A recent study conducted by the Grey Economy Information Unit of the Finnish Tax Administration has found that the tax credit for household expenses has a limited impact on reducing shadow economy activities among businesses. While there is a lower risk of engaging in shadow economy practices for companies that provide services eligible for the tax credit, the overall average risks of shadow economy activity do not differ significantly between sectors eligible for the credit and other sectors.
This is due to various errors in claims for the tax credit and fraudulent schemes used to obtain the credit, resulting in tax revenue losses for the State of Finland, which could amount to 20 to 30 million euros.
The study reveals that if service production eligible for the tax credit constitutes a significant portion of a company's annual turnover, the risk of participating in shadow economy activities is lower. However, for businesses that provide such services only occasionally or on a small scale, the risk reduction is not as pronounced. Additionally, the probability of non-reporting and non-payment of taxes is equally likely for companies selling services that qualify for the credit and those that do not.
The Grey Economy Information Unit analyzed the impact of the tax credit for household expenses on the shadow economy using tax-assessment data from 2018 to 2021. Proponents of the tax credit often highlight its positive effects on job creation and combating the shadow economy. However, the study suggests that the credit's beneficial impact primarily applies to a limited number of businesses across different sectors, rather than improving the overall state of affairs in the entire sector. Therefore, using the fight against the shadow economy as a justification for increasing the credit or expanding its scope to new sectors may not be justified.
Director Janne Marttinen from the Grey Economy Information Unit of the Finnish Tax Administration states, "Our analysis indicates that while 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.
Consumers who receive services in their households can claim the tax credit for household expenses if the service provider is a registered company with tax prepayments. This serves as an additional incentive for companies offering these services to comply with tax regulations and maintain their registration status. Information from individual claims for the credit is also used for control purposes, increasing the likelihood of detecting non-compliant 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. Surprisingly, the overall risk of encountering shadow economy practices is found to be at the same level in both types of business sectors.
The report highlights the prevalence of fraudulent claims for tax credits. Some individual taxpayers submit claims containing false expenses and information. The State of Finland loses 20 to 30 million euros annually in tax revenue due to claims for the credit that contain errors or intentional false information. This indicates that the problem exists in approximately 5% to 7% of all submitted 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. However, lowering the credit threshold to zero is not considered a cost-effective solution to combat the shadow economy.
According to yearly statistics, approximately 490,000 individual taxpayers submit claims for the tax credit for household expenses. The granted credits reduce total tax revenues derived from individual income taxes by more than 400 million euros each year.
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