Parties engaging in the production or distribution of prohibited goods and services are members of the illegal economy. Examples include the trade, illegal currency transactions. Violations of the tax code involving income tax evasion constitutes membership in the unreported economy, because tax evasion or participation in a black market activity is illegal, participants will attempt to hide their behavior from the government or regulatory authority. Cash usage is the medium of exchange in illegal transactions since cash usage does not leave a footprint. Common motives for operating in markets are to trade contraband, avoid taxes and regulations. Typically the totality of such activity is referred to with the article as a complement to the official economies, by market for such goods and services. Black money is the proceeds of a transaction, on which income and other taxes have not been paid. Because of the nature of the black economy it is not possible to determine its size. There is no single underground economy, there are many and these underground economies are omnipresent, existing in market oriented as well as in centrally planned nations, be they developed or developing.
Different types of activities are distinguished according to the particular institutional rules that they violate. Illegal economy participants engage in the production and distribution of prohibited goods and services, such as trafficking, arms trafficking. The unreported economy consists of economic activities that circumvent or evade the institutionally established fiscal rules as codified in the tax code. A summary measure of the economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the economy is the tax gap. In the U. S. unreported income is estimated to be $2 trillion resulting in a tax gap of $450–$500 billion, the unrecorded economy consists of those economic activities that circumvent the institutional rules that define the reporting requirements of government statistical agencies. A summary measure of the economy is the amount of unrecorded income. Unrecorded income is a problem in transition countries that switched from a socialist accounting system to UN standard national accounting.
New methods have been proposed for estimating the size of the unrecorded economy, but there is still little consensus concerning the size of the unreported economies of transition countries
Double Irish arrangement
The double Irish arrangement was a tax strategy that some multinational corporations used to lower their corporate tax liability. The strategy has ceased to be available since 1 January 2015, the strategy used payments between related entities in a corporate structure to move income from a higher-tax country to a lower or no tax jurisdiction. It relies on the fact that Irish tax law does not include transfer pricing rules as does the United States, Ireland has territorial taxation, and does not levy taxes on income booked in subsidiaries of Irish companies that are outside the state. The double Irish tax structure was first used in the late 1980s by companies such as Apple Inc, in 2013, the Irish government announced that companies which incorporate in Ireland must be a tax resident there. This counter-measure took effect in January 2015, for newly incorporated companies, Irish Finance Minister Michael Noonan, during the presentation of his 2015 budget, said that he believed this would align Irelands corporate tax regime with international best practice.
It is called double Irish because two Irish companies are used in the arrangement, one of these companies is tax resident in a tax haven, such as the Cayman Islands or Bermuda. This company is the entity which owns the valuable non US rights that are licensed to a second Irish company in return for substantial royalties or other fees. The remaining profits are taxed at the Irish rate of 12. 5%, the payments between the two Irish companies are ignored for American tax purposes. Ireland does not levy a tax on certain receipts from European Union member States. Revenues from sales of the products shipped by a second Irish company are first booked by a company in the Netherlands. The remaining profits are transferred directly to Cayman Islands or Bermuda and this part of the scheme is referred to as the Dutch Sandwich. The Irish authorities never see the revenues and hence cannot tax them. In 2010, the Obama administration was said to propose to tax profits of offshore subsidiaries to curb tax avoidance in the United States.
The first deadline for corporate tax submissions under the new rules was September 2012, Irish Finance Minister Michael Noonan addressed the Double Irish during the presentation of his 2015 budget. An effective tax rate of 6. 25% can be obtained on qualifying profits generated in periods commencing on or after 1 January 2016. In Summer of 2016 another dispute is flaring up between the European Commission and the US Treasury Department over Irish tax breaks, which in the EU may comprise a type of state aid. U. S. Secretary of the Treasury Jacob J. Lew has issued a white paper referring to transfer pricing. ”A number of companies are known to employ the double Irish strategy, Tax exporting Tax inversion Singapore Sling Bermuda Black Hole K2 Base erosion. Companies Dodge $60 Billion in Taxes With Global Odyssey An illustration
Tax noncompliance is a range of activities that are unfavorable to a states tax system. This may include tax avoidance, which is tax reduction by legal means, the use of the term noncompliance is used differently by different authors. Its most general use describes non-compliant behaviors with respect to different institutional rules resulting in what Edgar L. Feige calls unobserved economies. Non-compliance with fiscal rules of taxation, gives rise to unreported income, in the United States the use of the term noncompliance often refers only to illegal misreporting. In addition, judicial doctrines have accomplished the purpose, notably in the United States through the business purpose. Though the specifics may vary according to jurisdiction, these rules invalidate tax avoidance which is technically legal, related terms for tax avoidance include tax planning and tax sheltering. Individuals that do not comply with tax payment include tax protesters, Tax protesters attempt to evade the payment of taxes using alternative interpretations of the tax law, while tax resisters refuse to pay a tax for conscientious reasons.
