Tax Evasion in Quebec

Transcription

1 ISSN Volume, no. April, 005 Tax Evasion in Quebec Its Sources and Extent Summary. Every year, a significant amount of tax revenue is lost to the government due to tax evasion stemming from the underground economy, unlawful claims for tax benefits and other illegal activities.. The approach used by the Ministère des Finances to evaluate these tax losses is based on a breakdown of the GDP into several economic sectors to which tax evasion rates are applied.. This approach makes it possible to estimate the Québec government s tax losses generated by the underground economy in 00 at $.5 billion. The sectors with a tax evasion rate of more than 0% (including construction and renovation, alcoholic beverages, restaurants and tobacco) represent just over 0% of the GDP but they account for 85% of tax losses. 4. Tax evasion has significant negative consequences for the government, for individuals and for businesses. This document begins with an analysis of the sources of tax evasion. It then describes the method chosen for evaluating tax evasion and concludes with a description of the phenomenon s extent in Québec. Sources of tax evasion The underground economy is a major source of tax evasion. It refers to all illegal economic activities that are not reported to the government by individuals or enterprises (under-the-table work, concealment of income, and concealment by businesses of part of their sales). Various reasons lead individuals to commit tax evasion, which allows them to increase their standard of living. A survey ordered in 000 by Revenu Québec identified some of the causes of tax evasion. They include the possibility of saving money by paying less tax or of obtaining goods and services at a lower cost. The belief that taxes are too high was also found to be a cause. The businesses that commit tax evasion do so primarily by concealing the full extent of their income in order to increase their profits, reduce their production costs or avoid regulatory restrictions. Government tax losses also occur due to claims by taxpayers of tax benefits to which they are not entitled (e.g., unlawful claims for tax credits or input tax rebates, and non-payment of taxes collected on behalf of the government). Another source of tax evasion arises through illegal activities that funnel into underground networks significant amounts of money that would normally go into the legal economy and provide tax revenue for the government. La perception de la population du Québec à l égard du travail au noir survey conducted for the Ministère du Revenu, June, 000.

2 TABLE Examples of tax evasion sources Underground economy Income fully concealed and parties unknown to tax authorities Taxpayers who have never sent tax returns (includes rental income) Persons who do not report income through renovation work done for others Income partially concealed and parties known to tax authorities Sellers of beverages or food products who conceal income, usually from customers paying in cash Construction entrepreneurs who do not report income for all hours spent at a worksite Unlawful claims for tax benefits Companies that submit fraudulent applications for tax credits Taxpayers who fraudulently claim the tax credit for persons living alone RESULT = TAX LOSSES Source: Ministère des Finances du Québec. Methods for evaluating the underground economy Illegal activities Procuring Illegal trade of drugs, arms, etc. Money laundering The methods used to evaluate the extent of tax evasion only provide approximations because it is difficulty to directly observe the phenomenon, particularly when illegal activities are involved. Overall evaluation of the underground economy Interest in evaluating the underground economy in Canada arose in the late 980s as a response to government deficits and the greater tax burden on taxpayers, which increased even more with the introduction of provincial and federal sales taxes at the start of the 990s. Since that time, several studies have sought to assess the size of Canada s underground economy. They have obtained a relatively broad range of estimates varying from about % to more than 5% of the GDP. The application of these estimates to Canada s GDP in 00 gave figures ranging from $5 billion to $75 billion as the total amount of the underground economy. TABLE Latest estimates of the underground economy in Canada Target years. MACROECONOMIC APPROACHES () Underground economy as a % of GDP Berger (986) 98 From.8 % to. % () Drummond et al. (99) % Gervais (994) 99 From.7 % to 5. % () Mirus et al. (994) Gutman s method % Monetary transaction % Spiro (994) 99 From 8 % to % () MFQ (996) % (Québec) Schneider (000) % Schneider and Enste % (000) Giles and Tedds (00) % (). MICROECONOMIC APPROACHES () Fortin et al. (99) 99.0 % (Québec) Pinard, under the supervision of Fortin and Lacroix (005) % () (Québec) Macroeconomic approaches include various estimation methods, including monetary aggregate analyses, government account analyses and use of latent variables. The evaluations presented may include a margin of error or may vary according to the universe analyzed. They also provide the value for the last year when the study covers a longer period. Microeconomic approaches group together methods used to survey and estimate household consumer demand. The wide variability of the results obtained may lead one to conclude that the evaluation methods did not succeed at achieving a reliable level of accuracy. It is true that some discrepancies are due to the different hypotheses and methodologies used. However, these discrepancies may be due in good part to the differences in the sample universes that were studied. Moreover, the three tax evasion studies conducted in Québec produced relatively convergent results ranging from.0% to 5.7%. Approach used by the Ministère des Finances The approach used by the Ministère des Finances to establish the overall level of tax losses related to the underground economy is based on a breakdown of the GDP into several economic sectors to which tax evasion rates are applied. Average income tax and federal/provincial sales tax rates are then used as the basis for quantifying the amount of tax loss. Tax evasion rates, i.e., the proportion of non-declared economic activities to all economic activities, are based on the following:

