**Audit Office Warns Weak VAT Checks Put Millions in Public Revenue at Risk**
A recent report from the Audit Office has raised significant concerns about the effectiveness of the tax department's value-added tax (VAT) audit processes, indicating that serious weaknesses could lead to substantial revenue losses for the state. The findings, published on Thursday, highlight years-long delays, inadequate investigations, and millions of euros in VAT refunds that were issued without sufficient verification.
The report calls for a comprehensive overhaul of the VAT audit system, recommending the implementation of an annual audit program based on documented risk criteria, increased onsite inspections, and enhanced cooperation between various authorities to improve tax compliance and safeguard public finances.
The audit office conducted a review of a random sample of VAT files and uncovered alarming deficiencies in the tax department's audit procedures. Key issues identified included prolonged delays of several years before substantive audits were initiated, an excessive reliance on desk-based reviews, insufficient documentation supporting tax decisions, and confusion regarding the tax treatment of complex transactions, particularly those involving trade within the European single market and gold trading.
One of the most concerning findings was that substantial VAT refunds were issued without adequate verification. In some instances, the six-year statutory limitation period for tax assessments expired before the audits could be completed, increasing the risk of lost state revenue. The auditors also noted discrepancies between VAT and income tax declarations, failures to submit financial statements, and a lack of action against professionals who filed inaccurate tax returns.
Among the notable cases highlighted in the report was a company engaged in trading investment and refined gold, which received approximately €38 million in VAT refunds from 2010 to 2024 without undergoing an onsite inspection for a decade. The auditors pointed out conflicting interpretations within the tax department regarding the VAT treatment of investment gold and recommended closer collaboration with the central bank to ensure compliance with legal standards.
Another case involved a consultancy firm that received nearly €696,000 in VAT refunds based solely on desk reviews, despite accumulating tax losses of €31.2 million. The audit office argued that the ongoing correction requests and significant losses warranted a more thorough investigation.
The report also detailed other instances of delayed audits, discrepancies in tax declarations, and failures to investigate potential professional misconduct, suggesting a broader systemic issue within the tax department's audit procedures.
Despite these troubling findings, Auditor-General Andreas Papaconstantinou acknowledged the early achievements of the newly established nationwide VAT audit unit, which began operations in 2024. This specialist unit conducted 175 audits, resulting in tax assessments totaling around €10 million. In contrast, the tax department performed 3,609 VAT audits during the same period, yielding approximately €30 million in assessments. Notably, the specialist unit accounted for one-third of the total VAT assessed, despite handling only five percent of all VAT audits and examining a mere 0.067 percent of the 261,077 VAT-registered taxpayers.
Papaconstantinou emphasized that the effectiveness of the audit system should not be solely measured by the amount of tax collected. He argued that audit resources should be allocated based on documented risk assessments that encompass the full range of economic activities.
However, the report criticized the specialist unit for focusing primarily on the construction and consultancy sectors without clear justification for this selection. Additionally, it operates without a structured annual audit program and is often assigned unrelated duties, which diminishes the time available for specialized VAT investigations.
To address these issues, the audit office recommended the introduction of a structured annual audit program, increased onsite inspections, improved cooperation with the central bank and other authorities, enhanced data-sharing between government systems, and the issuance of uniform guidance to ensure consistent application of tax legislation. Furthermore, it called for a targeted review of high-risk cases involving cross-border transactions and significant discrepancies between VAT and income tax declarations, asserting that these measures are essential for strengthening tax enforcement and better protecting public finances.
The report's findings underscore the urgent need for reform within the VAT audit system to mitigate risks to public revenue and enhance the overall integrity of the tax administration process in Cyprus.