The most normalized white-collar crime worldwide: tax evasion

FACULTAD DE TURISMO Y FINANZAS GRADO EN FINANZAS Y CONTABILIDAD THE MOST NORMALIZED WHITE-COLLAR CRIME WORLDWIDE: TAX EVASION Trabajo Fin de Grado presentado por Dª Laura Real Rodríguez, siendo la tutora del mismo la profesora Dª Pilar Cubiles Sánchez-Pobre. Vº. Bº. del Tutora: Dña. Pilar Cubiles Sánchez-Pobre Alumna: Dña. Laura Real Rodríguez Sevilla. Junio de 2022 GRADO EN FINANZAS Y CONTABILIDAD FACULTAD DE TURISMO Y FINANZAS TRABAJO FIN DE GRADO CURSO ACADÉMICO [2021-2022] TÍTULO: THE MOST NORMALIZED WHITE-COLLAR CRIME WORLDWIDE: TAX EVASION AUTOR: Dª LAURA REAL RODRÍGUEZ TUTOR: Dra. Dª. PILAR CUBILES SÁNCHEZ-POBRE DEPARTAMENTO: Derecho Financiero y Tributario ÁREA DE CONOCIMIENTO: Derecho Financiero y Tributario ABSTRACT: One of the main problems around the taxation systems worldwide is the lack of a complete exchange of information between territories. International cooperation is the cornerstone of the fight against tax evasion. However, reaching fluent communication between countries, even within the European Union, is complex and far more efforts are needed to achieve the desired objective. Efforts such as the organization of the Fifth Forum by part of the OECD where the Ten Global Principles against Tax Crime were born in order to ensure tax compliance. Trying to find a solution, the analysis of financial statements and the Beneish model will be included as the main source of early identification of these fraudulent activities, in addition to the use of certain types of incentives, both tangible and intangible, as an attempt to promote the voluntary compliance. Once analysed the global situation, this paper will examine the impact of this fraud on the Spanish economy, the penalties imposed and action plans by institutions such as the AEAT. KEYWORDS: Tax evasion; OECD; Tax compliance; Tax Administration; Special Purpose Entities. TFG-Finanzas y Contabilidad. Most normalized White-collar crime worldwide: Tax evasion. - I - INDEX 1 INTRODUCTION ................................................................................................................ 4 2 WHAT IS CONSIDERED ‘TAX CRIME’? ........................................................................ 6 2.1 Tax avoidance ............................................................................................................. 6 2.2 Tax flight ...................................................................................................................... 6 2.3 Tax evasion ................................................................................................................. 6 3 TAX EVASION AROUND EUROPE ................................................................................. 8 3.1 Main institutions that ensure compliance with the law ......................................... 8 3.1.1 European Union .............................................................................................. 8 3.1.2 Europol ................................................................................................................ 9 3.1.3 Financial Action Tax Force ............................................................................... 9 3.1.4 World Bank Group ........................................................................................... 10 3.1.5 International Monetary Fund ......................................................................... 11 3.2 OECD fifth forum ...................................................................................................... 12 3.2.1 Action plan ........................................................................................................ 12 3.2.2 Principles of the Forum: ................................................................................. 13 4 MOST COMMON MECHANISMS USED FOR TAX EVASION................................. 15 4.1 Special Purpose Entities ......................................................................................... 15 4.1.1 Definition ........................................................................................................... 15 4.1.2 Tax advantages of SPEs ................................................................................ 16 4.1.3 Tax disadvantages of SPEs ........................................................................... 17 4.1.4 Enron Scandal: cooking the books ............................................................... 17 5 MEASURES FOR IDENTIFICATION OF TAX CRIME ............................................... 19 5.1 Financial Statements Analysis: Ratio Analysis .................................................... 19 5.2 Beneish Model .......................................................................................................... 20 6 INCENTIVES FOR TAX COMPLIANCE ....................................................................... 22 6.1 Materialistic Incentives ............................................................................................ 22 6.2 Respectful and responsive treatment ................................................................... 22 6.3 Verbal rewards.......................................................................................................... 23 7 WHAT ABOUT SPAIN? .................................................................................................... 24 7.1 Economic impact of Tax evasion. .......................................................................... 24 7.2 Concept of Tax evasion in Spain. Penalties and punishment. .......................... 24 7.2.1 Concept of Tax evasion in Spain. ................................................................. 24 7.2.2 Penalties and punishment. ............................................................................ 25 7.3 Fraud related to accounting. .................................................................................. 26 7.3.1 Accounting fraud. ............................................................................................ 26 7.3.2 Dual-use software technology ....................................................................... 26 7.4 Key agencies combating tax crime ....................................................................... 27 TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 7.5 Anti-fraud measures ................................................................................................ 28 7.5.1 Prevention of Tax and Customs Fraud ........................................................ 