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Smuggling and Evasion of VAT: Getting Around Tax Laws and Customs

26th March 2010
By Frank Smith in Taxes
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The act of smuggling is all about the importing and exporting of foreign products without authorization from the government, which controls customers and the boarders of each country. Smuggling is a means of avoiding having to pay for customs duties, which many be inevitable. It is also a means of importing and exporting contraband items, including drugs, rare animals, and even human beings.

Tax Evasion and Value Added Tax

Smugglers avoid paying any customs duties because the products are not routed through either an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes. Evasion of value added tax (VAT) and sales taxes are other ways of robbing the government and avoiding handing money to government authorities. The latter half of the twentieth century saw the introduction of value added tax (VAT), which has emerged as a modern form of consumption tax through the world. There is a notable exception of the United States, however, where producers who collect VAT from the consumers can basically avoid the tax by under-reporting their sales.

Government Strategies to Prevent Tax Evasions

In the US, there is no broad-based consumption tax at the federal level, and there are no state collects for VAT. The vast majority of states collect sales taxes, however, including Canada. Canada collects both a VAT at the federal level, known as the Goods and Services Tax, and sales taxes at the provincial level. A number of provinces have a single tax that combines both forms. Most jurisdictions that apply a VAT or sales tax help legally require their residents to report and pay the tax on items purchased in another jurisdiction. Consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax applied in their country of residence are breaking the law in many instances. This type of evasion is particularly common in federal states such as the US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax.

The level of evasion or the amount of smuggling that goes on, affecting a particular country, depends on a number of factors. For instance, the tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also requires efficiency on the part of the tax administration. Corruption by the tax officials often renders control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include strategies such as the privatization of tax enforcement, tax farming, and institution of PSI or Pre-Shipment Inspection agencies.

This article is not giving legal advice.

Legal Consult: Businesses in the Washington D.C. area that need help with criminal tax investigations should contact the Thorn Law Group to understand more about preventing tax evasion.
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