Good results in combating tax fraud in 2020

Source: Tax Administration

The Finnish Tax Administration plays a major role in combating the shadow economy, and handling tax-related and other forms of economic crime. Co-operation and information exchange between the Tax Administration and other authorities ensures a holistic approach to monitoring, identifying and combating various shadow economy phenomena. The shadow economy is combated preventatively with a proactive approach in real time, using a varied selection of tools ranging from registration to tax audits carried out through co-operation between authorities. International cooperation and exchange of information also have a key role to play in combating the shadow economy. Monitoring tools are constantly being developed.

Dishonesty occurs throughout business life

Companies participating in the shadow economy that are uncovered in tax audits usually have a turnover of under EUR 10 million, and a large proportion of these are enterprises with a turnover of less than EUR 2 million. In addition, a large number of companies that the Tax Administration does not have any turnover data on participate in the shadow economy. These include foreign companies and companies that have been reported dormant or dissolved. Tax control measures uncover shadow economy activities in all fields of business, however, most often in transport, construction, cleaning, restaurants, and the car trade. In addition, shadow economy activities have been uncovered through the monitoring of e-commerce and foreign transactions. As most of the business activities are in the southern part of the country and in the Uusimaa region, the tax risks also mostly affect southern Finland. This also applies to the shadow economy; however, as a nationwide phenomenon, it requires tackling all over the country. In 2020, Uusimaa accounted for around 55 % of the shadow economy audit figures.

The Tax Administration has a dedicated function and personnel specialised in the fight against serious manifestations of the shadow economy. Elements of the shadow economy are also monitored in other tax control activities. Targets for the shadow economy includes all tax cases that are considered for reporting to the police.

The total number of shadow economy audits carried out in 2020 was 547, of which 78 per cent was carried out by the Corporate Taxation Unit's shadow economy specialists. The taxes levied in these cases amounted to EUR 21.4 million of valued-added taxes (EUR 26.1 million with tax increases) and EUR 19 million of employer contributions (EUR 22.3 million with tax increases). The unreported earnings found in the audits amounted to EUR 119.5 million, and the taxes levied on them were EUR 31.2 million. (Chart 1) The audits found that approximately EUR 26.4 million in hidden dividends had not been declared.

Of the time used by Tax Administration for tax audits, about 46 per cent was used for shadow economy audits (Chart 2). The resources used by the shadow economy specialists in 2020 accounted for 31.5 per cent of the Tax Administration's total resources. The risk-based selection of targets for the shadow economy has been successful, as 90% of the cases resulted in taxes being levied.The shadow economy specialists at the Corporate Taxation Unit accounted for about 44 per cent of all taxes levied in 2020 as the result of an audit.

Some of the cases are considered for reporting to the police

In about 29 per cent of all tax audited cases in 2020, a police report was considered; the year-on-year growth is 3 per cent. The corresponding figure for the shadow economy specialists was roughly 75 per cent. The majority of these cases concern limited liability companies; private individuals comprise another major group.

Using falsified receipts in accounting are a typical means of tax evasion in the shadow economy. A total of about 1,670 falsified receipts were found during tax audits in 2020, with a value of over EUR 30 million. Fraudsters use falsified receipts to free up funds for undeclared payroll or hidden dividends while at the same time fabricating tax-deductible expenses for both income taxation and VAT.

In 2020, tax audits uncovered about 460 undeclared employees, and the value of the detected undeclared payroll was about EUR 6.2 million. A large part of undeclared employees are not identified during tax audits, even if companies can clearly be found to have paid undeclared wages.

The Tax Administration tackles the shadow economy in many ways

In 2020, about 32 per cent of all removals of taxable entities from the VAT Register and 37 per cent from the prepayment register were made on the initiative of the authorities. Generally, removal from these registers by the authorities means that the taxable entity has failed to comply with essential statutory obligations. Entry into a register may be declined based on previous misconduct. In combating the shadow economy, the impact of VAT registrations on the prevention of fraud has been at least EUR 30 million, while a fraudulent operator causes losses of EUR 5,000 a month on average.

The shadow economy team specialising in VAT control handled more than 4,200 cases in 2020 in connection with periodic tax control; control measures such as tax decisions and changes or blocking in registration were taken in over 1,400 of these cases. This is much more than during the previous year. Part of the cases resulted in tax audits or directly to considering a police report.

The number of cases taxed on the basis of estimated corporate income in 2019 was about 6,000, with the assessment arising from failure to file a tax return or an unreliable tax return. The amount of tax levied in case of assessments based on estimated corporate income was over EUR 266 million in total, with the average tax increase amounting to about EUR 44,000. In the tax year of 2019, some taxpayers had an extended deadline for tax returns due to the exceptional circumstances caused by the coronavirus epidemic. In addition, the taxpayer-specific end date for taxation entered into force in the tax year of 2019, which partly explains the number of estimates and the decrease in amounts compared to 2018. For these reasons, taxpayers have had more time to submit their tax returns and also to react to assessments by estimation.