28 7.5.1.1 Assistance to taxpayers ................................................................................. 28 7.5.1.2 Preventive actions ........................................................................................... 29 7.5.2 Tax and customs fraud control actions. ....................................................... 30 8 CONCLUSION .................................................................................................................. 32 BIBLIOGRAPHY ........................................................................................................................ 34 TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. LIST OF ACRONYMS ACRONYM MEANING OECD Organization for Economic Co-operation and Development EU European Union IT Computers and Information Technology VAT Value-Added Tax EUROPOL European Union Agency for Law Enforcement MTIC Missing Trader Intra Community Fraud EFECC European Financial and Economic Crime Centre FATF Financial Action Task Force DPRK Democratic People´s Republic of Korea WBG World Bank Group DRM Domestic revenue mobilization PCT Platform for Collaboration on Tax IMF International Monetary Fund UN United Nations GDP Gross Domestic Product CRS Common Reporting Standards SPE Special Purpose Entity SPV Special Purpose Vehicle BEPS Base and Erosion Profit Shifting Project MTM Mark-to-Market SOX Sarbanes-Oxley FIU Financial Intelligence Unit AEAT ‘Agencia Estatal de Administración Tributaria’ (State Tax Administration Agency) SEPBLAC ‘Servicio Ejecutivo de Comisión de Prevención del Blanqueo de Capitales e Infracciones Monetarias’ (Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences) SAR Suspicious Activity Reports ED Excise Duties IS Internal Revenue Service PIT Personal Income Tax TFG-Finanzas y Contabilidad. The most normalized white-collar crime worldwide: tax evasion. 4 1 INTRODUCTION All research is born of a concern. In the case of this study, it arises from the need to emphasize the impact that our behavior as citizens has on the Tax Administration. It is also important to study the negative consequences that will influence the welfare state that citizens of countries such as Spain and the United States enjoy. The concept "Welfare State" or welfare society is a political-economic expression that refers to the social model of a state that is responsible for covering the social rights of all its citizens. (Will Kenton and Toby Walters 2020) The State therefore assumes certain responsibilities for the provision of certain services that will thus be considered public, such as health or education, with the main aim of preventing certain social groups from falling into marginality. (Will Kenton and Toby Walters 2020) The main method available to governments to redistribute the wealth needed to achieve the Welfare State is the collection of taxes and fees, Hence, the main objective of the principal institutions, such as the OECD in an international field and the ‘Agencia Tributaria’ in the Spanish territory, is to pursue the effective application of the tax system. As a result, a second complementary objective will be implicitly born: voluntary compliance by taxpayers. This concept is one of the main objectives of Tax Administrations worldwide. Thus, the fundamental challenge facing administrations, both nationally and internationally, is tax evasion. The complexity of the system, together with the tax burden and the lack of economic education make tax evasion a tempting way out for many taxpayers. In view of this situation, the Administration is generally at a disadvantage and tries to tackle very specific problems in a piecemeal manner. This scenario will further incentivize tax crime since the taxpayer does not perceive the real risk or cost of their actions. The role of governments in this field is key and has been intensified by pressure to increase the collection of their taxes in order to meet the need to comply with the provision of public services, among other obligations. While evasion has always been an issue of relevance, it was in the early 1980s that developing countries found themselves at a difficult crossroads. Virtually most of them were unable to meet their payment obligations and as a result began to experience a lack of funds for their development. (Cosulich Ayala 1993) As a solution, debtor countries reached certain agreements with creditors, through the intervention of international organizations, to clean up their public accounts. In this way, the role of governments in this field is intensified with the pressure to increase the collection of their taxes to face the need to comply with the provision of public services, among other obligations. This resulted in the reduction of public expenditures and the approval of numerous tax reforms. Currently, tax evasion continues to face a far-reaching challenge. In recent years there has been increased concern about the so-called informal economy, whose fiscal consequences will cause significant losses for the Administration. TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. In this way, cooperation between territories is essential for continuing progressing in the fight against tax crime, to definitively put an end to the tax hideouts of the criminals who take advantage of this lack of information exchange. For all this, the implementation of measures to prevent and suppress evasion is considered a fundamental mission, from the moral, social, legal, and economic point of view. Taking into account the relevance of the problem, it will be considered a collective responsibility, which involves the whole society at all levels. All of above explain the need of study some factors related with Tax evasion. First of all, it is important to define the concept of tax evasion, and once internalized, its application in the European territory will be of special interest, where institutions such as the OECD will play a fundamental role. Secondly, Special Purpose Entities will be analyzed as the main vehicle of expansion of this fraud, exemplifying the use of this tool by the Enron Corp scandal. As rational beings, arises the need of finding a solution to this problem. Specifically in this document, the analysis of financial statements and the Beneish model will be included as the main source of early identification of these fraudulent activities, in addition to the use of certain types of incentives, in order to promote the voluntary compliance. To conclude with the analysis of the situation, the attention is focused on the impact that these illicit practices have on the Spanish economy, analyzing in this way the penalties imposed and anti-fraud measures by institutions such as the AEAT will be exposed. TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 2 WHAT IS CONSIDERED ‘TAX CRIME’? If we ask someone what he or she considers as tax crime, the answer may seem obvious to them: the act of defrauding or deceiving the public treasury on the payment of taxes. And this is totally true but, most of the time, this is mixed up with other situations as the tax loopholes exploitation or tax havens. Are they legal? Are they moral? In order to clarify these doubts, we will introduce the definitions of the following terms: tax avoidance, tax flight and tax evasion. 