirect taxes, including VAT. These amounts have not yet been confirmed by the Audit Service.

In relation to the above, the report states that, according to the debt management office, as well as the Tax Department’s prosecution unit, between November 2014 and December 2020, the department registered a lien on immovable property for debts totalling €593.1 million but collected €319 million in total.

Also, between April 2015 and December 2020, the department committed €4.18 million in bank account savings for unpaid taxes, preventing this amount from being withdrawn or otherwise used by the account owner, and collected €1.39 million in total.

The Audit Service castigated the department for the low amount in committed savings, noting that it reflects the Tax Department’s “complete inability and/or lack of will to utilise a tool provided to it by the state”.

For 2020, the total amount for direct tax receivables and arrears, excluding interest and charges, as reported to the Audit Service by the Tax Department, stood at €1.22 billion, compared to €1.06 billion in 2019. This represents an increase of €164.4 million or 15.5 per cent.

Among the Audit Service’s most important findings is the administrative court annulling the appointment of a tax commissioner, as well as assistant tax commissioners, which may have resulted in significant financial consequences for the state.

However, it should be noted that a tax commissioner has since been appointed, with the position being filled on July 1, 2022.

An additional finding was the accumulation of overdue tax revenues in excess of €2 billion.
In relation to this, the Audit Service has recommended that the Tax Department utilises all the tools at its disposal, including relevant measures enacted in 2014, to more effectively limit the amount of uncollected taxes.

What is more, the Audit Service has also flagged the total amount of taxes that are under appeal. The service has recommended that an effort be made to examine old objections as soon as possible and that any new objections be examined without any delay.

The service also found that natural and legal persons did not submit their tax returns for a number of years, without the imposition of additional taxes by the department, based on the judgment of the treasurer, resulting in the loss of revenue for the state.

The Audit Service has recommended that the department requests the submission of tax returns for all years and impose the relevant taxes and penalties, in accordance with the law.

Another finding was taxpayers who do not declare all of their income or declare part of it, with a significant loss of revenue for the state. The Audit Service has recommended that a tax investigation takes place and the imposition of the necessary taxes, in accordance with the law.

The report also identified cases where companies declared a specific turnover for the purpose of indirect taxation, but which either did not declare a turnover amount or declared a larger turnover amount for direct taxation.

The service proposed that all specific cases are investigated and taxes are imposed where necessary. The service also recommended that the Tax Department makes use of the information available to it and compares, on a regular basis, VAT and Income Tax information, in order to increase its tax collection capacity and minimise tax evasion.

The report also highlighted public and wider public sector employees who own shares or have the position of director or secretary in private companies, without securing the relevant permit.

The Audit Service recommended that the department ensures full compliance with the relevant legislation and regulations and that those who violate them are subject to the prescribed sanctions and fines.

Furthermore, the service also identified internal offsets of large amounts of VAT, without carrying out on-site checks and desk audits.

It suggested that the Tax Department intensifies its on-site visits in cases where taxpayers submit VAT refunds and offset requests, in combination with other types of audits.

Finally, the service flagged the low inspection visit rate to the premises of persons registered in the VAT Register.

The Audit Service proposed that the department increases its visits to the taxpayers’ properties in order to prevent tax evasion, protect public revenues, create tax awareness and better enforce the relevant legislation.