Areas of Strength

• Finland has one of the lowest value added tax (VAT) compliance gaps in the EU. The VAT compliance gap is estimated at 3% of the VAT Total Tax Liability (VTTL), compared to an EU average of 9.5%. Between 2019 to 2023, Finland’s VAT compliance gap has trended downward. Low compliance gaps are a reflection of overall high tax morale in Finnish society.
• Finland performs corporate income tax (CIT) compliance gap estimation, which points to a very low CIT compliance gap. According to the latest available figure, the CIT compliance gap for small and medium-sized enterprises was estimated to be 3% of reported CIT in 20212022. This estimate is corroborated by the European Commission’s own estimate of the CIT gap of Finland which is also verry low. Finland has also developed a method to estimate the CIT compliance gap for all businesses. Additionally, Finland has developed methods to estimate the impact of the shadow economy on CIT and PIT revenues.
• The tax administration provides a very high level of digitalisation and strong customer orientation. The comprehensive, seamless digital services for tax matters that have been put in place in Finland facilitate tax compliance and minimise compliance gaps.
• The Finnish tax administration is characterised by its high efficiency. It has an effective strategy to ensure tax revenues and reduce the size of the grey economy. In Finland, the closing stock of arrears at year-end as percentage of the total revenue collected was 4.3% in 2022, one of the lowest in the EU.

Areas for Improvement

• Finland currently does not have an institutional framework in place for regular reviews and impact evaluations of tax expenditures. Finland’s budgetary rules provide for robust reporting of tax expenditures. There is a legally recognised definition and annual publication of tax expenditures paired with foregone revenue estimates, both in the budget proposal and in the final accounts. However, the evaluation of whether tax expenditures meet their intended policy objectives does not seem to be systematically embedded in law or practice.
• While Finland is performing comparatively well in the area of VAT collection, there may be scope for further improvements. For the registration process of taxpayers for VAT purposes, an increased set of data could lead to an improvement in risk analysis. For instance, it could be assessed whether data such as the identity of the associated entities or the identification of the segment of the taxpayer can contribute to the completeness of the VAT database. In the area of enforcement and debt collection, Finland has a penalty system for failure to submit VAT returns and failure to make payments on time, as well as an IT subsystem to manage VAT arrears. Finland could analyse the effectiveness of its penalty system to identify areas of improvement. There might also be scope to develop well-connected IT

Tax Complexity

Finland ranks 2^nd out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Finland 2^nd among the Member States with regards to Tax Framework Complexity, and 4^th with regards to Tax Code Complexity. This suggests a strong performance of the county with regards to the tax processes carried out by the tax authorities (notably in terms of statutory tax rate and additional taxes, according to the authors), and the tax regulations (particularly in the area of audits, according to the authors).

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Finland  can be found here.

Copyright – internationaltaxplaza.info

Follow International Tax Plaza on Twitter (@IntTaxPlaza)