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Facebook is letting people hide their money to avoid paying tax and authorities around the world are struggling to play catch up.

Two Australian-based researchers say its an international phenomena across multiple social media platforms, and it has stumped government agencies like the Australian Taxation Office (ATO) even those with sophisticated tax-detection systems.

The loophole means nations around the world are losing millions of dollars in revenue that could otherwise be pumped back into the community.

Selling an old dog kennel or last seasons clothing on Facebook Marketplace could be considered the online equivalent of a garage sale or a modern-day Trading Post.

But instead of receiving a few coins in a bucket, or cash in hand, the profit is transferred through Facebook Pay (yet to be introduced into Australia) into the sellers account within 24 hours.

All from the comfort of home and with the touch of an iPhone button.

Sounds good, right? Well, not for everyone, apparently.

Its become clear that some users activity is more akin to a business not just an occasional sale after a spring clean as, for example, they make frequent transactions and move high volumes of stock.

Tax authorities cant trace the money thats being transferred, just like they cant see cash exchanging hands, said Dr Eva Huang from the University of Sydney.

Right now, most countries are losing millions of dollars in tax because of social networking tools, she told The New Daily.

Her PhD student Xi Nan, who has also been researching the issue, said there are many sellers without a registered business using social payment options like Facebook Pay to earn revenue.

The hidden economy problem has worsened during COVID-19, Ms Xi said.

It could be the person selling masks via Facebook or home-made food via WeChat groups. Seemingly innocent except in some cases its actually business set up to bypass tax law, not a helpful local making a few dollars from their hobby.

Even a platform like Instagram where people cant send or receive money is still being used to hide income.

Dr Huang and Ms Xi uncovered a trend in which users trying to sell something on Instagram will mention in their post a way for buyers to connect with them on another social networking site that enables transactions to be made.

They detailed their findings in a working paper seen by The New Daily.

The pair conducted a study that assessed 2229 Instagram posts with the hashtag #lipstick and found almost a quarter were related to hidden economy transactions and thereby resulting in tax evasion.

As to how big a problem social media is in enabling tax evasion in Australia, Dr Huang said it is too big for me to tell you how big it is.

Because it affects so many countries we dont even know how much of that is [occurring in] Australia, she said.

The in-chat payment feature on Facebook is just one of many social networking apps with a digital wallet function that allows unregistered sellers to hide from tax authorities.

Others include WeChat Pay on WeChat, LINE Pay on LINE and WhatsApp Pay on WhatsApp.

Users are generally required to link their credit or debit card with their digital wallet to use the payment transfer function.

Money is transferred from the buyers digital wallet to the sellers digital wallet, and then to the sellers account via the card.

At this stage, the tax authorities in many countries may face technical difficulties and high compliance costs to achieve the detection on social media platforms, Ms Xi said.

For example, will the social media platform be willing to undertake the joint obligation to report suspicious sellers or account users to the tax office?

Therefore, there are many unregistered sellers who deliberately do not declare the revenue on their tax return as it is not obvious to the tax authority how that money was made, Ms Xi said.

That is another big challenge facing tax authorities (aside from detecting the digital footprints); determining if the income is taxable, she said.

It comes down to the fact that social networks werent designed for commercial purposes, meaning that even if tax authorities begin detecting the money transfers, they will have a hard time differentiating if it was for social or commercial reasons.

For cross-border transactions, Ms Xi said sellers and buyers will always choose to state the parcels are for personal use because governments usually impose tax rates on parcels for commercial purposes.

The indirect taxes are evaded due to the manipulation of the courier statement, she said.

The sellers can also create an offshore bank accounts to receive income from sales, she added.

For some countries like China under a schedular income tax system Australia is under a global income tax system the income tax is levied on particular categories of income stipulated by the taxation law, Ms Xi said.

The ATO maintains its data-matching analysis and forensic capabilities are very sophisticated.

But when it came to questions about tax evasion and social media, the office had nothing to say.

See the original post here:
Virtual tax havens: How social media platforms are helping tax dodgers hide their loot - The New Daily