25th September 2023
A week is a long time when it comes to global tax affairs. Professionals working across borders have a challenging enough time remaining compliant, let alone in an environment where tax requirements are constantly shifting around them. That’s why we’ve provided a round-up of some of the latest news from the international compliance market from recent weeks. Here’s what contractors need to know.
I.R.S. deploys Artificial Intelligence to catch tax evaders
The US authority is launching plans to utilise AI to collect unpaid taxes from high earners, partnerships and large corporations which has the potential to transform tax compliance in the country, as well as creating new challenges for the agency, according to some reports. There have been multiple criticisms of low audit rates amongst the wealthy, which has led to the IRS announcing renewed plans to focus on high-end enforcement including expanded use of AI to examine large partnerships like hedge funds, real estate investors, legal firms and more. This shift doesn’t apply to individual citizens earning under $400,000 a year who won’t face increased numbers of audits, and there are also safeguards in place for low to moderate earners who claim earned income tax credit.
“Right now, you file a tax return and you play the audit lottery,” said Robert Kovacev, tax controversy partner at law firm Miller & Chevalier. “But with AI, the data is constantly being interrogated by the algorithm.” Once the tech is introduced it will make it more likely that the IRS will catch previous missed higher-end tax issues. “They can expect increased scrutiny from the IRS over the next few years,” said Kovacev. The change won’t be immediate, but within three to five years, “there will be a noticeable increase in audits of large partnerships, large businesses, and high-net-worth families,” he said. Even if you’re not subject to increased IRS scrutiny, the authority has warned that it’s ‘more important than ever’ to keep tax records up to date. This advice also applies to contractors navigating this, but also other, tax systems all around the world that are subject to changes and adaptations on a regular basis. You can find out more about the proposed introduction of AI to the US tax system and its potential implications here.
Pakistani FBR unearths country’s biggest tax fraud
The Federal Board of Revenue (FBR) in Pakistan has unearthed the country’s biggest tax fraud worth Rs314 billion (£873m). The illegal activity was committed by a shell organisation and was detected by the Internal Audit Inland Revenue team. The firm, K H & Sons Company, only existed on paper with documents suggesting it operated as an iron and steel forgery. The company had been used as a front to deliver different illegal activities. A case is expected to be launched against the firm with the accused being monitored to prevent them from fleeing to another country. Four suspects have been arrested with one being detained when filing fake sales tax returns from his home address. The FBR has launched a countrywide crackdown against tax evasion and has stepped up efforts in recent months to catch those not complying with its legislation, which should serve as a warning to contractors operating in the country.
Multinational firms evaded $375 million in customs duties in South Korea
Authorities in South Korea have been urged to overhaul their administrative processes and scale up cooperation with other countries in order to tackle the growing issue of multinational firms evading tax. International firms have been found to have evaded more than 500bn Won ($375m) in customs duties for the past five years by failing to submit relevant data and documents. The Korea Customs Service (KCS), however, has emerged victorious in only three out of 10 tax litigation cases on average involving these companies. This is significantly lower compared to the KCS’s track record of winning 48% of lawsuits filed against domestic firms for the same violation. Many experts attributed the low success rate primarily to an unfavourable judicial system for tax authorities coupled with a lack of manpower. While making significant changes to domestic laws in South Korea will take time, it’s highly likely that we will see shifts to the regulatory system in the coming months. Contractors operating in what is already a complex environment should keep a close eye on their tax compliance to monitor any further changes.
India must take the lead on G20 proposal to track cross border property deals
Wealthy Indian citizens are going to find it much harder to hide their wealth in properties in London, Dubai and other tax havens through shell companies with complex structures and escape scrutiny if a proposal in the G20 New Delhi Declaration becomes a reality. India, as chair of the G20, has pressed for finding ways to enhance international tax transparency in real estate. This has led to the Organisation for Economic Cooperation and Development (OECD) outlining a robust framework to track tax evaders using real estate deals to hide their undeclared incomes.
The framework involves jurisdictions (countries) capturing electronic records on property ownership, creating registries to identify the beneficial owner, and sharing real-time information on overseas real estate deals. The world’s largest country by population is making major moves to tackle non-compliance, and it will be interesting to see if others follow its lead in the coming months.
The move is indicative of a changing tide in the wider global tax system and should act as a warning to contractors operating internationally to prioritise the effective management of their regulatory affairs. If you are working on a contract basis in countries around the world then it’s never been more important to remain compliant within different tax systems. If you are in any doubt about your ability to navigate challenging regulatory requirements – often in a foreign language – then speak to our expert team before it’s too late.
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