Tax risk is the uncertainty of how much tax will be paid, or the degree to which an action will lead to a different tax outcome than was expected.
A small business owner with a regular income and straightforward accounting procedures has a low tax risk as they will generally know how much tax they will pay and when.
A multi-national company has sold a number of assets in different countries over the last year, some of which were at a loss. There is a degree of uncertainty over what can be deducted and written off, and how much tax will be owed in total.
A high net worth individual invests in a tax avoidance scheme which is currently under review by the tax authorities. There is a high tax risk since the action of attempting to reduce the tax liability could end up having the opposite effect if the scheme is closed down.
Tax evasion is a crime that occurs when a person or entity underpays or avoids paying taxes using illegal methods. This greatly increases the tax risk, as it could result in criminal prosecution as well as increased tax liability.
Tax evasion can include:
The key element of tax evasion is that an illegal act is being used to escape paying taxes, including misrepresenting or concealing financial affairs.
that an illegal act is being used to escape paying taxes, including misrepresenting or concealing financial affairs.
The actor who starred in Blade was charged by US federal prosecutors with a host of tax evasion offences. The prosecution alleged that Snipes hid income in offshore accounts and did not file federal income tax returns for a number of years. His tax debt was estimated to be at least $12 million.
In 2008, the actor was acquitted of tax fraud and conspiracy charges, but found guilty of lesser charges and sentenced to three years in prison. However, his accountant Douglas Rosile was convicted and sentenced to four and a half years in prison.
The Barcelona FC player and his father Jorge were handed 21 month sentences by a court in Catalonia for tax evasion. They were convicted of hiding more than €4m in South American tax havens. While neither of the pair went to jail, they both paid millions of euros in fines for defrauding the Spanish tax authority.
Messi claimed he knew nothing of how his money was managed and admitted to signing documents without reading them, but the judge found his ignorance did not remove responsibility.
Tax avoidance is the use of legal methods to lower the amount of tax owed by taking deliberate advantage of loopholes in the tax system. Tax avoidance schemes might move money offshore or make financial arrangements to reduce the tax burden outside the intent of the law. Tax avoidance increases the tax risk due to the ambiguity of the transaction.
Select an example below to read more about cases of tax avoidance.
“Attempted avoidance schemes which seek to use artificial and contrived arrangements to get an unintended advantage, do not work. HMRC’s firm view is that such schemes are notifiable under the disclosure of tax avoidance schemes (Dotas) rules.”
The Disclosure of Tax Avoidance Schemes (DOTAS) allows HMRC to keep track of the different tax avoidance schemes available. Promoters of such schemes must disclose them so that HMRC can determine whether a scheme is aggressive and unfair, and, if so, take steps to block it. Taxpayers must tell HMRC about schemes that fall within the disclosure rules. Failing to do so can result in penalties.
If a tax arrangement will enable someone to obtain a tax advantage which is one of the main benefits of the arrangement, and it falls within one of the ‘hallmarks’ of tax avoidance schemes set out in legislation, then it must be disclosed under DOTAS rules. HMRC keeps a close eye on these schemes and anyone using it must declare it in their tax return.
On its own the disclosure of a tax arrangement has no effect on the tax position of any person who uses it. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect. If a scheme is ruled to be tax avoidance, then a hefty tax bill will likely follow.
Select an example below to read more about HMRC enforcement action
Offshore tax havens are jurisdictions around the world; generally small, stable territories which have highly favourable tax regimes and few restrictions on business. These places generally levy no taxes on personal income, inheritance or corporate tax. They tend to have strict secrecy laws and a lack of transparency that easily enables foreign investors to hold money there and avoid or evade tax liabilities in their home country.
Some countries, such as Ireland, deliberately lower their corporate tax rate to attract major international companies, while others, such as Switzerland, have a reputation for highly secretive banking practices.
Various international efforts have been mobilised against offshore tax havens in recent years, including from the G20 and OECD, which focus on increasing transparency and information sharing with jurisdictions designated as tax havens. National regulations, including the UK’s Criminal Finances Act, aim to tackle the problem from the other side, criminalising the corporations who fail to prevent those who are evading tax.
While some hold a negative perception of offshore jurisdictions, many have taken significant steps to improve their transparency standing and adopt international standards including the Common Reporting Standard (CRS) and the latest anti-money laundering rules. Offshore jurisdictions are home to many highly reputable law firms and other professional services who recognise the need for having robust policies, procedures, training and control systems in place, as do the regulators in these jurisdictions who supervise and oversee their conduct.
It is important to note that many onshore jurisdictions, the UK and US included, have been heavily criticised for their less than robust corporate tax laws. In some cases financial regulations in offshore jurisdictions are stronger than regulations in onshore jurisdictions. Many offshore schemes that are deemed “aggressive” by tax authorities are actually set up by tax advisors based onshore.
7.2M
Population
2.5M
Companies
0.35M
Companies per person
Corporation tax
16.5%
VAT
0%
Capital gains
0%
Dividend taxes
0%
Hong Kongis one of the world’s major financial centres, with the second largest stock exchange in Asia after Tokyo and third largest in equities and initial public offerings in the world. It is one of the fastest growing tax havens and is attractive to many international companies as offshore profits are generally not subject to tax. The island’s fund management industry is worth over $2.1 trillion and there is over $350 billion in private banking assets. In 2015,Hong Kong topped the list of the highest density of Ultra High Net Worth Individuals who have personal wealth of over $100 million, at 15.3 per 100,000 households. China’s control overHong Konghas helped shield it from global transparency initiatives.
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