Taxation

Tax Administration focuses its efforts on the fight against the grey economy

Source: Tax Administration

The Finnish Tax Administration plays a significant role in combating the grey economy and handling tax-related and other forms of economic crime. Cooperation between the Tax Administration and other authorities ensures a broad approach to identifying, combating and monitoring various grey economy phenomena.

Tax audit is Tax Administration’s most powerful weapon

A considerable portion of Finnish business concentrates in Southern Finland and particularly in the region of Uusimaa. Despite the concentration of business in the south, the shadow economy is met throughout the country and measures to curb it are carried out accordingly.

With the majority of business in the south, the tax risks also concentrate in the region. Of all the control measures at the Tax Administration’s disposal, a tax audit is the most drastic one, and most of the audits are carried out in businesses in the region of Uusimaa. It is, therefore, natural that the amounts of the taxes debited on the basis of the audits are also the highest in Uusimaa. The proportion of audits resulting in measures in 2017 was slightly over 70% in the whole country. The highest amount of taxes debited on the basis of a tax audit concerned value added taxes (60%) while the proportion of withholding taxes and income taxes was approximately 20%. At the Large Taxpayers’ Office, income taxes form the largest amount of taxes debited.

The number of audits and amount of taxes debited 2016-2017 and by region 2017

The efforts to combat the grey economy were reorganised under the Corporate Taxation Unit of the Tax Administration at the beginning of 2016. The proportion of audits carried out by the function in 2017 was 15.4% of all audits, and its proportion of all taxes debited was nearly 59% (34% in 2016). The above figures are exclusive of those of the Large Taxpayers’ Office. The results of the division concentrating on the shadow economy improved substantially in 2017, particularly in Uusimaa. Since the Tax Administration was particularly burdened by various types of VAT fraud in 2016 and 2017, the control measures were specifically focused on value added taxation.

The results of the combat against the grey economy 2017

Companies participating in the grey 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 turnover less than EUR 2 million. In addition, there is a large number of enterprises participating in the shadow economy who have filed no turnover data with the Tax Administration. These enterprises include foreign companies and companies that have been reported dormant or dissolved. Industries with the most involvement in the shadow economy based on the control measures of the Tax Administration are transport, construction, cleaning, restaurant and consulting business and car trade.

Cases considered for possible reporting to the police

Nearly 18% of all cases where tax audit was conducted in 2016 were considered for possible reporting to the police, while the figure in 2017 was 19 %. A large number of VAT frauds or attempted VAT frauds committed by means of identity fraud were considered for reporting to the police. A majority of cases that are considered for reporting to the police concern limited liability companies; another significant group is private individuals.

Using fictious invoices is a typical way of operating in the grey economy. The number of fictious invoices detected in connection with tax audits in 2017 was 3,726, and their total value exceeded EUR 28 million. In 2016, 1,610 fictious invoices worth EUR 36.5 million were discovered. Invoices are a way of freeing funds for undeclared payroll or dividends and, at the same time, fabricating tax-deductible expenses for income taxation, and value-added taxation.

In 2017, over 600 undeclared employees were uncovered through tax audits, and the value of detected undeclared payroll was close to EUR 62.3 million. In 2016, the number of detected undeclared employees was 351, and the value of undeclared payroll was EUR 51 million. Usually, most of the undeclared labour will remain unidentified through tax audits.

The grey economy is targeted through multiple means

In 2017, 38% of the removals of taxable entities from the VAT register and 43% from the prepayment register were made on the initiative of the authorities. In practice, removal from these registers by the authorities means that the taxable entity has failed to comply with essential statutory obligations. Entry to a register may be declined based on previous misconduct.

The grey economy team specialising in VAT control has handled 1,010 cases in 2017 in connection with periodic tax control, and control measures were taken in 618 cases. As a result of the control measures, tax adjustments worth EUR 24 million, 300 registration amendments and 75 refusals of registration were made. Numerous cases were brought to either tax audit or directly for consideration of reporting to the police.

