In a recent report to the House of Representatives, Cyprus’ Tax Department revealed a staggering €3.4 billion in taxes owed to the state as of September 2023, with nearly €900 million considered uncollectible. This revelation underscores the profound impact of tax evasion and avoidance on the Cypriot economy and its citizens.
Tax evasion, the illegal non-payment or underpayment of taxes, alongside legal tax avoidance strategies, has been linked to weak tax administration within the country. The Tax Department’s primary goal is to enforce tax laws and maintain public confidence in the system; however, the current shortfall in tax collections suggests inefficiencies in its operations.
The scale of tax evasion is particularly pronounced among self-employed individuals, including high-earning professionals who, on average, paid just €1,080 in personal income taxes in 2022 compared to the €1,920 average paid by employees. This discrepancy highlights the challenge of quantifying tax evasion due to significant untaxed economic activity.
The consequences of these practices extend beyond lost revenue. They limit the government’s ability to finance public goods and services and potentially reduce tax rates. Moreover, the tolerance of tax evasion fosters public cynicism and undermines confidence in government institutions. Law-abiding businesses are disadvantaged, and Cyprus’ reputation suffers as it becomes a haven for illicit funds through evasion and money laundering.
Despite promises from finance ministers to address these issues, little progress has been made. However, with a €24.2 million allocation from the EU’s Recovery and Resilience fund earmarked for improving tax department efficiency, there is an opportunity for reform. Increased digitalization and integration of public services are expected to enhance enforcement by providing more accurate taxpayer information.
To further deter evasion, simplifying the tax registration and filing process is essential, as is increasing penalties for delinquency and streamlining appeals processes. Cooperation with employers for timely submission of revenue and income data is also crucial.
In conclusion, Cyprus must take decisive action to reform its tax administration and enforce compliance. Without such measures, tax evasion will continue to undermine the economy and unfairly burden honest taxpayers.