More emphasis is being put on preventive measures in the fight against the shadow economy. For example, the Tax Administration and the Finnish Competition and Consumer Authority (FCCA) joint forces to collaborate with cities on training procurement staff how to identify dishonest contractual partners. During 2020, training on how to identify the shadow economy was also provided for the personnel of other authorities and stakeholders, such as banks.

Collaboration with other authorities

The Tax Administration's measures taken in its fight against the shadow economy are most effective when tax audits are conducted simultaneously with the pretrial investigation of dishonest activities and as close to real time as possible. Of the shadow economy cases completed in 2020, 11% were carried out simultaneously in cooperation with the Police or Customs. Congestion in the Police of Finland’s investigations in the Helsinki region reduced the number of joint cases.The most important partner is the Police.

Besides the regular tax control duties, the Tax Administration’s fight against the shadow economy includes gathering observations that may be relevant from the perspective of another control authority. In 2020, control notifications on about 505 cases were made to various authorities regarding issues such as misuse of welfare benefits and noncompliance with employers’ statutory insurance requirements. In most cases, information is submitted to the Social Insurance Institution of Finland (Kela), the Finnish Centre for Pensions, the Regional State Administrative Agencies, the Workers’ Compensation Center and unemployment funds. Alongside control measures against the shadow economy, the Tax Administration also reports on suspected money laundering. The Tax Administration has a legal obligation to take measures for preventing money laundering and terrorism financing.

The Tax Administration’s bankruptcy petitions in 2020

In 2020, the number of pending bankruptcy petitions decreased by 590 from 2019. The Tax Administration accounted for 36% of all petitions in 2020. The Tax Administration prepared 411 fewer petitions than in the previous year. The number of bankruptcies petitioned by the Tax Administration decreased by 33% compared with 2019.

The decrease in bankruptcy petitions resulted from the global coronavirus crisis which broke out in March, when the Tax Administration started to consider any relief planned by the Finnish Government for companies facing financial difficulties. In addition, the Bankruptcy Act was amended temporarily between 30 May 2020 and 31 January 2021 so that declaring a debtor bankrupt as petitioned by the creditor was limited.

Criminal offences

In total, 930 new criminal cases were instituted during 2020. Included in the number are matters reported to the police by the Tax Administration, as well as criminal matters in which the Tax Administration is an injured party but the pre-trial investigation is based on another party's report.

A criminal case may contain several criminal offences, which is why the number of criminal offences is higher than the number of criminal cases. For example, an accounting offence is commonly associated with tax fraud. The focus of criminal cases involving the Tax Administration is on aggravated tax frauds (Chart 2a). 

Judgments in criminal cases according to court

The number stands for criminal cases involving the Tax Administration in which a judgment was rendered in 2020. It is not the same as the total number of judgments rendered, as more than one criminal matter may be considered under each criminal proceeding and sentencing phase (Chart 2b).

Tax debt – The amount of tax dept did not increase in 2020 despite the coronavirus crisis

The statistics show all tax arrears regardless of whether they are accumulated by operators in the shadow economy or other taxable entities. Despite the coronavirus crisis, the amount of outstanding tax did not increase even though VAT was returned to entrepreneurs and corporate entities as a support measure. Payment arrangements with a lower late payment increase were agreed on with the recipients of the returned VAT.

Chart 1 presents the tax debt at the beginning of the year by tax type. Chart 2 presents tax arrears at the beginning of each tax year. Tax arrears for the most recent tax year are shown at the top. The annual reduction in tax arrears can be seen by comparing the sum outstanding in a given year with that in the following years.

The Compliance Report supports decision-making

The information exchange between the authorities is at the core of the fight against the grey economy. It is difficult to make the right decisions without sufficient information on the financial standing of a subject or an applicant. The Compliance Report is an updated summary of the essential records held by the authorities. The Compliance Reports are issued by the Grey Economy Information Unit. The reports help authorities target and execute their control measures. The exchange of information between the authorities must always be based on the law.

The information on the Compliance Report is illustrative of the level of compliance of an organisation or a person with statutory obligations. The report includes information on activities, financial standing and compliance with obligations related to taxes, statutory pension, accident insurance and unemployment insurance contributions and fees levied by Customs.

The information on the Compliance Report is mostly based on information submitted by the subjects themselves. The report includes payroll information obtained from the Tax Administration, pension contribution information obtained from the Finnish Centre for Pensions and Customs information. The report also includes a possible extract from the enforcement register and information on bankruptcy and restructuring proceedings. The reports can be requested and received through an automated interface.

Act on Grey Economy Information Unit [.fi]› (in Finnish)