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ESSTs – what are they and why there is no place for them in the tax system

Tax Alert - February 2023

Tax evasion is never acceptable and one of the prices to pay for rapid technology development is the development of tools to aimed at helping those who are not interested in paying their fair share of tax. In mid-December 2022 the Inland Revenue issued Revenue Alert 22/01 Consequences of acquiring, possessing or using electronic sales suppression tools. Before then most of you will have never heard of Electronic Sales Suppression Tools (ESSTs) and so this article looks at what ESSTs are and why the Inland Revenue suddenly published a revenue alert.

ESSTs, also known as “Phantomware” and “Zappers”, facilitate tax evasion by linking into Point of Sale systems (POS) and manipulating electronic sales records to match the “skimming” of cash receipts, hiding the real revenue of a business and allowing tax evasion. The ESSTs work in several ways, including targeting the integrity of transactions, software, internal memory, external filing, or reporting to delete, change or simply not record selected sales data. The manipulation of the data can either be at the point of sale or afterwards and can produce false records which are then used to underreport sales and profit. To illustrate, a meal at a restaurant may have been $60 with a $40 bottle of wine, however, the ESST overrides the POS and records the meal at $20 with a $4 soft drink, underreporting the sale by $76.

On 9 December 2022 the Joint Chiefs of Global Tax Enforcement (J5) – which comprises the Australian Tax Office (ATO), the Canada Revenue Agency, the Dutch Fiscal Intelligence and Investigation Service, His Majesty’s Revenue and Customs from the United Kingdom and the IRS Criminal Investigation from the United States – announced an international probe into the use of sales suppression software, which resulted in the arrest of five individuals in the United Kingdom who allegedly designed and sold the ESSTs internationally. The J5 announced that the group behind this investigation was suspected of enabling thousands of businesses to evade tax in a large-scale, technologically enabled fraud. The system was allegedly first introduced in the United Kingdom and then exported to the United States and Australia during the COVID-19 pandemic. As part of the coordinated global crackdown, the ATO and Australian police raided 35 businesses across Australia that were suspected of supplying or using ESSTs.

It is almost certain that ESST technology has already found its way into some New Zealand businesses and the Inland Revenue has stated that they are working hard to identify who has been exposed and they will “come knocking”.

The Revenue Alert

In 2022 several measures were introduced into the Tax Administration Act 1994 (TAA) to respond to the threat of ESSTs, including a new civil penalty and criminal offences:

  • Section 141EE (a civil penalty) establishes the ESST penalty of $5,000 for the acquisition or possession of a suppression tool;
  • Section 143BB (a criminal offence) establishes an offence of manufacturing or supplying a suppression tool, with a fine of up to $250,000 on conviction;
  • Section 143BC (a criminal offence) establishes an offence of acquiring or possessing a suppression tool, with a fine of up to $50,000 on conviction.

The Commissioner considers the threat from ESSTs to the integrity of the tax system is significant and is therefore increasing his focus on taxpayers who may be thinking of acquiring, creating or using ESSTs, and will consider all options available to him whenever ESSTs are found, including prosecution under the new sections 143BB and 143BC.

As well as the new penalty and offences, the use of ESSTs to reduce the income tax or GST payable is also tax evasion and so the Commissioner also has the tax evasion remedies at his disposal, including:

  • Prosecution under section 143B of the TAA for tax evasion, which on conviction, can result in a term of imprisonment of a term not exceeding 5 years, or a fine not exceeding $50,000, or both;
  • Imposition of a shortfall penalty of 150% on the resulting tax shortfall (with a previous good behaviour shortfall penalty reduction not being available for evasion penalties);and
  • The requirement to pay the actual tax shortfall.

It should also be remembered that the Commissioner is also not able to write off any amounts owing by a taxpayer when a taxpayer is liable to pay a shortfall penalty for evasion and the four-year time-bar period does not apply for tax returns that are fraudulent or wilfully misleading.

Deloitte supports the Inland Revenue in taking a dim view of ESSTs as the use of this type of software is only detrimental to the integrity of the tax system and there is no valid excuse for their use. If you would like to discuss the issues covered in this article, please contact your usual Deloitte advisor.

February 2023 – Tax Alerts

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