The Ministry of National Economy and Finance plans radical changes to the “capital consumption” system, with which taxpayers can cover additional differences in taxable income that arise on the basis of presumptions.
It has been found that this system, as implemented today, leaves tax evasion windows open.
Specifically, “capital depletion” allows taxpayers to claim huge fictitious amounts of savings from prior years’ income to cover presumptions.
These amounts are “accumulated” practically because the legislation in force does not provide for limitations on the number of previous years to which the taxpayer can refer to claim income earned that has not been spent.
In other words, each taxpayer has the right to go back as far as they want and claim income from many decades, even from the 70s, 80s and 90s, without any scrutiny by the tax authorities. All they need to do is keep intact the copies of the tax returns they submitted on paper during all these years, and be able to provide the respective settlement notes.
Thus, based on income declared over decades, each taxpayer can accumulate a huge capital of “unspent income from previous years” – a fictitious amount of savings from previous years – of which he can then show a part annually as an expense, so that in the tax return for the corresponding fiscal year he always covers the additional amounts of taxable income determined by the subsistence assumptions and any real costs of acquiring assets that he has declared, however large they may be.
Thus, by using this legal method, he can permanently avoid taxation based on presumptions. In this way, that is, every cunning tax evader can deliberately declare a low real income and not be “caught” by the presumptions.
Only limitation
The only limitation that the legislation provides for the method of fulfilling the presumptions through the “exhaustion of capital from income from previous years” is that it requires the taxpayer to deduct from the total annual income of each year claimed the amounts of the subsistence presumptions and any expenses of acquiring assets that burdened him in that year.
From there, he can use any remaining balance as the “prior year’s income” amount to cover presumptions. But this limitation is not enough to reduce the amount of fictitious savings from prior years that can be
on which the taxpayer relies because the amounts of the cost of living allowances, which are normally the only ones presented in the tax return of each previous year, do not, in themselves, represent the taxpayer’s real expenses in each year.
Essentially, during the formation of “capital from income of previous years”, the actual annual expenses incurred by the taxpayer in the same year on rents, insurance premiums, purchases of consumer goods, payments of taxes and utility bills and many other things are not deducted from the declared annual income of each year – these everyday expenses actually reduce the margins for savings to a minimum or eliminate them!
From the income of each past year cited by the taxpayer, that is, as a rule, only the already predetermined amounts of living expenses provided for by law are deducted and the huge remaining amount that remains in many cases is considered “savings”, that is, capital that has not been spent and is used to circumvent the presumptions!
Remodeling plan
This system will be reviewed with a view to reforming it so as to prevent tax evasion and avoidance. The changes that will occur will, in principle, provide for:
1) Imposing a limitation on the number of previous years to which the taxpayer may refer and exceptions to this limitation only if there is evidence of the existence of large amounts of savings built up over a large number of years, such as details of bank account movements. It is not excluded that the number of past years, to which taxpayers may go back, may be limited to 20 or 10 or even 5 years, as well as the limitation period for tax proceedings.
2) Subtraction of annual income from previous years and actual expenses of taxpayers. The expenses that will be deducted from annual income from previous years will be the actual annual expenses of taxpayers and not just the imputed ones. Thus, it will now be much more difficult to accumulate huge fictitious surpluses of income and revenue that make it possible to accumulate huge fictitious amounts of “capital for consumption”.
These changes, which are expected to close the huge tax evasion windows that currently exist in the way the “capital consumption” method is applied, will come into effect from tax returns in the coming years.
Useful information
In order to correctly “form” the “capital” from tax returns from previous years, taxpayers should know, in particular, the following:
To determine the “capital” based on each previous year’s tax return, actual income that was taxed or legally exempt from tax, amounts of money that were acquired but are not considered income, amounts of money that come from the sale of goods, from the import of funds from abroad, from loans, donations, parental benefits, etc., as well as any
other amount demonstrably collected.
From the sum of all these income and revenue values, the amounts of allowances for housing, cars, boats, swimming pools, employees and private school fees must be deducted, as well as expenses incurred in the acquisition of goods, donations or parental benefits of monetary amounts and for the repayment of loans.