3 detailed evaluations of four sectors which are susceptible to tax evasion (construction, restaurants, alcoholic beverages and tobacco products); a risk indicator reflecting the results of more than 70,000 tax audits carried out, per sector, by Revenu Québec from 999 to 00; and other information sources, in particular the results of a Statistics Canada study (Gervais, 994). Extent of tax evasion in Québec related to the underground economy The results obtained according to this approach enable us to estimate Québec government tax losses due to the underground economy at $.5 billion in 00. These losses stem from the concealment of approximately $9.7 billion of economic activity accounting for close to 4.0% of the GDP. Taxes lost on the income of individuals and companies accounted for $.777 billion of the total amount of identified tax losses in 00, while $55 million was lost on the Québec Sales Tax (QST) and $08 million was lost on specific taxes on alcoholic beverages and tobacco products. Estimation of Québec government tax losses associated with the underground economy in 00 (in millions of dollars) given their small size. They still, however, present significant tax evasion rates. The combined GDP of all sectors showing a tax evasion rate of 0% or more comes to just over 0% of the total GDP for the sectors analyzed, but they are responsible for 85% of all tax losses. The other sectors of the economy present lower tax evasion rates. They account for just 5% of tax losses even though they represent 80% of the economy. They include, for example, the food and non-alcoholic beverage sector, and government expenses for which tax evasion is practically non-existent. The tax losses related to the export of goods and services is also low, due in particular to the fact that export activities are not taxable and are governed by customs regulations. Tax losses according to firm size Table 4 gives a breakdown of the tax evasion risk indicators associated with the underground economy of businesses in Québec. These indicators have been established according to the amounts recovered by Revenu Québec through tax and consumer audits conducted from 999 to 00. The table is based on a risk indicator established at 00 for all sectors evaluated. A value of more than 00 indicates a higher-than-average tax evasion rate within the economy and a value of less than 00 indicates a lower-than-average rate. On this basis, Table 4 shows that some sectors, the services sector in particular, are more susceptible to tax evasion than others. It also shows that large businesses are proportionally less likely to conceal income than small ones are. Large firms present a risk indicator () that is nearly five times lower than average. Conversely, small businesses present an overall risk of 8, which is just over three times higher than average. 777 Impôt sur le revenu TVQ Autres Source: Ministère des Finances du Québec. Includes tax on the income of individuals and companies, and contributions to the Fonds des services de santé. Includes specific taxes on tobacco products and alcoholic beverages, and the net profit of the Société des alcools du Québec (regarding the sale of alcoholic beverages). Tax losses by economic sector The economic sectors showing the largest tax loss are construction and renovation, alcoholic beverages, restaurants and tobacco products. Some other sectors such as personal services show lower tax losses, The size of a business is determined as follows: A large business is one with an income of more than $0 million (or shares valued at more than $ million for manufacturing companies). A small business is one with an income of less than $ million (or shares valued at less than $ million for manufacturing companies). Medium-sized businesses are inbetween these two categories.

4 TABLE The underground economy and tax losses per economic sector in Québec 00 (in millions of dollars) Components of the inquiry GDP according to expenses Tax evasion in % Underground activities Tax losses Major underground economic activities (tax evasion equal to or more than 0%) - Construction and renovation Restaurants Alcoholic beverages Tobacco products Various personal services Vehicle maintenance, including parts Others Sub-total Percentage of GDP 0.7. Lesser underground economic activities (tax evasion lower than 0%) - Food and non-alcoholic beverages Other goods and services bought by consumers Government expenses, exports and other components Sub-total Percentage of GDP TOTAL Percentage of GDP 4.0 Source: Ministère des Finances du Québec. Expenses under each heading exclude consumption taxes, which form part of other components. Excludes alcoholic beverages. In addition, GDP associated with household demand for the restaurant sector was evaluated to take account also of all expenses in that sector, including, for example, expenses incurred by businesses. Includes in particular servants, building custodians, hairdressers and taxi services. 4

