Tax crooks

The aforementioned is an important, particularly psychological, explanation for why 'cheating the taxman' is somewhat popular, although it should be noted that my firm belief is that the vast majority of taxpayers adhere to the rules. However, there are some who do not. Sometimes it involves minor 'slip-ups,' such as forgetting to report a foreign bank account, failing to declare income from certain jobs, or being overly generous with expense deductions. An inconvenience for the government, but as long as it remains within limits, it's all part of the game. It's also a nuisance for law-abiding citizens because every euro or dollar that one taxpayer underpays essentially needs to be compensated by the honest taxpayers. In other words, the tax evader – small or large – is not primarily deceiving the government, but rather their fellow citizens.

For the government, it is impractical and costly to systematically detect tax avoidance in these smaller cases, although 'smart' programs are used that can indicate whether a tax return might pose fiscal risks. Additionally, if a tax offender is caught, they can not only be required to pay the owed taxes but can also be fined. This should ideally have a deterrent effect. Whether it does or not largely depends on the likelihood of getting caught and the severity of the penalty.

Other taxpayers don't witness these minor matters. They play out behind closed doors between the Tax Authority and the taxpayer. However, there are, of course, larger cases with substantial financial implications. These can become visible if it is decided to pursue criminal charges against the taxpayer. The tax inspector then hands over the case to the public prosecutor. The prosecution ultimately leads to a ruling by a criminal judge, which may result in a conviction unless a settlement is reached. While the taxpayer's name is not explicitly mentioned in a ruling – in published criminal court judgments, everyone is referred to as X or Y – the case itself becomes visible through the publication of the ruling. What is noteworthy is that in the Netherlands, over the last two years, the number of published tax-related criminal cases has increased significantly. In the past two months alone, I observed around ten cases. In all these instances, the taxpayers were convicted of tax fraud. The resulting penalty consistently includes a prison sentence, averaging approximately two years. Furthermore, the taxes must still be paid. In this situation, imposing a fine concurrently is not possible. This principle is known as the una-via principle: either prosecution by the tax inspector under administrative law or by the public prosecutor under criminal law.

Here are a few recent examples of such cases of fiscal criminal fraud. In the Netherlands, the levy of the so-called BPM – or tax on vehicle purchase – has led to quite a few instances of fraud. In a recent case, the Supreme Court upheld a 12-month prison sentence imposed on a car dealer who, through his company, had systematically filed incorrect BPM and VAT returns for years, having also bribed an official in the process. In another recent case that the Supreme Court also had to review, it involved the intentional submission of incorrect VAT and payroll tax returns. The prejudice to the tax authorities in this instance was around €1.5 million, for which the individual was prosecuted. The tax authorities had incidentally excluded an additional amount of €2.2 million from the indictment. The question was whether this latter amount could be considered in determining the sentence. The Supreme Court concluded that it could. All in all, the taxpayer was sentenced to 27 months in prison. The third case I mention is also recent and pertains to a certain Caribbean matter. The case involves real estate held by a Private Foundation on Bonaire. The sale of the property leads to an incorrect tax return for the individual residing in the Netherlands behind the Private Foundation. This taxpayer was criminally prosecuted, resulting in an unconditional prison sentence of five months.

All in all, it appears evident that the Tax Authority and the public prosecutor increasingly opt for a criminal approach. This might be to deter taxpayers more effectively. Incidentally, this phenomenon is apparently not unique to the Netherlands alone. A recent case that made headlines concerns a Dutch tax advisor residing in Italy, referred to as the 'advisor to the stars.' The U.S. tax authorities have requested his extradition because his advice allegedly caused a loss of around $100 million to the American tax authorities. This extradition has been approved. If this fiscal damage is indeed accurate, it will undoubtedly lead to several years in an American prison. However, keep in mind that the burden of proof lies with the public prosecutor. Every individual is innocent until proven guilty.

Peter Kavelaars is a Professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.