Tax protesters believe that taxation under the Federal Reserve is unconstitutional, because taxation is often perceived as onerous, governments have struggled with tax noncompliance since the earliest of times. The use of the tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term applies to illegal actions and avoidance to actions within the law. An avoidance/evasion distinction along the lines of the present distinction has long been recognised, in 1860 Turner LJ suggested evasion/contravention, Fisher v Brierly. In 1900 the distinction was noted as two meanings of the word “evade”, Bullivant v AG, the technical use of the words avoidance/evasion in the modern sense originated in the USA where it was well established by the 1920s. It can be traced to Oliver Wendell Holmes in Bullen v. Wisconsin and it was slow to be accepted in the United Kingdom. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term “tax evasion” from “avoidance”.
However, in the UK at least, “evasion” was regularly used in the sense of avoidance, in law reports and elsewhere, now that the terminology has received official approval in the UK this usage should be regarded as erroneous. But even now it is helpful to use the expressions “legal avoidance” and “illegal evasion”. In the United States tax evasion is evading the assessment or payment of a tax that is legally owed at the time of the criminal conduct. Tax evasion is criminal, and has no effect on the amount of tax actually owed, by contrast, the term tax avoidance describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place
Offshore financial centre
An offshore financial centre is a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds. The term was coined in the 1980s, whether a financial centre is to be characterized as offshore is a question of degree. The more nebulous term tax haven is often applied to offshore centres, a 1981 report by the United States Internal Revenue Service concluded, a country is a tax haven if it looks like one and if it is considered to be one by those who care. Views of offshore financial centres tend to be polarised, proponents point to the tacit support of offshore centres by the governments of the United States and United Kingdom. Opponents view them as draining tax revenues away from developed countries by allowing tax arbitrage, very few commentators express neutral views. One could argue that US external aid statutorily cannot even take place without the formation of offshore entities, in 2000 the FATF began a policy of assessing the cooperation of all countries in programmes against money laundering.
Considerable tightening up of both regulation and implementation was noted by the FATF over subsequent years, most of the principal offshore centres considerably strengthened their internal regulations relating to money laundering and other key regulated activities. Indeed, Jersey is now rated as the most compliant jurisdiction internationally, well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system. The Channel Islands hold that funds generated offshore do indeed go through the Bank of England allowing the UK to benefit from the success of the crown dependencies as offshore centres, offshore centres benefit from a low burden of regulation. An extremely high proportion of funds who register offshore are presumed to be driven by lighter regulatory requirements rather than perceived tax benefits. Offshore centres have historically seen as venues for laundering the proceeds of illicit activity. The leading offshore financial centres are more compliant with the Financial Action Task Force on Money Launderings 40+9 recommendations than many OECD countries, a study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions.
