€2.5 billion in unpaid taxes, Audit Office report reveals

A whopping €2.5 billion in taxes is owed to the state, of which €1.1 billion are deemed doubtful as to whether it can be collected, a report released Thursday found.

The findings formed part of the Audit Office’s special report on the Tax Department for fiscal year 2022.

The Tax Department was found to be lax in various ways in terms of tax collection, and often does not utilise the tools available to it to force laggards to pay up – such as placing encumbrances on immovable property.

In addition, the department is dealing with 14,500 cases of taxation under appeal, concerning the amount of €683 million. Until and unless these appeals are resolved, the taxes are not considered receivable on the books.

The department is also unable to track the non-filing of income tax returns by individuals and companies – in many cases across several years. It further does not take “adequate steps” to trace taxpayers who declare no income or who declare only part of it – resulting in significant loss in tax revenue for the state.

Another major issue relates to the department imposing taxes – without having done the relevant checks – on companies posting losses over a number of years due to write-downs on investments in subsidiaries or affiliates.

Similarly, tax authorities do not adequately track companies which post tax losses for several years, and which tax losses are transferred to affiliates within the same group.

In another instance, the department issued an opinion regarding a certain company which, according to the auditor-general, violated the relevant law. Under the opinion, there were no restrictions on the interest payable on loans related to the purchase of shares in non-wholly owned subsidiaries.

Moreover, the department appears to not have investigated or taken into account the disclaimers of in-house auditors who harboured doubts about the correctness of the revenues reported by companies.

In one such case, the audit firm refused to sign off on a company’s financial statements for the years 2013 through to 2020, inserting a disclaimer on the document. But the tax department later disregarded this when calculating the taxes due.

As a result of this practice, the department agreed to class as tax-deductible the amount of €1.1 billion (for the year 2024) relating to defaulting debtors.

Elsewhere in the dossier, the auditor-general states that authorities grant rebates and/or internal offsets for VAT, without conducting on-site checks. And tax inspectors carry out far too few visits at the premises of companies with a VAT file.

Meantime a massive discrepancy came up between the number of corporate entities listed with the Registrar of Companies, and the number of companies registered on the tax department’s database of direct taxation. A check conducted back in August 2020 found that 25,528 companies were listed on the former but not on the latter.

And a sample check taken between March 2018 and March 2019 found several cases of restaurants and entertainment establishments not filing income returns or the IR7 form known as the ‘Employer’s Return of Employees’.

The report also flags a decision by the cabinet to award a no-bid contract for surveys to build extra roofs at the building of the tax department’s Nicosia district office. The no-bid contract was given to the architect of the current building.

Here, the auditor-general recommends that the cabinet cancel the decision and assign the project to the Department of Public Works.