Cyprus is best EU performer in closing ‘VAT Gap’
A nice ring to everyone’s ears, but more needs to be done to tackle VAT evasion
Cyprus was one of the best performers in the EU in closing the ‘VAT Gap’ managing to reduce it by more than half from EUR 174 mln to just EUR 83 mln, said the European Commission.
The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.
According to the European Commission’s report, regarding the VAT Gap of EU member states in 2016, Cyprus is one of only four EU member states (Bulgaria, Latvia, and the Netherlands) which achieved over five percentage points in closing the gap.
Since 2014, the VAT Gap in Cyprus has decreased by nearly 10 percentage points.
Of the EU28, the VAT Gap share decreased in 22 countries and increased in six— namely, Romania, Finland, the UK, Ireland, Estonia, and France.
The smallest gaps were observed in Luxembourg (0.85%), Sweden (1.08 percent), and Croatia (1.15 percent). The largest gaps were registered in Romania (35.88%), Greece (29.22%), and Italy (25.90 percent). Overall, half of EU28 recorded a gap below 9.9%, including Cyprus with 4.73%.
Auditors are delighted over the drop and prospects created by the development, but warn that authorities should not tighten the legislative grip over companies regarding VAT, as it may bring about a halt to economic growth.
Talking to the Financial Mirror on behalf of the Institute of Certified Accountants of Cyprus, the president of the VAT Tax committee, Charis Charalambous, said that the numbers may have a nice ring to everyone’s ears, but more needs to be done to tackle VAT tax evasion.
Acknowledging that a lot of work went in to putting together legislation and implementing controls on the business world, he said that measures taken need to expand to cover sectors of the economy which are currently left out.
Charalambous said that one of the measures which went a long way to closing the VAT gap, was the implementation of the method of ‘reverse charge’ when it comes to VAT charged in the construction sector.
“VAT evasion was a common practise by small subcontractors who would charge VAT for their services to a project’s contractor, while never paying the amount due to the state. The contractor who bought the services or materials from subcontractors would then roll over the VAT to the property buyer,” said Charalambous.
He added: “The property buyer would then reclaim VAT from the government, with the state on the one hand essentially being cheated out of proceedings from the smaller subcontractors, and on the other having to compensate the final buyer for VAT they had paid. That was a tremendous source of losses for the state.”
However, he argued more needs to be done for the country to eliminate its VAT gap. He said that the reverse charge method applied should be applied in all business fields such as firms dealing with mobile phones and electric appliances.
The tax professional explained that the reverse charge method was introduced to the building industry with a law voted in back in March 2012 and has ensured VAT losses are at a minimum.
A tax partner for one of the ‘Big 4’ audit firms feels that Cyprus has come a long way, making steady steps over the past few years achieving results better than those produced by countries with a more developed tax consciousness and better control tools.
The tax expert said that the EU commission report is an acknowledgement of efforts made by the state and its tax mechanisms, but Cyprus needs to be extremely careful when designing more controls.
“There is always the risk that with the introduction of more controls and regulations that we will create unnecessary red tape, hindering investments and economic growth.” The expert said that the government should be concentrating on finding ways to improve the quality of data collected by businesses.
“The state needs to introduce methods of electronically charging VAT to companies and performing checks. Companies should move to submitting electronic ‘standard audit files for tax.’”
The expert argued that introducing methods of electronic audits will increase efficiency and, over time, will increase the attractiveness of the country for foreign investments.
“Investors will know that all businesses are treated equally when it comes to taxation, and that other companies, for whatever reason, are not able to get away with tax evasion at their expense.”