Tax Evasion - Evasion of Value Added Tax (VAT) and Sales Taxes

Evasion of Value Added Tax (VAT) and Sales Taxes

During the second half of the 20th century, value added tax (VAT) emerged as a modern form of consumption tax through the world, with the notable exception of the United States. Producers who collect VAT from consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.

In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are breaking the law in most cases. This is especially prevalent in federal countries like Nigeria, US and Canada where sub-national jurisdictions charge varying rates of VAT or sales tax. In Nigeria, for example, some federal states enforce VAT on each item of goods sold by traders. The price must be clearly stated and the VAT shown separately from the basic price. If the trader does not comply (e.g. by including the VAT in the price of the goods) this is punishable as attempting to siphon the VAT.

It is not usually practicable to enforce tax collection on goods carried in private vehicles from one district to another with a different tax rate, and states often only seek to collect the tax on high-value items such as cars.