There is a clear difference between tax evasion and tax evasion. One is legally acceptable and the other is an offense. Unfortunately, however, many consultants even in this country do not understand the difference between tax evasion and tax evasion. Most of the planning aspects suggested by these consultants often fall into the tax avoidance category (which is illegal) and therefore tend to put clients at risk and reduce the value of tax planning.
This may be one of the main reasons clients have lost confidence in tax planning consultants as most of them have often suggested questionable systems that clearly fall under the tax evasion category.
In this chapter, I provide some examples and case studies (including legal cases) on how tax evasion (often suggested by consultants purported to be tax planning specialists) is not only done in this country, but in many parts of the world. It is true that many people do not like to pay their hard earned money to the government. However, doing this in an illegal way such as tax evasion is not the answer. Good tax planning involves tax avoidance or tax evasion reduction. If done correctly, it can save significant amounts of money in a legally acceptable way. This chapter also highlights some practical examples and case studies (including legal ones) of tax evasion.
Why Governments Need Your Taxes (Basic Economic Arguments)
Income tax, the largest source of public funds today in most countries, is a relatively recent invention, probably because the notion of annual income itself is a modern concept. Governments preferred to tax things that were easy to measure and thus easy to calculate the obligation. This is why the early taxes are concentrated on tangible things like land and property, physical goods, commodities and ships, as well as things like the number of windows or fireplaces in a building. In the 20th century, especially in the second half of the year, governments around the world took a growing share of their country’s national income into taxes, mainly to pay for increasingly expensive defense efforts and for a modern welfare state. Indirect consumption tax, such as value added tax, has become increasingly important as direct taxation of income and wealth has become increasingly unpopular. But there are major differences between countries. One is the overall tax. Eg. Tax revenues in the US amount to approx. one third of its GDP (gross domestic product), while in Sweden it is close to half.
Others are the preferred methods of collecting it (directly versus indirectly), the rates at which it is charged, and the definition of the tax base to which those rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also major differences in how responsibility for taxation is distributed at different levels of government. According to economic discipline, it is likely that any tax is a bad tax. But public goods and other governmental activities must be paid for in some way, and economists often have strong views on which tax methods are more or less effective. Most economists agree that the best tax is one that has as little impact as possible on people’s decisions about whether to carry out a productive economic activity. High tax rates on labor can discourage people from working, and thus result in lower tax revenue than would be, if the tax rate were lower, an idea captured in the Laffer curve in economic theory.
The marginal tax rate can certainly have a greater effect on incentives than the overall tax burden. The land tax is considered the most efficient by some economists and the tax on others by the expenditure, as it does everything it takes after wealth is created. Some economists welcome a neutral tax system that does not affect the kind of economic activity that takes place. Others please use taxes and tax breaks to guide economic activity in ways they please, such as to minimize pollution and to increase the attractiveness of hiring people rather than capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity because this is fair and because when the tax system is fair, people may find it more difficult to justify tax fraud or evasion.
However, whoever pays (the tax return) may be different from who is initially charged if that person can pass it on, by adding the tax to the price he charges for his output. Taxes on businesses, for example, are always ultimately paid by people, whether workers, customers or shareholders. You should note that taxation and its role in economics is a very broad subject, and this book does not address the issues of taxation and economics, but rather tax planning to improve your financial situation. But if you are interested in understanding the role of taxes in the economy, read a good book on economics that often talks about the impact of different types of taxation on the economic activities of a community nation.
Tax evasion and evasion
Tax evasion can be summed up as doing everything possible within the law to reduce your tax bill. Learned Hand, a U.S. judge, once said there is nothing sinister in arranging one’s affairs, so taxes are kept as low as possible, as no one owes any public duty to pay more than the law requires. On the other hand, tax evasion can be defined as paying less tax than you are legally required to. There may be a thin line between the two, but as Denis Healey, a former British chancellor, once put it, “The difference between tax evasion and tax evasion is the thickness of a prison wall.” The courts recognize that no taxpayer is required to arrange his / her affairs to maximize the tax the government receives. Individuals and businesses have the right to take all legal steps to minimize their taxes.