2.1 Tax avoidance Tax avoidance is the practice of reducing the tax payments using legal mechanisms, such as the exploitation of tax loopholes. This task is associated with terms such as ‘good idea’ and ‘clever’, as a study published by the Journal of Economic Psychology shows. This paper counts with the collaboration of 252 fiscal officers, Economics and Business Administration students, business lawyers and different entrepreneurs. (Kirchler, Maciejovsky, and Schneider 2003) These tax loopholes mainly arise from the lack of detailed information for the taxpayers, as the legal framework cannot cover all the specific cases worldwide, together with the difficulty this implies for the tax authorities to detect the illicit activities. Additionally, some countries may have lack of fiscal capacity, which may lead to the inability to create precise accounting and fiscal rules. (Thum, Marjit, and Seidel 2016) This legal limbo encompasses ex/cum transactions, among others. These are transactions in which the shares are paid immediately before the payment of dividends (cum dividend), but they are delivered after the payment (ex-dividend). This action creates confusion about who owns the shares at the time the payment is done, allowing both parties to claim refunds on withholdings taxes, even though they are only paid once, when the dividend is issued. It is classified as tax arbitrage and it is considered illegal in some countries as Germany. (Buettner et al. 2020) 2.2 Tax flight Tax flight talks about reallocating the main business into a new country, called tax havens. These are territories that offers tax advantages to foreign investors, including strategies as the low or zero corporate tax rates. (Dharmapala 2008). This activity is totally legal, but in the eyes of most of the society, is immoral. The population consider a country as a big family, so as everyone is obliged to contribute to the state treasury. This statement is exemplified by the slogan of the Spanish Treasury “Hacienda Somos Todos”. The list elaborated by the OECD in 2000, include territories such as Panama, the Principality of Monaco, the Republic of the Maldives or Gibraltar in these practices. (OECD 2000). Nowadays, these countries are classified inside the EU list of noncooperative jurisdictions for tax purposes since 2020, as it will be mentioned in point 3.1.1. 2.3 Tax evasion The Oxford Languages Dictionary (2022) defines tax evasion as the ‘illegal non-payment or underpayment of tax’. Therefore, this activity is considered completely illegal, and for that reason, each government of each nation will establish different sanctions for its inhabitants. In the case of Spain, these penalties will be exposed in point 6.4. TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. This practice is committed wilfully, which implies involves the subject’s knowledge of the malicious behaviour he is engaging in and the consequences it will have on government tax collection.(Yánez Henríquez 2015) Even so, according to the principle of presumption of innocence, any person investigated for the execution of an alleged offence shall not be guilty a priori and shall lose his or her innocence only and exclusively when there is a judicial decision made by an independent and impartial court supporting this accusation. (Belda Pérez-Pedrero 2001) Moreover, talking about the international relations between countries, some people try to deceive tax-collecting organizations by spreading their business nucleus across different territories. It should be noted that one of the main characteristics of the tax havens mentioned above is not to declare the income obtained by its inhabitants. (Uckmar 2006) This would complicate the question of where these individuals should report income, often causing confusion because, in accordance with the principle of World Wide Income Taxation, every person is taxed in his or her country of residence on the income he or she earns anywhere in the world. (Marín Benítez 2007) Aimed to clarify such situations and determine the residence of the individuals, each country may maintain a double taxation agreement with the other countries with which it maintain any kind of relationship. (Uckmar 2006) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. - Principle 4: Have Effective Powers to Freeze, Seize and Confiscate Assets. ‘Jurisdictions should have the ability to freeze / seize assets in the course of a tax crime investigation, and the ability to confiscate assets’ - Principle 5: Put in Place an Organizational Structure with Defined Responsibilities. ‘A jurisdiction should have an organizational model with defined responsibilities for fighting tax crime and other financial crime.’ - Principle 6: Provide Adequate Resources for Tax Crime Investigation. ‘Tax crime investigation agencies should have adequate resources’ - Principle 7: Make Tax Crimes a Predicate Offence for Money Laundering. ‘Jurisdictions should designate tax crimes as one of the predicate offences for money laundering.’ - Principle 8: Have an Effective Framework for Domestic Inter-Agency Cooperation. ‘Jurisdictions should have an effective legal and administrative framework to facilitate collaboration between tax authorities and other domestic law enforcement and intelligence agencies.’ - Principle 9: Ensure International Co-operation Mechanisms are Available. ‘Tax crime investigation agencies must have access to criminal legal instruments and an adequate operational framework for effective international co-operation in the investigation and prosecution of tax crimes.’ - Principle 10: Protect Suspects’ Rights. ‘Taxpayers suspected or accused of committing a tax crime must be able to rely on basic procedural and fundamental rights.’ TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 4 MOST COMMON MECHANISMS USED FOR TAX EVASION After analyzing the institutions that ensure the tax compliance, it is worthy to study the performances of the firms involved in this illicit activity. Some big scandals have brought into light the mechanism that they used for avoiding paying what corresponds. The most used tool in this case is the Special Purpose Entities (SPE). 4.1 Special Purpose Entities 4.1.1 Definition A Special Purpose Entity (SPE), also called Special Purpose Vehicle (SPV), is an entity created with a specific objective, that can be, for example, to contract a leasing, investment property or even trade in the financial markets for swaps and other derivative instruments. The principal characteristic of this kind of entities is that they have the ability to isolate the financial risk of its parent company, that is to say, its creator. As it is a completely independent firm, its assets, net worth and obligations are totally safe, even if its parent company goes bankrupt. This scheme briefly sets out an example where the SPE acquires a loan for the purchase of an asset that the parent company will subsequently enjoy: Figure 1: SPE example scheme Mainly thanks to the above characteristics, these entities depict a clear representation of the fine line between legal limbo and illegal activities, between tax avoidance and tax evasion. On the one hand, tax avoidance is achieved by the difference between the tax rates to be paid by each company separately. But, on the other hand, tax evasion comes into play when these unique features are used to hide the holding company’s real situation, trying to hide debts or toxic assets 2 among a Special Purpose Vehicle (SPV) (Hayes 2021) and both companies are not perceived as a whole. (Demeré, Donohoe, and Lisowsky 2020) This manipulation of its numbers means that the parent firm does not communicate or express the company’s faithful image to external users and that it seems to be more 2 Toxic assets are those that are hard or impossible to sell as the market is totally upset and the firm cannot find a counterparty for the sale. The potential buyers see it as a guaranteed loss of money. (Chen 2020) The bank grants a loan to the SPE The SPE acquires the new asset The SPE rents the asset to the parent company The SPE pays the loan with its corresponding interest The parent company pays the rent to the SPE PARENT COMPANY ASSET BANKING INSTITUTION SPECIAL PURPOSE ENTITY TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. profitable than it really is. (Hayes 2021) This situation contradicts the accounting bases that stipulate that the actual representation of the accounts is a prerequisite, since it contributes truthfulness to the accounts of the given company. (Coll Morales 2020) 4.1.2 Tax advantages of SPEs As mentioned above, these entities are always created with a special purpose. Depending on it, the aggressiveness of the strategies carried out will oscillate. It should be noted that the presence of these entities does not always ensure the existence of tax savings, since other factors such as the perception of the whole as a consolidated group or the correct distribution of assets come into play for them to come true. Therefore, these entities may only generate tax savings to their creators when they are linked to the term ‘tax-advantaged’. (Demeré et al. 2020) Tax-advantaged is defined as a type of asset that offers tax benefits, that can tender from some exemptions to the deferral of the taxes. The tax-deferred accounts include the advantage of possible tax deductions on the whole current taxable amount, but this quantity will be included in future years taxations. On the other hand, the tax-exempt accounts consists of a privilege as established by the Government or the Law, which excludes the payment of a tax, to a subject who would be theoretically obliged to pay it by law. (Investopedia 2021) Once these terms have been defined, it can be stated that a SPV can generate savings in taxation through two different canals. Firstly, SPEs can help its parent company to achieve more tax-advantaged features. This can be possible as these entities are totally independent, and their assets and transactions follow a completely different line to their holding. In that way, the SPE can support high-risk assets, relieving the debt ability of their parent, consequently leading to a reduction on tax payments and increase on the tax-deductible interest expenses. Moreover, thanks to their ability to captivate financing, they can also include in their accounts assets and projects that can increase its parent depreciation or bad debt deductions. (Demeré et al. 2020) Secondly, they can boost the tax efficiency contributing to adoption of some business nucleus, for example the patents, and later to the relocation of them to low-tax territories. These practices are so extremely common, to the point that the OECD has had to implement measures as it considers it a tax mistreat according to the Base and Erosion Profit Shifting Project (BEPS) 3 . (Demeré et al. 2020) Furthermore, on the most hostile side, the SPEs can achieve the tax saving across tax shelters. (Demeré et al. 2020) Some assets as the municipal bonds and the employment retirement plans are considered tax shelters. These shelters are legal mechanisms to cumulate assets in order to minimize its liabilities. (Kagan 2021) In some cases, this vehicle can allow a “double deduction” for a particular loss. For example, selling to another enterprise of the group the SPEs, in such a way as to generate a deductible loss.(Demeré et al. 2020) As a conclusion, the SPEs have countless opportunities that can be used to do business, but care must be taken with the management of these entities not to cross to the dark side. 3 The tax base erosion and profit shifting (BEPS) refers to the exploitation of gaps and mismatches in tax rules achieving tax avoidance. Specifically, the BEPS project sum up fifteen actions with the objective of adjusting the international taxation.(OECD 2016) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 4.1.3 Tax disadvantages of SPEs Although, as explained above, these entities can provide us with the opportunity to save on taxes, it should be noted that these savings are not in large amounts, and therefore, in many cases it is not profitable. (Demeré et al. 2020) Moreover, the problem arouses when the costs of setting up such an entity outweighs the benefits. But, as the benefits will be obtained in the short to medium term and the costs will take longer to be reflected in the accounts because they arise as a consequence of the transaction, at first glance it seems that the project is profitable, and the managers jump in the deep.