Audit Office's Report Reveals Major Income Boost and Backed-up Payments Accumulated in Tax Department
The Audit Office of Cyprus has released a special report titled "Audit of the Tax Department," which highlights several issues within the department, despite a significant increase in state revenues over the past few years.
The report reveals that the failure of the Tax Department to take timely and effective collection measures is a primary reason for the €1.4 billion at risk of non-collection. By the end of 2023, the state had accumulated €3.1 billion in tax arrears, with approximately €1.4 billion considered at risk of not being collected.
The department's inability to perform substantial audits on companies that owe money has also been a concern, potentially harming revenue collection efforts. The report emphasises that high-risk companies, such as those in construction, land development, or with years of losses or disproportionate expenses, should not remain unaudited for extended periods.
Another issue raised in the report is inadequate tracking of VAT collections on behalf of other countries. The Audit Office found a lack of reconciliation mechanisms between various subsystems and the main accounting system (FIMAS), leading to incomplete or inaccurate revenue confirmation, particularly regarding VAT.
The report also identifies incorrect classification of revenue from overpayments, affecting the proper presentation of income in financial statements. Interest payments to taxpayers that violated legislation and delays in remitting amounts concerning third parties (e.g., OSS, GHS) are other concerns noted in the report.
The Auditor General reports underutilization of available legal tools by the Tax Department. The department has failed to detect and monitor non-submission of income tax returns by individuals and legal entities for multiple tax years. Tax refunds were issued without verifying potential outstanding debts, according to the report.
Despite these concerns, the report notes a significant increase in state revenues. Revenues rose from €4.6 billion in 2021 to €6.9 billion in 2024, representing increases of 18% in 2022, 14% in 2023, and 12% in 2024. However, the significant reduction in outstanding taxes was achieved without substantial audits or income reassessments.
The report is available on the Audit Office's website: Audit Office's website for further review. It is hoped that the findings in the report will lead to improvements in the Tax Department's collection efforts and overall financial management.
[1] Data from the Audit Office's Special Report on the Tax Department.
The report underscores the need for the Tax Department to address its inefficiencies in finance, such as the timely and effective collection of taxes and the auditing of high-risk businesses, to reduce the €1.4 billion at risk of non-collection. The EU economy could potentially benefit from the Tax Department's improved performance, particularly in terms of VAT collections and income reassessments. To enhance business and financial management, it is crucial for the department to utilize available legal tools and improve its tracking mechanisms.
