What types of tax crimes exist?

Tax crimes can include a multitude of different crimes including tax fraud, tax avoidance and tax evasion. Do you know the difference? We will also discuss profit shifting techniques where organisations shift profits to more favourable low tax or offshore jurisdictions to avoid paying higher levels of tax in source countries across business supply chains.

The importance of understanding different tax crimes are an integral part of the financial crime investigation process. Famous gangster Al Capone was involved in a multitude of crimes but was eventually convicted for tax evasion.  Tax investigations can provide vital information and enforcement tools where other avenues may prove fruitless.

An overview of key terms includes:

• Tax fraud – tax fraud is when information and individual or entity falsifies information on a tax return to limit the tax liability. Tax fraud is like other fraud, the numbers are falsely manipulated to avoid the tax obligation. This can include claiming false deductions, claiming personal expenses or not reporting income.

• Tax avoidance – is structuring your tax affairs in an “efficient” manner to minimise tax obligations. This area is very “grey” on whether it is legal or not. This can include for example, allocating income out to your children to pay a lower marginal tax rate.  With this particular case, the taxpayer was prosecuted in a tax avoidance arrangement. Other international tax schemes may or may not be prosecuted by the tax agency where the taxpayer seeks to lower the marginal tax rate payable.

• Tax evasion – Tax evasion is when no taxes on income are paid. It is common in the informal economy where a plumber or other tradesperson may give a discount for a “cash job.” This will mean that the contractor is not paying tax on his income.  Tax evasion is illegal and can result in fines, penalties and even jail time. In another case, an individual could collect rental income but use an offshore account to avoid the national authorities knowing that he has earned the income. This also avoids showing income earnt in the country of residence.

• Profit shifting – for organisations, profit shifting is a common way to minimise international tax liabilities. Companies will shift profits to low tax jurisdictions or use offshore locations to minimise tax. Generally this is a tactic that can be employed by MNEs (Multi-national enterprises) and a multitude of methods are used to move money offshore. For example, a fisheries company in Iceland used both Mauritius and Cyprus to book profits on fisheries rather than paying higher taxes in Namibia where the fishing quotas were issued. Profit shifting can deprive governments of rightful revenues and is common especially in the extraction of natural resources.

Transition Statement:  Next we will look at the multitude of law enforcement agencies that all play a role in combatting various financial crimes.