12th September 2023
While our latest tax news update has a strong Eastern European bias to it, we always strive to bring you the latest tax developments from around the world. From industry-specific tax fraud to country reforms, from digital and crypto taxation to false tax returns and unemployment benefits cases, the battle to catch perpetrators of tax evasion never relents. As ever, the key message for organisations and, in particular, businesses placing global contractors, is that their tax compliance affairs must be in order or they risk the wrath of local tax authorities and can be hit with severe penalties.
The US Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service Criminal Investigation (IRS CI) are fighting back against payroll tax evasion and fraud in the construction sector. The two bodies are targeting the use of schemes such as shell companies to hide hundreds of millions of dollars in income while undercutting those contractors in construction operating legally. “Illicit actors within the construction industry are using shell companies and other tactics to commit workers’ compensation fraud and avoid payroll taxes,” said Himaumali Das, FinCEN acting director.
A notice was sent to financial institutions, and in particular banks, to report cases of payroll tax fraud and evasion as part of the wider Corporate Transparency Act rules, which require businesses to report their business owners. Criminal entities pretending to be legitimate subcontracting businesses set up shell companies used as illegal vehicles to aid subcontractors in avoiding payroll taxes in exchange for a small fee. Das added, “Today’s Notice provides information that financial institutions can use to remain vigilant in monitoring, detecting, and reporting suspicious activity”.
The ongoing Russia-Ukraine conflict has once again brought the topic of illicit financial flows (IFFs) to the fore in the western Balkans region. The Global Initiative think tank estimates IFFs to be worth more than $1tn annually, accounting for 6% of GDP for these countries, compared to the 3-5% global average. “IFFs in the Balkan region are manifold, multi-directional and comparatively large with regards to the percentage of gross domestic product (GDP),” says Vanya Petrova, senior analyst at the Center for the Study of Democracy (CSD). Tax evasion is a main contributor to IFFs.
Weak regulatory processes and the widespread use of cash make it much harder for authorities to track IFFs in Southeast Europe. Cash sums are being trafficked not only in euros but other currencies too such as Norwegian and Danish krone as well as Swedish krona. The use of shell companies is also prevalent in these cases. This has led to calls for tighter regulation, particularly around investment screening, which remains a problem despite the EC mechanism for foreign direct investment (FDI). There is no requirement for mechanisms to be established nationally.
Tightening the net on tax evasion
Meanwhile, Prime Minister Marcel Ciolacu’s social democratic party in Romania is striving to drive through its controversial tax and fiscal reforms package while bypassing the government, albeit facing a potential vote of no confidence. In a bid to tackle tax inefficiency and evasion, Ciolacu said, “We need to distinguish between those genuinely striving to enact reforms and propel this country forward and those opposing such changes while advocating for privileges and wealth.” Discussions are ongoing with the European Commission (EC) as Romania seeks to finalise these fiscal measures.
Elsewhere, in the South Korean city of Cheongju, the capital and largest city of the North Chungcheong province, authorities are taking possession of the digital assets of local investors suspected of evading taxes. No fewer than seven crypto exchanges, including Upbit and Bithumb, have been targeted, with information requests on the activities of over 8,500 users who owe the government in excess of one million won (£600). While the city collected 68m won (over £40,000) in 2022, this pales in significance compared to the 260bn won of crypto tax income seized in the country.
Our last story takes us to the US via Germany where two Nigerian citizens living in Canada stand accused of defrauding US tax authorities during the pandemic. In a case of identity fraud, the perpetrators used the details of thousands of US citizens to submit over 2,300 false tax returns as well as more than 1,700 fraudulent unemployment benefit claims across more than 25 US states. The co-conspirators managed to obtain $2.4m from the total of $25m sought while only $30,000 was paid out in tax refunds from the $7.1m claimed thanks to the vigilance and work of the IRS.
Cases of tax fraud and evasion are becoming ever more common and sophisticated, as global authorities seek to eradicate and shut down schemes that aim to defraud them of key tax revenues. Although progress is some way behind where it needs to be in areas such as IFFs as highlighted above, there is a very real desire to clamp down and punish perpetrators. For businesses placing contractors abroad, the need to be tax compliant is crucial if they want to avoid paying a very hefty price. Our 6CATSPRO experts can help you navigate the global contractor compliance tax landscape.
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