5 TABLE 4 Tax evasion risk indicators associated with Québec businesses involved in the underground economy Business size Small Medium Large All businesses combined Manufacturing industry Wholesale trade Retail trade Services All sectors combined Average amount recovered per,00 9,9 50,8 0,885 enterprise, in dollars Source: Revenu Québec. These amounts correspond to the average recovery per business following auditing and may include adjustments concerning at-source deductions, consumption taxes and business taxes. The average amount recovered from large businesses comes to $50,8 dollars, and an average amount of less than $0,000 is recovered from smaller businesses. These results, combined with a set of qualitative observations, confirm that tax evasion stems from situations that vary widely from one sector to the next. Significant tax losses in other sectors There are other activities besides the underground economy that generate large tax losses. For example, there are tax losses stemming from nonproductive activities such as unjustified claims for tax credits or input tax rebates. Also, taxpayers who participate in the underground economy may receive various social benefits to which they are not entitled. The amounts of these tax losses are, however, difficult to estimate. Other tax losses are created by illegal activities that funnel into underground networks significant amounts of money that would normally go into the legal economy and provide tax revenue for the government. proportion of these tax losses is the same as that caused by the underground economy. TABLE 5 Extent of tax evasion and estimate of tax losses in Québec 00 Extent of tax evasion Underground economy Unlawful claims of tax benefits Illegal activities In MM$ 9.7 n. a..5 As a % of GDP 4.0 n. a..0 Tax losses In MM$.5 n. d. 0.6 Source: 4 Ministère des Finances du Québec. Conclusion Tax evasion limits the government s ability to meet its obligations towards the population and can have negative impacts on individuals (for example, lack of social protection for underground economy workers and of warranties for people who use their services) and on businesses (unfair competition, etc.). This exhaustive evaluation of tax losses by economic sector in Québec indicates that they stand at significant levels. It also shows that they are concentrated in a few sectors, which will allow the government to focus its actions more closely. Produced by the Direction de l analyse et prévision des revenus autonomes with contributions from Marc Dupéré, Julie Gingras and Lévi Pagé. Special thanks go to the Direction des études économiques, fiscales et statistiques at Revenu Québec for its invaluable collaboration. For more information, please contact Simon Bergeron, director, at (48) This document is available on the website of the Ministère des Finances at the following address: Estimating the extent of illegal economic activities is a very complex process. Statistics Canada estimated the value of these activities at % of Canada s GDP in 994. However, very few analyses have been carried out, and the ones that have been conducted give approximate values only. It is therefore difficult today to indicate the percentage of GDP that these activities represent, just as it is difficult to identify the underlying tax losses. Nevertheless, in accounting for % of the GDP, illegal activities represent a dollar value of least $.5 billion, and the associated tax losses for the Québec government can be estimated at $600 million, if the 5

6 BIBLIOGRAPHY Berger, Seymour. The Unrecorded Economy: Concepts, Approach and Preliminary Estimates for Canada, 98, Canadian Statistical Review VI-XXVI (986). Drummond, Don, Mireille Éthier, Maxime Fougère, Brian Girard and Jeremy Rudin. The Underground Economy : Moving the Myth Closer to Reality, Canadian Business Economics -7, vol., no. 4 (994). Fortin, Bernard, Pierre Fréchette and Joëlle Noreau. L économie souterraine au Québec, Interface / (99). Gervais, Gylliane. The Size of the Underground Economy in Canada, Statistics Canada, Catalogue - 60F, no. (994). Giles, David E.A. and Lindsay M. Tedds. Taxes and the Canadian Underground Economy, Canadian Tax Papers, no. 06 (00). Ministère des Finances du Québec. L économie souterraine, le travail au noir et l évasion fiscale., Fiscalité et financement des services publics (996). Mirus, Rolf and Vladimir Karoleff. Canada s Underground Economy Revisited: Update and Critique, (Canadian Public Policy, vol. 0, no., pp. 5-5 (994). Pinard, Dominique. Un regard sur la taille de l économie souterraine : une méthode d estimation pour le Québec, Master s thesis in economy supervised by Bernard Fortin, Université Laval (005). Schneider, Friedrich. The Value Added of Underground Activities: Size and Measurement of the Shadow Economies and Shadow Economy Labour Force All Over the World, Mimeograph, Department of Economics, Johannes Kepler University of Linz, Austria (July 000). Schneider, Friedrich and Dominik H. Enste. Shadow Economies: Size, Causes, and Consequences, Journal of Economic Literature, vol. 8, no., pp 77-4 (000). Spiro, Peter S. Estimating the Underground Economy: A Critical Evaluation of the Monetary Approach, Canadian Tax Journal, vol. 4, no. 4, pp (994). 6