A report by Global Witness, Undue Diligence, found that kleptocrats used OECD banks rather than offshore accounts as destinations for plundered funds, statutory banking secrecy is a feature of several financial centres, notably Switzerland and Singapore. However, many offshore financial centres have no statutory right. Offshore centres act as conduits for global trade and ease international capital flows, low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets. Many corporate conglomerates employ a number of holding companies. Similarly, it is common for fleets of ships to be separately owned by separate offshore companies to try to circumvent laws relating to group liability under certain environmental legislation. These structures work best when the wealth is foreign-earned, or has been expatriated over a significant period of time, many countries from France to Saudi Arabia continue to employ forced heirship provisions in their succession law, limiting the testators freedom to distribute assets upon death
Theories of taxation
Several theories of taxation exist in public economics. Governments at all levels need to raise revenue from a variety of sources to finance public-sector expenditures, adam Smith in The Wealth of Nations wrote, Such things as defending the country and maintaining the institutions of good government are of general benefit to the public. Thus, it is reasonable that the population as a whole should contribute to the tax costs and they are proportionate to incomes or abilities to pay certain rather than arbitrary payable at times and in ways convenient to the taxpayers and cheap to administer and collect. In modern public-finance literature, there have two main issues, who can pay and who can benefit. Influential theories have been the ability theory presented by Arthur Cecil Pigou, there is a version of the benefit theory known as the voluntary exchange theory. Under the benefit theory, tax levels are determined, because taxpayers pay proportionately for the government benefits they receive. In other words, the individuals who benefit the most from public services pay the most taxes, two models adopting the benefit approach are discussed, the Lindahl model and the Bowen model.
DDa is the curve of taxpayer A, and DDb is the demand curve of taxpayer B. The vertical summation of the two demand curves results in the total demand schedule for state services. A and B pay different proportions of the cost of the services, when ON is the amount of state services produced, A contributes NE and B contributes NF, the cost of supply is NG. Since the state is non-profit, it increases its supply to OM, at this level, A contributes MJ and B contributes MR. Equilibrium is reached at point P on a voluntary-exchange basis, bowen’s model has more operational significance, since it demonstrates that when social goods are produced under conditions of increasing costs, the opportunity cost of private goods is foregone. For example, if there is one good and two taxpayers, their demand for social goods is represented by a and b, therefore. The supply curve is shown by a+b, indicating that goods are produced under conditions of increasing cost, the production cost of social goods is the value of foregone private goods, this means that a+b is the demand curve of private goods.
Simultaneously, the tax shares of A and B are determined by their individual demand schedules, the total tax requirement is the area out of which A is willing to pay GCEO and B is willing to pay FDEO. The advantage of the theory is the direct correlation between revenue and expenditure in a budget. It approximates market behaviour in the procedures of the public sector. Taxes are based on ability to pay, there is no quid pro quo
A tax is a financial charge or other levy imposed upon a taxpayer by a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent, the legal definition and the economic definition of taxes differ in that economists do not regard many transfers to governments as taxes. For example, some transfers to the sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments, governments obtain resources by creating money and coins, through voluntary gifts, by imposing penalties, by borrowing, and by confiscating wealth. In modern taxation systems, governments levy taxes in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states, the method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics.
Tax collection is performed by a government agency such as the Canada Revenue Agency, when taxes are not fully paid, the state may impose civil penalties or criminal penalties on the non-paying entity or individual. The levying of taxes aims to raise revenue to fund governing and/or to alter prices in order to affect demand and their functional equivalents throughout history have used money provided by taxation to carry out many functions. A governments ability to raise taxes is called its fiscal capacity, when expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts, governments use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, energy and waste management systems are common public utilities. A tax effectively changes relative prices of products and they have therefore sought to identify the kind of tax system that would minimize this distortion.
Governments use different kinds of taxes and vary the tax rates, taxes on the poor supported the nobility, modern social-security systems aim to support the poor, the disabled, or the retired by taxes on those who are still working. A states tax system often reflects its communal values and the values of those in current political power. To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing or administering the tax system, in countries where the public does not have a significant amount of influence over the system of taxation, that system may reflect more closely the values of those in power. All large businesses incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, the resource collected from the public through taxation is always greater than the amount which can be used by the government, the difference is called the compliance cost and includes the labour cost and other expenses incurred in complying with tax laws and rules
Tax evasion is the illegal evasion of taxes by individuals and trusts. Tax evasion is an activity associated with the informal economy. In contrast, tax avoidance is the use of tax laws to reduce ones tax burden. In 1968, Nobel laureate economist Gary Becker first theorized the economics of crime, allingham and A. Sandmo produced, in 1972, an economic model of tax evasion. This model deals with the evasion of tax, the main source of tax revenue in developed countries. According to the authors, the level of evasion of income tax depends on the detection probability, the literatures theoretical models are elegant in their effort to identify the variables likely to affect non-compliance. Alternative specifications, yield conflicting results concerning both the signs and magnitudes of variables believed to affect tax evasion, empirical work is required to resolve the theoretical ambiguities. Income tax evasion appears to be influenced by the tax rate, the unemployment rate. The U. S. Tax Reform Act of 1986 appears to have reduced tax evasion in the United States, customs duties are an important source of revenue in developing countries.
