The risky reform of the Danish tax system

Following a number of damaging scandals at the tax authority SKAT, the government has announced plans to close it down and divide it into seven parts. It's a bold decision, but is it enough to fix a lack of funding, a culture of mismanagement and a lack of government oversight?

An IT system so dysfunctional it had to be put out of its misery. A collective tax debt of 92 billion kroner that the state can’t recoup. 12 billion kroner lost to foreign conmen on falsified VAT rebates on Danish stocks.

These are just some of the shocking scandals to have plagued SKAT over past few years. This summer, the government decided to finally take action and close it for good, replacing the current system with seven different authorities, each with its own area of responsibility.

The question is whether it will it make any difference at all.

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In June, tax minister Karsten Lauritzen held a press conference. With Prime Minister Lars Løkke Rasmussen at his side, he announced that nothing could be done. SKAT had to be given the coupe-de-grâce. Rebuilding from scratch, we were made to understand, was easier than repairing the crippled system.

“The time has come to take stock of our tax authorities and decide what kind of tax system we want in the future. I have to say that the tax authorities of the future will be without SKAT. This conclusion was reached after recognising that the current organisational framework is simply not adequate to the task of giving the tax payers the system they rightly demand,” Lauritzen told Berlingske in June.

A decade of mismanagement and cost-cutting
In 2006, the government fused the municipal and state tax authorities to create SKAT, a massive organisation with almost 9,200 employees. Every year since, both left and right-wing governments attempted to centralise and streamline the organisation with budget and staff cuts. This has widely been recognised as having backfired.

Around 3,000 fewer staff now work at SKAT, based on the expectation that their roles would be replaced by automated systems, including the EFI automatic debt collection system. But the system faced lengthy delays, and when it was finally implemented in 2015, it was discovered that it was attempting to collect debt that was obsolete.

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EFI was shelved in 2015 at a cost of 1.2 billion kroner, which means that SKAT must now collect the debt owed by Danish tax payers semi-manually. This is a slower method and, as a result, the debt exploded to 92 billion kroner – of which at least 40 billion is now thought to be impossible to collect.

The delays to EFI meant that SKAT was effectively understaffed, making it vulnerable to fraud. Foreign investors can choose to pay the VAT on profits made from Danish stocks in their home country, and can submit to have the Danish VAT repaid if they live abroad.  So far, foreign conmen have made off with 12.3 billion kroner by submitting falsified purchase agreements for Danish stocks – the criminals were reimbursed for money that SKAT never received.

Other scandals were the result of poor management and political oversight. In 2011, the state auditor Rigsrevisionen concluded that SKAT had incorrectly valued homes in three out of four cases. The tax ministry had been aware of the issue since 2007, but had done nothing to correct the flaw. In 2019, homeowners are expected to be paid nine billion kroner in compensation for inflated taxes on their homes.

Seven new tax authorities
The scandals and decade-long political neglect of SKAT led the government to pull the plug in June. To replace SKAT, the government is establishing seven brand-new tax authorities with different areas of expertise, to be spread across Denmark.

While Lauritzen has been commended for finally taking decisive action, some experts and commentators are concerned. In an editorial in June, Berlingske called the tax minister a “brave man,” citing the huge complications that are likely to result from moving roughly 1500 jobs from Copenhagen to different parts of the country. Previous attempts to decentralise government workers have shown that civil servants are often reluctant to leave the capital.

Tax spokeswoman for government coalition member Venstre, MP Louise Schack Elholm, says they have addressed this issue, however.

READ MORE: Commission launched to investigate tax scandals

“For example, we have moved the Tax Appeal Agency to Odense, as we estimate it will be easier to find qualified employees in that particular area, and moved part of the Evaluation Agency to Haderslev to ensure the jobs aren’t lost in that area,” she says.

The government is not alone in looking forward to a reformed tax system. Deputy head of the Confederation of Danish Industry (DI), Kent Damsgaard, is quietly optimistic about the reforms.

“We are deeply dependent on getting back a strong tax administration. So we view it as positive that a plan has taken shape. However, it is far too soon to begin grading the initiatives. The whole thing is completely dependent on how it is executed,” he told Berlingske Business.

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The unions representing SKAT’s employees, however, are worried about the potential consequences of pushing such significant organisational changes on a tight schedule. Sara Vergo, chairwoman of DJØF Offentlig, is concerned by the prospect of losing large numbers of qualified employees.

“If only one out of five employees stays in the organization, then it is self-evident that there will be a huge loss of competencies,” she told Information newspaper, adding that she is happy that the government plans to hire roughly 1000 new staff in connection with the relocation and establishment of the new agencies.

The challenge of age
Despite these new hires, SKAT is challenged by an ageing workforce. 2000 employees currently working in the tax system will be retiring in the next few years. Replacing them will be a huge challenge, but one that the government is dealing with, ensures Elholm.

“It is true that the staff in the tax system are relatively old, because people tend to stay in the tax system for a long time. Their age is a big challenge, but that is why SKAT has had a specific focus on offering employees senior benefits in order to make them stay on a little longer,” the spokeswoman says, adding that the government is also actively training new, younger staff.

“We have taken an important step in the right direction with the new diploma education in taxation at the Metropolitan University College in Copenhagen, which was designed to provide the right background for the training of new tax employees. We are aware of the serious structural challenges connected to the age of the employees, but we are attempting to establish a foundation for the training of the future of the tax system,” she says.

Commission to assign blame
At the end of June, a majority of MPs bypassed the minority right-wing government to establish a new Tax Commission that will attempt to assign responsibility for the scandals that have crippled SKAT. It will have three main areas of focus: the wrongful collection of debt, fraud of VAT rebates on stocks, and the cuts and centralisation of responsibilities that have dominated the tax policies of the last three governments.

MP Louise Schack Elholm says she understands why MPs and voters alike want to hold someone accountable for the scandals, but argues the commission is unlikely to assign responsibility in a manner that satisfies MPs.

“The government doesn’t think anything significant will come from the commission’s work, mostly because it takes such a long time to finish this sort of work. We never wanted a commission, although we respect the majority’s decision, but we don’t think it is likely we will see responsibility assigned clearly. Generally, commissions do not produce results that get people convicted of anything.” M


By Joshua Hollingdale

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