The number of cases taxed on the basis of estimated corporate income was approximately 5,400 in 2016, with the assessment arising from failure to file a tax return or unreliable tax return. The amount of tax debited in case of assessments based on estimated corporate income totalled EUR 144 million in 2016, with the average tax increase approximately EUR 27,000.

Collaboration with other authorities

The measures adopted by Tax Administration in its fight against the grey economy are most effective when the Tax Administration is conducting tax audits simultaneously with a pre-trial investigation into irregularities as they take place.  By the end of 2017, 165 such cases were in process, and 61 were concluded. The corresponding figures at the end of 2016, were 109 and 130, respectively. The most important partner for the Tax Administration in combating the grey economy is the police.

Besides its regular tax control duties, the grey economy division at the Tax Administration gathers observations that may be relevant from the perspective of another control authority. In 2017, a total of 77 notification concerning 321 persons were issued to the relevant authorities for detected, for example, the misuse of welfare benefits and non-compliance 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 as well as the Regional State Administrative Agencies, Workers' Compensation Center, and different unemployment funds. In 2016, 62 similar notifications were issued on 248 persons.

Alongside control measures against the grey economy, the Tax Administration also reports on suspected money laundering. In 2017, the number of notifications filed was 35 and in 2016 25.

Tax debt – the state and municipalities lose part of their annual income

Tax debt at the beginning of the year by tax type category 2014–2018

(Figure 2) Tax debt at the beginning of the year by tax year 2014–2018

The statistics show all tax arrears regardless of whether they are accumulated by operators in the grey economy or other taxable entities. The increase in the amount of tax arrears in 2017 is explained by the gap in the collection operation due to the system overhaul and changes in the compilation of statistics. Slide 1 illustrates tax arrears by tax type and calendar year. The third slide describes tax arrears per tax year. Tax arrears of the most recent tax year are shown on top. The reduction in the tax arrears each year is evident when comparing a sum outstanding in a given year with that in the following years.

The Tax Administration often acts as a creditor in bankruptcies

New bankruptcy petitions by applicant

The total number of bankruptcy petitions has been in decline since 2013.  The proportion of the Tax Administration of all petitions has remained at approximately 40%, except in 2017, when the percentage was 33% owing to the system overhaul. The monthly statistics show that the dip took place during the first quarter of 2017, after which the bankruptcy petitions instituted by the Tax Administration have returned to the level before the system overhaul.

The number of cases the Tax Administration reported to the police has shown an increase in 2016 and 2017

Number of reported offences by year

The increase is partly due to the improved effectiveness of tax audits in uncovering operators in the grey economy. As an isolated phenomenon, the number of reported offences has also been raised by identity thefts and unjustified VAT refund claims, both of which have been effectively addressed. Furthermore, the higher number of reported cases is partly explained by the transfer of car taxation and excise duties under the remit of the Tax Administration from the beginning of 2017.

In cases in which the Tax Administration has not reported the offence but has acted in the role of the injured party presenting its demands for punishment and amount of damages are also classified as reported offences in the statistics.

(Figure 2) The type of offences reported by year

Aggravated tax fraud is by far the most common type of offence reported by the Tax Administration, and the number of reports on any other type of offence is much lower. The number of offences of a debtor reported by the Tax Administration has been on the decline because these offences are nowadays usually reported by the estate administrator.

The Tax Administration may also report other criminal offences to the police, such as forgeries. The offences committed in connection with car taxation and excise duties are also included in the figure for Other offences.

There may be several types of offences included on a single report, which is why the number of offence categories is higher than that of reports. In cases in which the Tax Administration has not reported the offence but acts in the role of the injured party presenting its demands for punishment and amount of damages are also included 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 some delay. The criminal process is naturally largely dependent on the action taken by other authorities besides the Tax Administration.

Sentences and dismissed charges per year

Types of sentences passed by year

Matters that were institute 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.

Tax offenders are usually sentenced to imprisonment. The community sanctions are also a form of 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.

Obligation 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 obligation compliance report is an updated summary of the essential records held by the authorities. The obligation 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 obligation 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 obligation 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.

Obligation compliance report requests 2016–2018

Act on Grey Economy Information Unit ( in Finnish)