A taxpayer can legally arrange her affairs to minimize the tax at such steps as deferring income from one year to the next. It is legal to take all available tax deductions. It is also legal to avoid taxes by making charitable contributions. Tax evasion, on the other hand, is a crime. Tax evasion typically involves failure to report income or incorrectly claiming unauthorized deductions. Examples of tax evasion include such actions as when a contractor “forgets” to report LKR 1, 000,000 cash he gets for constructing a pool, or when a business owner attempts to deduct LKR 1,000,000 personal expenses from his business tax or person erroneously claims that she has contributed to charitable causes, or overestimates the value of property donated to charity to a significant degree.
Similarly, if a estate is worth 5,000,000 LKR and the executor files a false tax return, incorrect omission of property and claim on the estate is only worth 100,000 LKR, which is due to much less tax. Tax evasion has an impact on our tax system. It results in a significant loss of revenue to the community that can be used to fund improvements in health, education and other government programs. Tax evasion also allows some companies to gain an unfair advantage in a competitive market and some individuals not to meet their tax obligations. As a result, the burden of taxes not paid by those who choose to avoid tax falls on other law-abiding taxpayers.
Examples of tax evasion are: ï? ~ Requirements for input credits for goods where no value added tax (VAT) has been paid ï? ~ Failure to: declare an assessable income ï? ~ Claims for deductions for expenses not incurred or not legally deductible ï? ~ pay Wages (pay as you serve as a form of withholding tax) deductions deducted from a payment, for example tax deducted from a worker’s salary ï? ~ Failure to file tax returns in an attempt to avoid payment. The following are some signs that a person or business can avoid taxes: ï? ~ Not registered for VAT despite clearly exceeding the threshold ï? ~ Does not charge VAT at the right rate ï? ~ Don’t want to issue a receipt ï? ~ Provision of fake invoices ï? ~ Using an incorrect business name, address or taxpayer identification number (TIN) and VAT registration number ï? ~ Keeping two account sets, and ï? ~ Does not provide staff with payment statements
Legal aspects of tax evasion and tax evasion Two general points about tax evasion and evasion can be made. First, tax evasion or evasion occurs across the tax spectrum and is not specific to any tax type such as import taxes, stamp duty, VAT, PAYMENT and income tax. Second, legislation relating to avoidance or fraud must necessarily be imprecise. There is no regulatory set of rules for determining when a particular scheme constitutes tax evasion or evasion. This lack of precision creates uncertainty and increases compliance costs for both the Department of Inland Revenue and the taxpayer.
Definitions of tax avoidance avoidance and avoidance It is impossible to express an accurate test of whether taxpayers have avoided, avoided or simply mitigated their tax obligations. As Baragwanath J said in Miller v CIR; McDougall v. CIR: What is legitimate ‘restriction’ (meaning avoidance) and what is false ‘avoidance’ (meaning avoidance) must ultimately be decided by the commissioner, the tax investigating authority and ultimately the courts as a matter of judgment. Note in the above statements the words are exactly as stated in the judgment. However, there is a mix of words that have been clarified by the words in parentheses by me. Tax limitation (avoidance in planning) Taxpayers have the right to mitigate their tax liability and are not vulnerable to the general rules for combating avoidance in a statute. A description of tax limitation was provided by Lord Templeman in CIR v Challenge Corporate Ltd: The income tax is reduced by a taxpayer who reduces his income or incurs expenses in circumstances that reduce his estimated income or entitle him to a reduction in his tax liability.
Tax limitation is therefore behavior which, without amounting to tax evasion (by planning), serves to attract less responsibility than might otherwise have arisen. Tax evasion Tax evasion, as Lord Templeman has pointed out, is not merely mitigation. The term is described directly or indirectly by ï? ~ Changing the incidence of an income tax ï? ~ To free any person from liability to pay income tax ï? ~ Avoid, reduce or defer any liability for income tax On an overly literal interpretation Approach could be applied to pure mitigation, for example, on the individual’s decision not to work overtime because the extra income would attract a higher tax. However, a better way to approach tax evasion is to consider it a scheme that, unlike mitigation, produces results that Parliament did not intend.
