Tax Evasion, An Illegal Act
It's not uncommon to come across the term 'Tax Evasion', but do we have a thorough comprehension of its meaning and the potential consequences if we become involved in it? In this article, we will explore the definition and what the results could be if we take part in it.
Tax evasion is the deliberate act of failing to pay or underpaying taxes that are required by law. It is a serious crime that undermines the integrity of a country's tax system and can have serious consequences for individuals and businesses that engage in it, but oftentimes, we mistake "Tax Evasion" for another similar term “Tax Avoidance”. “Tax Avoidance”, is actually a component of "Tax Planning". Let us then look at the definition of this term.
In contrast to tax evasion, tax avoidance is an acceptable practice that takes advantage of legal methods to reduce the amount of money someone or a business needs to pay in taxes. Although it is not against the law, it is generally frowned upon since it allows those who are better positioned to find ways to pay lower taxes than those who are not. This results in an unbalanced system, where certain people and businesses are able to pay less tax than they would have to, while others are not able to and have to pay more.
Now let’s dig further into tax evasion as an illegal act. In Sierra Leone, tax evasion is specifically addressed in the Income Tax Act of 2000 as amended and according to section 154 of the Act, "a person who wilfully evades or defeats or attempts to evade or defeat tax imposed by this Act either by, among other things, physically or otherwise preventing the tax officer from access to tax information or the business premises of the taxpayer during normal working hours or the payment and collection of such tax, commits an offence”
The consequences of tax evasion in Sierra Leone can be severe. Under the Act, individuals found guilty of tax evasion can receive a maximum penalty of five years in prison and/or be required to pay a fine. For businesses, the penalties can be even more severe, with companies facing fines of up to three times the amount of taxes that were evaded.
An example of how an entity or an individual might evade customs duties, as per section 24 of the “Customs Act 2011 as amended, customs duties shall be levied and collected on all goods imported into Sierra Leone and section 11 of the act requires that all goods imported or exported must be correctly declared. If someone were to file a declaration with a lower value than the actual cost of the goods, or if they were to deliberately omit important information, they would be evading customs duties. According to Section 77 of the same act, making false statements about filing a declaration is an offence punishable by a fine of between NLe100,000 and NLe200,000 and or imprisonment of not less than two (2) years. As we can see, the repercussions for attempting to evade taxes become increasingly harsher depending on the severity of the illegal act being committed.
The impact of tax evasion on the economy cannot be overstated. When some individuals and businesses evade taxes, it can lead to higher taxes for those who are honest about their payments and can also result in a reduction of the government's revenue. This can create an unfair distribution of the tax burden and have negative consequences for the economy as a whole.
In Sierra Leone for example, the National Revenue Authority (NRA) which is the government’s department responsible for the collection of taxes, has a variety of methods at its disposal for detecting tax evasion, including audits, investigation of financial records, and examination of spending habits in some cases, people or businesses may be reported to the authorities for engaging in tax evasion. If you know of someone who is dodging taxes, it's essential to notify the right authorities. In many countries including Sierra Leone, there are confidential hotlines or online reporting systems to report any tax evasion suspicions.
Financial Institutions such as banks and investment companies have an obligation to inform the relevant authorities about dubious activities. This is advantageous in halting taxes from being evaded by making sure that these establishments are not being utilized to carry out unlawful acts.
Besides attempting to tackle tax evasion within its own borders, numerous countries have made agreements with each other to swap information and support one another in examining and prosecuting cases of tax evasion through Exchange of Information agreements. This cooperation can be effective in addressing instances of tax evasion that involves hiding assets or income in other countries.
In conclusion, it is essential to understand the distinction between tax evasion and tax avoidance. Tax evasion is a serious criminal offense that can have severe consequences, while tax avoidance is legal, but may be perceived as immoral. It is imperative to pay your fair share of taxes to support the necessary operations of government and uphold the integrity of the tax system. Additionally, be mindful of the methods that governments employ to detect and prevent tax evasion.
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