Grey economy link to small, medium Cos´ tax totals €120m yearly

The grey economy relating to corporate income tax of small and medium sized companies amounts to an average of €120 million annually, according to a report published by Finnish Tax Administration on Thursday.

This is around five per cent of the corporate income tax payable by those companies.

Small companies engaged in grey economy activities typically hide their profits, whereas medium sized companies exaggerate their expenses.

The corporate income tax is paid by limited liability companies on their business profits. The grey economy relating to corporate income tax refers to activities where companies evade paying the corporate tax on purpose and against the law.

However, some losses of tax revenue can be tackled through authorities' prevention measures, such as tax control.

"Although most Finnish companies act according to law, a notable amount of tax revenue attributable to corporate income tax is lost every year due to the grey economy. It corresponds to the amount by which the funding for vocational training is reduced this year," said Janne Marttinen, Director of the Tax Administration's Grey Economy Information Unit.

The report looked into limited liability companies whose annual turnover was less than €10 million.

The report discovered that evasion of corporate income tax takes different forms depending on the company's size. Companies with the smallest turnover typically fail to report their business profits either partly or in full.

"In other words, some or all of the company's income remains undeclared, and so the company does not generate a profit, on the basis of which corporate income tax is determined," Marttinen said.

An estimated 70 per cent of the grey economy relating to the corporate income tax of small and medium sized limited liability companies is attributable to companies whose turnover is less than €300,000 or is not known to the Tax Administration.

According to Marttinen, an explanation for this is that it may be easier to bend the rules in small companies whose activities are not as well organised as those of larger companies. Smaller companies do not necessarily have external accountants, either.

The report said that in medium sized limited liability companies, profits are typically reduced by exaggerating expenses.

"The company's profits may be artificially reduced by recording entrepreneurs' personal expenses in the company's bookkeeping, for example, so as to reduce the amount of taxable profits," said Marttinen.

According to the report, grey economy activities are found especially in construction, food and beverage service activities and services to buildings and landscape activities.

The recently published report did not look into large companies.

According to Marttinen, large companies typically seek to evade taxes by rearranging their income and expenses between different countries to minimise their tax liabilities.

"The grey economy manifests itself differently in large companies and in small and medium sized companies, so to estimate the volume of the grey economy in large companies, a separate investigation using different methods is needed," said Marttinen.