What Effect Would Switching To VAT Have on Tax Cheaters?

Could Switching To VAT Deter Tax Cheaters?

Tax Evasion

Tax Evasion

Tax Evasion

The recession of San Juan, Puerto Rico is interfering with profits from local fast food restaurants and shops which caused two brothers to respond in an illegal manner, shortchanging the country’s government. This is actually more common than you would think due to all of the hardship that the recession has caused around the globe but that does not make it any less illegal.

A Case of Getting Caught In the Act

The two brothers, Oscar and Javier did not turn over $1.27 million in taxes from sales that they have accumulated for more than 4 years. Their lawyer, Joaquin Monserrate, states that the brother made this bold move to be able to keep their business alive on an island that so many business go under, especially in the past few years.

Getting Caught

Getting Caught

The lawyer justifies the brothers by saying, “It was a way to try and survive. They were and are in a tight economic situation and were using the money to pay for other things.” But do you really think the Puerto Rico Government cares if Oscar and Javier were using the $1.27 million in illegal money for “other things”? I think not…

Last year, the brothers were caught in the scandal and told to pay up the $1.27 million and so they did. Despite this one case where the tax cheaters were caught, there are many situations that never get caught and continue to go unpunished. Authorities report that the main reason why the island’s financial status is sinking is because of the extensive amount of tax evasion from individuals and businesses in Puerto Rico. The government only collects only about half of the tax it should collect every year. This means that about $800 million in taxes goes into the pockets of the businesses and individuals without getting handed to the government every income tax year.

VAT System

Governor of Puerto Rico, Alejandro Garcia, has a new plan to stop this significant issue. The plan is to add 16% value added tax (VAT) which will increase the island’s revenue decrease the uncontrollable public debt. If this passes, all manufacturers of Puerto Rico will have to pay tax on their raw materials and also include it in the price that they will sell to all of their retailers. The retailers would pay the tax and then sell to their customers. This would prevent any retailer from performing tax evasion because they would simply not be able to do business if they did not pay for the tax on their inventory.

The VAT System

The VAT System

The tax would be levied monitored every step so it would be almost impossible for retailers to be able to succeed in tax evasion. In 2006, Puerto Rico’s sales tax became 7% which a lot of residents of the island would avoid through under the table transactions. Now, the 7% would be replaced by the 16% mandatory value added tax (VAT).

Alejandro Garcia states, “We currently have a tax system that penalizes work and productivity while encouraging evasion. It is inefficient and unfair.”

Advantages

Puerto Rico has had a hard time paying off its $73 billion in public debt but now with the new VAT, revenues would be increased significantly. They are killing two birds with one stone with passing the value added tax proposition. The current public debt that the island has accumulated is creating higher interest rates and extreme difficulty for the government to borrow any more money.

Advantages

Advantages

Alejandro Garcia will most likely be re-elected this next year and will probably win the support on this by the legislator because his party holds the majority even though there has been a lot of public controversy on the issue. There is a lot of debate going on which will continue until the pass or reject on the proposal. Some of the legislators including the president of Puerto Rico’s House of Representative are commanding that some changes are made before it gets passed.

The European Union and many other governments use the value added tax system and it works very well for them. However, the United States has not implemented the system. VAT is great for countries that are in a bad financial situation that have high unemployment rates and a limited amount of income. Puerto Rico has been experiencing an eight year recession with an unemployment rate of 13%. This is more than two times the United States.

Disadvantages

Disadvantages

Disadvantages

Business owners do not think all that highly of the VAT system in Puerto Rico. They think that it will be very expensive to use and will cause a decrease in consumption. The president of a retailer’s association on the island mentioned, “Our main concern is that it would cause an enormous contraction in the economy, which is already extremely fragile.”

The government has debated the upsides and downsides of the VAT system, and they have still come to the conclusion that it would be more helpful than harmful.

Hopefully, this article got you thinking about how to advise clients properly on the topic of sales tax simplification. With all this in mind, if  you’re not already doing electronic tax filing, you should think about it. If you efile 1099 and W-2 tax forms, you’ll notice results faster than using the paper format. When running a CPA practice, or just helping a few clients, this season should be about time management. Like most tax pros, your clients have a few employees and outsourced staff helping them.

I invite you to follow my lead if you’re spending lots of time printing and mailing tax docs. I use eFile4Biz.com to file 1099 online, and focus on generating clients, instead of mailing tax forms. This industry leader connects to the major accounting software brands, on top of printing and delivering the tax forms for me. The video below will tell you more.

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