Evasion of value-added tax can lead to commercial cover-ups, fraud, money laundering

To raise revenue for the provision of quality state services, countries impose taxes on income from various sources, or as is the case in the Kingdom, on capital gains and foreign investments. This tax collection typically accounts for between 25 and 70 percent of national government budgets.

However, the wealthy evade taxes in several ways, which affect revenue collection and therefore the efficient running of the state.

The local press reported in late July this year that most gold shops in Saudi Arabia cities were encouraging customers to pay in cash rather than using electronic billing machines linked to the Zakat, Tax and Customs Authority.

In return, customers are offered a discount on the value-added tax. The problem is that customers comply without questioning the reasons or considering the potential for fraud and tax evasion, and the resulting harm to state revenues and services provided to citizens.

This can also lead to security and social problems, as well as commercial cover-ups, fraud and money laundering.

Aside from the fact that the ministries of commerce and municipalities are not fulfilling their required roles, the penalties imposed to deter violators are insufficient. The fine for a delay in registering income digitally is no more than SR20,000 ($5,326).

Those who evade taxes are fined three times the value of the goods or services in question. I tried to find evidence that this triple fine had ever been implemented but found nothing. The maximum reward for reporting such an offense is SR1 million, assuming one would receive it.

Meanwhile, according to experts, the average gold shop makes about SR30 million annually. By transacting in cash, the shop avoids paying tax of SR4.25 million. Assuming 100 shops are engaging in this practice, the total amount would be SR3 billion. The lost tax revenue would amount to SR425 million — and this is in just one sector.

The authorities would be able to track these transactions and investigate any suspected tax evasion or fraud, though this would not apply to the regional headquarters of foreign companies, which have been granted 30-year, renewable tax exemptions.

The behavior of some gold-shop owners is not new; there are published precedents dating back to 2020, along with similar activity in clothing stores, real estate brokerage, and other sectors.

A European study published this year has revealed that tax evasion is depriving Europe of massive sums, estimated at around 825 billion euros annually, or five times the EU’s entire budget. This equates to 1,650 euros per European citizen.

The 2021 ProPublica report, which analyzed 15 years of individual tax data in America, found a significant wealth gap and tax evasion between social classes in the US. It noted that the middle class pays around 15 percent of their annual income in federal taxes, while the wealthiest pay less than 1 percent.

Furthermore, according to Forbes, the combined wealth of the world’s 25 richest people increased by $401 billion between 2014 and 2018, yet they only paid $13.6 billion in taxes, or just 3.4 percent of their profits.

As indicated above, governments typically collect taxes on earned income, capital gains, and foreign investment, which can account for 25 to 70 percent of their national budgets. The wealthy, however, are able to evade taxes by, among other means, converting stocks into cash (which are not considered income until sold) and by borrowing against their shares to access cash while paying lower interest rates.

The Romans were the first to introduce sales, income, and inheritance taxes. One peculiar historical tax was the “beard tax” imposed by Russian Tsar Peter the Great in the 18th century, requiring traders to pay 100 rubles, the general public 60 rubles, and rural clergy 30 rubles to maintain the European fashion trend of being clean-shaven.

Italy has implemented a system they call the “Income Measure” that allows the Italian government to closely monitor the spending of Italian citizens. If their spending exceeds certain thresholds, it can be compared to the taxes they have paid. If there are clear discrepancies, the individual is then summoned for an investigation.

This year in July, Italian authorities seized $131 million from Amazon’s Italian branch due to allegations of tax fraud and irregular labor practices. The model used in this system could potentially be developed further to monitor and ensure compliance with Italy’s value-added tax on consumer goods, as well as the 20 percent income tax on foreign investors’ profits.

The authorities would be able to track these transactions and investigate any suspected tax evasion or fraud, though this would not apply to the regional headquarters of foreign companies, which have been granted 30-year, renewable tax exemptions.

As Benjamin Franklin, whose picture appears on the $100 bill, says: “In this world nothing can be said to be certain, except death and taxes.”

• Dr. Bader bin Saud is a columnist for Al-Riyadh newspaper, a media and knowledge management researcher, and the former deputy commander of the Special Forces for Hajj and Umrah in Saudi Arabia. X: @BaderbinSaud.