The Tax Administration has many effective ways of tackling tax fraud

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 Tax Administration has personnel specialising in fighting against more serious manifestations of the shadow economy. 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.

A tax audit is the Tax Administration’s most powerful weapon

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 2019, Uusimaa accounted for around half of the shadow economy audit figures. 

The Tax Administration's Corporate Taxation Unit has a division that specialises in combating the shadow economy, but shadow economy cases are detected and monitored through other tax audit measures as well. The classification ‘shadow economy case’ refers to all tax audits that are considered for reporting to the police.

The total number of shadow economy audits carried out in 2019 was 588, 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 19.3 million of valued-added taxes (EUR 25.5 million with tax increases) and EUR 12.6 million of employer contributions (EUR 19.2 million with tax increases). The unreported earnings found in the audits amounted to EUR 86.6 million, and the taxes levied on them were EUR 23.5 million.  The audits found that approximately EUR 25 million in hidden dividends had not been declared.  

Of the time used by Tax Administration for tax audits, about 47 per cent was used for shadow economy audits.  The resources used by the shadow economy specialists in 2019 accounted for 28 per cent of the Tax Administration's total resources. The risk-based selection of targets for shadow economy audits in specialized division has been successful, as 87 per cent 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 2019 as the result of an audit. 

Some of the cases are considered for reporting to the police

In about 26 per cent of all tax audited cases in 2019, a police report was considered; the year-on-year growth is 7 per cent. The corresponding figure for the shadow economy specialists was roughly 74 per cent, which is 10 per cent more than in the previous year.  The majority of these cases concern limited liability companies; private individuals comprise another major group. In 2019, 16 of the cases reported to the police concerned car taxation. 

Using falsified receipts in accounting are a typical means of tax evasion in the shadow economy. A total of about 4,850 falsified receipts were found during tax audits in 2019, with a value of over EUR 31 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 2019, tax audits uncovered about 500 undeclared employees, and the value of the detected undeclared payroll was about EUR 20 million. Most undeclared employees are not detected in tax audits. 

The Tax Administration tackles the shadow economy in many ways 

In 2019, about 31 per cent of all removals of taxable entities from the VAT Register and 51 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. With the losses caused by fraudsters averaging EUR 5,000 a month, the deterrence of shadow economy measures on VAT registration frauds alone amounts to at least EUR 30 million.

The shadow economy team specialising in VAT control handled more than 3,100 cases in 2019 in connection with periodic tax control; control measures such as tax decisions and changes or blocking in registration were taken in over 1,025 of these cases. This is much more than during the previous year (1,100 cases and 600 measures in 2018). 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 2018 was about 8,000, 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 400 million in total, with the average tax increase amounting to about EUR 52,000.  The number of assessments has increased significantly compared to tax year 2017, with the introduction of quicker and more flexible taxation procedures.  

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 2019, training on how to identify the shadow economy was also provided to accounting firms, banks and educational institutions, among others. Information on how to find an honest contractual partner has also been sent to companies in the form of warning letters and video materials shared via social media.  

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 2019, 93 were carried out in co-operation with the Police or Customs. The most important partner is the Police.

The Tax Administration carried out hundreds of unannounced spot checks during 2019, mainly in co-operation with other authorities, in various sectors, including taxis, construction companies, restaurants, and berry farms.

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 2019, control notifications on about 750 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) 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. The Tax Administration has a legal obligation to take measures for preventing money laundering and terrorism financing. In 2019, the Tax Administration reported on 19 (31 in total in 2018) suspicious transactions to FIU.

The Tax Administration plays an active role as creditor in bankruptcies and is an expert in tax offences

Compared to 2018, 73 more applications for bankruptcy were filed in 2019 (Chart 1). The Tax Administration's share of all bankruptcy applications was approximately 43 per cent, and the number of applications corresponds with the previous year's level. With respect to the economy, the operational environment developed favourably in 2019, and the number of bankruptcy applications did not change markedly.

Number of criminal cases involving the Tax Administration

In total, 920 new criminal cases were instituted during 2019. 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.

Criminal offences

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 2019. 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).

Judgments in criminal cases according to type of punishment

More often than not, criminal cases in which the Tax Administration is an injured party result in the offender being sentenced to imprisonment. For statistical purposes, the number of punishments is calculated as based on the number of criminal cases involving the Tax Administration in which a judgment has been rendered. Several defendants may be involved in the same criminal matter. In such cases, statistics based on the type of punishment are compiled according to the most severe punishment imposed in the judgment (Chart 2c).

Tax debt – favourable development continued in 2019

The statistics show all tax arrears regardless of whether they are accumulated by operators in the shadow economy or other taxable entities. Decreasing tax deficit is a favourable development for the second consecutive year. 

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 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)