by Stephen McPhie, CA
Partner, RSD Solutions Inc.
Most western countries are massively fiscally challenged. In plain English of course that means running large and unsustainable deficits adding to already excessive debt. And yes, I include Canada as a country that is not the worst but is far too indebted, especially when the Provinces are brought into the equation. So governments are now under huge pressure to reduce those deficits. Cost cutting is of necessity a major component of this effort.
Taxes are close to the limit of what people will tolerate, especially here in the UK where years of Gordon Brown saw massive overall tax increases, but governments are still squeezing out extra cash from fees and stealth taxes.
Another part of the effort to squeeze out every possible dollar is beefing up enforcement. Not only will there be more audits and challenges for businesses, but there will be less (or no) leniency about imposing penalties for the most minor of infractions. There are many existing filing requirements with new ones springing up all the time. Many of those requirements are nothing really to do with the amount of tax to be paid but are to provide information, most of which is likely to be of no use and often people are totally unaware of the requirements. However, they do create traps – and financial penalties for those who get caught that grab yet more of our money.
I have 3 examples of areas where tax departments will impose penalties
· Example 1 – UK - a recent quarterly filing requirement in the form of a “Value Added Tax EC Sales List” whereby UK companies must list sales to customers in other EU countries by customer along with VAT registration numbers for each customer. Presently total sales to EU customers have to be reported on VAT returns (Value Added Tax, which is equivalent to Canada’s GST). Now businesses have to file this separate form quarterly. Some companies could have thousands of names to report. This is hugely onerous and for no apparent useful purpose. Furthermore, the form has to be filed by calendar quarter and that might not coincide with quarterly VAT reporting periods. Of course, there are penalties for not filing the form or for filing it late.
· Example 2 – Canada – Regulation 105 (which this author has written about before and would be happy to forward information to anyone who requests it) imposes a requirement for Canadian businesses to withhold 15% of amounts paid to foreign service providers, even if no withholding tax is applicable under a tax treaty. The foreign service provider must file Canadian tax returns to recover these amounts. There appear to be few Canadian businesses that are aware of this. However, the penalties for non-compliance can be significant. I am told that CRA enforcement of Regulation 105 is being stepped up.
· Example 3 – U.S.A. – many U.S, citizens have lived much of their lives outside the U.S. but still have to file U.S. tax returns, even though many of them have little connection with the U.S, and owe no tax under tax treaties. Unfortunately, the U.S. tax system is a constantly changing minefield. One requirement is to file a Form 90-22.1 detailing accounts with foreign financial institutions if the total balance in all accounts is $10,000 or more at any time in a year. This includes all accounts over which the person has signing authority. This form is filed separately from tax returns. The penalty for non-willful failure to file is $10,000 for each account. (Fines for willful failure to file start at $100,000 and can go up to $500,000 plus 5 years in prison.) Recently, such fines have been imposed on U.S. citizens living abroad who in good faith thought they were in compliance with all their filing requirements. The fines were so onerous that the Canadian finance minister has even complained to the U.S. about it. There are obviously reasons for the U.S. wanting to know about foreign bank accounts but applying such fines to honest citizens acting in good faith is not going to convince people that the tax system is fair.
It seems that tax departments are aggressively seeking out little known and apparently innocuous filing requirements to grab more of our hard earned cash. Creating what many may view as absurd filing requirements that only dedicated tax practitioners can hope to keep up with, and imposing stiff penalties for non-compliance may be viewed as confiscation by some, but there is not much we can do but be aware and beware. The taxman is sharpening his fangs.
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