(Demeré et al. 2020) In addition, the creation of these entities entails other problems for the image of the parent company. These entities reduce the quality of the information, as, being a completely separate entity from the holding, it will be very difficult for external users to identify the relationship if they are not recognized as a consolidated group. This will also lead the pressure, from both the competent authorities and society, to increase enormously. (Demeré et al. 2020) Furthermore, the SPEs can cost an increase in the payment of taxes, especially after completing the task for which they were created, the tax savings at a certain moment in time. Along with this issue, they can lead to serious penalties by the tax authorities if they do not accept the tax relationship between the two companies as a result of a negative audit. (Demeré et al. 2020) Through these audits, authorities could also adjust transfer pricing between border transactions. In this case, it must also be borne in mind that the region where the company is established must allow compensatory adjustment. If it were not accepted, it would result in double taxation 4 .(Demeré et al. 2020) 4.1.4 Enron Scandal: cooking the books Enron Corp. was founded in 1985 in the merger of two natural-gas-transmission companies, Houston Natural Gas Co. and Omaha, Neb.-based InterNorth Inc. At that time, the energy market regulations were significantly reduced, allowing companies to gamble with future prices. Enron positioned itself as one of the most important companies in this sector, as it achieved to fix gas prices to its customers through a contract that negotiated with gas producers by a fee. It became one of the most popular intermediaries in society. Jeffrey Skilling, the head of the firm, changed from a historical cost accounting method to a mark-to-market (MTM) accounting method. (Seabury 2015) The Mark-to-Market (MTM) method allows the continuous updating of the fair value of the firm’s accounts, such as the value of the assets and the liabilities. This procedure gives more accurate information about the fair image. In contrast, in the historical cost method the assets maintain its fair value since the purchase moment. (Corporate Finance Institute 2022) Enron used this accounting method to hide the troubles they were having at the end of the boom years. Enron managers began to register unrealized future profits, which they were able to account for thanks to this method. But even so, those efforts were not enough as the problems overflowed all the accounts of the organization. (Bondarenko 2021) In this way, Enron began to use the creation of these entities to try to hide the situation so that the price of the shares would not collapse, since, if so, the company would go 4 On many occasions, the firms can take refuge in the double taxation agreements that have been established by many countries among them. These agreements try to avoid the enterprises to pay for the same reason in two different jurisdictions. (EFE 2019) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. from being a benchmark to being practically bankrupt. The company created a complex set of instrumental companies that were supposedly, independent. But Enron indirectly controlled them. They were used to hide the reality through the concealment of liabilities, protect assets or hide them, create fictitious benefits…(Seabury 2015) For example, Enron built a power-plant and immediately, accounts its projected profits on its books. If the plant revenues were less than projected, it would transfer them on its accounts. So, the loss went underreported, making the firms appearance more profitable than it really was.(Seabury 2015) The mechanics of transactions between these two entities were based on the exchange of stocks by Enron replacing them for SPE cash. The shares received by the entities were used in turn to cover an asset in Enron’s accounts. Thus, Enron would guarantee SPEs a constant commitment, apparently eliminating counterparty risk. (Seabury 2015) Along the same lines, the capital of the companies was wholly owned by Enron, as it triggered its creation. This meant that if Enron fell, his entire army of SPEs would fall with it. In addition, this data was not transferred to investors, who knew the existence of these entities but not the capitalization of these.(Seabury 2015) The analysts started making questions about this mechanism in April 2001. Then, Enron closed what it called its Raptor SPEs, that is to say, its SPE network, to avoid distributing the 58 million in stock shares they owned. When the company began to be investigated, Enron revealed its $591 million and $628 million in losses and debt, respectively. Because of that, the Sarbanes-Oxley (SOX) Act 5 determined a huge penalty for financial manipulation. Finally, Enron collapsed in December 2001, and with it the values of all SPEs, compelling the guarantees of the protagonist to come into force. (Seabury 2015) 5 The Sarbanes-Oxley (SOX) Act of 2002 is a special law created in order to protect investors from dishonest financial reporting for enterprises. (Kenton 2020) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 5 MEASURES FOR IDENTIFICATION OF TAX CRIME At the present time, tax fraud has become a major issue for the society as a whole. As the volume and impact of it has increased over time, no one is dealing with it in a superfluous way. In addition, the evolution of technology has opened many doors to the great scammers, being these increasingly strategic and sophisticated with their methods. In response to this wave, regimes have become more robust and relentless. As rational human beings, we try to develop mechanisms to identify and, consequently, be able to eliminate these problems that endanger the natural course of things. In the financial analysis sector, the experts can assist in detecting these irregularities through various tools. Among them, two different interlinked methods can be found: the Ratio Analysis and the Beneish Model. 