- The relationship between two key aspects, international tax gap and international tax
- The effectiveness of the existing framework of international tax laws and regulations.
The International Center for Tax and Development – ICTD estimates that almost three-
quarters of countries in the world are 80% dependent on their tax revenue, and attributes 85% of the tax gap to tax fraud. International Tax-gap information on offshore and cross-border tax revenue is a little bit murky. However, the ICTD reports that one-third of the tax gap is international today. What is a tax gap? Simply put, its a cultural phenomenon marking the difference between actual tax collected and what ought to have been collected resulting from non-compliance. Noteworthy is the depth of impact of the multifarious issues, culture, processes, rules, law, politics, and statistics involved in international tax fraud, a risky tax area that continues to slew tax authorities and a huge challenge to the global economy.
Tax Fraud is committed against a government (and tax-paying nationals) of any country across the globe. The important adage of tax fraud is a (sometimes intentional) surreptitious violation of a known legal duty to pay taxes. Certainly, every country has some form of laws prohibiting tax fraud and regulating its compliance, and the best possible approach to be used in understanding all about particular tax laws, compliance or fraud is by consulting a local tax expert legal counsel of a given country or jurisdiction for guidance.
Any actions or omissions typically involving concealed information or false claims committed to defraud a government of owed tax money is Tax Fraud. It is also a fundamental element of the informal economy,
call it the grey economy. The Association of Certified Fraud Examiners – ACFE research shows that anyone with sufficient pressure, adequate opportunity, and the ability to rationalize a dishonest act is at risk of committing any kind of fraud.
“A typical tax evaders apparent knowledge about whistleblowing schemes does not deter them from evading tax even with the assurance of anonymity and the likelihood of being caught.”
Tax Evasion is tax fraud and thus illegal. It is any fraudulent intentional action that is committed to avoiding reporting or paying tax but it is not to be confused with tax avoidance or violation of proper tax procedures, which can result in fees and interest penalties.
Tax Avoidance is an actual lawful method of lowering ones tax bill by legitimate deductions, credits, and shelters mainly made possible by structured practices of domestic tax base erosion and profit shifting (BEPS). In global business, it is the multinational enterprises that exploit BEPS, the lapses in tax systems of different countries, and the non-coherent international tax rules, which more often than not, contribute to tax evasion.
Tax evasion is fraudulent in a way characterized by the perpetrators inadequate moral development, however, don’t be mistaken, more often than not the perpetrator possesses measured intellectual development which vastly aids fraudulent schemes to a level of resilience.
No surprise that a well-designed inexpensive whistleblowing scheme put in place to catch organized group tax evaders does not significantly alter their inner cooperation and operations. More so, a typical evaders apparent knowledge about whistleblowing schemes does not deter them from evading tax even with the assurance of anonymity and the likelihood of being caught. Long-standing tax evaders seek legal advice on all loopholes in the law and the tax structural setup before the decision to avoid tax. A night-mare for law enforcement and tax capacity-building pillars for enforcement of tax fraud.
Until recently, with exception of some jurisdictions, the regular determinant of tax evasion was acting with criminal intent, and to determine such intent, the jurisdictions where it works require a willful act or attempt rather than an honest mistake, to constitute tax evasion. The United Kingdom did away with the requirement of proving intent to evade tax and thus turned tax evasion into a strict-liability offense. Strict liability offenses do not require proof of the element of intent.
The International Tax Regulatory Framework works to determine how a country collects and manages tax revenue from the cross-border movement of capital, technology, goods, and services supplemented with Territorial Tax Policy Frameworks that impact international taxation. The Framework includes;
- Territorial and International Rules that define and determine what income will be taxed by the source country and Rules intended to minimize double taxation, and tax avoidance by multinationals;
- Over 3900 specific Bilateral and Unilateral Tax Treaties in force worldwide;
- The prospective evolutionary and revolutionary multilateral BEPS 2.0 (Pillar one & Pillar two) Rules to be implemented in 2023 (Including; the Global anti-base Erosion Rules (GloBE Rules) such as; the IIR Income Inclusion Rule, and the Undertaxed Payment Rule UTPR, and a treaty-based rule termed as Subject to Tax Rule STTR)
Tax laws are concerned more with legalistic aspects of tax rather than taxs financial, economic, or administrative aspects, however, sometimes its hard not to correlate those aspects all together. Here, what is of interest regards how to manage cross-over tax revenue of an individual, organization, or country, involving different national tax systems and international transactions including income from highly intangible assets such as patents and trademarks among others.
Each cross-border transaction attracts a certain tax and triggers one or more international tax rules as cross-border tax rules are understood to exist not only for purposes of limiting gaps that multinational corporations use to minimize their cross-border tax obligation but also to regulate tax crime.
“The rules must be aligned with what makes the most sense from a tax perspective because they impact the behavior and reaction of multinational corporations to tax compliance.”
Under the American 2017 Tax Cuts and Jobs Act – TCJA, it is mandatory that the taxable income of goods manufactured partly within, and partly out of the USA, be apportioned and allocated in both or all countries involved in the manufacturing activities.
Estonia has some proven and authentic tax perspectives. Arguably, today Estonia has the best territorial tax system around the world attributed to its least compliance burden, zero property transfer tax, an allowance to reinvest corporate profits tax-free, almost zero tax on foreign profits earned by a resident or domestic corporation, and low marginal tax rates in other aspects, encouraging investment and business with high returns after-tax.
Despite the extensive network of tax treaties existing the world over, and largely whose intention is to prevent tax cheating by closing tax loopholes, treaty abuse has risen by way of treaty-shopping.
Tax treaty-shopping is classic treaty abuse that happens when one taps the benefits of a tax treaty while being neither an intended beneficiary by design nor a member of the tax treaty, and as a result it;
- Abuses the first bite at the apple rule in international taxation regarding primacy in taxation by member countries;
- Brings about the unquantifiable political damage issue;
- Deprives intended treaty members of their negotiated tax revenue supremacy;
- Alters the agreed balance of concessions among members;
- Causes inadequate taxation or no taxation at all; and
- Exacerbates resident members loss of incentive to remain a party to the treaty.
To that end, the OECD BEPS Action 6 Review Reports suggest some recommendations for reforms and establishing minimum standard measures to curb tax treaty abuses and in the end, facilitate the effort against tax evasion.
Tax evasion more often than not transcends national boundaries mostly due to investigative and jurisdictional limits of a countrys revenue authority. The main types of such jurisdictional limits are; secrecy jurisdictions, tax shelters, and tax havens.
“Tax Shelters are designed to yield benefits to multinational investors and result in tax write-offs, deductions, and conversion of taxable income to capital gains taxed at minimal rates.”