In Challenge Corporation Ltd v CIR, Cooke J described the effect of the general rules for combating unnecessaryness in these terms: [It] the Commissioner cancels for income tax purposes any scheme to the extent that it has a purpose or effect of tax evasion, unless that purpose or effect is just the case. If a scheme is invalid, the commissioner is empowered to adjust the discretionary income of any person affected by it to counteract any tax advantage that person obtains. Woodhouse J commented on the breadth of the general rule against combating needlessness in the Challenge Corporation case, noting that Parliament had made: The conscious decision that because the problem of the definition in this evasive field cannot be met by explicitly spelling a a number of detailed specifications in the statute itself, the intermediate states must be left to the judges.
Tax evasion Limitation and avoidance are concepts that relate to whether a tax liability has arisen. With avoidance, the starting point is always that a liability has arisen. The question is whether this responsibility is illegal, even criminal, has not been satisfied. In the CIR v. Challenge Corporation Ltd, Lord Templeman said: Avoidance happens when the commissioner is not informed of all the facts relevant to a tax assessment. Innocent evasion can lead to a re-assessment. Fraudulent fraud can lead to prosecution as well as reassessment.
The elements that may attract the criminal label for evasion were elaborated on by Dickson J of Denver Chemical Manufacturing v. Commissioner of Taxation (New South Wales): An intention to withhold information so that the commissioner should not consider the taxpayer responsible to a greater extent than the taxpayer is prepared to admit, are behaviors that, if the result is to avoid taxation, would justify the finding of fraud. Not all evasion is fraudulent. It becomes fraudulent if it involves a deliberate attempt to cheat the revenue. On the other hand, there may be evasion, but may not be fraudulent if it is the result of a genuine mistake. In order to prove the infringement of the infringement, the commissioner must show intent to evade the taxpayer. As with other offenses, this intention can be inferred from the circumstances of the particular case. Tax evasion and tax limitation are mutually exclusive. Tax evasion and tax evasion are not: They can both arise in the same situation. For example, a taxpayer files a tax return based on the effectiveness of a transaction known to be invalid against the Commissioner as a tax evasion scheme.
A senior United Kingdom taxman recently referred to this issue: If an “avoidance” scheme relies on misrepresentation, deception and concealment of the full facts, avoidance is an error number; the scheme will be more accurately described as fraud and falls to be treated as such. In the case of fraud, it cannot be characterized as avoidance again by hiding the behavior of artificial structures, pursued transactions and esoteric arguments on how the tax law should be applied to structures and transactions. Tax evasion in a political framework We now move from the existing legal framework for income tax to a possible political framework to consider issues that generally relate to tax evasion. The questions that are considered relevant for a policy analysis of tax evasion are: What is tax evasion? Under what conditions is tax evasion possible? When is tax avoidance a ‘policy problem? What is a sensible policy response to tax evasion?
What is the value of, and what are the limitations of, the general rules for combating unnecessary? The first two questions are discussed below What is tax avoidance? Financial literature may offer some guidance on what is meant by tax avoidance in its definition of ‘arbitrage’. Arbitrage is a means of taking advantage of a price disparity. An example is finding and capitalizing on price differences between New Zealand and Australia on shares in the same listed company. A real value can be found in such arbitrage activity as it disseminates information about prices. Demand for low prices is rising and demand for expensive goods is falling, ensuring that goods and resources are utilized to the best possible extent. Tax arbitration is therefore a form of tax planning. It is an activity aimed at reducing taxes. It is this notion of tax arbitration that seems to constitute widely accepted notions of what is tax evasion. Activities such as giving money to charities or investing in tax-favored sectors would not fall under this definition of tax arbitrage, and thus would not be tax evasion, even if the act was motivated by tax considerations. It has been noted that financial arbitrage can have a useful economic function. The same can be the case with tax arbitration, assuming that differences in taxation are a deliberate government policy that promotes economic efficiency.