The amount remaining after deducting the above costs is the “unspent capital” that the taxpayer can claim in each year.
No limitation
There is no time limit for covering presumptions with “capital consumption”. Therefore, “capital consumption” from any previous years (i.e.: 5, 10, 20, 25 or even 30 and 40 years) can be invoked to cover presumptions. Forms E1 of tax returns and settlement notes for tax years whose limitation period has expired constitute full proof of the amounts declared therein, without the need to present other supporting documents.
In other words, this year the taxpayer can claim income and revenue that has been declared in tax returns and reflected in settlement notes for many tax years prior to 2018, which are now considered to have expired, without the need to present documents proving the amounts declared in the settlement notes.
However, data from tax returns that are not included in the extracts will only be considered after cross-referencing.
Furthermore, in the event that a taxpayer invokes funds from previous tax years for consumption purposes and in the end they are not used or a part of them is used, they are considered unused and can be used in the future as funds to cover an additional presumed difference.
The taxpayer can find the declarations and settlement notes of previous years in his account in the TACHISNET system where the E1 forms that were submitted and the settlement declarations that were issued for the years 2002-2022 (years of filing declarations 2003-2023) are registered in electronic format).
Status writing
For the “formation” of “capital”, the taxpayer must prepare on paper or in an electronic EXCELL program a “statement of capital consumption”, in table format with at least three lines and with a number of columns equal to the number of previous years to which it refers, plus one column for the sum of the totals for all years.
In the first line of each column you must enter the income and revenue that you declared in your tax return for each year, in the second line the values of the deductions for the same year and in the third line the remaining “capital” that can be claimed for the same year.
In the last column of the table, the total amounts of income and revenue from all previous years cited by the taxpayer must be written in the first line, in the first line, the total amounts of presumptions deducted from income and revenue from all years, and in the third line, the total remaining “capital to spend” from all previous years.
This year’s tax returns
The “prior years’ capital exhaustion” method of covering presumptions has been available each year to taxpayers seeking to avoid excessive taxation due to presumptions.
As we have already mentioned, with the “capital consumption” method, each taxpayer can cover any additional difference in taxable profit that arises from the application of the presumptions (due to the fact that the presumed income determined by the tax authorities based on the presumptions of subsistence and the presumptions of acquisition of assets are higher than the declared income), citing income and income declared many years ago.
Flashback
In particular, he can consult the tax returns of previous consecutive years (as many years as he wants) and take the following actions:
a) Add up the amounts of all types of income (from salaries, pensions, allowances, rents, business income, interest on deposits, dividends, capital gains from the sale of shares, etc.) and the amounts of income from the sale of assets and from any other sources (sums collected from lump sum insurance fund benefits, lottery winnings, donations received, etc.) that he has entered in his tax returns for the past few years.
b) From the resulting sum of income and revenue from previous years, deduct the amounts that were taken into account in the same tax returns as living expenses (for homes, cars, swimming pools, boats, service personnel, etc.), as well as the amounts that you declared in the same returns that you spent on the acquisition of goods (real estate, cars, boats, high-value movable objects, etc.).
The net amount that will result from the mathematical operations mentioned above is the “capital” from previous years that the taxpayer can “form” and present to the tax authorities as a savings product until the end of 2022.
From then on, in any case, from the “fund” that will be formed, the taxpayer will be able to argue that he “spent” in 2023 part or all of the “fund” to cover the difference in additional income that will specify the assumptions in his declaration of this year. In other words, he can claim that the additional difference in income imputed in his tax declaration was covered by the “exhaustion” of a part of the “capital” that he had left over from previous years and that is obtained based on the declarations of previous years, as we described previously.
Record
The taxpayer must then declare the “spent” part of the “capital” in table 6 of the tax return, either under code 787 (which concerns him/her) or under code 788 (which concerns his/her spouse), and in the form in which this covers the additional difference in presumed income arising on the basis of the presumptions, so that in this case the tax authorities will not take into account the presumed income, but rather the much lower declared income, as taxable income. (The amount to be entered under one of these codes must be greater than the additional difference in income due to the presumptions, in order to fully cover the difference in income resulting from the presumptions).