Understanding The Effects of Illicit Cash Flows on Taxes

Tax avoidance is the act of taking advantage of the loopholes in the tax regime to dodge paying a tax. Any tax regime should be crafted in a way that makes it difficult or impossible to avoid a tax. The biggest culprits in this ungodly economic activity are the Multinationals that repatriate untaxed profits. In a bid to tame the vice, the Uganda Revenue Authority is undertaking tax reforms to address the problem.

According to Stella Nyapendi, the URA assistant commissioner for policy and rulings, the new valuation controls target Multinationals involved in trade misinvoicing, treaty shopping and transfer pricing.

Misinvoicing involves deliberate falsification of the value or volume of goods and services arising out a foreign trade transaction. Under declarations result in one paying a small tax. Treaty shopping is a practice of structuring a multinational business to take advantage of favourable tax regime of a home country and not the host country. Transfer pricing refers to the practice of pricing transactions of the same entity differently among its branches or divisions. This is mostly done when a large multi-entity firm has branches or divisions in different parts of the world under common ownership or control.

The emergence of e-commerce poses another challenge. There is need to enact laws that can be used to track online trading platforms. Apart from trading, e-commerce is a sophisticated way of illicitly moving money out of the country. For this to succeed, there is need to create synergy with other partners like the African Tax Administration Forum (ATAF). Tracking illicit money through organized networks makes it easier to ascertain its source and the taxes evaded which makes it easier to execute penalties and sanctions.

Another measure is to ratify double taxation agreements with different countries that are considered to be tax havens like Mauritius and the Caribbean islands. Constant engagements and bilateral agreements create a framework for tackling the problem. This would call a wider framework like the Global Forum to share information about taxpayers

The blockchain chain technology is posing a great challenge to the tax man. The use of cryptocurrency in trade makes it hard to monitor payments for goods and services. The elaborate system of creating a wallet to the computer nodes then the miners placing the transactions in blocks in response to proof of transactions is a daunting task for tax collectors. This sublime system of trading is not only secretive but too complicit in tax avoidance.

The ever changing terrain in the technology realm calls for tax bodies to act swiftly if they have to tighten the noose to stem the vice of tax pillage through illicit cash flows aided by foreign bank.