The Finnish Tax Administration tackles tax fraud efficiently
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. Cooperation and information exchange between the Tax Administration and other authorities ensures a holistic approach to identifying, combating and monitoring various shadow economy phenomena. The Tax Administration has personnel specialising in fighting against more serious manifestations of the shadow economy. The shadow economy is combated both preventatively and with a real-time approach using a varied range of means from registration to tax audits carried out through cooperation between authorities.
A tax audit is the Tax Administration’s most powerful weapon
A considerable portion of Finnish business is concentrated in Southern Finland, particularly the Uusimaa region. Even though business is concentrated in the south, the shadow economy is encountered everywhere in Finland and measures to curb it are taken accordingly.
As the majority of business is in the south, the tax risks are also concentrated in this region. A substantial share of the Tax Administration’s control measures target client companies in Uusimaa. This region accounts for the highest amount of taxes levied on the basis of tax audits. The percentage of audits that led to measures was about 80 per cent in 2018 and about 70 per cent in 2017.
VAT accounted for 42 per cent, income taxes for 35 per cent and withholding for 23 per cent of taxes levied on the basis of tax audits by Corporate Tax Offices in 2018 (Chart 1). At the Large Taxpayers’ Office, income taxes account for the largest amount of tax levied. Of the time used for tax audits, around 36 per cent was used for shadow economy audits.
Combating the shadow economy in tax audits
The shadow economy specialists at the Corporate Taxation Unit carried out about 20 per cent of all tax audits in 2018 and accounted for almost 50 per cent of all taxes levied. The figures for 2017 were 15 per cent and 59 per cent, respectively. The abovementioned figures do not include the Large Taxpayers’ Office. Uusimaa accounts for around half of the shadow economy audit figures. The results of anti-shadow economy efforts have increased significantly compared to 2017, particularly in Eastern Finland.
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 small enterprises with a turnover of less than EUR 2 million. In addition, a large number of companies that have not filed any turnover data with the Tax Administration participate in the shadow economy. These include foreign companies and companies that have been reported dormant or dissolved. Control measures uncover shadow economy activities in all fields of business, but most often in transport, construction, cleaning, restaurants, consulting and the car trade.
Part of the cases are considered for reporting to the police
In about 19 per cent of all tax audited cases in 2018, a police report was considered; this figure was 65 per cent in cases audited by shadow economy specialists. The majority of these cases concern limited liability companies; private individuals comprise another major group.
Falsified receipts are a typical means of tax evasion in the shadow economy. A total of about 5,300 falsified receipts were found during tax audits in 2018, with a value of approximately EUR 30 million. Fraudsters use receipts to free up funds for undeclared payroll or dividends while at the same time fabricating tax-deductible expenses for both income taxation and VAT.
In 2018, tax audits uncovered 1,100 undeclared employees. Most undeclared employees are not identified in tax audits. The value of the detected undeclared payroll was about EUR 42 million.
The Tax Administration tackles the shadow economy in many ways
In 2018, about 31 per cent of removals of taxable entities from the VAT Register and 40 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.
The shadow economy team specialising in VAT control handled about 1,100 cases in 2018 in connection with periodic tax control; control measures such as changes in registration and prohibitions were taken in around 600 of these cases. Part of the cases led to tax audits or directly to considering a police report.
The number of cases taxed on the basis of estimated corporate income in 2017 was 7,115, 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 totalled EUR 241 million, with the average tax increase amounting to EUR 34,000.
Collaboration with other authorities
The measures taken by the Tax Administration in its fight against the shadow economy are the most effective when the Tax Administration conducts tax audits simultaneously with pretrial investigation of dishonest activities as close to real time as possible. At the end of 2018, 60 such cases were in process. Of the shadow economy cases completed in 2018, 117 were carried out in cooperation with the Police or Customs. The most important partner is the Police.
Besides their regular tax control duties, the shadow economy specialists of the Tax Administration gather observations that may be relevant from the perspective of another control authority. In 2018, control notifications on about 750 cases were made to different 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) and the Finnish Centre for Pensions. Information is also submitted to the Regional State Administrative Agencies, Workers’ Compensation Centre and unemployment funds.
Alongside control measures against the shadow economy, the Tax Administration also reports on suspected money laundering. In 2018, the Tax Administration reported on 31 cases of money laundering and several cases of suspected corruption to the National Bureau of Investigation.
The Tax Administration is an expert in tax offences
The Tax Administration transferred its monitoring of criminal matters to a new IT system in November 2018 and enhanced its monitoring operations. However, due to the changes, the statistics on offences are not fully comparable with previous years.
The statistics for 2018 only cover the period up to 31 October 2018.
Offences by year
By the end of October 2018, the Tax Administration had initiated 740 new criminal cases. The corresponding figure in 2017 was 852 (Chart 1).
The number of offences in 2017 was exceptionally high, as many offence reports were made in January about suspected identity theft and fraudulent applications for VAT returns. The changeover to a new IT system in 2018 and the related training required working time, which somewhat reduced the number of offence reports submitted.
Types of offences reported
Aggravated tax fraud is by far the most common type of offence reported by the Tax Administration. The number of offence reports submitted on any other type of crime is much lower (Chart 2).
The other types of offences that the Tax Administration reports to the police include forgeries. Tax offences committed in connection with car taxation and excise duties are also included in the figure for other offences. The greater number of snus smuggling offences detected by Customs also increases the number of excise duty fraud cases at the Tax Administration, which is evident in the statistics.
Number of sentences passed by court instance and year of sentencing
The criminal processes in economic offences are typically lengthy, lasting several years, so the number of offences reported by the Tax Administration correlates with the number of sentences with a delay (Chart 3). The criminal process is naturally largely dependent on the actions taken by other authorities besides the Tax Administration.
Compensation for damages paid by year
The amounts of compensation for damages vary, as individual large cases impact on the total amount of this compensation.
Consequences of offence reports
Cases instituted based on an offence reported by the Tax Administration are usually resolved successfully through the criminal process: many lead to sentencing, while the number of charges fully dismissed is low (Chart 4).
Tax offenders are usually sentenced to imprisonment (Chart 5). Community sanctions are also based on imprisonment, as fines cannot be converted into a community sanction. The proportion of fines imposed has steadily decreased in recent years, which is linked to the fact that the tax offences under criminal procedure are mainly aggravated tax frauds.
Tax debt – the state and municipalities lose part of their annual income
The statistics show all tax arrears regardless of whether they are accumulated by operators in the shadow economy or other taxable entities. Growth in tax arrears in 2017 is explained by the gap in collection operations due to the system overhaul and changes in the compilation of statistics.
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. As from 2016, tax arrears have decreased in each subsequent year. Quarterly versions of both figures are also available.
The Tax Administration often serves as a creditor in bankruptcies
The total number of bankruptcy petitions rose in 2018 (Chart 1). The Tax Administration’s share of all petitions has been about 40 per cent, but it grew to about 44 per cent in 2018. Growth in 2018 is due to the 2017 system overhaul, as a result of which the percentage of petitions handled by the Tax Administration was only 33 per cent. The monthly statistics show that growth was seen particularly in the first quarter of 2018, after which the number of bankruptcy petitions instituted by the Tax Administration levelled out.
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 (in Finnish)