5.1 Financial Statements Analysis: Ratio Analysis Economic decision-making is based on financial and accounting information gathered in the company's financial statements. In order for the information user to make decisions based on reality, especially for external users, this information must be unbiased and reflect the true image of the company at issue.(Kenton 2021b) Here lies the main reason for the manipulation of the accounts by the executives of the company: to show the accounts of the most profitable and attractive company for potential investors. Thus, some experts consider high levels of indebtedness as a major matter, which can encourage managers to committing any illicit activities, so as to safeguard or preserve the company’s reputation.(Kanapickienė and Grundienė 2015) Consequently, the financial ratio analysis can be a great help in the investigation of financial statements fraud, as it can spot accounting irregularities. In this way, the experts study these ratios, which build direct relation between items, in order to detect those that are more likely to reflect that some irregular activities have been carried out inside the organization. (Bloomenthal 2020) Following this stream of study, the experts divide them into five different groups: profitability, liquidity, solvency, activity and structure ratios. Furthermore, they summarize the importance of this ratios for fraud detection into profitability, activity and structure area, using the following ratios for this analysis.(Kanapickienė and Grundienė 2015) On the one hand, some authors argue that the Gross Profit is a variable inclined to manipulation. This manipulation can be carried out through classification shifting, where the managers miscategorize the expenses, expanding the earning impact on the gross profit margin. (Poonawala and Nagar 2019) In terms of financial ratio analysis, the following ratios can show any hint of illegality: - Gross Profit to Sales - Gross Profit to Total Assets On the other hand, there are two accounts that entitled to subjective estimation: Inventories and Accounts Receivables. As a result, these items can be used as a red flag for fraudulent reports, included in the subsequent ratios: (Kanapickienė and Grundienė 2015) - Inventories to Sales - Inventories to Total Assets - Accounts Receivables to Sales TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. Once the most optimal ratios are selected for this task, the following question arises: What would be the value for each ratio that would indicate that a company’s reports are fraudulent? With the above information it is almost impossible to answer this question, since this value depends on various factors such as the type of company, its previous situation or the country in which it is located.(Kanapickienė and Grundienė 2015) In order to solve this position, the following concept is introduced: the Beneish Model. 5.2 Beneish Model The Beneish M-Score model was born in 1999, developed by the Professor Messod D. Beneish. This statistical model emphasizes the use of various variables that have an impact on results and are likely to be manipulated, which does not necessarily imply fraud or illegality. The M-Score is calculated using eight ratios that allow comparing the evolution of financial variables from year to year and determine the year in which the irregularity occurs.(Mantone 2013) Figure 2: Beneish Model Ratios An M-score obtained from the computation of those eight ratios that is greater than -2.22 is an indicator of the possible alteration of the company’s financial statements.(Kenton 2021a) The first time this model was put into practice was in 1998, by part of some students at Cornell University, who used it to predict that the financial statements of Enron Corp. were being manipulated before its bankruptcy in 2001.(Kenton 2021a) DAYS SALES IN RECEIVABLE INDEX GROSS MARGIN INDEX ASSET QUALITY INDEX SALES GROWTH INDEX DEPRECIATION INDEX SELLING, GENERAL AND ADMINISTRATIVE INDEX TOTAL ACCRUALS TO TOTAL ASSETS INDEX LEVERAGE INDEX TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. This model has also some limitations. It cannot be applied to financial firms as banks and insurance companies as these companies were not considered by the professor when he was evaluating his models. In addition, the entities must have its financial statement available for the external users, as it was considered by Beneish. (Terreno, Campana, and Sattler 2020) Furthermore, it is a probability theory model and has not the capacity to guarantee detection of real fraud in a company. (Mantone 2013) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 6 INCENTIVES FOR TAX COMPLIANCE In order to increase the commitment of taxpayers, governments are in the research of some incentives which have the ability to boost tax compliance. In this way, these incentives are divided into materialistic, respectful and responsive treatment, and verbal rewards. 6.1 Materialistic Incentives A materialistic incentive can be focused on a positive or a negative way. Inside the positive incentives can be found tax benefits or advantages such as lotteries for compliant behavior. (Smith and Stalans 1991) This gameplay was implemented for the first time in 1951 in Taiwan. The government offered lottery tickets in exchange for consumers receipts. In addition to ensuring the commitment of individuals, this system manages to improve the control of transactions among users and firms to the Administration, and, in this way, facilitates the detection of illicit activities, hindering the tax evasion. (The Economist 2019) Some research has brought to light some defeats of the positive incentives, mainly its fleeting nature. As it forms part of extinctic motivation, when the effect or feeling that this stimulus produces evaporates, the taxpayer tends to resume its initial behavior. In this way, these incentives cause the user to fulfil their tax duties only if there is such a motivation. (Smith and Stalans 1991) On the other hand, the materialistic incentives in a negative manner includes policies that undermine the unattractive aspects of the tax system, as for example streamlined tax forms or penalties reductions. It is closely linked to the negative reinforcement concept as its main objective is to strength a behavior by the removal of negative consequences. (Nesenoff 2020) It has fewer adverse effects, but these effects are worse when the monetary factor comes into play, assimilating it to the positive incentives behavior in matter of its short-lived essence. (Smith and Stalans 1991) 6.2 Respectful and responsive treatment The relation that governments maintain with its