1.1.2 Cyprus VAT GAP
According to the European Commission, the VAT GAP for Cyprus for 2015 (latest
report) was estimated to be 122 million EUR or 7.44%. Its critical for the Tax department
to reduce the VAT GAP.
1.2 The Tax department
The primary goal of a Tax Department is to collect the taxes payable, according to
the tax legislation in a sustainable manner by increasing the public confidence to the
tax system and its administration.
Taxpayers may be ignorant, careless, reckless, purposely evading taxes or due to
the inefficiencies of the tax department. Therefore its impossible for all the taxpayers
to be compliant all the time. The tax administration effort is placed into strategies
and structures ensuring that compliance with tax legislation is maximized.
The tax department with a finite level of resources need to carefully allocate them so
as to achieve the maximum possible outcome in terms of improved compliance with
the tax legislation.
1.2.1 Tax Compliance
A taxpayer obligations towards the tax department are in general:
registration in the system with accurate data on time;
timely filing of required information;
complete and accurate information reporting; and
on time payment of obligations.
A taxpayer meeting all the above may be considered as tax compliant. Each failure
to meet any of the above obligations, may result to an increase of the VAT GAP.
1.2.2 Tax compliance actions
A Tax administration can utilize a plethora of measures so to tackle non compliance
based on the taxpayer behavior understanding. For example taxpayers who
have been compliant in the past and have not filed the latest return may be sent a
reminder letter. A taxpayer with a history of non compliance, can expect legal measures
to be taken against him immediately.
The most expensive in respect of resource allocation is the tax audit, it requires
highly trained and experienced auditors to perform a detailed lengthy audit on just
one taxpayer. The decision whether a taxpayer is audited/ being allocated the scarce
resources is of paramount importance.
1.3 Classical audit case selection
Traditionally a tax department would rely on rule based systems to analyze data,
assess the risk and make predictions about taxpayer behavior.
1.1.2 Cyprus VAT GAP