State Revenue Service shall eliminate a number of significant shortcomings in internal procedures and the regulation of laws in order to improve the administration of several taxes and duties. That was concluded by the State Audit Office while carrying out the audit of the execution of 2017 State budget.
Improvements are necessary in the registration of economic operators – the payers of the compulsory social security contribution, and the thematic examinations by the State Revenue Service and the control of corporate vehicle tax shall be carried out more efficiently, administration of emergency oil product stocks and State Revenue Service control at the customs points shall be improved. Laws that regulate the personal income tax shall be clarified in order to reduce the possibility that people become tax debtors because of their lack of knowledge or incomplete understanding.
The State Audit Office has drawn the attention of the State Revenue Service and the Ministry of Finance to the shortcomings in the accounts of potential state budget income for at least the last five years. As bad debts, which the state will never receive back, are also included in the potential income, the amount to be collected in reality is lower than the forecast amount.
Although the total amount of tax debts has reduced by 4% during one year, it has been mainly achieved by writing off bad debt and reducing the surcharge for tax audits. At the same time, the State Audit Office approves the initiated work on improving tax accounting.
Auditor General Elita Krūmiņa explains: “On paper, the amount of tax debt is decreasing but in reality new tax debts are created. Is it really only the fault of the public’s attitude towards the state, as the responsible ministry thinks? Problems arise also because the state and the public do not trust each other. How should a resident feel who, not knowing, has become an infringer, because of not being able to read the law in the same way as the clerks do. Taxes have to be paid but also the state has to fulfil its duties, e.g. by not permitting unclear laws, ambiguous situations.”
Forgiven debt is income for which a tax is due
Because of the generality of the law, people may become infringers unintentionally and without being aware of it because they do not understand when does income, including from reduction or extinguishment of liabilities, need to be declared and paid the personal income tax for.
All income of a person, which is not laid down in the law as an exception, is subject to personal income tax. For example, if a debt of a natural person is reduced or extinguished, this person gains benefit – according to law, it is income for which the personal income tax is due. The creditor, who extinguishes the debts, needs to inform the State Revenue Service about the amount of the debt, but this law requirement is not always applied correctly. The State Revenue Service itself does not always comply with this obligation when extinguishing tax debts and the auditors believe that it probably indicates a shortcoming in the law.
In the audit, the situation with the extinguishment of study and student loans was examined in-depth, which is unique because to the national regulatory authority – the Administration of studies and research – full information on both the loan and its extinguishment is available. Despite the fact that tax payments for the income from extinguishment of loans are not made because only a part of information is submitted to the State Revenue Service and the State Revenue Service itself does not further control the tax payment. It would exceed 435 thousand Euros for 2016 only.
Experience shows that also in other situations the State Revenue Service does not sufficiently control the information provided by tax payers and it permits situations in which the factual income from distinguished or reduced liabilities is accounted for as income on which the personal income tax is not applied.
The State Audit Office is of the opinion that it should be clearly determined in which cases income received as a result of reduction or extinguishment of liabilities is due personal income tax. The Ministry of Finance has agreed to solve one of the issues found in the audit – to adjust legislation so that the income from extinguished study loans and student loans is laid down as non-taxable income.
There are improvements in the processes of repayment of overpaid taxes
Similarly as in the audits of previous years, also in this audit it was found that the State Revenue Service delays the repayment of overpaid taxes and does not increase or just partially calculates and pays the penalty payment but a positive trend was seen in the audit – the number of delayed days has been reduced, striving to meet the deadlines laid down in law, and the amount of money which the State Revenue Service has not paid on time has been reduced as well.
It is positive that during the last years the State Revenue Service has carried out a number of measures in order to repay the overpaid taxes on time, including by automating the repayment process of personal income tax. Compared to the previous year, repayment of the overpayment of this tax has started to improve. The State Audit Office recommends the State Revenue Service to improve internal procedures for the control of repayment of overpaid personal income tax and VAT which will enable a correct calculation of the amount of penalty payments for tax payers.