Case for Tax Compliance

Petros Piki, CA(Z), MSc, RPA

 "The difference between tax avoidance and tax evasion is the thickness of a prison wall." -- Denis Healey

Since time immemorial there has been compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. People have been paying tax and people will continue to pay tax when they are alive in the form of Employment tax (which you pay as you earn), Value Added Tax (Sales tax in some jurisdictions), Duty (on import of goods), Income Tax (on profits you make), Estate Duty when you die and many other taxes. The state is funded by the taxes you and me pay. The question is, does it pay to run away from taxes?

Tax issues have brought down many men and women in the course of history. Prime Ministers, footballers, singers and many celebrities have found themselves on the wrong side of the tax man. Soccer star Cristiano Ronaldo was fined over $20 million for tax fraud. The Portuguese soccer star was fined €18.8 million ($21.6 million) for tax fraud. He was accused of dodging taxes in Spain between 2010 and 2014, when he was playing for Real Madrid. Because he could pay, he paid his way out of prison. Another popular star footballer Lionel Messi's was found guilt of tax fraud and was given a 21-month prison sentence for tax fraud was later changed to a fine by a Spanish court. In Italy, Former Italian Prime Minister Silvio Berlusconi was found guilty of tax fraud, and given a four-year prison sentence that was later reduced to one year. Lil Wayne had to pay US authorities a colossal US$14 million tax penalty. These and many other local tax scandals are testimony that tax issues may become nasty and come at a very heavy price. Many companies that were caught off feet by Tax authorities have closed because they could not pay off the penalties and continue surviving.

Most people fail to differentiate and comprehend the difference between tax avoidance and tax evasion. Tax evasion is an illegal activity in which a person or entity deliberately avoids paying the correct amount of tax liability. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions. If one is caught evading taxes, they are generally subject to criminal charges and substantial penalties.

A tax payer is however allowed to do tax avoidance. Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. Tax avoidance is legal whereas tax evasion is illegal. There are many provisions in the tax laws that are meant to promote certain behaviours, investments etc that an investor or a citizen may apply to reduce their tax burden. The ability to identify and apply mechanisms that legally assist a person is what we call tax planning and that’s where professionals like us come through. Some people use tax shelters, that is vehicles used by individuals or organizations to minimize or decrease their taxable incomes and, therefore, tax liabilities. Tax shelters are legal, and can range from investments or investment accounts that provide favourable tax treatment, to activities or transactions that lower taxable income through deductions or credits. Tax Planning is the key.

As entrepreneurs grow their business, they get too concerned and involved in growing the business forgetting to address tax issues. The most unfortunate issue is that authorities may take their time to look at your tax affairs through tax audits etc and meanwhile one will be squandering their earnings. When they ultimately catchup with you the money will be gone. So technically one will be paying tax on funds spend way back and it will no longer be exciting. In my career as an advisor I have seen people breaking down and some getting bankrupted by tax authorities leading to winding up of hard built businesses. It’s sad!

Tax compliance refers to fulfilling all tax obligations as specified by the law freely and completely. One need to make sure they maintain their business records, ensure compliance from the start and avoid unnecessary drama in the future. Anyone can be audited by tax authorities. Where you need to file a return do so. Be wise where you lack knowledge consult!

Looking for a tax expert? Talk to us so that we assist in tax compliance. Be the stress-free good citizen.

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