It is possible that tax arbitration directs resources for low tax activities as determined by government policy. It is also likely that investors in tax-favored areas will be the ones who can benefit most from the tax concessions, namely those facing the highest marginal tax rates. If the government’s political goals are better achieved, tax arbitration is in line with the government’s political intent. Tax avoidance can therefore be seen as a form of tax arbitration that is contrary to legislative or political intent. What makes tax evasion possible? The basic ingredients of tax arbitrage are the notion of arbitrage and the opportunities to benefit from differences that the concept of arbitrage implies. This definition leads to the view that three conditions are needed to avoid tax evasion. A difference in the effective marginal tax rates on economic income is required. For arbitrage to exist, there must be a price difference, and in tax arbitrage, this is a tax difference. Such tax differences may arise from a variable exchange rate structure, such as a progressive rate scale, or exchange rate differences that apply to various taxpayers, such as tax-exempt bodies or tax-loss companies.
Alternatively, it may arise because the tax base is less than comprehensive, for example because not all financial income is subject to income tax.
o An opportunity is needed to capitalize on the difference in tax by converting high tax activity into low tax activity. If there are differences in tax rates but no ability to go from high to low taxes, no arbitrage is possible.
o Although these two conditions are met, this does not allow for tax arbitration and avoidance. The tax system can mix taxpayers with high and low rates. The high rate taxpayer may be able to convert income into a low taxpayer or convert high taxed income into a low taxed form. But this is meaningless unless the high taxpayer can be rewarded in a low taxed form to redirect or convert his or her income into a low tax category. Income must return in a low tax form. The benefit must also exceed transaction costs. This is the third necessary condition for tax arbitration.
o Since all tax systems have tax bases (the thing or amount to which a tax rate applies.
To charge income tax, for example, you need a meaningful definition of income. Definitions of the tax base can vary enormously over time and among countries, especially when taking into account tax allocations. As a result, a country with a relatively high tax rate may not have a high tax burden (Total tax paid for a period as a proportion of total income during that period. It may refer to personal, business or national income.) has a more narrowly defined tax base than other countries. In recent years, the political unpopularity at high tax rates has led many governments to lower rates and at the same time expand the tax base, which has often left the tax burden unchanged. ) which is less than comprehensive due to the impossibility of defining and measuring all financial income, tax arbitrage and avoidance are part of the tax systems. Examples of tax arbitration / avoidance The simplest form of arbitrage involves a family unit or single taxpayer. If the family unit or taxpayer is facing differences in tax rates (condition 1 above) and condition 2 above applies, the third condition applies automatically.
This conclusion follows because people can always compensate themselves for converting or redirecting income to a low tax rate. An example of such a simple tax arbitrage involving a family unit is income splitting through, for example, the use of family trust. An example of simple tax arbitration involving a single taxpayer is an unevenness in which a trader in financial assets makes losses on, say, shares, and steals gains while retaining a financial interest in the shares through the use of options. Transfer pricing and thin capitalization practices through which non-residents minimize their tax liabilities are more sophisticated examples of the same principles. Multi-party arbitrage is more complex; the complexity is made necessary by the need to fulfill condition 3 above, that is, to ensure that a net profit accrues to the high taxpayer. In the simpler cases of multi-party income tax arbitrage, this process usually involves a tax-exempt (or tax loss or tax haven) entity and a taxable entity. Revenue is redirected to the tax-exempt entity and expenses are transferred to the taxable entity. Finally, the taxable entity is compensated for the restructuring of income and assumption of expenses by receiving non-taxable income or a non-taxable benefit, such as a capital gain.
Over the years, many have relied on several examples of such tax arbitrage using elements of legislation at the time. Examples are financial leasing, non-recourse lending, tax havens (a land or designated zone that has low or no taxes, or highly secretive banks and often a warm climate and sandy beaches that make it attractive to foreigners prone to tax evasion and evasion) ‘investments’ and redeemable preference shares. Low tax policies pursued by some countries in the hope of attracting international companies and capital are called tax competition, which can provide a rich ground for arbitrage. Economists usually prefer competition in any form. But some say tax competition is often a beggar-your-neighbor policy that can reduce another country’s tax base, or force it to change its mix of taxes or stop it from taxing the way it wants.
