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Tax Engineering

What is tax evasion?


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What is tax evasion? Is tax evasion legal? Does es mean the same as tax avoidance?

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Nowadays, almost all of us are familiar with a term “tax evasion”. However, not all of us know what tax evasion exactly is and what are the situations when this act takes place. Therefore, in this article we will analyze deeply this topic and will answer the questions that majority of our clients have when they decide moving their funds offshore.

Tax evasion has stopped being something occasional. Almost every day, turning on the TV, we hear news about large companies and famous public figures getting caught on nonpayment of their tax liabilities. As a result, many of them end up imprisoned and others have to pay high fines and spend years trying to clean up their public image. But don’t rush to point a finger because all of us at least once have contributed to tax evasion without being aware of it.

What does “evasion” mean?

Evasion means elusion, escaping, or freeing yourself from an action that you have to or committed to do. In many cases it is related to overcoming the legality of an action or obligation, and therefore, the consequences of it can lead you to having problems with law authorities of your country.

What is Tax evasion?

Tax evasion, also known as fiscal evasion, is an illegal act that consists in hiding or not filing the real figures of income tax with an objective of paying less tax. In some occasions, the hidden amounts are so small that they go totally unnoticed. However, the cases that we see on news involve exaggerated amounts of money, thousands and millions of dollars, that get hidden from fiscal agencies without respective tax payments.

It is precisely these cases that cause indignation and revolt among the rest of the population. Unfortunately, there will always be people who will try to evade its responsibilities pursuing its own benefits. It is very important that everyone who is planning to follow this practice, knows that nowadays tax evasion is considered a serious crime against the state punished by high fines and in some cases years of prison.

5 cases of tax evasion that you have to avoid.

Even though in its majority tax evasion is associated with high fortunes and multinational companies, you will be surprised to know how many small-scale tax frauds that take place all around the world every day. Following are 5 examples, taken from everyday life of many entrepreneurs and common individuals, of when tax evasion takes place, and, in some cases, we don’t even realize that.

1. The professional that doesn’t issue an invoice for its services

All of us at least once heard a phrase: Do you want an invoice? Each time we use a service of a freelancer for a small text translation or house arrangements and don’t ask for an invoice we give place to a tax fraud. Any individual who doesn’t issue an official document charging its clients commits a crime of tax evasion. Why, you might ask? Because in the end of the fiscal year, when this worker will have to file the declaration, all the money that he earned in B, without issuing an invoice, will be exempt of tax. Of course, these amounts that won’t be included in declaration are very small in this case, but if we imagine the number of freelancers who use this practice, we can see that it sums up into large amounts that leave wholes in budgets of fiscal authorities.

2. Illegal sale of goods on the street  

Every day we see people on the streets selling flowers, food, bags, CDs…etc. Keep in mind that when they sell all these products, obviously, without any corresponding invoice and VAT application, they commit a crime called tax evasion. Another aspect of majority of these street sales involves copyright infringement, the use of works protected by copyright law without authorization of a brand. Only few of them obtain a regular seller’s permit for continuous and ongoing sales or a temporary license for a one-time event.

3. Fraudulent property value when sold

Image you are buying a house and, all of the sudden, a sales agent offers you to lower the price of a property that will figure in a sales contract and the difference to pay in cash. The outcome of this action is that you pay less tax on your purchase and the owner of the house also lowers his tax liability on the sale that he is going to make. From one point of view it is an advantageous situation for any buyer who is looking for a better price and fewer expenses. However, you should be very careful because once you declare the amount of money you have paid for this property (the price that is figures in a sales contract), the tax agency of your country can compare it with a real value of properties with these characteristics established by the authorities. In case the difference is suspicious, your purchase can be investigated, and you take a risk to be caught on committing tax evasion crime.      

4. International purchases and sales

Imagine that you live in France and you came to Andorra to spend a weekend. A pack of cigarettes in your home country costs 7 EUR and in Andorra 4. The laws of import and export between these two countries allow you to bring with you to France only 2 cartons of cigarettes without an obligation to declare it. However, we all know that a lot of one day visitors of Andorra, who come mostly from France and Spain, infringe this law passing through a border a larger number of cartons of cigarettes or bottles of alcohol than allowed by customs law. If they don’t get caught and once in their home country consume these smuggling products, the will be committing a crime of tax evasion by consuming a product that they did not pay a tax on.

5. Tax havens

Tax havens and tax evasion sometimes walk along. Not everyone registers a company abroad with a goal to enter international business or to save on tax through legal tax planning. Sometimes, the only objective of opening a bank account or registering a company in a tax haven is tax evasion. Now, almost every day we hear news about politicians, businessmen, singers, famous sports players keeping their money in tax havens and offshore territories. Not all of them get accused of tax evasion, but only those that don’t declare these accounts or its participation in offshore companies and, as a result, do not pay tax on benefits generated outside of their country of residence. Therefore, sometimes there is a lot of confusion among the population that believes that keeping your money in offshore or tax havens is illegal. This statement is false, because the illegality begins not when you keep your funds in offshore, but when you don’t declare it in your home country and your activities involve money laundering.

As you can see from all these examples, sometimes intentionally, sometimes not, a lot of us have committed a crime of tax evasion. Of course, the scales are different, and we cannot compare someone who did not pay tax on a rose that he bought from a street seller for 2 USD with football players whose millions of US dollars get discovered in banks of Panama. Since we can be responsible only for our own actions we all should try not to  cross the line of a law and comply with our corresponding tax duties.



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