PROTESTS from entrepreneurs and experts against the low fixed penalties for tax defaulters enticed the government to amend the Act on Tax Administration, but lawyers are critical of the changes.
“It is not a systematic amendment that fundamentally changes the behaviour and motivation of tax dodgers,” Andrej Leontiev, partner with the law firm TaylorWessing, told The Slovak Spectator, “who profit from delinquency thanks to the rare inspections and very cheap solutions in the case of discovery.”
The amendment also factors in the length of time a payment is overdue, setting different rates and penalties. The basic tariff remains 10 percent of the back duty for each day late. In case the taxpayer submits an additional tax return before announcement of the initiation of a tax audit, the penalty will be lower, at 3 percent, according to the Finance Ministry.
A new option is to submit the additional tax return within 15 days from the audit initiation which means a 7 percent penalty of the back duty. The maximum sanction equals to the amount of the back duty imposed, Finance Ministry spokeswoman Alexandra Gogová told The Slovak Spectator.
Another provision only penalises a violator for their worst transgression even in cases overlapping deliquencies by the same person.
“It shall apply in the case of imposition of sanctions for administrative delinquencies provided for by the tax law as well as by the specific Code and accounting regulations,” Gogová said.
Conditions given by legislation
The previous law distinguished between tax inspectors or debtors revealing tax arrears, however, only one tariff of 5 percent was set up if the debtor reported the delay himself. The rules generated penalties of €1.57 million in the 3,740 decisions in 2014, according to Financial Directorate data.
The Finance Ministry declined to estimate how much revenue the new law might generate.
“It is not possible to assume the back duty either after the audit or on the basis of additional tax returns,” Gogová said.
However, Leontiev stressed that amendment can create more space to ease penalties on willful defaulters.
“So far, the entity risked maximum penalty when they stated a lower tax liability,” Leontiev said, “but after the amendment it can anticipate the audit and thus submit the tax return and pay the lower penalty rate.”
Leontiev called this another anomaly of the current Slovak legal order.
“It provides fraudsters who have committed a criminal offence of non-payment of taxes the possibility to avoid the criminal sanction, for example imprisonment, if they pay the due tax, and also the fine, by the end of the investigation,” said Leontiev. “Despite the expert’s criticism the statute still remains in force.”
A thorn in the side
Tax dodgers with a total due tax exceeding of €17,000, for a natural entity, or more than €170,000, for a legal entity are visible on a Financial Directorate list. But the amendment also includes plans to make more frequent monthly updates and include those with arrears from €170 starting in May.
Experts consider the list as ineffective.
“During two years the VAT ledger statement has been in use no big fish have been caught,” Radovan Ďurana, an analyst at the Institute for Economic and Social Studies (INESS), told The Slovak Spectator, “On the contrary, there is a desire to identify defaulters with the minimum arrears as a result of disputes about the due date and the contents of the invoice or a plain typing error in accounting.”
Ďurana pointed to services verifying the solvency of companies that formerly existed on the market. There is no reason for their replacement by a tool with limited explanatory power which can be abused, he said.
“More efforts should be devoted to identifying unauthorised VAT deductions,” Ďurana said.
Leontiev agreed that changes will affect mainly those who make mistakes rather than those intentionally dodging taxes.
“We suppose that more frequent update of the list will not markedly affect the efficiency of the tax collection,” Leontiev said.
Around 50 measures against tax evasion have been introduced into practice within the action plan framework since 2012. The Finance Ministry considers plan as successful.
“The fight against tax evasion in the period 2013 to 2015 brought into the [state] budget by more than €2 billion as if we stayed at the level of efficiency from the 2012,” Gogová said.
The ministry together with other government departments wants to continue implementing its action plan. Gradually there will be measures to ensure the simplification of the conditions for faster VAT refunds, settle the basic stock of a limited company in a preliminary bank account, a reduction of court fees in registration of entities in the commercial registry, VAT reimbursement after the receipt of payment from the buyer and other changes.
“The Financial Administration has registered a rapid move into more sophisticated forms of scams within the VAT ledger statement,” Gogová said, “such as the transition from excess deductions to tax optimisation.”
Tax evasion is also dealt with at the international level. The Organisation for Economic Co-operation and Development (OECD) approved the Base Erosion and Profit Shifting (BEPS) project in October 2015 with the recommendations targeting the distortion of tax bases and transfer of profits across borders.
The project includes a push to avoid double taxation treaties, neutralise disharmony between tax systems, strengthen rules on the protection of tax base, adjustments in transfer pricing, resolve cross-border disputes as well as offering tax solutions to challenges in the digital economy.
Gogová said that BEPS is a response to the tax strategies of transnational corporations exploiting loopholes in the current system.
1. Mar 2016 at 6:15 | Peter Adamovsky