citizens also determine the taxpayers’ behavior. As a kind of positive incentive, when people perceived that the authorities appreciate its contribution, valuing its dignity, they recognized the country as a group. In that way, this team feeling lead to an increase in the taxpayers’ commitment. (Smith and Stalans 1991) The strategies that a government can follow in order to achieve treating people with respect include active and reflective listening, demonstrating the seriousness of the pledge and strengthening trust. (State of New South Wales 2017) Firstly, people want to feel that its complaints and needs have been taken into account for their administration plans. Thereby, several territories have enabled what is called suggestions boxes. In the case of Spain, these procedure process complaints about the performance of the Administration and suggestions on how to improve the service to taxpayers before the Council for the Defense of the Taxpayer. (AEAT 2022b) Secondly, especially when they are not favorable to taxpayers, the government must demonstrate the basis of its measures implemented, describing the actions that have been considered and the investigation carried out. This will also foster the transparency of the Administration, leading to the third objective for responsive treatment: trust. (State of New South Wales 2017) Thirdly, after the 2008 economic crisis, the international tax system suffered a deterioration very quickly, as the citizens blamed the government for the side effects of it. One of the main objectives at that time was recovering the trust of the population, as TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. the organizations know it is the cornerstone of the relation with their people. (Saint- Amans 2014) This was a clear example of how important the reliance as an incentive for tax compliance is. 6.3 Verbal rewards Finally, in this category must be included the verbal rewards such as praises and recognitions of the proper contribution of the taxpayers. These actions embrace the intrinsic motivation of the user, as this causes citizens to be included in the work of the Administration, thus defending its integrity. (Smith and Stalans 1991) Following the information from experts’ researches, the positive feedback in some cases becomes more relevant to individuals than material or symbolic rewards, as the user significantly values their unique identity and personal dignity. (Smith and Stalans 1991) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. o Analysis of information on fiscal risks in different economic sectors. o Development of the Taxpayer Visitation Plan 2020-2023: the public agency will promote the personations in different centers of several business sectors to combat unsupportive behaviors of a very small part of taxpayers who take advantage of the difficulty of contrasting data on the real volume of income. o Implementation of phases similar to previous ones in relation to other economic sectors and other types of taxpayers: to ensure the greatest effectiveness of this plan, the previous initiative will be implemented in new sectors and taxpayers. o Development and execution of other visits. These visits are mainly triggered by indications of irregularities. ▪ Prevention of collection fraud: include the reorientation of the deferral policy and other initiatives to positively influence the spontaneous compliance of taxpayers. In addition, it is intended to facilitate the payment of debts by reducing the administrative costs of compliance. 7.5.2 Tax and customs fraud control actions. At this level, collaboration between the main actors involved in this field, both nationally and internationally, is considered of vital importance. (AEAT 2020) In national terms, it is important to highlight the work of the Social Security Treasury, Labour Inspectorate, Directorate-General of the Cadastre and the regional tax authorities. (AEAT 2020) Internationally, the role of both the OECD and its environment and that of the European Union is indispensable. (AEAT 2020) In this way, in order to tackle tax fraud, it is essential the exchange of information between those agents and cooperation to bring about changes in regulations and common actions. (AEAT 2020) These actions are classified following the type of department it belongs to. In this case the principal areas object to be analysed are the Department of Tax Management, Department of Financial and Tax Inspection and Department of Revenue. (AEAT 2020) Moreover, the main lines of action to be promoted in this area of control and fight against fraud are the following: ▪ Coordinated use of Internal Revenue Service (IRS) information. ▪ Consolidation of control tools. Here it is included the standardization of the VAT registry books and their consolidation with the PIT (Personal Income Tax) economic activity books to facilitate a more effective analysis of these books and reduce the burdens by allowing the consolidated keeping in the same format of the VAT registry books and income tax. ▪ Evaluation of the ex-post behaviour of taxpayers: In the collection area, the behavior induced in other taxpayers in the same sector or who may be related to the debtors visited will also be analyzed. In the Plan for the Prevention and Correction of Tax, Labor and Social Security Fraud mentioned before, thirteen different measures are included within the control of risk areas. Among them, the most important are a plan to combat tax fraud through tax havens, investigation of cash movements, comprehensive control over false or irregular invoices, and control of tax-deductible expenses. (AEAT 2010) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. On the first place and following the recommendations of G20 and the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, the principal objective of the plan to combat tax fraud through tax havens is stablishing miscellaneous international covenants in order to end up with the major obstacle of those territories qualified as offshore: the lack of exchange of information. (AEAT 2010) In 2008, negotiations begun with territories such as Aruba, Andorra, San Marino, Singapore and Panama. Most of the discussions ended up with the firm of a convention. For example, in 2010 Panama and Spain concluded stablishing a double-taxation convention. (AEAT 2010) Secondly, the AEAT commenced cash movement investigations around our whole territory. The inform economy is one of the biggest issues in all economic sectors, as the Administration