Economists who prefer tax competition often cite an article by Charles Tiebout of 1956 (1924-68) entitled “A Pure Theory of Local Expenditure”. In it, he argued that when faced with a choice of different combinations of tax and government services, taxpayers will choose to find where they come closest to the mix they want. Variations in tax rates between different countries are good because they give taxpayers more choice and thus more chance of being satisfied. This also puts pressure on governments to be effective. Therefore, measures to harmonize taxes are a bad idea. There is at least one major caveat to this theory. Tiebout decisively assumed that taxpayers are highly mobile and able to move where their preferred combination of taxes and benefits are offered.
Tax competition can make it more difficult to redistribute from rich to poor through the tax system by allowing the rich to move to the place where taxes are not distributed. Tactics used by tax evaders Moonlighting Tax evasion at its simplest level simply involves staying out of the tax system. The Revenue sets up small teams of volunteer officers to conduct surveillance to track moon rails. Early success was followed by the deployment of compliance officers in almost every tax office. Revenue investigators routinely scan advertisements in local newspapers or store windows, and even before the advent of the modern personal computer, they often had access to reverse phone directories to track moonlight from bare phone number information. They also study banks and other financial institutions deposits and lending databases, customs registers, and hotel-class hotel bookings for private functions and ceremonies to identify wealthy individuals who may be avoiding taxes.
Non-extractive fraud Alternatively, it may arise because the tax base is less than comprehensive, for example because not all financial income is subject to income tax. in? ~ An ability to capitalize on the difference in tax by converting high tax activity into low tax activity. If there are differences in tax rates but no ability to go from high to low taxes, no arbitrage is possible. in? ~ Even if these two conditions are met, this does not make tax arbitration and avoidance possible. The tax system can mix taxpayers with high and low rates. The high rate taxpayer may be able to convert income into a low taxpayer or convert high taxed income into a low taxed form. But this is meaningless unless the high taxpayer can be rewarded in a low taxed form to redirect or convert his or her income into a low tax category. Income must return in a low tax form. The benefit must also exceed transaction costs. This is the third necessary condition for tax arbitration. Since all tax systems have bases that are less than extensive due to the impossibility of defining and measuring all financial income, tax arbitrage and avoidance are included in the tax systems. This involves profit shifts or time differences, for example:
o After receipt after date
o Ante dating expenses
or hidden reserves
o Incorrect accounting of transactions such as to show an income to be paid.
o Stock Manipulation The perhaps most common place approach seen in practice is stock manipulation to produce the desired “profit”.
It is not unknown that the escorts’ accountants are involved – which endangers their livelihoods and, if the amount involved is substantial, personal freedom! The most obvious case of this kind is where the accountant practically treated this as a tax planning by the end of the year. Based on the formal disclosures that are avoided under the Hansard procedure for Inland Revenue (where he invited the accountant and in connection with an account in a false name also his bank manager), the following scene can be recreated: “Studying the draft accounting accountant made a quick calculation to find out the number of figures that could be used to close the inventory by hand without giving rise to suspicion, and then apparently discussing with the customer the impact on net profit by reducing the final inventory.
Then it was arranged for the review to take place, and in the meantime, some stock was moved from the site! “The accountant and bank manager who assisted the evader are both guilty of conspiracy to defraud – it doesn’t matter that they did not make any financial gain themselves. mainstream takings and often an unpublished bank account, but the more resourceful capabilities can benefit from special events or unexpected receipts: Where the proprietor or director personally deals with some customers, it may be possible to make checks in a way that facilitates fun. Alternatively, control replacement can be used so that the otherwise “non-sale” check is banked and an equivalent amount of “on record cash” is extracted.