Importers purport to evade customs duty by under-invoicing and misdeclaration of quantity, when there is ad valorem import duty, the tax base can be reduced through underinvoicing. Misdeclaration of quantity is more relevant for products with specific duty, production description is changed to match a H. S. Code commensurate with a lower rate of duty. Smuggling is importation or exportation of products by illegal means. Smuggling is resorted to for total evasion of customs duties, as well as for the importation of contraband, during the second half of the 20th century, value-added tax emerged as a modern form of consumption tax throughout the world, with the notable exception of the United States. Producers who collect VAT from consumers may evade tax by under-reporting the amount of sales, the US has no broad-based consumption tax at the federal level, and no state currently collects VAT, the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the level and sales taxes at the provincial level, some provinces have a single tax combining both forms.
In addition, most jurisdictions which levy a VAT or sales tax legally require their residents to report and this is especially prevalent in federal countries like Nigeria, US and Canada where sub-national jurisdictions charge varying rates of VAT or sales tax. In Nigeria, for example, some federated states enforce VAT on each item of goods sold by traders, the price must be clearly stated and the VAT shown separately from the basic price. If the trader does not comply this is punishable as an attempt to siphon the VAT, therefore, it is not generally cost-effective to enforce tax collection on low-value goods carried in private vehicles from one jurisdiction to another with a different tax rate
There are various motivations to smuggle. Examples of non-financial motivations include bringing banned items past a security checkpoint or the removal of classified documents from a government or corporate office, Smuggling is a common theme in literature, from Bizets opera Carmen to the James Bond spy books Diamonds are Forever and Goldfinger. The verb smuggle, from Low German schmuggeln or Dutch smokkelen, apparently a frequentative formation of a meaning to sneak. Smuggling has a long and controversial history, probably dating back to the first time at which duties were imposed in any form, in England smuggling first became a recognised problem in the 13th century, following the creation of a national customs collection system by Edward I in 1275. Medieval smuggling tended to focus on the export of highly taxed export goods — notably wool, merchants also, sometimes smuggled other goods to circumvent prohibitions or embargoes on particular trades. Most studies of historical smuggling have been based on official sources — such as court records, according to Dr Evan Jones, the trouble with these is that they only detail the activities of those dumb enough to get caught.
This has led him and others, such as Prof Huw Bowen to use records to reconstruct smuggling businesses. Grain smuggling by members of the elite, often working closely with corrupt customs officers, has been shown to have been prevalent in East Anglia during the 16th century. In England wool was smuggled to the continent in the 17th century, the principal reason for the high duty was the need for the government to finance a number of extremely expensive wars with France and the United States. The thievery was boasted about and romanticized until it seemed a kind of heroism and it did not have any taint of criminality and the whole of the south coast had pockets vying with one another over whose smugglers were the darkest or most daring. The Smugglers Inn was one of the commonest names for a bar on the coast, in Henley Road, smuggling in colonial times was a reaction to the heavy taxes and regulations imposed by mercantilist trade policies. After American independence in 1783, smuggling developed at the edges of the United States at places like Passamaquoddy Bay, St.
Marys in Georgia, Lake Champlain, and Louisiana. During Thomas Jeffersons embargo of 1807-1809, these places became the primary places where goods were smuggled out of the nation in defiance of the law. Like Britain, a gradual liberalization of laws as part of the free trade movement meant less smuggling. In 1907 President Theodore Roosevelt tried to cut down on smuggling by establishing the Roosevelt Reservation along the United States-Mexico Border, Smuggling revived in the 1920s during Prohibition, and drug smuggling became a major problem after 1970. In the 1990s, when sanctions were imposed on Serbia. The state unofficially allowed this to continue or otherwise the entire economy would have collapsed, much smuggling occurs when enterprising merchants attempt to supply demand for a good or service that is illegal or heavily taxed. As a result, illegal trafficking, and the smuggling of weapons, as well as the historical staples of smuggling, alcohol