cannot follow the trace of this money. In this way, the goal of this initiative is controlling those movements of cash in order to have the origin of this kind of illicit operations. (AEAT 2010) With the purpose of fulfilling this objective, the Administration has taken some actions, such as stablishing a protocol for cash movements, for both national and cross-borders territories, in order to establish bonds between money owners and activities related to the informal economy. (AEAT 2010) Talking about the comprehensive control over irregular invoices, AEAT has developed a protocol to verify the veracity of invoices whose origin is doubtful, through collaboration throughout the overall process of both tax management, and financial and tax inspectorate departments. (AEAT 2010) Thirdly, for the detection of illicit tax-deductible expenses, the Administration has designed specific filters for detecting expenditure above the average for each activity sector as a precautionary indicator. In addition, taxpayers will be selected to declare certain costs items disproportionately high in relation to the total volume of expenses declared. (AEAT 2010) Finally, an analysis of costs invoiced by suppliers of goods or services of the "luxury" type or especially related to personal consumption will be carried out to verify the linkage of these expenses with business activities. (AEAT 2010) TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. 8 CONCLUSION Over the last few years, evasion has become one of the main problems directly affecting the credibility of Tax Administrations and governments. Present throughout the globe, it carries serious economic consequences that affect all of us, but as a result of the efforts to combat it and according to the AEAT, the figures show its downward trend in Spain. Thanks to the freedom of the territories to choose the legislation that will regulate this type of crime, it is possible to adapt it to the specific tax needs of each country. But this independence makes the efforts of organisations such as the OECD more complex. The OECD is the visible leader in the fight against tax evasion in the international arena. Its mission is based on transparency and cooperation between territories in order to achieve a homogeneous exchange of information, which allows an optimal detection of irregularities. The line of work that this institution pursues should be the example to be followed by all Administrations, since through action plans such as the one that emerged in the Fifth Forum, certain clear principles or commitments were created, concise and easy to implement by the collaborating territories. Here is born the key to success to stop the haemorrhage of the tax fraud: international cooperation. This teamwork needs to be reciprocated by all its contributors. This is where the failure of the international system in this field lies, since in many cases it is chosen to put the encryption of citizens' data before the exchange of potentially useful information. A good example of this situation is the functioning of countries considered as tax havens or noncooperative territories according to the OECD, where concealment of information is the key. Working to combat fraud, arises the need to find tools that, through the use of quantitative information on the economic performance of companies, can detect the existence of illicit activities. This field includes the Beneish Model which, although it is a probabilistic model, helps notably in the detection of cases such as Enron, thanks to the accuracy provided by its main source of data: numbers. In the next phase of the development of this problem, the struggle of governments to find incentives that can promote compliance with their tax obligations appears. In this case, incentives that ease the pressure of paying taxes will always have a much greater impact on the lives of citizens. That is why initiatives such as respectful treatment and verbal rewards go to the background, leaving no effect on the behavior of society. Of course, Spain is also the victim of fraudulent tax actions, which have different connotations, in terms of definition and dimensioning, legislation and punishment of the crime. It is subject to the criteria of the Criminal Code. Contrary to the OECD plan, as has been demonstrated throughout the investigation, the latest preventive and control measures implemented by the Tax Administration (AEAT) are clearly confusing and imprecise. Although it was intended to follow a multiannual framework, the objectives of each department within the Administration must be more precise so that its agents can clearly understand them and, in this way, work on its implementation and achievement. On the positive side, it highlights the hardening of penalties for which the Administration bet in 2021. In addition to the increase in fines, it is important to emphasize the inclusion TFG-Finanzas y Contabilidad. The most normalized white-collar crime: Tax evasion. of the regularization of technological aspects such as the billing software. As technology advances by leaps and bounds, the public entities around us must move in the same direction and this initiative is a good starting point. Definitely, the leading focus should be placed on increasing the economic-fiscal education of our society in general, through training offered by the Administration in collaboration with the central government, to make citizens aware of the impact of their actions and the consequences they entail. The most obvious projection of this study lies with the continuation of the investigation of the mechanisms used by individuals who manage to defraud in an undetectable way, mainly in the technological field. With the rise of technological advances, new ideas also emerge, camouflaging themselves from the ordinal detection, as happened at the time with dual-use software. 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LEGISLATION Organic Law 10/1995 of 23 November on the Criminal Code, BOE 24 November 1995, num. 281, Arts. 305, 305 bis, 310, 310 bis, https://www.boe.es/eli/es/lo/1995/11/23/10/con Law 11/2021 of 9 July on measures to prevent and combat tax fraud, transposing Council Directive (EU) 2016/1164 of 12 July 2016, laying down rules against tax avoidance practices which directly affect the functioning of the internal market, the amendment of various tax rules and the regulation of gambling, BOE 10 July 2021, num. 164, pages 60-61 (93 pp.), https://www.boe.es/eli/es/l/2021/07/09/11