Nicosia, Cyprus. A special report published by the audit office on Thursday said serious weaknesses in the tax department’s handling of value added tax audits exposed the state to potential revenue losses. The report cited years-long delays, inadequate investigations and millions of euros in VAT refunds paid without sufficient verification.
Call for overhaul
The report called for a major overhaul of the VAT audit system, recommending an annual audit programme based on documented risk criteria, more onsite inspections and stronger cooperation between authorities to improve tax compliance and protect public finances.
Shortcomings in audit procedures
The audit office said its review of a random sample of VAT files uncovered significant shortcomings in the tax department’s audit procedures and compliance with both VAT and income tax legislation.
Among the main problems identified were delays of several years before substantive audits were carried out, an overreliance on desk-based reviews, inadequate documentation to support tax decisions and uncertainty over the tax treatment of complex transactions, including trade within the European single market and gold trading.
Risks to public revenue
According to the report, these weaknesses resulted in substantial VAT refunds being paid without adequate verification. In other cases, the six-year statutory limitation period expired before taxes could be assessed, increasing the risk of lost state revenue.
Auditors also found discrepancies between VAT and income tax declarations, failures to submit financial statements and cases in which no action was taken against professionals who submitted inaccurate tax returns.
The report concluded that the current system for selecting audit cases, monitoring VAT refunds and cross-checking taxpayer information does not provide sufficient safeguards to protect public revenue.
Cases highlighted in the report
Among the cases highlighted was a company trading in investment and refined gold, which received around €38 million in VAT refunds between 2010 and 2024 despite not undergoing an on-site inspection for ten years.
Auditors also pointed to conflicting interpretations within the tax department over the VAT treatment of investment gold and recommended closer cooperation with the central bank to clarify whether the company’s activities complied with the law.
In another case, a consultancy company received almost €696,000 in VAT refunds following desk-based reviews alone while accumulating tax losses of €31.2 million. The audit office said the repeated correction requests and mounting losses should have prompted a more comprehensive investigation.
