Audit Office highlights weaknesses in VAT inspections
Cyprus’ Audit Office has identified significant weaknesses in the Tax Department’s VAT audit system, citing delays in investigations, inadequate inspections and cases that may have resulted in the loss of public revenue.
According to a special report on VAT tax audits, the newly established Nationwide VAT Audit Unit (PME) delivered strong results in 2024. Of the 175 audits it carried out, 112 resulted in tax assessments worth approximately €10 million. Although the unit conducted just 5% of all VAT audits nationwide, it accounted for one-third of the total VAT assessments generated from 3,609 inspections.
However, the report notes that the unit focused mainly on the construction and consultancy sectors, with insufficient documentation explaining how cases were selected. It also found that the unit lacks an annual audit programme and is burdened with additional administrative responsibilities.
€38 million in VAT refunds without on-site inspection
The report draws particular attention to a company involved in the purchase and sale of gold, raising serious concerns over the tax treatment of investment and refined gold sales.
The Audit Office says the Tax Department has applied conflicting interpretations of VAT legislation regarding these transactions. It also notes that the company did not undergo a single on-site inspection over the past decade, despite receiving VAT refunds totalling €38 million.
According to the report, the lack of field inspections raises concerns over the possible incorrect application of tax legislation.
Cases left without meaningful investigation
The report also highlights a self-employed individual operating in the carpentry and funeral goods sectors who showed signs of non-compliance with both income tax and VAT obligations.
Despite these concerns, no substantial tax audit appears to have been carried out, while the Tax Department reportedly did not even maintain a physical case file.
In another case, a consultancy company received approximately €696,000 in VAT refunds after submitting four amended VAT returns, despite reporting tax losses of €31.2 million in 2022. Audits were limited to desk-based reviews without any on-site verification.
Delays may have cost the state millions
The Audit Office also identified cases where VAT audits only began almost a decade after companies had registered for VAT.
One financial services company was subject to a meaningful audit around ten years after it began operations, despite having claimed approximately €500,000 in VAT refunds. The report says VAT input claims linked to intra-community transactions worth nearly €300 million were never examined.
In another case, a delayed audit uncovered undeclared intra-community acquisitions worth €188,002, leading to a tax assessment of €35,720. However, because the six-year statutory limitation period had expired, the state may have lost the opportunity to recover around €315,000 in additional tax.
The report also criticises the failure to investigate the accountant responsible for repeatedly submitting zero VAT returns without sufficient supporting documentation.
Questions over yacht VAT scheme
The Audit Office further examined a yacht management company that imported two vessels under a temporary importation regime allowing a zero VAT rate.
Although both yachts remained in Cyprus well beyond the permitted period, with one staying for more than two years, the report says no corrective action appears to have been taken by the Tax Department.
The Audit Office says there are indications that the legislation may have been used abusively, creating a potential risk of lost public revenue.
In the report’s foreword, Auditor General Andreas Papaconstantinou stresses that effective tax collection is essential not only for protecting state revenues but also for ensuring equal treatment of taxpayers and maintaining public trust in government institutions.
He adds that warning signs of tax risk should trigger immediate action by the authorities to prevent tax evasion and safeguard public finances.
Also read: VAT strategy: Hidden cost of digital transformation
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