Tricks lead to decrease in income tax due this year

The 500-million-euro drop in the income tax demanded from taxpayers after this year’s processing of declarations compared to last year’s is the outcome of the decline in incomes declared by professionals – following a tough 2017 when they were forced to pay huge social security contributions and taxes.

It took a 33 percent drop in the taxable income of a self-employed professional for their tax dues to decrease by 77 percent this year.

However, the consequences for the state stretch beyond the income tax due: When the time comes for the definitive calculation of this year’s social security contributions – which requires 2017 earnings as a basis, instead of those of the year before – the state will need to return significant amounts from contributions deducted, at least to those who consistently pay their contribution deposits every month.

The drop in declared incomes is not necessarily the result of tax evasion: It is also, for instance, due to the splitting of annual earnings between two tax registration numbers with the aim of reducing taxes and contributions due.

This practice has proven efficient since the Finance Ministry decided to abandon the single tax rate for self-employed professionals – up to 2016 all earnings up to 50,000 euros per year were taxed at a 26 percent rate – and introduced brackets with rates ranging from 22 percent to 45 percent (or 55 percent when the solidarity levy is factored in). The splitting of profits between two registration numbers reduces the tax and solidarity levy due as the taxable income drops to a lower bracket to is taxed at a lower rate.

The government is getting nervous about all this, as it is seeing a decline in revenues not only from income tax but also from value-added tax and previous years’ taxes, which could lead to the country’s creditors disputing the achievement of the budget target for a primary surplus of 3.5 percent of gross domestic product throughout the year.