Types of tax evasion and red flag indicators – Taxation

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Malta: Tax evasion typologies and red flag indicators

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The 30e November 2021, as part of its commitment to effectively fight against tax crimes, the FIAU published an information sheet on the typologies and warning indicators related to tax evasion and money laundering. One of the shortcomings identified by the FATF in its Mutual Evaluation of Malta concerned tax offenses and the lack of information available to competent authorities and data subjects to detect or identify tax offenses. The guidance document hopes to increase the knowledge of those affected about these tax offenses and improve their ability to detect and ultimately report situations in which they suspect their services are, have been or are expected to be used for. launder funds related to serious tax evasion. FIAU is expected to focus on more relevant cases that involve one or more of the following:

  • Large amounts;
  • Complex structures;
  • Multi-jurisdictional elements; and
  • Other foreign elements.

The information sheet groups the typologies and red flags into five categories;

1. Customer identification information

  • The client does not disclose his nationality or tax residence, the non-disclosure indicating an attempt to evade his tax responsibilities; and
  • No reasonable business justification for a natural person’s residence to differ from their registered business;

2. Unusual or suspicious transactions

  • While the FIAU recognizes that subject persons are not required to report transactions that exceed a certain threshold, subject persons may, at their discretion, set a certain threshold to detect unusual activities. Smurfing, the process of deliberately structuring transactions to avoid the threshold, has been identified by FIAU as an indicator of tax evasion – particularly with respect to cash-generating activities;
  • Transactions outside the known customer profile;
  • Undervaluation or overvaluation of goods and / or goods when the declared value on invoices of such goods and / or services does not reflect the market value;
  • Inconsistent withdrawals or deposits; and
  • Circular or round-trip transactions;

3. Structure and governance of the entity

  • Buffering, that is, when a representative of a company carries out a transaction given by the beneficial owner without any doubt;
  • The governance of an entity lacks the skills, resources or time commitment to undertake its function;
  • Grouping of personal and professional accounts;
  • Complex structures without sufficient justification;
  • Cash-intensive businesses; and
  • The lack of a local footprint, such as bank accounts held with Maltese credit or financial institutions;

4. Source of wealth and source of funds

  • The Client does not provide the requested information and / or supporting documents concerning the SOW / SOF;
  • Frequent amounts of deposits from unexplained sources;
  • Indications that funds may not have been declared to the tax authorities; and
  • Doubts about the veracity or adequacy of the supporting documents provided;

5. Customer interaction and behavior

  • The client shows questionable curiosity about the regulatory reporting requirements of the person concerned;
  • The taxable person realizes that the customer has not paid his tax on time, has not filed income tax returns or refuses to pay overdue taxes;
  • The client asks for unreasonable levels of confidentiality;
  • The client does not meet his tax obligations for a number of years; and
  • False declaration or tax documents

The guide ends with examples of case studies drawn from the strategic analysis of suspicious transaction reports submitted by data subjects to the FIAU. Subjects are reminded of their obligations to put in place internal and external reporting procedures which provide for the reporting of suspected or known cases of ML / FT. FIAU reminds subject persons that although there is no minimum value threshold for declaring a transaction, resources should be better focused on cases which are likely to be more important for law enforcement. . In this regard, taxable persons should seek to increase their capacity to detect and report serious cases of money laundering by tax evasion.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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