Challenges in Tax Collection and Compliance
The state is facing a substantial fiscal challenge with an outstanding tax bill of €2.5 billion, as revealed in the Audit Office’s special report on the Tax Department for the fiscal year 2022. Of this staggering amount, concerns are raised over €1.1 billion classified as doubtful, casting uncertainty over its collectability.
The Tax Department’s approach to tax collection has been criticized for its laxity. It has been reported that the department often fails to employ the tools at its disposal effectively, such as not placing encumbrances on immovable property to ensure tax compliance. This has contributed to a significant backlog of 14,500 cases under appeal, which account for €683 million in taxation, effectively freezing these funds until resolutions are reached.
Furthermore, the department’s system appears to be inadequate in tracking individuals and companies who do not file income tax returns, sometimes for multiple years. This lack of oversight extends to those who underdeclare their income, resulting in a considerable loss of potential tax revenue.
Another highlighted issue is the premature imposition of taxes on companies reporting losses due to investment write-downs without proper checks. The audit also found that tax losses transferred within corporate groups are not being adequately monitored.
In one notable instance, the department’s opinion on a company’s tax obligations was deemed in violation of the law by the auditor-general. The opinion overlooked restrictions on interest payable on loans for share purchases in non-wholly owned subsidiaries.
The report also points out that the Tax Department has at times ignored disclaimers from in-house auditors expressing doubts about reported revenues. In a case where an audit firm refused to sign off on a company’s financial statements from 2013 to 2020, the department later neglected these concerns when assessing taxes due.
Issues extend to VAT management as well, with rebates and offsets being granted without necessary on-site checks, and insufficient inspections at company premises. A stark discrepancy was uncovered between corporate entities listed with the Registrar of Companies and those registered for direct taxation – with over 25,000 companies unaccounted for on the tax database.
Additionally, sample checks have revealed non-compliance among restaurants and entertainment venues in filing income returns or the mandatory ‘Employer’s Return of Employees’ form.
The report concludes with a recommendation from the auditor-general urging the cabinet to revoke a no-bid contract awarded for construction work at the Nicosia district tax office and to reassign the project to the Department of Public Works, ensuring due process and transparency.
