The State of Finland is facing tax revenue losses due to various mistakes in claims for the tax credit and fraudulent schemes used to obtain the credit, resulting in tax revenue losses for the state of Finland that could amount to 20-30 million euros.
The study finds that if service production eligible for the tax credit is a significant portion of a company's annual turnover, the risk of participating in shadow economy activities is lower. For businesses that offer such services only occasionally or on a small scale, the risk reduction is not as pronounced. For companies selling services that qualify for the credit and those that don't, the probability of non-reporting and non-payment of taxes is equally likely.
The Grey Economy Information Unit calculated the impact of the tax credit on the shadow economy with tax-assessment data from 2018 to 2021. Proponents of the tax credit frequently highlight its positive effects on job creation and combating the shadow economy. The study suggested that the credit's beneficial impact was primarily applicable to a limited number of businesses across different sectors, rather than improving the overall state of affairs in the entire sector. The struggle against the shadow economy may not be justified using it as a justification for expanding its scope to new sectors.
Our analysis indicates that although the tax credit can deter shadow economy activities to some extent, its useful impact is confined to a relatively small number of businesses in various sectors. Therefore, increasing the credit or extending its scope to new sectors cannot be justified as a measure to combat the shadow economy. The study did not address the question of how many unreported activities would occur if the tax credit were unavailable to households purchasing services.
If the service provider is a registered company with tax prepayments, consumers can claim the tax credit for household expenses if the service provider is a registered company with tax prepayments. This is an added motivation for companies offering these services to comply with tax regulations and maintain their registration status. In addition, information from individual claims for the credit is also used for control purposes, increasing the chances of detecting non-compliance entrepreneurs who fail to report their sales.
The report compared companies in sectors where the tax credit for household expenses is available with companies in similar sectors where no qualifying work for tax credits is offered to customers. In contrast, the risk of encountering shadow economy practices is similar in both business sectors, revealing that the risks of encountering shadow economy practices are at the same level.
The report shows the widespread acceptance of false claims for tax credits. Some individuals file claims containing false expenses and information. Finland loses 20-30 million dollars annually in tax revenue due to claims for the credit that contain mistakes or intentional false information. This indicates that the problem exists in approximately 5% to 7% of all filed claims for the tax credit for household expenses.
To address shadow economy practices among businesses providing services to households, the study suggests introducing changes to the tax rules, such as prohibiting the credit for cash payments to service providers and prohibiting the credit if the main part of the qualifying service was not performed by an employee of the company. To combat the shadow economy, lowering the credit limit to zero is not viewed as a cost-effective solution.
According to yearly statistics, approximately 490,000 individuals file claims for the tax credit for household expenses. The funds have reduced total tax revenue derived from individual income taxes by more than 400 million euros annually.