It is not unknown that delayed cash payment of credit turnover bypasses the accounting system with the debt, which is subsequently written off as bad. Unexpected receipts always provide a good opportunity for deflection. E.g:
1. Scrap sale
2. Insurance or recovery of bad debt
3. Refunds, discounts or discounts
4. Returned goods sold for cash, disposal of fully written-down assets and depletion in general.
The evader can benefit from a new business opportunity that remains hidden and not registered. Examples of this set in practice include:
1. The dentist with three practices, only two of which were revealed
2. Off-record sales of previously obsolete auto parts to the growing classic car market Inflated purchases & expenses Where the ability to deflect receipts is too difficult, the evduer can withdraw cash from the commercial bank’s account and hide such payments as a form of legitimate business expense. In practice, this often involves the use of “ghost employees” or fictitious expenses to cover such extractions. Fictitious expenses must use fake invoices. These can take the form of modified invoices, photocopied or even scanned “blank” versions of real invoices, completely false invoices or even blank invoices provided by an associate.
Another approach seen in practice included the use of a seemingly unaffiliated offshore company to raise invoices for fictitious services. To conceal the true ownership of the off shore company, the avoidant uses a “black hole” trust to hold the shares. Essentially, this involved a compliant non-resident trustee and “dummy” settler – the administrator provided “stooge” directors as part of the arrangements.
Tax evasion schemes for employment Ordninger med skatteunddragelse kan antage forskellige former. Nogle af de mere udbredte metoder til unddragelse inkluderer pyramiding, leasing af medarbejdere, betaling af medarbejdere kontant, arkivering af falske selvangivelser eller manglende indberetning af lønbeskatningsangivelser. Pyramiding “Pyramiding” af beskæftigelsesskatter er en svigagtig praksis, hvor en virksomhed tilbageholder skatter fra sine ansatte, men med vilje ikke overfører dem til de relevante afdelinger. Virksomheder, der er involveret i pyramidering, ansøger ofte om konkurs for at imødekomme de påløbne forpligtelser og derefter starte en ny virksomhed under et andet navn og begynde en ny ordning. Leasing af beskæftigelse Leasing af medarbejdere er en anden juridisk forretningspraksis, som undertiden er udsat for misbrug.
Leasing af medarbejdere er den praksis, der indgås aftaler med eksterne virksomheder for at håndtere alle administrative, personale- og lønningsproblemer for ansatte. I nogle tilfælde undlader medarbejderudlejning virksomheder over for myndighederne nogen del af den opkrævede beskæftigelsesafgift. Disse skatter bruges ofte af ejerne på forretnings- eller personlige udgifter. Ofte opløses virksomheden og efterlader millioner af arbejdsskatter ubetalte. Betaling af medarbejdere kontant Betaling af ansatte helt eller delvis i kontanter er en almindelig metode til at undgå indkomst- og ansættelsesafgift, hvilket resulterer i tabte skatteindtægter til regeringen og tab eller reduktion af fremtidige sociale ydelser. Arkivering af falske lønnsbeskatningsangivelser eller undladelse af at arkivere lønnsbeskatningsangivelser Forberedelse af falske lønnsbeskatningsangivelser, der beskriver størrelsen af lønningerne, som skat skyldes, eller manglende indberetning af beskatningsangivelser for beskæftigelsen, er metoder, der ofte bruges til at undgå beskæftigelse. Betalinger af fordele Disse inkluderer gratis fordele såsom personlig underholdning, overdreven godtgørelse for udenrigsrejser, levering af uddannelsesordninger (udenlandsk uddannelse) til kun foretrukne ansatte, bil og chauffør, der betales af virksomheden osv., Er enkle eksempler.
Jeg håber, at jeg har klargjort forskellen mellem at gøre tingene rigtigt og legitimt og på en svigagtig måde. Uanset om du er skatteyder eller konsulent, er det vigtigt at sikre dig, at du forstår nuancerne i god skatteplanlægning. Selvom det forstås, at skatteplanlægning bliver vanskeligere, og at der kun er en tynd linje mellem, hvad der er rigtigt og forkert, kræver det naturligvis, at eksperten gør det nødvendige. Vær dog forsigtig med ikke at narre af dem, der hævder at være eksperter i skatteplanlægning, når de kun er beregningseksperter.