A significant increase in state revenues was observed by the Audit Office in its Special Report titled “Audit of the Tax Department.” It also found that overdue tax debts amount to €3.1 billion, of which approximately €1.4 billion are at risk of not being collected.

In the report’s foreword, Auditor General Andreas Papaconstantinou states that the Audit Office conducted a review of a sample of the Tax Department’s (TD) transactions for 2023, focusing both on the accurate presentation of the state's financial statements and on the Department’s compliance with legislation.

He notes a significant increase in revenues, as the reduction of outstanding taxes contributed to a sharp rise in state income from €4.6 billion in 2021 to €6.9 billion in 2024.

Among the identified weaknesses, the report mentions the accumulation of overdue tax revenues, which reached €3.1 billion as of 31.12.2023. Of that amount, approximately €1.4 billion are at risk of not being collected, primarily due to the Department's failure to take timely and effective collection measures.

The Auditor General also highlights that the significant reduction in outstanding taxes was achieved without substantial audits or income reassessments — potentially at the expense of state revenue.

He further notes the imposition of taxes outside the legal time frame for reassessment by the Tax Commissioner, indicating underutilization of available legal tools.

The Auditor General reports that the TD did not conduct adequate audits of companies with significant transactions, profit margin discrepancies, or large differences between declared turnover for direct and indirect tax purposes.

“There was also a lack of reconciliation mechanisms between various subsystems and the main accounting system (FIMAS), resulting in incomplete or inaccurate revenue confirmation, especially concerning VAT. Additionally, there were delays in remitting amounts concerning third parties (e.g., OSS, GHS), with no corresponding clarifications in the financial statements,” the report states.

The Auditor General also points to incorrect classification of revenue from overpayments, affecting the proper presentation of income in financial statements, as well as interest payments to taxpayers that violated legislation, inadequate tracking of VAT collections on behalf of other countries, and tax refunds without verifying potential outstanding debts.

He underscores the important role of citizens in combating tax evasion through submitted complaints and praises the Tax Commissioner’s constructive stance on providing information and investigating cases raised by the Audit Office, which strengthened the effectiveness of audits.

The Special Report presents key audit findings, including that overdue taxes have dropped significantly in recent years, resulting in notable increases in total tax collections — and by extension state revenues — with annual growth of 18%, 14%, and 12% in 2022, 2023, and 2024, respectively.

However, the report notes that this reduction in outstanding taxes was achieved without substantive audits or taxable income reassessments, potentially leading to revenue losses. In several cases, taxes were imposed beyond the legal deadlines of six or twelve years allowed for additional assessments, risking the loss of public funds.

“We pointed out that at the very least, high-risk companies — such as those in construction, land development, or with years of losses or disproportionate expenses — should not remain unaudited for extended periods,” the report emphasizes.

It notes the accumulation of overdue revenue reaching €3.1 billion by 31.12.2023, of which only about €1.7 billion is expected to be immediately collectible. This is mainly due to the Department's failure to take timely and effective action to collect tax debts. Arrears rose by nearly €1 billion (from €2.2 billion in 2021 to €3.1 billion in 2023).

The report also finds that the Department has failed to detect and monitor non-submission of income tax returns by individuals and legal entities for multiple tax years. Over 50% of the audited sample for legal entities (30% for individuals) either failed to submit income tax returns for two or more years or filed them late. The Department also does not seem to be utilizing the legal provision allowing the Tax Commissioner to impose taxes based on their judgment within a set timeframe, resulting in revenue loss for the state.

Additionally, the report finds insufficient oversight by the Department in cases where companies engage in significant transactions with related or third parties, potentially violating relevant legislation. Taxes were also imposed without proper audits in cases where companies showed large fluctuations in gross profit margins or disproportionate income-to-expense ratios, risking further revenue losses.

The report has been published today on the Audit Office’s website:
https://www.audit.gov.cy/audit/audit.nsf/annualscg_gr/annualscg_gr?OpenForm