TAX cobra and VAT ledger statements are the most commonly cited measures adopted to combat tax evasion and avoidance, and they are already starting to get results. These are part of a series of measures adopted by the Finance Ministry, for which fighting tax evasion has become a major priority.
“At the beginning we based the fight against tax evasion and avoidance on repression, but later we adopted an action plan with more than 50 measures, which we are gradually putting into practice,” Alexandra Gogová, spokesperson of the Finance Ministry, told The Slovak Spectator.
When listing the measures enacted so far, she mentioned extending cooperation between the police and the prosecution and creating a specialised team called the tax cobra, which uncovers tax evasion-related crimes. Other measures include the so-called reverse charge and the receipt lottery.
“Last year we focused especially on VAT-related evasion and adopted several measures, which meant for the state an improved collection of taxes and a halt in the decline of the effective tax rate, which decreased from 2005 until 2012,” said Gogová.
While Slovakia’s VAT rate is 20 percent, the Institute of Financial Policy (IFP) governmental think tank calculated the effective VAT rate for 2012 at 12.5 percent. In 2013, it was 13.2 percent and it is expected to increase further.
“Based on the latest estimates of tax revenues we assume that the effective VAT rate in 2014 will reach 13.9 percent, which is an improvement by 1.4 percentage points compared with 2012,” Martin Filko, the head of IFP, told The Slovak Spectator.
In June IFP also increased its estimate of tax and contribution revenues by €290 million, or 0.4 percent, for 2014 and improved the outlook for 2015-2017 thanks to more effective VAT collection and positive developments in the labour market.
So far, IFP’s analyses focused mainly on tax evasion involving VAT, which international institutions identified as the biggest area in tax collection in need of improvement.
“The increase in the effectiveness of the collection of this tax confirmed our reasoning,” said Filko.
IFP has identified retail trade and wholesale as the riskiest sectors, where the VAT gap, i.e. the difference between estimated tax duty and the actual tax paid, is estimated at €830 million, followed by construction (€530 million), the sector of professional services (€343 million), agriculture (€177 million) and hotels and restaurants (€129 million).
Successes so far
The tax cobra has uncovered several cases of tax fraud, which received extensive media coverage. Patrícia Macíková, a spokesperson for the Financial Administration, told The Slovak Spectator that these tax fraud cases involved deals with meat, corn, nickel, sugar, wood, wine, diesel fuel, toners, stone, steel for the construction industry and cars. Under the cobra project, there are currently 14 cases within which 493 tax audits were conducted and 465 are underway. The completed audits prevented unauthorized VAT refunds of €38 million while the as yet unfinished audits indicate unauthorised VAT refunds of over €23 million.
VAT ledger statement
The VAT ledger statement was introduced at the beginning of this year as another measure to combat tax evasion. This detailed list of issued and received invoices provides comprehensive information to the tax authority about when and with whom a given business person conducted transactions and in what amount.
“It enables more effective and faster audits,” said Gogová. “For example, with a cross-check it is possible to uncover local as well as cross-border carousel fraud, machinations with invoices, fictitious invoices or asking twice for a VAT refund from the same invoice.”
According to Gogová, VAT ledger statements have already helped uncover a new form of tax fraud involving fictitious receipts for motor fuel.
The Financial Administration sees the VAT ledger statement as one of the most complex measures; it has a wide reach and is not limited only to various forms of VAT avoidance, abuse or fraud, but also extends into other forms of direct and indirect taxes, Macíková told The Slovak Spectator.
“Equally important is also the aspect of using the ledger statement as a tool to forecast new forms of tax evasion,” said Macíková.
By introducing VAT ledger statements, the state has obtained access to complex information about: the payer, transactions and transaction chains, enabling the effective planning of tax audits, getting early information about tax fraud, new trends in tax fraud and their territorial occurrence, monitoring highly risky tax payers and preventing additional changes in accounting books.
With respect to VAT ledger statements, Peter Pašek, managing director of Accace, wonders whether the Financial Administration is able to use all the obtained data effectively. On the other hand, these statements do not prevent fraud when selling goods to end customers – like private individuals – for whom the sale without a receipt and VAT is still financially more advantageous.
According to Pašek, strengthening the position of tax advisors would help to combat tax evasion and increase Slovakia’s tax revenues.
Employers support the state’s fight against tax evasion and tax avoidance. Rastislav Machunka, head of the Federation of Employers’ Associations (AZZZ), sees fraud involving unauthorised VAT refunds as the worst way to rob the state of its revenues and the AZZZ welcomes measures that combat it.
“We perceive [the measures] as having a positive effect on the business environment because it is not possible for one to pay taxes while another draws unauthorised VAT refunds and enjoys a nice life to the detriment of the work of other business entities,” Machunka told The Slovak Spectator, adding that in respect to measures combating VAT fraud, they regard the VAT guarantee payment obligation as controversial.
Machunka also points to the psychological impact that tax reforms which increase the tax burden have on businesses, which, instead of putting more money into the state’s pocket, compels some businesses to find new, creative ways to avoid or reduce their tax obligations.
In this respect, Pašek believes that simplifying the income tax act and reducing tax rates would lead to higher collection of taxes, because companies or private individuals would be less motivated to try to “optimise” their tax duties.
Martin Hošták, the secretary of the National Union of Employers (RÚZ), said that measures adopted to fight tax evasion and avoidance, like the VAT ledger statements, put a higher administrative burden on companies. But while companies are forced to make a sacrifice in the form of increased administrative costs, they expect these measures to bring benefits in the form of higher tax collection.
“If this does not happen, then it will be necessary to re-evaluate these measures because they significantly burden the business community in Slovakia,” said Hošták.
Ján Lalka, managing director and founder of Surveilligence, a specialised forensics agency, said that based on his company’s experience, cases of carousel fraud are common, and they involve not only trading in commodities like sugar and sunflower or rapeseed oil, but also in electronics. VAT fraud also occurs often in the sectors of construction, retail, medicine production and others.
But he also pointed to what may be the most serious form of tax fraud committed by large companies. These involve big companies which have subsidiary firms registered in, for example, Slovakia, Hungary or the Czech Republic, that trade between each other on the basis of internally set transfer prices. This enables them to manipulate the price and afterwards the tax, according to their needs, and thus avoid paying taxes or reduce their taxes to the lowest level possible.
The Financial Administration believes that expanding tax legislation, especially tax supervision, a revision to the Commercial Code and educating state employees and the public, may help further reduce tax evasion.
The Finance Ministry continues to fight those who do not pay taxes, and recent activities have included a revision to the Income Tax Act, which parliament has advanced to the second reading.
“The efforts of the Finance Ministry are aimed at increasing the fairness of the tax system and removing various loopholes in the law that can be abused with the aim of affecting the tax base,” said Gogová, adding that they are refining the definition of tax expenses, i.e. those which enable a tax payer to reach, secure and keep taxable incomes. “Apart from this, the Finance Ministry wants to extend the circle of users of electronic cash registers, because based on our experiences we can say that in places where cash registers are not used, the tax payment discipline is very low.”
29. Sep 2014 at 0:00 | Jana Liptáková