Saturday, 26 March 2011

CASE 248 - IRS, HMRC and other government tax corporations

To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name." The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums), by imposing penalties (e.g., traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, taxes are levied in money; but, in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. 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 Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual with consent.

Her Majesty's Revenue and Customs (HMRC) is a non-ministerial department of the UK Government owned by the crown responsible for the collection of taxes and the payment of some forms of state support. HMRC was formed by the merger of the Inland Revenue and Her Majesty's Customs and Excise which took effect on 18 April 2005. The department's logo is the St. Edward's Crown enclosed within a circle.

Contrary to popular myth, the income tax and the IRS are constitutional. That's what happens when you have your own constitutional amendment authorizing you. Nobody likes them though, so we should be able to get rid of that amendment. The 16th Amendment, ratified in 1913, is concise: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." According to information on the IRS website, President Lincoln and Congress created an income tax in 1862 to help pay for the Civil War. The income tax was repealed a decade later, then revived n 1894. But the Supreme Court declared it unconstitutional in 1895. Then came the 16th Amendment. In 1913, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000. The IRS is part of the federal Department of Treasury.

HMRC and the IRS are turning the screw

Where HMRC have obtained information about potential liabilities e.g. offshore bank details , lists of medical practitioners, or, as in this case, details of registered gas installers, their aim is to offer an opportunity for those who have underpaid tax to come forward or run the risk of being readily identified and punished appropriately. This gives HMRC maximum coverage for the minimum input of manpower and resources. The PTSP should not be dismissed as applying only to a very narrow band of traders. Buried in the small print of the explanatory notes is an all but cast iron guarantee that its generous terms are available to anyone who has underpaid tax in the past. In certain circumstances tax underpaid will be recouped for a six year period only. As with all these initiatives, there is tight deadline to be met. Those who wish to take advantage of it must declare their intention to do so by 31 May 2011.

HMRC is not alone

HMRC is not the only tax authority aiming to flush out reluctant taxpayers. The IRS has just launched a second offshore disclosure arrangement. But it is questionable whether the terms are sufficiently attractive to tempt those who turned a blind eye to the amnesty of 2009 to come forward by 31 August 2011, despite the clear threat of criminal prosecution if they don’t and are subsequently found out. The terms include payment of tax unpaid for the eight years to 2010, interest, fixed and tax-geared penalties and, as if that weren’t enough, 25% of highest aggregate balance in the accounts held offshore and 25% of the value of foreign assets acquired with the undeclared funds.

Last October the Finance Ministry in Switzerland announced that it had entered into discussions with the UK government part of the aim of which is to ‘regularize’ undisclosed funds held in Switzerland by UK resident individuals and entities – presumably by payment of a percentage of the funds to HMRC. Unofficial estimates put the potential revenue at stake for the UK as high as £6bn. And it is likely that income arising in future from the remaining funds will be subject to a substantial withholding tax. However, the statement from Switzerland makes it clear that a core feature of whatever deal emerges, will be the retention of the jealously guarded Swiss bank secrecy. This leaves unanswered the question of how undisclosed funds held by the same entity in other jurisdictions could be ‘regularized’.

HMRC have stated that the impending deal with Switzerland will not be more favourable than that on offer under the deal with Liechtenstein (LDF). However, this is at odds with the Finance Ministry statement. Any deal even remotely resembling that outlined in the Swiss announcement would undoubtedly give rise to a storm of protest from those who have already made complete disclosures under the LDF and previous offshore disclosure arrangements.

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