Studies on the shadow economy
Working Group of Finnish Tax Administration proposes the introduction of fiscal online point-of-sale systems in Finland. These systems send data of sales transactions to the Tax Administration. In Finland, the systems would be introduced in some 170,000 companies engaged in consumer sales.
Concealment of income is a commonly used method in the shadow economy
Concealment of income and cash register manipulation create a tax gap. In sectors dominated by the use of cash, the simplest way to avoid declaring all sales is to alter the sales data recorded in accounts. There is currently no legislation in Finland defining the minimum requirements, uses, or features of point-of-sale systems or equipment. A fiscal point-of-sale system would ensure unchanged sales data.
Higher tax revenues can be expected
The introduction of a fiscal point-of-sale system can be expected to increase the annual growth in tax revenues by approximately EUR 120–140 million. Countries that have introduced these systems have reported an increase in tax revenues. In Sweden, tax revenues grew by around 5% in various sectors. According to OECD studies, competitive neutrality between businesses has also improved.
The start-up expenses would total around EUR 122 million for companies and EUR 24 million for the Tax Administration. There would be no marked change in annual operating costs for businesses over the current level, and the increase for the Tax Administration would total approximately EUR 4–6 million.
Finland not up to speed with international development
At least 22 OECD and IOTA countries are already using various types of fiscal point-of-sale systems. Of these, 15 are EU countries. The various countries have different systems. The online system is electronically connected to a party outside the cash register system, e.g. the tax administration.
Tax control of companies' sales data
According to the proposal, the Tax Administration would receive information on companies’ sales through the point-of-sale systems. Customer information would not be collected. The data to be collected would, in substance, consist of data defined by legislation governing the obligation to offer a receipt. Aggregate sales data would also be collected.
A buffered online system is proposed as a solution for implementing fiscal point-of-sale systems. Buffering means that an enterprise's sales transactions are stored in a buffer in potential network error situations and transferred to the Tax Administration when the network is restored.
The solution would be available for controlling business transactions in point-of-sale systems. This would be a multifunctional technological solution, which could also be applied to controlling the platform economy.
The reform takes account of future development
When implemented, the fiscal point-of-sale systems would prevent the shadow economy in consumer trade. The systems would significantly promote the combating of the shadow economy and the development of electronic payments. The implementation would also provide a basis for the development of digitalisation in companies’ financial administration.
The surveys are based on the Government's strategy for tackling the shadow economy and economic crime in 2016–2020.
Preliminary studies on the suitability and impacts of fiscal point-of-sale systems have been completed, read more (in finnish only):
- Yhteenveto selvityksistä
- Vaikutukset yrityksiin, verotuloihin ja lainsäädäntöön
- Kansainvälinen käytäntö
- Tekninen toteutus ja sovellutukset
Janne Marttinen, Director, tel.: +358 29 512 6066
Marko Niemelä, Assistant Director, tel.: +358 29 512 6070
From an employee into a self-employed individual – is the tax risk dispersed to small companies?
Finnish companies are small
Small entrepreneurs have been in focus in many of the Grey Economy Information Unit’s reports. Nearly half of the limited liablity companies studied were owned and managed by one person. In every second enterprise of a self-employed individual and every third business operating in company form, net sales were below €15,000.
Small entrepreneurs’ impact on tax revenue
Small entrepreneurs’ low income also affects tax revenue. When business operations are divided into smaller entities, the responsibility for the obligations is also divided. The risks of neglecting the obligations may grow as the number of operators increases.
Shadow economy risks are also present in small companies
Some small companies are established to operate in sectors – such as construction – where the risks of shadow economy are high. Quick changes in the business base may be a sign of a healthy development in which resources are being allcoated to more productive growth industries. It may also indicate that one-off companies are used to evade taxes and other public charges.
During the past ten years, the Tax Administration has filed nearly 600 crime reports on companies owned by small-income entrepreneurs. Most of these crime reports have dealt with tax frauds, particularly in the aggravated form.
The operating environment of small companies is described in the following reports:
Uudet yritykset (in Finnish)
Pienituloiset organisaatiohenkilöt (in Finnish)
Omistajat organisaatiohenkilöinä ( in Finnish)
A company’s tax debt increases the likelihood of the manager’s personal tax debt
Companies with outstanding employment pension contributions often also have irregularities in the management of their other statutory obligations. Typically they also owe money to a large number of creditors.
Most debtor companies are small enterprises. The risk industries for shadow economy – construction, and the accommodation and restaurant sector – rose to the surface in the analysis of the debtor companies’ lines of business.
The pension contribution debt was studied in the Grey Economy Information Unit. The financial standing and other business contacts of the senior managers of the companies with outstanding employment pension contributions were also investigated.
Read more (in Finnish)
Suspected crimes detected during tax audits were screened in Raksa
The majority of the people sentenced had utilised more than one company. Other typical features of these crimes included the use of straw men and companies with a short lifecycle, fake sales receipts and falsified invoices. The proceeds of crime were often used to pay wages “under the table.”
In 2008–2012, the Tax Administration implemented a tax control project (the Raksa project) targeting the construction sector. Crime reports made on the basis of tax audits and sentences passed and people sentenced on account of them were studied more closely. In addition, the amounts of damages and the collection of damages were investigated.
Read more (in Finnish)